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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON D.C. 20549

|         
|---------
|         
|         
|FORM 10-Q

(Mark One)

|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
  THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2008

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 of Organization)                                                      |  | Identification Number
|                                                                                    |  |                      
|111 Arlozorov Street, Tel Aviv, Israel                                              |  | 62098                
|                                                                                    |  |                      
|(Address of Principal Executive
  Offices)                                          |  | (Zip code)           
|                                                                                    |  |                      
|Registrants Telephone Number, Including Area Code (866) 447-8636                  
|                                                                                   
|                                                                                   
|Former Name, Former Address and Former Fiscal Year, If Changed Since
  Last Report.

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 whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act (Check one):

Large accelerated filer   o   Accelerated filer x   Non-accelerated filer   o

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

Yes   o   No x

The number of shares outstanding of the
issuers Class A Stock, its only authorized common stock, is 58,086,165 (as of
July 28, 2008).

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AMPAL-AMERICAN ISRAEL CORPORATION AND
SUBSIDIARIES

Index to Form 10-Q

|         |         |                                                                                         |                                                               |   
|-------- | ------- | --------------------------------------------------------------------------------------- | ------------------------------------------------------------- | --
|         |         |                                                                                         | Page                                                         
|         |         |                                                                                         |                                                              
|         |         |                                                                                         |                                                              
|Part I   |         | Financial
  Information                                                                 |                                                              
|         |         |                                                                                         |                                                              
|         | Item 1. | Financial
  Statements (unaudited)                                                      |                                                              
|         |         |                                                                                         |                                                              
|         |         | Consolidated
  Balance Sheets                                                           | 1-2                                                          
|         |         |                                                                                         |                                                              
|         |         | Consolidated
  Statements of Operations for the Six Months Ended June 30, 2008 and 2007 | 3-4                                                          
|         |         |                                                                                         |                                                              
|         |         | Consolidated
  Statements of Cash Flows                                                 | 5-6                                                          
|         |         |                                                                                         |                                                              
|         |         | Consolidated
  Statements of Changes in Shareholders Equity                            | 7-8                                                          
|         |         |                                                                                         |                                                              
|         |         | Notes to the
  Consolidated Financial Statements                                        | 9-15                                                         
|         |         |                                                                                         |                                                              
|         | Item 2. | Managements
  Discussion and Analysis of Financial Condition and Results of Operations | 15-23                                                        
|         |         |                                                                                         |                                                              
|         | Item 3. | Quantitative
  and Qualitative Disclosures About Market Risk                            | 24                                                           
|         |         |                                                                                         |                                                              
|         | Item 4. | Controls and
  Procedures                                                               | 25                                                           
|         |         |                                                                                         |                                                               |   
|Part II. |         | Other
  Information                                                                     | 26                                                           
|         |         |                                                                                         |                                                               |   
|         |         | Item 1.                                                                                 | Legal
  Proceedings                                           | 26
|         |         |                                                                                         |                                                               |   
|         |         | Item 1A.                                                                                | Risk Factors                                                  | 26
|         |         |                                                                                         |                                                               |   
|         |         | Item 2.                                                                                 | Unregistered
  Sales of Equity Securities and Use of Proceeds | 26
|         |         |                                                                                         |                                                               |   
|         |         | Item 3.                                                                                 | Defaults
  upon Senior Securities                             | 26
|         |         |                                                                                         |                                                               |   
|         |         | Item 4.                                                                                 | Submission
  of Matters to a Vote of Security Holders         | 26
|         |         |                                                                                         |                                                               |   
|         |         | Item 5.                                                                                 | Other
  Information                                           | 26
|         |         |                                                                                         |                                                               |   
|         |         | Item 6.                                                                                 | Exhibits                                                      | 26

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ITEM 1. FINANCIAL STATEMENTSAMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                   |  |               |           |                   |   |         | 
|------------------------------------------------------------------ |  | ------------- | --------- | ----------------- | - | ------- | 
|ASSETS AS OF                                                       |  | June 30, 2008 |           | December 31, 2007 |  
|                                                                   |  |               |           |                   |  
|(U.S. Dollars in thousands)                                        |  | (Unaudited)   |           | (Audited)         |  
|                                                                   |  |               |           |                   |   |         | 
|Current assets:                                                    |  |               |           |                   |   |         | 
|Cash and cash equivalents                                          |  | $             | 136,457   |                   | $ | 44,267  | 
|Marketable securities                                              |  |               | 23,552    |                   |   | 22,459  | 
|Accounts receivable                                                |  |               | 134,082   |                   |   | 106,665 | 
|Deposits                                                           |  |               | 35,678    |                   |   | 13,737  | 
|Inventories                                                        |  |               | 36,822    |                   |   | 28,928  | 
|Other assets                                                       |  |               | 22,818    |                   |   | 23,164  | 
|                                                                   |  |               |           |                   |   |         | 
|Total current assets                                               |  |               | 389,409   |                   |   | 239,220 | 
|Non-current assets:                                                |  |               |           |                   |   |         | 
|Investments                                                        |  |               | 375,090   |                   |   | 371,791 | 
|Fixed assets, less accumulated depreciation
  of $8,168 and $3,697 |  |               | 97,604    |                   |   | 73,007  | 
|Deposits                                                           |  |               | 36,314    |                   |   | 3,738   | 
|Deferred income taxes                                              |  |               | 15,509    |                   |   | 11,637  | 
|Other assets                                                       |  |               | 16,979    |                   |   | 15,557  | 
|Goodwill                                                           |  |               | 57,030    |                   |   | 50,406  | 
|Intangible assets                                                  |  |               | 13,502    |                   |   | 9,433   | 
|                                                                   |  |               |           |                   |   |         | 
|Total Non-current assets                                           |  |               | 612,028   |                   |   | 535,569 | 
|                                                                   |  |               |           |                   |   |         | 
|                                                                   |  |               |           |                   |   |         | 
|                                                                   |  | $             | 1,001,437 |                   | $ | 774,789 | 
|                                                                   |  |               |           |                   |   |         | 

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

1

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                     |  |               |           |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | ----------------- | - | ------- | -
|LIABILITIES
  AND SHAREHOLDERS EQUITY AS OF                                                                                                                         |  | June 30, 2008 |           | December 31, 2007 |  
|                                                                                                                                                                     |  |               |           |                   |  
|(U.S.
  Dollars in thousands, except share amounts)                                                                                                                  |  | (Unaudited)   |           | (Audited)         |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|LIABILITIES                                                                                                                                                          |  |               |           |                   |   |         |  
|Current liabilities:                                                                                                                                                 |  |               |           |                   |   |         |  
|Notes and
  loans payable and current maturities                                                                                                                     |  | $             | 154,161   |                   | $ | 136,612 |  
|Accounts
  payable, accrued expenses and others                                                                                                                      |  |               | 94,054    |                   |   | 73,769  |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|Total current liabilities                                                                                                                                            |  |               | 248,215   |                   |   | 210,381 |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|Long term
  liabilities:                                                                                                                                             |  |               |           |                   |   |         |  
|Notes and
  loans payable                                                                                                                                            |  |               | 220,461   |                   |   | 187,405 |  
|Debentures                                                                                                                                                           |  |               | 268,860   |                   |   | 79,350  |  
|Deferred
  income taxes                                                                                                                                              |  |               | 2,466     |                   |   | 3,275   |  
|Other long
  term liabilities                                                                                                                                        |  |               | 13,351    |                   |   | 12,760  |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|Total long term liabilities                                                                                                                                          |  |               | 505,138   |                   |   | 282,790 |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|Commitments
  and Contingencies                                                                                                                                      |  |               |           |                   |   |         |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|Total liabilities                                                                                                                                                    |  |               | 753,353   |                   |   | 493,171 |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|Minority
  interests, net                                                                                                                                            |  |               | 2,969     |                   |   | 23,206  |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|SHAREHOLDERS EQUITY                                                                                                                                                 |  |               |           |                   |   |         |  
|Class A
  Stock $1 par value; authorized 100,000,000 and 100,000,000 shares; issued
  63,277,321 and 63,277,321 shares; outstanding 57,792,282 and 57,702,532 shares |  |               | 63,277    |                   |   | 63,277  |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|Additional
  paid-in capital                                                                                                                                         |  |               | 190,317   |                   |   | 189,899 |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|Retained
  earnings                                                                                                                                                  |  |               | 20,127    |                   |   | 47,931  |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|Accumulated
  other comprehensive loss                                                                                                                               |  |               | (1,181    | )                 |   | (14,821 | )
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|Treasury
  stock, at cost                                                                                                                                            |  |               | (27,425   | )                 |   | (27,874 | )
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|Total
  shareholders equity                                                                                                                                         |  |               | 245,115   |                   |   | 258,412 |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  
|TOTAL
  LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                         |  | $             | 1,001,437 |                   | $ | 774,789 |  
|                                                                                                                                                                     |  |               |           |                   |   |         |  

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

2

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                               |  |             |         |             |   |        |  
|-------------------------------------------------------------- |  | ----------- | ------- | ----------- | - | ------ | -
|SIX MONTHS
  ENDED JUNE 30,                                    |  | 2008        |         | 2007        |  
|                                                               |  |             |         |             |  
|(U.S.
  Dollars in thousands, except per share amounts)        |  | (Unaudited) |         | (Unaudited) |  
|                                                               |  |             |         |             |   |        |  
|REVENUES:                                                      |  |             |         |             |   |        |  
|Chemical
  income                                              |  | $           | 277,171 |             | $ |       |  
|Equity in
  earnings (losses) of affiliates                    |  |             | 578     |             |   | (342   | )
|Realized
  gain on investments                                 |  |             | 379     |             |   | 227    |  
|Realized and
  unrealized gain (loss) on marketable securities |  |             | 139     |             |   | (245   | )
|Interest
  income                                              |  |             | 2,156   |             |   | 985    |  
|Leisure-time
  income                                          |  |             | 1,492   |             |   | 1,146  |  
|Gain from
  change in ownership interest at a subsidiary       |  |             | 342     |             |   |       |  
|Other income                                                   |  |             | 376     |             |   |       |  
|                                                               |  |             |         |             |   |        |  
|Total revenues                                                 |  |             | 282,633 |             |   | 1,771  |  
|                                                               |  |             |         |             |   |        |  
|EXPENSES:                                                      |  |             |         |             |   |        |  
|Chemical expense
  - cost of goods sold                        |  |             | 259,142 |             |   |       |  
|Real estate
  expenses                                         |  |             | 387     |             |   | 125    |  
|Loss from
  impairment of investments & real estate            |  |             |         |             |   | 484    |  
|Interest
  expense                                             |  |             | 14,931  |             |   | 4,121  |  
|Translation
  loss (gain)                                      |  |             | 25,381  |             |   | (460   | )
|Marketing
  expense                                            |  |             | 6,105   |             |   |       |  
|Other (mainly
  general and administrative)                    |  |             | 18,307  |             |   | 4,360  |  
|                                                               |  |             |         |             |   |        |  
|Total expenses                                                 |  |             | 324,253 |             |   | 8,630  |  
|                                                               |  |             |         |             |   |        |  
|Loss before
  income taxes                                     |  |             | (41,620 | )           |   | (6,859 | )
|Provision
  for income taxes                                   |  |             | (1,081  | )           |   | 896    |  
|                                                               |  |             |         |             |   |        |  
|Loss after
  income taxes                                      |  |             | (40,539 | )           |   | (7,755 | )
|Minority
  interests in losses (profits) of subsidiaries, net  |  |             | (12,894 | )           |   | 41     |  
|                                                               |  |             |         |             |   |        |  
|Loss from
  continuing operations                              |  |             | (27,645 | )           |   | (7,796 | )
|Discontinued
  operation:                                      |  |             |         |             |   |        |  
|Loss from operation of discontinued, net of tax                |  |             |        |             |   | (416   | )
|                                                               |  |             |         |             |   |        |  
|                                                               |  |             |        |             |   | (416   | )
|                                                               |  |             |         |             |   |        |  
|Net loss for
  the period                                      |  |             | (27,645 | )           |   | (8,212 | )
|                                                               |  |             |         |             |   |        |  
|                                                               |  |             |         |             |   |        |  
|Basic and
  diluted EPS:                                       |  |             |         |             |   |        |  
|Loss from continuing operations                                |  |             | (0.48   | )           |   | (0.16  | )
|Discontinued operations                                        |  |             |        |             |   | (0.01  | )
|                                                               |  |             |         |             |   |        |  
|                                                               |  | $           | (0.48   | )           | $ | (0.17  | )
|                                                               |  |             |         |             |   |        |  
|                                                               |  |             |         |             |   |        |  
|Shares used in EPS calculation (in
  thousands)                |  |             | 57,722  |             |   | 47,574 |  
|                                                               |  |             |         |             |   |        |  

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

3

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                  |  |             |         |             |   |        |  
|----------------------------------------------------------------- |  | ----------- | ------- | ----------- | - | ------ | -
|THREE MONTHS ENDED JUNE 30,                                       |  | 2008        |         | 2007        |  
|                                                                  |  |             |         |             |  
|(U.S. Dollars in thousands, except per share amounts)             |  | (Unaudited) |         | (Unaudited) |  
|                                                                  |  |             |         |             |  
|REVENUES:                                                         |  |             |         |             |   |        |  
|Chemical income                                                   |  | $           | 151,559 |             | $ |       |  
|Equity of affiliates                                              |  |             | (7      | )           |   | (325   | )
|Realized gains (losses) on investments                            |  |             | (33     | )           |   | 190    |  
|Realized and unrealized gains (losses) on
  marketable securities |  |             | 39      |             |   | (246   | )
|Interest income                                                   |  |             | 1,508   |             |   | 539    |  
|Leisure-time income                                               |  |             | 766     |             |   | 524    |  
|Other income                                                      |  |             | 72      |             |   |       |  
|                                                                  |  |             |         |             |   |        |  
|Total revenues                                                    |  |             | 153,904 |             |   | 682    |  
|                                                                  |  |             |         |             |   |        |  
|EXPENSES:                                                         |  |             |         |             |   |        |  
|Chemical expense - cost of goods sold                             |  |             | 140,044 |             |   |       |  
|Real estate expenses                                              |  |             | 188     |             |   | 42     |  
|Interest expense                                                  |  |             | 10,506  |             |   | 2,277  |  
|Translation loss (gain)                                           |  |             | 12,158  |             |   | (1,466 | )
|Marketing expense                                                 |  |             | 3,008   |             |   |       |  
|Loss from change in ownership interest at a
  subsidiary          |  |             | 148     |             |   |       |  
|Other (mainly general and administrative)                         |  |             | 10,412  |             |   | 2,391  |  
|                                                                  |  |             |         |             |   |        |  
|Total expenses                                                    |  |             | 176,464 |             |   | 3,244  |  
|                                                                  |  |             |         |             |   |        |  
|Loss before income taxes                                          |  |             | (22,560 | )           |   | (2,562 | )
|Provision for income taxes                                        |  |             | (254    | )           |   | 873    |  
|                                                                  |  |             |         |             |   |        |  
|Loss after income taxes (tax benefits)                            |  |             | (22,306 | )           |   | (3,435 | )
|Minority interests in profits of
  subsidiaries, net              |  |             | (4,936  | )           |   | (6     | )
|                                                                  |  |             |         |             |   |        |  
|Loss from continuing operations                                   |  |             | (17,370 | )           |   | (3,429 | )
|Discontinued operation:                                           |  |             |         |             |   |        |  
|Loss from operation of
  discontinued, net of tax                 |  |             |        |             |   | 266    |  
|                                                                  |  |             |         |             |   |        |  
|                                                                  |  |             |        |             |   | 266    |  
|                                                                  |  |             |         |             |   |        |  
|Net Loss for the period                                           |  |             | (17,370 | )           |   | (3,163 | )
|                                                                  |  |             |         |             |   |        |  
|                                                                  |  |             |         |             |   |        |  
|Basic and diluted EPS:                                            |  |             |         |             |   |        |  
|Loss from continuing operations                                   |  |             | (0.30   | )           |   | (0.07  | )
|Discontinued operations                                           |  |             |        |             |   | 0.01   |  
|                                                                  |  |             |         |             |   |        |  
|                                                                  |  | $           | (0.30   | )           | $ | (0.06  | )
|                                                                  |  |             |         |             |   |        |  
|                                                                  |  |             |         |             |   |        |  
|Shares used in calculation (in thousands)                         |  |             | 57,742  |             |   | 49,377 |  
|                                                                  |  |             |         |             |   |        |  

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

4

---

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

|                                                                                                   |  |             |         |             |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ----------- | ------- | ----------- | - | ------- | -
|SIX MONTHS ENDED JUNE 30,                                                                          |  | 2008        |         | 2007        |  
|                                                                                                   |  |             |         |             |  
|(U.S. Dollars in thousands)                                                                        |  | (Unaudited) |         | (Unaudited) |  
|                                                                                                   |  |             |         |             |  
|Cash flows from operating activities:                                                              |  |             |         |             |   |         |  
|Net loss for the period                                                                            |  | $           | (27,645 | )           | $ | (8,212  | )
|Adjustments to reconcile net (income) loss
  for the period to net cash from operating activities: |  |             |         |             |   |         |  
|Equity in loss (earnings) of affiliates                                                            |  |             | (578    | )           |   | 342     |  
|Realized and unrealized loss (gain) on
  investments, net                                          |  |             | (518    | )           |   | 18      |  
|Depreciation and amortization expense                                                              |  |             | 5,794   |             |   | 947     |  
|Income from tenants deposits                                                                       |  |             |        |             |   | (783    | )
|Non cash stock based compensation                                                                  |  |             | 418     |             |   | 367     |  
|Gain from change in owner ship of
  subsidiary                                                     |  |             | (342    | )           |   |        |  
|Loss from impairment of investment                                                                 |  |             |        |             |   | 484     |  
|Translation loss (gain)                                                                            |  |             | 25,381  |             |   | (579    | )
|Minority interests                                                                                 |  |             | (12,894 | )           |   | (108    | )
|Decrease (increase) in other assets                                                                |  |             | 2,380   |             |   | (1,306  | )
|Increase (decrease) in accounts payable,
  accrued expenses and others                             |  |             | (961    | )           |   | 1,779   |  
|Investments made in trading securities                                                             |  |             | (79     | )           |   | (9,484  | )
|Proceeds from sale of trading securities                                                           |  |             | 1,642   |             |   | 1,108   |  
|Dividends received from affiliates                                                                 |  |             | 3,140   |             |   | 63      |  
|                                                                                                   |  |             |         |             |   |         |  
|                                                                                                   |  |             |         |             |   |         |  
|Net cash used in operating activities                                                              |  |             | (4,262  | )           |   | (15,364 | )
|                                                                                                   |  |             |         |             |   |         |  
|                                                                                                   |  |             |         |             |   |         |  
|Cash flows from investing activities:                                                              |  |             |         |             |   |         |  
|Deposits, notes and
  loans receivable collected                                                   |  |             | 2,353   |             |   | 1,999   |  
|Deposits, notes and
  loans receivable granted                                                     |  |             | (54,552 | )           |   |        |  
|Investments made in affiliates                                                                     |  |             | (5,659  | )           |   | (7,340  | )
|Investments made in Gadot                                                                          |  |             | (18,071 | )           |   |        |  
|Proceeds from sale of investments                                                                  |  |             | 604     |             |   | 5,035   |  
|Proceeds from sale of fixed asset                                                                  |  |             | 3,742   |             |   |        |  
|Capital improvements                                                                               |  |             | (21,181 | )           |   | (1,099  | )
|                                                                                                   |  |             |         |             |   |         |  
|                                                                                                   |  |             |         |             |   |         |  
|Net cash used in investing activities                                                              |  |             | (92,764 | )           |   | (1,405  | )
|                                                                                                   |  |             |         |             |   |         |  

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

5

---

---

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

|                                                                      |  |             |         |             |   |         |  
|--------------------------------------------------------------------- |  | ----------- | ------- | ----------- | - | ------- | -
|SIX MONTHS ENDED JUNE 30,                                             |  | 2008        |         | 2007        |  
|                                                                      |  |             |         |             |  
|(U.S. Dollars in thousands)                                           |  | (Unaudited) |         | (Unaudited) |  
|                                                                      |  |             |         |             |  
|Cash flows from financing activities:                                 |  |             |         |             |   |         |  
|Notes and loans payable received                                      |  | $           | 25,841  |             | $ | 37,231  |  
|Notes and loans payable repaid                                        |  |             | (2,930  | )           |   | (26,587 | )
|Contribution to partnership by minority                               |  |             |        |             |   | 74      |  
|Proceeds from issuance of debentures                                  |  |             | 166,856 |             |   |        |  
|Deferred expense relating to issuance of
  debentures                 |  |             | (2,575  | )           |   |        |  
|Proceeds from exercise of stock option and
  warrants                 |  |             | 290     |             |   | 5,033   |  
|                                                                      |  |             |         |             |   |         |  
|Net cash provided by financing activities                             |  |             | 187,482 |             |   | 15,751  |  
|                                                                      |  |             |         |             |   |         |  
|                                                                      |  |             |         |             |   |         |  
|Effect of exchange rate changes on cash and
  cash equivalents        |  |             | 1,734   |             |   | (788    | )
|                                                                      |  |             |         |             |   |         |  
|                                                                      |  |             |         |             |   |         |  
|Net increase (decrease) in cash and cash
  equivalents                |  |             | 92,190  |             |   | (1,806  | )
|Cash and cash equivalents at beginning of
  period                    |  |             | 44,267  |             |   | 36,733  |  
|                                                                      |  |             |         |             |   |         |  
|                                                                      |  |             |         |             |   |         |  
|Cash and cash equivalents at end of period                            |  | $           | 136,457 |             | $ | 34,927  |  
|                                                                      |  |             |         |             |   |         |  
|                                                                      |  |             |         |             |   |         |  
|Supplement Disclosure of Non-cash Investing and Financing Activities: |  |             |         |             |   |         |  
|Conversion of a convertible debenture in subsidiary                   |  |             | 1,214   |             |   |        |  
|                                                                      |  |             |         |             |   |         |  

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

6

---

---

AMPAL-AMERICAN ISRAEL CORPORATION AND
SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(U.S. Dollars in thousands)

Unaudited

|                                                                 |  |                     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                |         |   |  |         |   |  |         |  
|---------------------------------------------------------------- |  | ------------------- | ------ | ------ |  | ------------------------------ |  | ------------------- | ------- | --------------------------------------------------- |  | ---------------- | - | ------------------------------ | ------- | - |  | ------- | - |  | ------- | -
|                                                                 |  | Class A
  stock     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                |         |   |  |        
|                                                                 |  |                     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                |         |   |  |        
|                                                                 |  | Number
  of shares* |        | Amount |  | Additional
  paid in
  capital |  | Retained
  earnings |         | Accumulated
  other
  comprehensive
  income (loss) |  | Treasury
  stock |   | Total
  shareholders
  equity |        
|                                                                 |  |                     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                |        
|                                                                 |  |                     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                |        
|BALANCE AT JANUARY 1, 2008                                       |  |                     | 63,277 |        |  | 63,277                         |  |                     | 189,899 |                                                     |  | 47,931           |   |                                | (14,821 | ) |  | (27,874 | ) |  | 258,412 |  
|CHANGES DURING THE SIX MONTHS ENDED JUNE 30, 2008:               |  |                     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                |         |   |  |         |   |  |         |  
|Net Loss for the period                                          |  |                     |        |        |  |                                |  |                     |         |                                                     |  | (27,645          | ) |                                |         |   |  |         |   |  | (27,645 | )
|Unrealized gain from marketable securities                       |  |                     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                | (96     | ) |  |         |   |  | (96     | )
|Foreign currency translation adjustments                         |  |                     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                | 13,736  |   |  |         |   |  | 13,736  |  
|                                                                 |  |                     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                |         |   |  |         |   |  |         |  
|Total comprehensive loss                                         |  |                     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                |         |   |  |         |   |  | (14,005 | )
|Reissuance of 89,750 treasury stock for exercise of stock option |  |                     |        |        |  |                                |  |                     |         |                                                     |  | (159             | ) |                                |         |   |  | 449     |   |  | 290     |  
|Compensation expense recognized under SFAS 123R                  |  |                     |        |        |  |                                |  |                     | 418     |                                                     |  |                  |   |                                |         |   |  |         |   |  | 418     |  
|                                                                 |  |                     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                |         |   |  |         |   |  |         |  
|BALANCE AT JUNE 30, 2008                                         |  |                     | 63,277 |        |  | 63,277                         |  |                     | 190,317 |                                                     |  | 20,127           |   |                                | (1,181  | ) |  | (27,425 | ) |  | 245,115 |  
|                                                                 |  |                     |        |        |  |                                |  |                     |         |                                                     |  |                  |   |                                |         |   |  |         |   |  |         |  

*In thousands

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

7

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---

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

(U.S. Dollars in thousands)

Unaudited

|                                                              |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  |                                |   |  |         |   |  |         |   |  |         |   | 
|------------------------------------------------------------- |  | ------------------- | ------ | ------ |  | ------------------------------------------------ |  | ------------------------------ | ------- | -------- |  | ------------------- |  | --------------------------------------------------- | --- | ---------------- |  | ------------------------------ | - |  | ------- | - |  | ------- | - |  | ------- | - | 
|                                                              |  | Class A
  stock     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  |                                |   |  |         |   |  |        
|                                                              |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  |                                |   |  |         |   |  |        
|                                                              |  | Number
  of shares* |        | Amount |  | Receipt
  on
  account of
  unallocated
  shares |  | Additional
  paid in
  capital |         | Warrants |  | Retained
  earnings |  | Accumulated
  other
  comprehensive
  income (loss) |     | Treasury
  stock |  | Total
  shareholders
  equity |  
|                                                              |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  |                                |  
|                                                             
|BALANCE AT
  JANUARY 1, 2007                                  |  |                     | 46,328 |        |  | 46,328                                           |  |                                | 40,000  |          |  | 126,945             |  |                                                     | 308 |                  |  | 40,165                         |   |  | (17,059 | ) |  | (27,874 | ) |  | 208,813 |  
|CHANGES DURING
  THE SIX MONTHS ENDED JUNE 30, 2007:          |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  |                                |   |  |         |   |  |         |   |  |         |  
|Net income for
  the period                                   |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  | (8,212                         | ) |  |         |   |  |         |   |  | (8,212  | )
|Foreign currency
  translation adjustments                    |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  |                                |   |  | 756     |   |  |         |   |  | 756     |  
|                                                              |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  |                                |   |  |         |   |  |         |   |  |         |  
|Total
  comprehensive loss                                    |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  |                                |   |  |         |   |  |         |   |  | (7,456  | )
|Adjustment upon
  adoption of FIN 48                          |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  | (2,000                         | ) |  |         |   |  |         |   |  | (2,000  | )
|Change in
  deferred tax asset relating to adoption of FIN 48 |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  | 2,000                          |   |  |         |   |  |         |   |  | 2,000   |  
|Shares issued for
  investment made                           |  |                     | 8,603  |        |  | 8,603                                            |  |                                | (40,000 | )        |  | 31,397              |  |                                                     |     |                  |  |                                |   |  |         |   |  |         |   |  |        |  
|Shares issued
  upon conversion of convertible note           |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  |                                |   |  |         |   |  |         |   |  |         |  
|Compensation
  expense recognized under SFAS 123R             |  |                     |        |        |  |                                                  |  |                                |         |          |  | 366                 |  |                                                     |     |                  |  |                                |   |  |         |   |  |         |   |  | 366     |  
|Issuance of
  shares for exercise of Warrants                 |  |                     | 1,082  |        |  | 1,082                                            |  |                                |         |          |  | 4,033               |  |                                                     | (82 | )                |  |                                |   |  |         |   |  |         |   |  | 5,033   |  
|                                                              |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  |                                |   |  |         |   |  |         |   |  |         |  
|BALANCE AT JUNE
  30, 2007                                    |  |                     | 56,013 |        |  | 56,013                                           |  |                                |        |          |  | 162,741             |  |                                                     | 226 |                  |  | 31,953                         |   |  | (16,303 | ) |  | (27,874 | ) |  | 206,756 |  
|                                                              |  |                     |        |        |  |                                                  |  |                                |         |          |  |                     |  |                                                     |     |                  |  |                                |   |  |         |   |  |         |   |  |         |  

*In thousands

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

8

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIESNOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

|1. | As
used in these financial statements, the term the Company refers
                    to Ampal-American Israel Corporation (Ampal) and its
consolidated                     subsidiaries.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | The
accompanying unaudited condensed consolidated financial statements of the
                    Company have been prepared in accordance with generally accepted
accounting                     principles (GAAP), in the United States of
America, for interim                     financial information and with the instructions
to Form 10-Q and Article 10 of                     Regulation S-X. Accordingly, they do
not include all of the information and                     notes required by GAAP for
complete financial statements. In the opinion of                     management, all
adjustments (consisting of normal recurring accruals) considered
                    necessary for a fair presentation have been included. Operating
results for the                     interim period are not necessarily indicative of the
results that may be                     expected for the full year. You should read these
interim condensed consolidated                     financial statements in conjunction
with the audited consolidated financial                     statements in the Annual
Report on Form 10-K for the year ended December 31,                     2007, filed with
the Securities and Exchange Commission.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reference
should be made to the Companys consolidated financial statements for the year ended
December 31, 2007 for a description of the critical accounting policies. Also, reference
should be made to the notes to the Companys December 31, 2007 consolidated
financial statements for additional information regarding the Companys consolidated
financial condition, results of operations and cash flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Recently
Issued Accounting Pronouncements
|-- | -----------------------------------------

| | SFAS
No. 141R  Business Combinations
| | -------------------------------------

| | 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 Company is in the process
of evaluating the impact, if any, the adoption of SFAS 141R will have on the Companys
consolidated results of operations or financial position.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 160  Noncontrolling Interests in Consolidated 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. SFAS 160 will be effective
for the Company commencing January 1, 2009, except for the presentation and
disclosure requirements, which will be applied retrospectively. Early adoption is not
allowed. The Company is in the process of evaluating the impact, if any, that the
adoption of SFAS 160 will have on the Companys consolidated results of operations
or financial position.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 161  Disclosures about Derivative Instruments and Hedging Activities
| | ------------------------------------------------------------------------------

| | In
March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities  an amendment
of FASB Statement No. 133) SFAS 161) .SFAS 161 requires enhanced
disclosures regarding derivatives and hedging activities, including: (a) the manner
in which an entity uses derivative instruments; (b) the manner in which derivative
instruments and related hedged items are accounted for under Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities; and (c) the effect of derivative instruments and related hedged
items on an entitys financial position, financial performance, and cash flows. SFAS
161 is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company is in process of evaluating the
impact, if any, that the adoption of SFAS 161 will have on its financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

---

| | SFAS
No. 162  The Hierarchy of Generally Accepted Accounting Principles
| | ------------------------------------------------------------------------

| | In
May 2008, the FASB issued Financial Accounting Standard (FAS) No. 162,
The Hierarchy of Generally Accepted Accounting Principles. The statement is
intended to improve financial reporting by identifying a consistent hierarchy for
selecting accounting principles to be used in preparing financial statements that are
prepared in conformance with generally accepted accounting principles. Unlike Statement
on Auditing Standards SAS No. 69, The Meaning of Present in Conformity
With GAAP, FAS No. 162 is directed to the entity rather than the auditor. The
statement is effective 60 days following the SECs approval of the Public
Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with GAAP, and is not expected to have any
impact on the Companys results of operations, financial condition or liquidity.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 142-3
| | --------------

| | In
April 2008, the FASB issued FASB Staff Position (the FSP) FAS No. 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. The FSP 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
FSP is effective for fiscal years beginning after December 15, 2008, and the
guidance for determining the useful life of a recognized intangible asset must be applied
prospectively to intangible assets acquired after the effective date. The FSP is not
expected to have a significant impact on the Companys results of operations,
financial condition or liquidity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | Cash
and cash equivalents
|-- | -------------------------

| | Cash
equivalents are short-term, highly liquid investments that have original maturity dates
of three months or less and are readily convertible into cash.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
equal to $2.7 million has been placed as a compensating balance for various loans
provided to the Company and would therefore be unavailable if the Company wished to
pledge them in order to provide an additional source of cash.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | East
Mediterranean Gas Company
|-- | ------------------------------

| | On
December 1, 2005, the Company, through Merhav Ampal Energy, Ltd. (MAE), a
wholly-owned subsidiary of the Company, acquired a 2% interest in East Mediterranean Gas
Co. S.A.E., an Egyptian joint stock company (EMG), from Merhav M.N.F. Ltd. (Merhav).
The Company paid $30.0 million in cash, representing the fair value of the interest
purchased at the time this transaction closed.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 1, 2006, the Company acquired the beneficial ownership of 4.6% of the outstanding
shares of EMGs capital stock from Merhav. The transaction was accounted for as a
transfer of assets between entities under common control, which resulted in Merhav
transferring the investment in EMG to Ampal at carrying value. Due to the nature of Merhavs
operations, this entity would be treated as an investment company under GAAP, and as
such, the carrying value of the investment in EMG would equal fair value. On this basis,
the 4.6% investment in EMG was transferred to Ampal at carrying value, which also equals
fair value. The cost of the investment was $100.0 million, of which, $50.0 million was
paid in cash and the balance was paid in 10,248,002 shares of the Company Class A Stock
(based on the Companys share price of $4.88 per share) that was accounted for at a
fair value of $50.0 million. The issuance of the shares of Class A Stock received the
approval of the shareholders of the Company as required by the marketplace rules of the
NASDAQ Global Market. As a result of this transaction, the Company beneficially owned
6.6% of the total outstanding shares of EMG. Through August 2008, the cost of the
investment may be adjusted downward should Merhav sell any of its remaining shares of EMG
to a third-party purchaser at a price per share lower than the price per share paid by
the Company pursuant to the agreement. Additionally, pursuant to the agreement, the
Company was granted an option for a period of up to two years to have the right to
acquire up to an additional 5.9% of the total outstanding shares of EMG stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Yosef
A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling
shareholder group of the Company, is the sole owner of Merhav. Because of the foregoing
relationships, a special committee of the Board of Directors composed of the Companys
independent directors, who also constitute all of the members of the Companys Audit
Committee, negotiated and approved the transaction. Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., which was retained as financial advisor to the special
committee, delivered a fairness opinion to the special committee regarding the
transaction.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

---

| | On
August 22, 2006, EMG called for additional capital from all of its shareholders. As a
result, the Company paid an additional $2.7 million in order to maintain its pro rata
beneficial interest in EMG.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 21, 2006, the Company acquired the beneficial ownership of an additional 5.9% of
the outstanding shares of EMGs capital stock pursuant to an option granted by
Merhav in August 2006. The transaction was accounted for as a transfer of assets between
entities under common control, which resulted in Merhav transferring the investment in
EMG to Ampal at carrying value. Due to the nature of Merhavs operations, this
entity would be treated as an investment company under GAAP, and as such, the carrying
value of the investment in EMG would equal fair value. On this basis, the 5.9% investment
in EMG was transferred to Ampal at carrying value, which also equals fair value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
cost of the additional investment was approximately $128.3 million, of which
approximately $68.3 million was paid in cash, approximately $40 million was paid in
8,602,151 shares of the Companys Class A Stock and the balance was satisfied by the
issuance of a promissory note in the principal amount of $20 million (the Convertible
Promissory Note), which, at the option of Merhav, was payable in cash, additional
shares of the Company Class A Stock (based on a price per share of $4.65), or a
combination thereof. As permitted under the stock purchase agreement, Merhav assigned its
right to the 8,602,151 Shares to De Majorca Holdings Limited as part of Merhavs
restructuring process. The Convertible Promissory Note bore interest at 6 months LIBOR
(5.375%) and matured on September 20, 2007. Ampal could have pre-paid the Convertible
Promissory Note at any time in whole or in part. The maximum number of shares that could
have been issued in this transaction (including accrued interest payable through the
maturity date on the Convertible Promissory Note) is 13,078,540 shares of Class A Stock.
As a result of this transaction, Ampal beneficially owns 12.5% of the total outstanding
shares of EMG. The issuance of the 8,602,151 shares and the shares underlying the
Convertible Promissory Note received the approval of the shareholders of the Company on
February 7, 2007, as required by the marketplace rules of the NASDAQ Global Market. Due
to the agreement of the controlling shareholder group to vote in favor of the issuance of
these shares to Merhav as of the closing date of the EMG transaction (which ensured that
the proposal would be adopted by the requisite shareholders vote on February 7, 2007) the
Company, as of December 31, 2006, classified for accounting purposes the sale of these
shares as part of the exchange with Merhav on December 21, 2006 and recognized the
approximately $40 million with shareholders equity as Receipt on account of
unallocated shares.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Yosef
A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling
shareholder group of the Company, is the sole owner of Merhav. Because of the foregoing
relationships, a special committee of the Board of Directors composed of the Companys
independent directors, who also constitute all of the members of the Companys Audit
Committee, negotiated and approved the transaction. Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., which was retained as financial advisor to the special
committee, advised the special committee on these transactions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 4, 2007, EMG called for additional capital from all of its shareholders. As a
result, the Company paid an additional $5.8 million in order to maintain its pro rata
beneficial interest in EMG.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 29, 2007, Ampal and Israel Infrastracture Fund (IIF), leading a
group of institutional investors (the Investors), purchased a 4.3% interest
in EMG, through Merhav Ampal Energy Holdings, LP, an Israeli limited partnership (the
Joint Venture), from Merhav. for a purchase price of approximately $95.4
million, using funds provided by the Investors. In addition to the Joint Ventures
purchase from Merhav., Ampal contributed into the Joint Venture an additional 4.3%
interest in EMG already held by Ampal. The Joint Venture now holds a total of 8.6% of the
outstanding shares of EMG. Ampals contribution was valued at the same price per EMG
share as the Joint Ventures purchase. This amount is equivalent to the purchase
price (on a per share basis) paid by Ampal for its December 2006 purchase of EMG shares
from Merhav., which was accounted for as a transfer of assets between entities under
common control, which resulted in Merhav transferring the investment in EMG to Ampal at
carrying value. Due to the nature of Merhav s operations, Merhav would be treated
as an investment company under GAAP, and as such, the carrying value of the investment in
EMG would equal fair value. On this basis, the said investment in EMG was transferred to
Ampal at carrying value, which also equals fair value. Based on the terms stipulated in
the shareholders agreement of the general partner of the Joint Venture, Ampal and
Israel Infrastructure G.P. Ltd. have equal rights in governing the affairs of the Joint
Venture. However, in certain events and under certain conditions, matters relating to
decisions on how to vote the EMG shares held by the Joint Venture shall be decided by the
directors of the general partner of the Joint Venture appointed by Ampal or by IIF. As
such, Ampal has consolidated the results of the Joint Venture in its financial
statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys Financial Statements reflect a 16.8% interest in shares of EMG, with 8.2%
held directly and 8.6% held through the Joint Venture (of which Ampal owns 50%).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | Acquisition
of Gadot
|-- | --------------------

| | On
December 3, 2007, Ampal completed its acquisition of 65.5% of the control and ownership
(63.66% on a fully diluted basis) of Gadot Chemical Tankers and Terminals Ltd. (Gadot).
The total consideration including direct transaction expenses was $91.2 million. The cash
consideration was financed with Ampals own resources and with borrowings in the
amount of $60.7 million.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

---

| | Gadot
and its group of companies are an Israeli chemical distribution organization. Gadot
ships, stores, and distributes liquid chemicals, oils, and a large variety of materials
to the local industry.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition was accounted for by the purchase method. The results of operations of Gadot
were included in the consolidated financial statements of Ampal commencing November 30,
2007. The consideration for the acquisition was attributed to net assets on the basis of
fair value of assets acquired and liabilities assumed, based on an appraisal performed by
management, which included a number of factors, including the assistance of independent
appraisers. The following table summarizes the final fair values of the assets acquired
and liabilities assumed, with reference to Gadot balance sheet data as of November 30,
2007:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                | U.S. Dollars in
thousands
|----------------------------------------------- | -------------------------
|
|
|
|
|Current assets                                  |                          
|Investments and other non-current assets        |                          
|Fixed assets                                    |                          
|Identifiable intangible assets                  |                          
|Goodwill                                        |                          
|                                                |                          
|Total assets acquired                           |                          
|                                                |                          
|Current liabilities                             |                          
|Long-term liabilities, including deferred taxes |                          
|Minority interest                               |                          
|                                                |                          
|Total liabilities assumed                       |                          
|                                                |                          
|Net assets acquired                             |                          
|                                                |                          

| | Under
the purchase method of accounting, the total consideration of $91.2 million allocated to
Gadots identifiable tangible and intangible assets and liabilities assumed based on
their estimated fair values as of the date of the completion of the transaction.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 3, 2008, Ampal completed its acquisition of an additional 14.98% of the ownership
(14.71% on a fully diluted basis) of Gadot. The total consideration, including direct
transaction expenses, was $17.7 million. The cash consideration was financed with Ampals
own resources and with borrowings in the amount of $11.4 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition was accounted for by the purchase method. The results of operations of Gadot
were included in the consolidated financial statements of Ampal commencing May 31, 2008.
The consideration for the acquisition was attributed to net assets on the basis of fair
value of assets acquired and liabilities assumed, based on a preliminary
 appraisal performed by
management, which included a number of factors, including the assistance of independent
appraisers.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
identified tangible and intangible assets acquired amounted to approximately $3.9 million
and $3.9 million, respectively. The main assets included are ships and tankers and option
to purchase and lease ships, of approximately $2.6 million and $2.6 million,
respectively, to be amortized over an estimated useful life of 12 and 5 year
respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. | Option
Agreement for Sugarcane Ethanol Project in Colombia
|-- | ----------------------------------------------------------

| | On
May 29, 2008, Ampal loaned Merhav $10 million in addition to the $10 million that were
loaned on December 25, 2007, to fund the project in Colombia required for growing
sugarcane and the construction of an ethanol production facility, pursuant to a
promissory note, dated as of December 25, 2007, by Merhav in favor of Ampal (the Promissory
Note). The loan bears interest at an annual rate equal to LIBOR plus 2.25%, and
will be convertible into all or a portion of the equity interest purchased pursuant to
the option.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. | Fair
value measurement
|-- | ----------------------

| | On
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS
157), which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair-value
measurements. The Company adopted SFAS 157 effective January 1, 2008 for all
financial assets and liabilities and any other assets and liabilities that are recognized
or disclosed at fair value on a recurring basis. Although the adoption of SFAS 157 did
not materially impact the Companys financial condition, results of operations or
cash flows, the Company is required to provide additional disclosures within its
condensed consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

---

| | SFAS
157 defines fair value as the price that would be received to sell an asset or paid to
transfer the liability (an exit price) in an orderly transaction between market
participants and also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The fair value hierarchy within SFAS 157 distinguishes between
three levels of inputs that may be utilized when measuring fair value including level 1
inputs (using quoted prices in active markets for identical assets or liabilities), level
2 inputs (using inputs other than level 1 prices such as quoted prices for similar assets
and liabilities in active markets or inputs that are observable for the asset or
liability) and level 3 inputs (unobservable inputs supported by little or no market
activity based on the companys own assumptions used to measure assets and
liabilities). A financial assets or liabilitys classification within the
above hierarchy is determined based on the lowest level input that is significant to the
fair value measurement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company also adopted SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose
to measure many financial assets and financial liabilities at fair value. Unrealized
gains and losses on items for which the fair value option has been elected are reported
in earnings. SFAS 159 is effective for fiscal years after November 15, 2007. The Company
did not elect to apply the fair value option available under SFAS 159 for any of its
eligible instruments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financial
assets and liabilities measured at fair value on a recurring basis as at June 30,
2008 consisted of the following (in thousands):
| | -------------------------------------------------------------------------------------------------------------------------------------------

Fair Value Measurements as at June 30, 2008 Using:

|                              | Level 1 | Level 2 | Total
|----------------------------- | ------- | ------- | -----
|
|
|
|
|Trading securities            |         |         | $    
|Available for sale securities |         |         |      
|Derivative Assets             |         |         |      
|                              |         |         |      
|Total                         |         |         |      
|                              |         |         |      

| | Marketable
securities that are classified in level 1 consist of available-for-sale and trading
securities for which market prices are readily available, marketable securities that are
classified in level 2 consist of trading securities for which there are quoted prices in
active brokers markets. The fair value of derivative assets are determined based on
inputs that can be derived from information available in publicly quoted markets.
Unrealized gains or losses from available-for-sale securities are recorded in accumulated
other comprehensive (loss) income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *
Out of which approximately $ 2.7 million is attributable to the swap agreement.
| | ---------------------------------------------------------------------------------

|9. | Segment
information presented below, results primarily from operations in           Israel.
|-- | -------------------------------------------------------------------------------------------

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
chemical segment consists of the investment in Gadot, a 79.3%-owned subsidiary of Ampal,
which operates in the distribution and marketing of liquid chemicals for raw materials
used in the chemical industry.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
energy segment consists of the investment in EMG, an Egyptian joint stock company, which
holds the right to supply and supplies natural gas to Israel through an underwater
pipeline from Egypt to Israel.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
real estate rental segment previously consisted of operations of Am-Hal Ltd. (Am-Hal),
a wholly-owned subsidiary which owns which operates a chain of senior citizen facilities
located in Israel. On August 5, 2007, the Company sold all of its interest in Am-Hal .
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
leisure-time segment consists of an affiliate Country Club Hod Hasharon Sport Center and
Kfar Saba, the Companys 51%-owned subsidiary, each located in Israel.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
finance segment consists of all other activities which are not part of the above
segments.
| | ----------------------------------------------------------------------------------------------

13

---

---

| | SIX MONTHS ENDED JUNE 30,             | 2008 | 2007
| | ------------------------------------- | ---- | ----
|
|
|
|
| | Revenues:                             |      |     
| | Chemicals                             |      |     
| | Finance                               |      |     
| | Leisure-time                          |      |     
| |                                       |      |     
| |                                       |      |     
| | Equity                                |      |     
| |                                       |      |     
| | Total consolidated revenues           |      |     
| |                                       |      |     
| |                                       |      |     
| | Pre-tax Operating Gain (loss):        |      |     
| | Chemicals                             |      |     
| | Finance                               |      |     
| | Leisure-time                          |      |     
| |                                       |      |     
| |                                       |      |     
| | Equity                                |      |     
| |                                       |      |     
| | Total consolidated pretax gain (loss) |      |     
| |                                       |      |     
| |                                       |      |     
| | Total Assets:                         |      |     
| | Chemicals                             |      |     
| | Finance                               |      |     
| | Energy                                |      |     
| | Real Estate                           |      |     
| | Leisure-Time                          |      |     
| | Intercompany adjustments              |      |     
| |                                       |      |     
| | Total consolidated assets             |      |     
| |                                       |      |     

| | Corporate
office expense is principally applicable to the financing operations and has been charged
to that segment above. Revenues and pre-tax operating gain above exclude equity in
earnings of affiliates.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. | The
following table summarizes securities that were not included in the
                    calculations of diluted earnings per Class A share for the periods
ended June                     30, 2008 and 2007 because such shares are anti-dilutive.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (Shares in thousands)                    | Six Months EndedJune 30,
| | ---------------------------------------- | ------------------------
|
|
|
|
| | Shares resulting from Options and Rights |                         

|11. | LEGAL
PROCEEDINGS:
|--- | ------------------

| | 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 12,269,000
($3.66 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 4,172,000 ($1,085,000) 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. (Arieh) 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. In March 2008, the dispute was
submitted to mediation by order of the court, with the consent of the parties.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

---

---

|12. | SUBSEQUENT
EVENTS
|--- | -----------------

| | On
July 22, 2008 Ampal commenced an offer in Israel to purchase all outstanding shares of
common stock (Gadot Shares) and all outstanding convertible debentures of
Gadot. The consummation of the offer to purchase the Gadot Shares is conditioned upon,
among other things, (i) the tender of at least 15.72% of the outstanding Gadot Shares and
(ii) the tender of a sufficient number of convertible debentures such that Gadot will not
be a reporting issuer due to the convertible debentures. If the offers to purchase the
Gadot Shares and convertible debentures are consummated, Ampal will hold at least 95% of
the share capital of Gadot and will be able to require the remaining shareholders of
Gadot to sell their shares to Ampal. The offer to purchase the Gadot Shares is for a
price per Gadot Share of NIS 5.798 (approximately $1.673) and the offer to purchase the
convertible debentures is for a purchase price per convertible debenture of NIS 1.642
(approximately $0.474). The offers will expire on August 6, 2008 at 17:30 Israel time.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2007 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, except for a revenue recognition policy
resulting from the recent acquisition of Gadot Chemical Tankers and Terminals Ltd. (Gadot).

Revenue Recognition

Chemical income is measured at the
fair value of the consideration received or the consideration that the Company is
entitled to receive, taking into account trade discounts and/or bulk discounts granted by
the Company.

Revenue from sale of goods is
recognized when all the following conditions have been satisfied: (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.

Revenue from the provision of
services is recognized by reference to the stage of completion of the transaction at the
balance sheet date, and only when the stage of completion of the transaction at the
balance sheet date can be measured reliably.

Recently Issued Accounting
Pronouncements

SFAS No. 141R  Business
Combinations

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 Company is in the process of evaluating the impact, if
any, the adoption of SFAS 141R will have on the Companys consolidated results of
operations or financial position.

15

---

---

SFAS No. 160  Noncontrolling
Interests in Consolidated 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. SFAS 160 will be effective for the Company commencing January 1, 2009,
except for the presentation and disclosure requirements, which will be applied
retrospectively. Early adoption is not allowed. The Company is in the process of
evaluating the impact, if any, that the adoption of SFAS 160 will have on the Companys
consolidated results of operations or financial position.

SFAS No. 161  Disclosures about
Derivative Instruments and Hedging Activities

In March 2008, the FASB issued
Statement of Financial Accounting Standards No. 161, Disclosures about
Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133)
SFAS 161) .SFAS 161 requires enhanced disclosures regarding derivatives
and hedging activities, including: (a) the manner in which an entity uses derivative
instruments; (b) the manner in which derivative instruments and related hedged items
are accounted for under Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities; and (c) the effect of derivative
instruments and related hedged items on an entitys financial position, financial
performance, and cash flows. SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. The Company is
in process of evaluating the impact, if any, that the adoption of SFAS 161 will have on
its financial statements.

SFAS No. 162  The Hierarchy of Generally
Accepted Accounting Principles

In May 2008, the FASB issued
Financial Accounting Standard (FAS) No. 162, The Hierarchy of Generally
Accepted Accounting Principles. The statement is intended to improve financial
reporting by identifying a consistent hierarchy for selecting accounting principles to be
used in preparing financial statements that are prepared in conformance with generally
accepted accounting principles. Unlike Statement on Auditing Standards (SAS No. 69,
The Meaning of Present in Conformity With GAAP, FAS No. 162 is directed
to the entity rather than the auditor. The statement is effective 60 days following
the SECs approval of the Public Company Accounting Oversight Board (PCAOB) amendments
to AU Section 411, The Meaning of Present Fairly in Conformity with GAAP, and
is not expected to have any impact on the Companys results of operations, financial
condition or liquidity.

SFAS No. 142-3

In April 2008, the FASB issued
FASB Staff Position (the FSP) FAS No. 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. The FSP 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 FSP is effective for fiscal
years beginning after December 15, 2008, and the guidance for determining the useful
life of a recognized intangible asset must be applied prospectively to intangible assets
acquired after the effective date. The FSP is not expected to have a significant impact
on the Companys results of operations, financial condition or liquidity.

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 have been
volatile. The economic indicators from the United States and Europe have started to
negatively influence demand. The economic slow down is already being felt in the
construction sector, mainly in the United States, which had enjoyed significant growth in
recent years. The construction sector is a large consumer of chemical products.

Chemical Carriers

In recent years, the increased
demand for chemicals led to an increase in shipping demand in the chemical carrier
sector. Fuelprices significantly impact the profitability of this segment in Gadots
activity. The rapid increase in oil prices during the first six months of 2008 had a
significant negative influence on the gross profit of Gadot. Any future reduction in oil
prices may contribute positively to Gadots gross profit.

16

---

---

On April 29, 2008, Gadot announced
that an agreement had been signed for the winding-up of Chem-Tankers C.V., a limited
partnership registered in the Netherlands, which was engaged in the maritime shipping of
chemicals in bulk (hereafter  the Partnership). The Partnership was
established pursuant to an agreement signed on October 1, 2005 between Gadot Yam Chemical
Shipping Ltd., a wholly owned and controlled subsidiary of Gadot, and a foreign company
registered in Cyprus (hereafter  the Partners). The agreement sets
forth the manner in which the Partnership will wind down, including provisions relating
to the settling of accounts between the Partners, the distribution of the operating
routes, the ships, and the fixed assets of the Partnership and the payment of winding-up
expenses. Following the winding-up of the Partnership, the Company shall continue to
operate the operating routes that it operated prior to the establishment of the
Partnership in 2005, viz., the North Europe-Mediterranean Sea route and the North
America-Mediterranean Sea route.

Six months ended June 30, 2008
compared to six months ended June 30, 2007

The Company recorded a consolidated
net loss of $27.6 million for the six months ended June 30, 2008 compared to a net loss
of $8.2 million for the corresponding period in 2007. The increase in loss is primarily
attributable to an increase in interest expense, translation loss and increase in the
Israeli consumer price index for the six months ended June 30, 2008 as compared to the
corresponding period in 2007. This increase in loss was partially offset by increase in
gain from affiliates, other income and increase in realized gain from investments.

In the six months ended June 30,
2008, the Company included the results of operations of Gadot, which was purchased in two
parts, on December 3, 2007 and June 3, 2008. Below is data from Gadot results of
operations (in millions of dollar):

| |                                                   |  | 
| | ------------------------------------------------- |  | 
|
|
|
|
| | Chemical income                                   |  | 
| |                                                   |  | 
| | Chemical expense                                  |  | 
| |                                                   |  | 
| | Marketing expense                                 |  | 
| |                                                   |  | 
| | Other expense (mainly general and administrative) |  | 
| |                                                   |  | 
| | Interest expense                                  |  | 
| |                                                   |  | 
| | Net loss                                          |  | 

In the six months ended June 30,
2008, the Company recorded $6.1 million of marketing expense, as compared to recording no
marketing expense in the corresponding period in 2007. These expenses are attributable to
Gadot, whose results of operation was consolidated for the first time in 2008. Marketing
expense is composed mainly of salary expenses.

In the six months ended June 30,
2008, the Company recorded a $18.3 million of other general and administrative expense,
as compared to $4.4 million in the corresponding period in 2007. The increase is mainly
due to consolidating Gadot for the first time in 2008.

In the six months ended June 30,
2008, the Company recorded a $12.9 million of Minority interests share in losses of
subsidiaries, net, as compared to non in the corresponding period in 2007. These expenses
are mainly attributable to Merhav Ampal Energy Holdings, LP. and to translation loss
related to a change in the valuation of the New Israeli Shekel as compared to the U.S.
Dollar of its borrowings.

In the six months ended June 30,
2008, the Company recorded a $14.9 million interest expense, as compared to a $4.1
million interest expense for the corresponding period in 2007. The increase in interest
expense relates to the increase in notes payable which the Company received to finance
the purchase of Gadot in December 2007 and June 2008, issuance of the Companys
Series B debentures, increase in the Israeli consumer price index and the interest
expense of Gadot which the Company included for the first time in 2008.

In the six months ended June 30,
2008, the Company recorded a $25.4 million translation loss, as compared to a $0.5
million translation gain for the corresponding period in 2007. The increase in
translation loss is related to a change in the valuation of the New Israeli Shekel as
compared to the U.S. Dollar, increase of 12.8% in the six month ended June 30, 2008 as
compare to a decrease of 0.6% for the corresponding period in 2007.

Equity in earnings of affiliates
increased to a net gain of $0.6 million for the six months ended June 30, 2008, compared
to a net loss of $0.3 thousand for the corresponding period in 2007. The increase is
primarily attributable to the earnings from Gadots affiliates which were included
for the first time in six months ended June 30, 2008.

In the six month period ended June
30, 2008, the Company recorded $0.3 million gain from issuance of shares by Gadot in
2007.

17

---

---

In the six month period ended June
30, 2008, the Company recorded $0.4 million of net realized gain on investments, compared
to $0.2 million of net realized gain in the same period in 2007. The net gain recorded in
2008 was primarily attributable to the sale of certain assets by PSINet Europe, one of
the holdings of one of Ampals investee companies, Telecom Partners (TP)
($0.3 million gain) and the sale of certain assets by FIMI Opportunity Fund L.P (FIMI)
($0.1 million gain).

On August 5, 2007, the Company
completed the sale of Am-Hal Ltd (Am-Hal). Am-Hal was a wholly owned
subsidiary which owned and operated a chain of senior citizens facilities located in
Israel. Accordingly, Am-Hal has been reported as a discontinued operation for the six
months ended June 30, 2007.

Results of operations analyzed by
segments for six months ended June 30:

|                                          | 2008 | 2007
|----------------------------------------- | ---- | ----
|
|
|
|
|Revenues:                                 |      |     
|                                          |      |     
|Chemicals                                 |      |     
|Finance                                   |      |     
|Leisure-time                              |      |     
|                                          |      |     
|                                          |      |     
|Equity in earnings (losses) of affiliates |      |     
|                                          |      |     
|                                          |      |     
|Total                                     |      |     
|                                          |      |     

In the six months ended June 30,
2008, the Company recorded $282.6 million in revenue which was comprised of $277.5
million in the Chemicals segment, due to the acquisition of Gadot in December 2007, $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, as compared to $1.8 million for the
same period in 2007, which was comprised of $1.0 million in the Finance segment, $1.1
million in the Leisure-time segment and a $0.3 million loss in Equity in earnings of
affiliates. The increase in the Finance segment revenue is primarily related to the
increase in realized and unrealized gains on marketable securities and interest income
from deposits.

|             | 2008 | 2007
|------------ | ---- | ----
|
|
|
|
|Expenses:    |      |     
|             |      |     
|Chemicals    |      |     
|Finance      |      |     
|Leisure-time |      |     
|             |      |     
|             |      |     
|Total        |      |     
|             |      |     

In the six months ended June 30,
2008, the Company recorded $324.3 million in expenses which was comprised of $279.9
million in the Chemicals segment, due to the acquisition of Gadot in December 2007, $42.9
million in the Finance segment and $1.5 million in the Leisure-time segment, as compared
to $8.6 million expense for the same period in 2007 which was comprised of $7.6 million
in the Finance segment and $1.0 million in the Leisure-Time segment. The increase in
expenses in the Finance segment is primarily attributable to the $25.4 million
translation loss which was recorded due to the change in the valuation of the New Israeli
Shekel as compared to the U.S. dollar, increase in the Israeli consumer price index, the
interest expense of Gadot which the Company included for the first time in 2008 and to
the increase in interest expense relate to the notes payable which the company received
to finance the purchase of Gadot in December 2007 and June 2008.

Three months ended June 30, 2008
compared to three months ended June 30, 2007

The Company recorded a consolidated
net loss of $17.4 million for the three months ended June 30, 2008 compared to a net loss
of $3.2million for the same period in 2007. The increase in loss is primarily
attributable to an increase in interest expense, translation loss and increase in Israeli
consumer price index for the three months ended June 30, 2008 as compared to the same
period in 2007. This increase in loss was partially offset by increase in gain from
affiliates, other income and increase in realized gain from investments.

18

---

---

In the three months ended June 30,
2008 the Company included the results of operations from Gadot, which was purchased in
two parts, on December 3, 2007 and June 3, 2008. Below is data of Gadot results of
operations (in millions of dollar):

| |                                                   |  | 
| | ------------------------------------------------- |  | 
|
|
|
|
| | Chemical income                                   |  | 
| |                                                   |  | 
| | Chemical expense                                  |  | 
| |                                                   |  | 
| | Marketing expense                                 |  | 
| |                                                   |  | 
| | Other expense (mainly general and administrative) |  | 
| |                                                   |  | 
| | Interest expense                                  |  | 
| |                                                   |  | 
| | Net income                                        |  | 

In the three months ended June 30,
2008, the Company recorded a $3.0 million of marketing expense, as compared to recording
no marketing expense in the corresponding period in 2007. These expenses are attributable
to Gadot, whose results of operation was consolidated for the first time in 2008.
Marketing expense is composed mainly of salary expenses.

In the three months ended June 30,
2008, the Company recorded a $10.4 million of other general and administrative expense,
as compared to $2.4 million in the corresponding period in 2007. The increase is mainly
due to consolidating Gadot for the first time in 2008.

In the three months ended June 30,
2008, the Company recorded a $4.9 million of Minority interests share in losses of
subsidiaries, net, as compared to none in the corresponding period in 2007. These
expenses are mainly attributable to Merhav Ampal Energy Holdings, LP. and to translation
loss related to a change in the valuation of the New Israeli Shekel as compared to the
U.S. Dollar of its borrowings.

In the three months ended June 30,
2008, the Company recorded a $10.5 million interest expense, as compared to a $2.3
million interest expense for the same period in 2007. The increase in interest expense
relates to the increase in notes payable which the Company received to finance the
purchase of Gadot in December 2007 and June 2008, issuance of the Companys Series B
debentures, increase in the Israeli consumer price index and the interest expense of
Gadot, which the Company included for the first time in 2008.

In the three months ended June 30,
2008, the Company recorded a $12.2 million translation loss, as compared to a $1.5
million translation gain for the same period in 2007. The increase in translation loss is
related to a change in the valuation of the New Israeli Shekel as compared to the U.S.
Dollar, increase of 5.7% in the three months ended June 30, 2008 as compared to a
decrease of 2.3% for the corresponding period in 2007.

In the three months ended June 30,
2008, the Company did not record equity in earnings of affiliates, compared to a net loss
of $0.3 million for the same period in 2007. The gain is primarily attributable to the
earnings from Gadots affiliates which were included for the first time in 2008.

In the three months ended June 30,
2008, the Company didnt record any realized gain on investments, compared to $0.2
million of net realized gain in the same period in 2007.

On August 5, 2007, the Company
completed the sale of Am-Hal. Am-Hal was a wholly owned subsidiary which owned and
operated a chain of senior citizens facilities located in Israel. Accordingly, Am-Hal has
been reported as a discontinued operation for the three months ended June 30, 2007.

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

|                               | 2008 | 2007
|------------------------------ | ---- | ----
|
|
|
|
|Revenues:                      |      |     
|                               |      |     
|Chemicals                      |      |     
|Finance                        |      |     
|Leisure-time                   |      |     
|                               |      |     
|                               |      |     
|Equity in losses of affiliates |      |     
|                               |      |     
|                               |      |     
|Total                          |      |     
|                               |      |     

19

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In the three months ended June 30,
2008, the Company recorded $153.9 million in revenue which was comprised of $151.4
million in the Chemicals segment, due to the acquisition of Gadot in December 2007, $1.7
million in the Finance segment and $0.8 million in the Leisure-time segment and, as
compared to $0.7 million for the corresponding period in 2007, which was comprised of
$0.5 million in the Finance segment, $0.5 million in the Leisure-time segment and $0.3
million loss in equity in earnings of affiliates. The increase in the Finance segment
revenue is primarily related to the increase in realized and unrealized gains on
marketable securities.

|             | 2008 | 2007
|------------ | ---- | ----
|
|
|
|
|Expenses:    |      |     
|             |      |     
|Chemicals    |      |     
|Finance      |      |     
|Leisure-time |      |     
|             |      |     
|             |      |     
|Total        |      |     
|             |      |     

In the three months ended June 30,
2008, the Company recorded $176.5 million in expenses which was comprised of $151.5
million in the Chemicals segment, due to the acquisition of Gadot in December 2007, $24.0
million in the Finance segment and $0.9 million in the Leisure-time segment, as compared
to $3.2 million expense for the same period in 2007 which was comprised of $2.7 million
in the Finance segment and $0.5 million in the Leisure-Time segment. The increase in
expenses in the Finance segment is primarily attributable to the $12.2 million
translation loss which was recorded due to the change in the valuation of the New Israeli
Shekel as compared to the U.S. dollar, increase in the Israeli consumer price index and
the interest expense of Gadot, which the Company included for the first time in 2008, and
to the increase in interest expense related to the notes payable which the company
received to finance the purchase of Gadot in December 2007.

Liquidity and Capital Resources

Cash
Flows

On June 30, 2008, cash, cash
equivalents and marketable securities were $160.0 million, as compared with $66.7 million
at December 31, 2007. The increase is attributable to the issuance of the Companys
Series B debentures and partly offset by purchasing an additional 15% of Gadot.

As of June 30, 2008, the Company had
$23.6 million of marketable securities as compared to $22.5 million in 2007.

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 used in operating
activities totaled approximately $4.3 million for the six months ended June 30, 2008,
compared to approximately $15.4 million U.S. Dollar in operating activities for the
corresponding period in 2007. The decrease in cash used is primarily attributable to the
dividend received from affiliates in the six months ended June 30, 2008, and the decrease
in the investments made in trading securities.

Cash
flows from investing activities

Net cash used in investing
activities totaled approximately $92.8 million for the six months ended June 30, 2008,
compared to approximately $1.4 million used in investing activities for the corresponding
period in 2007. The increase in cash used in investing activities is primarily
attributable to the payment for ships purchased by Gadot and to the additional investment
in Gadot and Bay Heart.

20

---

---

Cash
flows from financing activities

Net cash provided by financing
activities was approximately $187.5 million for the six months ended June 30, 2008,
compared to approximately $15.8 million of net cash provided by financing activities for
the corresponding period in 2007. The increase in cash provided is primarily attributable
to the issuance of the Companys Series B debentures.

In the six months ended June 30,
2008, the Company received $25.8 million notes payable and paid down its existing notes
payable in the amount of $2.9 million, as compared to receiving approximately $37.2
million of net notes payable and paying down $26.6 million notes payable for the
corresponding period in 2007.

The Company received $0.3 million
from exercise of stock options for the six months ended June 30, 2008, as compared to
receiving $5 million for the corresponding period in 2007.

Investments

In the six months ended June 30,
2008, the Company made an additional investment in the form of a $4.6 million loan to Bay
Heart.

In the six months ended June 30,
2008, the Company disposed of the following investments:

On March 2008, the Company received
$0.3 million from the sale of certain assets by PSINet Europe, one of the holdings of TP.

On February 29, 2008, the Company
sold certain assets of FIMI for $0.1 million.

Debt

Notes issued to institutional
investors in Israel, the convertible note issued to 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 2008-2019. 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 June 30, 2008, the outstanding indebtedness under these bank loans totaled $112.5
million and the loans mature through 2008-2019.

On April 6, 2008, the Company
entered into a trust agreement with Clal Finance Trustees 2007 Ltd. pursuant to which the
Company issued notes (Series B) for trading on the Tel Aviv Stock Exchange (the TASE)
pursuant to a prospectus published with the Israel Securities Authority in the principal
aggregate amount of NIS 577,823,000 (approximately $165.7 million) with an interest rate
of 6.6%, which is linked to the Israeli consumer price index. The notes shall rank pari
passu with our unsecured indebtedness. The notes will be repaid in five equal annual
installments commencing on January 31, 2012, and the interest will be paid semi-annually.

The following additional terms apply
to the notes:

| | Ampal
may issue additional notes without limitation.
|- | ----------------------------------------------------

| | Ampal
has a four year grace period for making principal payments on the notes, which payments
will not begin until 2012.
|- | ------------------------------------------------------------------------------------------------------------------------

| | The
notes are partially secured by a cash deposit in a bank account in the name of the
trustee in an amount equal to four years of interest payments on the debentures, such
deposit to be returned to the Company in eight installments beginning on the first
interest payment date and continuing on each subsequent interest payment date thereafter.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Ampal funded the Gadot transaction
with a combination of available cash and the proceeds of a new credit facility, dated
November 29, 2007 between Merhav Ampal Energy, Ltd. (MAE) and IDB, for
approximately $60.7 million which amount was increased on June 3, 2008, on the same terms
and conditions, by approximately $11.3 million (the credit Facility). The
Credit Facility is divided into two equal loans of approximately $36.0 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 1.5
years, and shall thereafter be paid in equal installments over the remaining 9.5 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
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 June 30, 2008, the Company has a $14.5 million loan with
UBI, an $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 $6.2 million bearing interest at rates between 4.3%
and 4.8% to be repaid until 2009.

21

---

---

As of June 30, 2008, the Company has
a $22.5 million loan with Bank Hapoalim as part of a $27 million dollar loan facility.
The funds borrowed under the loan facility are due in six 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 June 30, 2008, the Company is in compliance with its debt covenants.

As of June 30, 2008, the Company has
a $109.3 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.

A short term loan from Bank Hapoalim
in the amount of $3.5 million bears interest of 7.1% and is to be repaid by December 31,
2008.

On November 20, 2006, the Company
entered into a trust agreement with Hermetic Trust (1975) Ltd. pursuant to which the
Company issued notes to institutional investors in Israel in the principal aggregate
amount of NIS 250 million (approximately $58 million) with an interest rate of 5.75%,
which is linked to the Israeli consumer price index. The notes shall rank pari passu with
our unsecured indebtedness. The notes will be repaid in five equal annual installments
commencing on November 20, 2011, and the interest will be paid semi-annually. As of June
30, 2008, the outstanding debt under the notes amounts to $78.7 million, due to the
change in valuation of the New Israeli Shekel as compared to the U.S. dollar. The Company
deposited an amount of $10,207,000 with Hermetic Trust (1975) Ltd. to secure the first
three years worth of payments of interest on the debentures. As of June 30, 2008, the
outstanding amount of the deposit was $6.4 million. Prior to the issuance of the
debentures, Midroog Ltd., an affiliate of Moodys Investors Service, rated the
debentures as A3, which rating was raised to A2 in March 2008.

On April 29, 2008 the Company
completed its Series B debenture offering in Israel. Ampal accepted subscriptions in the
amount of NIS 577.8 million (approximately $165.7 million) for its Series B debentures.
The debentures are linked to the Israeli consumer price index and will carry an annual
interest rate of 6.6%.

Other long term borrowings in the
amount of $0.2 million are linked to the Consumer Price Index in Israel, mature between
2008 and 2010 and bear annual interest of 5.7%.

As of June 30, 2008, Gadot had $0.2
million outstanding under its convertible debentures. Gadots debentures were listed
on the TASE in December 2003, are linked to the Consumer Price Index in Israel, bear
annual interest at the rate of 6.5%, and are repayable in two equal annual installments
on December 5, 2008 and 2009. The debentures are convertible into ordinary shares of
Gadot, commencing from the date they were listed on the TASE until December 5, 2009.

As of June 30, 2008, Gadot had $16.6
million outstanding under its other debentures. These debentures are not convertible into
shares and are repayable in five equal annual installments on September 15 of each
of the years 2008 through 2012. The unsettled balance of the principal of the debentures
bears annual interest at the rate of 5.3%. The principal and interest of the debentures
are linked to the Consumer Price Index in Israel and the interest is payable in
semi-annual installments on March 15 and September 15 of each of the years 2006
through 2012.

As of June 30, 2008, Gadot has short
term loans payable in the amount of $110 million and long term loans payable in the
amount of $42.5 million. The various short term loans payable are either unlinked or
linked to the Euro and bear interest at rates between 5.73% to 6.09%. The various long
term loans payable are either unlinked, linked to the Consumer Price Index in Israel or
linked to the Euro and bear interest at rates between 4.82% to 6.9%.

The weighted average interest rates
and the balances of these short-term borrowings at June 30, 2008 and December 31, 2007
were 5.3% on $154.2 million and 6.3% on $136.6 million, respectively.

As of June 30, 2008, the Company had
issued guarantees on certain outstanding loans to its investees and subsidiaries in the
aggregate principal amount of $24.9 million. These include:

|1. | A
$5.9 million guarantee on indebtedness incurred by Bay Heart in connection
               with the development of the property. Bay Heart recorded losses in 2008 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. | A
$1.3 million guarantee to Galha (1960) Ltd. (Galha) if a final
               judgment is entered against the Company in the Tel Aviv District Court.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | A
$17.7 million guarantee of Gadot for outstanding loans.
|-- | ---------------------------------------------------------

Off-Balance Sheet Arrangements

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

22

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FOREIGN CURRENCY CONTRACTS

The Companys derivative
financial instruments consist of foreign currency forward exchange contracts to purchase
or sell U.S. 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 June 30, 2008, the Company had
open foreign currency forward exchange contracts to purchase U.S. Dollars and sell Euros
in the amount of $3.9 million, contracts to purchase Euros and sell Pounds in the amount
of $0.3 million and contracts to sell U.S. Dollars and buy Euros in the amount of $1.3
million.

FORWARD LOOKING STATEMENTS

This Quarterly Report (including but
not limited to factors discussed above, in the Managements Discussion and
Analysis of Financial Condition and Results of Operations, as well as those
discussed elsewhere in this Quarterly Report on Form 10-Q) includes forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1993 and Section
21E of the Securities Exchange Act of 1934) 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
Quarterly 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 and the Middle
East and the global business and economic conditions in the different sectors and markets
where the Companys portfolio companies operate.

Should any of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect, actual
results or outcomes may vary from those described herein as anticipated, believed,
estimated, expected, intended or planned. These risks and uncertainties may include, but
are not limited to, those described in this report, in Part II, Item 1A. Risk Factors and
elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2007, and
those described from time to time in our future reports filed with the Securities and
Exchange Commission. The Company assumes no obligation to update or revise any
forward-looking statements.

23

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ITEM 3. 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 exchange rates, index
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 June 30, 2008, and are sensitive to the above market risks.

During the six months ended June 30,
2008, 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, 2007.

Interest Rate Risks

On May 15, 2008, the Company entered
into a swap agreement with respect to its Series B debentures, in the principal amount of
$165.7 million, due 2016. As a result of these agreements the Company is currently paying
an effective interest rate of LIBOR plus 5.12% on $43.9 million of these debentures,
as compared to the original 6.6% fixed rate which is linked to the Israeli consumer price
index.

As of June 30, 2008, the value of the
currency swap resulted in a $2.7 million increase in other assets and a corresponding
decrease in interest expense.

As of June 30, 2008, the Company had
financial assets totaling $206.5 million and financial liabilities totaling $643.5
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.

As of June 30, 2008, the Company did
not have fixed rate financial assets and had variable rate financial assets of $192.5
million. A ten percent decrease in interest rates would not increase the unrealized fair
value of the fixed rate assets.

As of June 30, 2008, the Company had
fixed rate debt of $398.3 million and variable rate debt of $245.2 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 $1.5 million.

The net decrease in earnings and cash
flows for the next year resulting from a ten percent interest rate increase would be
approximately $1.0 million, holding other variables constant.

Foreign Currency Exchange
Rate Sensitivity Analysis

The Companys exchange rate
exposure on its financial instruments results from its investments and ongoing operations.
As of June 30, 2008, the Company had open foreign exchange forward contracts to purchase
U.S. Dollars and sell Euros in the amount of $3.9 million, contracts to purchase Euros and
sell Pounds in the amount of $0.3 million and contracts to sell U.S. Dollars and buy Euros
in the amount of $1.3 million. Holding other variables constant, if there were a ten
percent devaluation of each of the foreign currency, the Companys cumulative
translation loss reflected in the Companys accumulated other comprehensive loss
would increase by $2.2 million, and regarding the statements of operations, a ten percent
devaluation of the U.S. Dollar exchange rate would result in a net increase in earnings
and cash flows of $25.6 million, and a ten percent devaluation of the Euro exchange rate
would result in a net increase in earnings and cash flows of $1.4 million.

On May 15, 2008, the Company entered
into a swap agreement with respect to its Series B debentures, in the principal amount of
$165.7 million, due 2016. As a result of these agreements the Company is currently paying
an effective interest rate of LIBOR plus 5.12% on $43.9 million of these notes, as
compared to the original 6.6% fixed rate which is linked to the Israeli consumer price
index. As of June 30, 2008, the value of the currency swap resulted in a $2.7 million
increase in other assets and a corresponding decrease in interest expense.

Equity Price Risk

The Companys investments at
June 30, 2008 included trading marketable securities which are recorded at a fair value of
$6.7 million, including a net unrealized gain of $1.1 million, and $16.8 million of
trading securities that are classified as available for sale, including a net unrealized
loss of $0.8 million. Those securities have exposure to equity price risk. The estimated
potential loss in fair value resulting from a hypothetical ten percent decrease in prices
quoted on stock exchanges is approximately $2.4 million. There will be no impact on cash
flow resulting from a hypothetical ten percent decrease in prices quoted on stock
exchanges.

24

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ITEM 4. 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 fiscal quarter to which
this report relates that have materially affected, or are reasonably likely to materially
affect the Companys internal control over financial reporting.

25

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|Part II |  | OTHER INFORMATION
|------- | - | -----------------

|Item 1. |  | Legal Proceedings:
|------- |  | ------------------

| | On
January 1, 2002, 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 12,269,000 ($3.66 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 4,172,000
($1,085,000) 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. (Arieh) 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. In March 2008, the dispute was
submitted to mediation by order of the court, with the consent of the parties.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 1A. |  | RISK FACTORS
|-------- |  | ------------

| | In
addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on
Form 10-K for the year ended December 31, 2007, which could materially affect our
business, financial condition or future results. The risks described in our Annual Report
on Form 10-K are not the only risks facing our 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item  2. |  | Unregistered Sales of Equity Securities and Use of Proceeds.
|-------- |  | ------------------------------------------------------------

| | None.
| | -----

|Item 3. |  | Defaults upon Senior Securities
|------- |  | -------------------------------

| | None.
| | -----

|Item 4. |  | Submission of Matters to a Vote of Security Holders.
|------- |  | ----------------------------------------------------

| | None.
| | -----

|Item 5. |  | Other Information.
|------- |  | ------------------

| | None.
| | -----

|Item  6. |  | Exhibits.
|-------- |  | ---------

| | (a) | Exhibits:
| | --- | ---------

|4.a |  | English
Translation of the original Hebrew language Trust Deed dated, April 6, 2008, between
Ampal American Israel Corporation and Clal Financial Trusts 2007 Ltd., and its amendments
(Filed as exhibit 4.a to Form 10-Q, for the quarter ended March 31, 2008, and
incorporated herein by reference).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11.1 |  | Schedule
Setting Forth Computation of Earnings Per Share of Class A Stock.
|---- |  | --------------------------------------------------------------------------

|31.1 |  | Certification
of Yosef A. Maiman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | -------------------------------------------------------------------------------------------

|31.2 |  | Certification
of Irit Eluz pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | -------------------------------------------------------------------------------------

|32.1 |  | Certification
of Yosef A. Maiman and Irit Eluz pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section                 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

| |  | AMPAL-AMERICAN ISRAEL CORPORATIONBy: /s/ Yosef A. Maiman
Yosef A. Maiman
Chairman of the Board
President & Chief Executive Officer
(Principal Executive Officer)
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | By: /s/ Irit Eluz
Irit Eluz
CFO and Senior Vice President,
Finance and Treasurer
(Principal Financial Officer)
| |  | ----------------------------------------------------------------------------------------------------------------------------

| |  | By: /s/ Zahi Ben-Atav
Zahi Ben-AtavVP Accounting and Controller(Principal Accounting Officer)
| |  | -----------------------------------------------------------------------------------------------------------

Date: August 5, 2008

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

Exhibit Index

|Exhibit No. | Description
|----------- | -----------

|4.a | English
Translation of the original Hebrew language Trust Deed, dated April 6, 2008, between
Ampal American Israel Corporation and Clal Financial Trusts 2007 Ltd., and its amendments
(Filed as exhibit 4.a to Form 10-Q, for the quarter ended March 31, 2008, and
incorporated herein by reference).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11.1 | Schedule
Setting Forth Computation of Earnings Per Share of Class A Stock.
|---- | --------------------------------------------------------------------------

|31.1 | Certification
of Yosef A. Maiman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- | -------------------------------------------------------------------------------------------

|31.2 | Certification
of Irit Eluz pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- | -------------------------------------------------------------------------------------

|32.1 | Certification
of Yosef A. Maiman and Irit Eluz pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section                 906 of the Sarbanes-Oxley Act of 2002.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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