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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549

FORM 20-F

|(Mark One)
|----------
|          
|o         
|          
|OR        
|          
|x         
|          
|OR        
|          
|o         
|          

Commission file number 1-14426

|BLUE SQUARE-ISRAEL LTD.                                 
|--------------------------------------------------------
|                                                        
|(Exact name of Registrant as specified in its
  charter)
|                                                        
|Israel                                                  
|                                                        
|(Jurisdiction of incorporation or organization)         
|                                                        
|2 Amal Street, Rosh Haayin 48092, Israel               
|                                                        
|(Address of principal executive offices)                

Securities registered or to be registered pursuant
to Section 12(b) of the Act.

|Title of class                                                         |  | Name of each exchange on which
  registered
|---------------------------------------------------------------------- |  | -------------------------------------------
|                                                                       |  |                                            
|American Depositary Shares, each
  representing one Ordinary Share (1) |  | New York Stock Exchange, Inc.              
|                                                                       |  |                                            
|Ordinary Shares, par value NIS 1.0 per share (2)                       |  | New York Stock Exchange, Inc.              

(1)     Evidenced by
American Depositary Receipts.

(2)     Not for trading,
but only in connection with the listing of the American Depositary Shares.

Securities registered or to be registered pursuant
to Section 12(g) of the Act:

|None                                                                                        
|--------------------------------------------------------------------------------------------
|                                                                                            
|(Title of Class)                                                                            
|                                                                                            
|Securities for which there is a reporting
  obligation pursuant to Section 15(d) of the Act:
|                                                                                            
|None                                                                                        
|                                                                                            
|(Title of Class)                                                                            

Indicate
the number of outstanding shares of each of the issuers classes of capital or
common stock as of the close of the period covered by the annual report:

38,400,000 Ordinary Shares, par value NIS 1.0
per share

|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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|x Yeso No                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                  
|Indicate
  by check mark which financial statement item the registrant has elected to
  follow.                                                                                                                                                                                                                                                                   
|x Item
  17o Item 18                                                                                                                                                                                                                                                                                                                                              

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INTRODUCTION

Unless
otherwise indicated, as used in this annual report, (a) the term Blue
Square means Blue Square-Israel Ltd., (b) the terms we, us and our,
mean Blue Square and its consolidated subsidiaries and (c) BSIP means Blue
Square Chain Investments &
Properties Ltd., a corporation of which we held 80.73% of the outstanding
shares as of March 31, 2004, and the balance of whose shares are publicly held
and traded on the Tel Aviv Stock Exchange.

We are a
leading food retailer in the State of Israel. 
Through our supermarkets, we offer a wide range of food and beverages
products and also housewares and cosmetics. 
As of December 31, 2003, we owned and operated 161 supermarkets
under the brand names Mega, Super Center, Super Center City, Shefa Shuk, Co-Op
and other formats. We were incorporated in June 1988.  In 1996, we completed our initial public
offering and our American Depositary Shares, or ADSs, were listed for trading
on the New York Stock Exchange.  In
November 2000, our ordinary shares were listed for trading on the Tel Aviv
Stock Exchange.

Except for
the historical information contained herein, the statements contained in this
annual report are forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, with respect to our business,
financial condition and operating results. 
Actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including all the
risks discussed in Item 3.  Key
InformationRisk Factors and elsewhere in this annual report.

We urge you
to consider that statements which use the terms believe, do not believe,
expect, plan, intend, estimate, anticipate, project and similar
expressions are intended to identify forward-looking statements.  These statements reflect our current views
with respect to future events and are based on assumptions and are subject to
risks and uncertainties.  Except as
required by applicable law, including the securities laws of the United States,
we do not undertake any obligation nor intend to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.

All
references in this annual report to dollars or $ are to U.S. dollars and all
references in this annual report to NIS are to New Israeli Shekels. Unless
mentioned otherwise, all figures in U.S. dollars are based on the
representative exchange rate between the NIS and the dollar as published by the
Bank of Israel for December 31, 2003, which was NIS 4.379 per $1.00,
except figures for the first quarter of 2004, which are based on the
representative exchange rate between the NIS and the dollar as published by the
Bank of Israel for March 31, 2004, which was NIS 4.528 per $1.00.

Our
consolidated financial statements appearing in this annual report are prepared
in NIS, in accordance with generally accepted accounting principles in Israel,
referred to in this annual report as Israeli GAAP.

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TABLE OF
CONTENTS

|         |           |                                                                                | Page
|-------- | --------- | ------------------------------------------------------------------------------ | ----
|         |           |                                                                                |     
|PART I   |           | 1                                                                             
|         | ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
  AND ADVISERS                        | 1   
|         | ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                        | 1   
|         | ITEM 3.   | KEY INFORMATION                                                                | 1   
|         | ITEM 4.   | INFORMATION ON THE COMPANY                                                     | 12  
|         | ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND
  PROSPECTS                                 | 27  
|         | ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                     | 47  
|         | ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                              | 66  
|         | ITEM 8.   | FINANCIAL INFORMATION                                                          | 71  
|         | ITEM 9.   | THE OFFER AND LISTING                                                          | 75  
|         | ITEM 10.  | ADDITIONAL INFORMATION                                                         | 78  
|         | ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES
  ABOUT MARKET RISK                   | 102 
|         | ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY
  SECURITIES                       | 103 
|PART II  |           | 104                                                                           
|         | ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND
  DELINQUENCIES                              | 104 
|         | ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF
  SECURITY HOLDERS AND USE OF PROCEEDS | 104 
|         | ITEM 15.  | CONTROLS AND PROCEDURES                                                        | 104 
|         | ITEM 16.  | [RESERVED]                                                                     | 104 
|         | ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                               | 104 
|         | ITEM 16B. | CODE OF ETHICS                                                                 | 105 
|         | ITEM 16C. | ACCOUNTANTS FEES AND SERVICES                                                  | 105 
|         |           |                                                                                |     
|PART III |           | 107                                                                           
|         | ITEM 17.  | FINANCIAL STATEMENTS                                                           | 107 
|         | ITEM 18.  | FINANCIAL STATEMENTS                                                           | 107 
|         | ITEM 19.  | EXHIBITS                                                                       | 107 

i

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PART I

ITEM
1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS

Not
applicable.

ITEM
2.     OFFER STATISTICS AND EXPECTED TIMETABLE

Not
applicable.

ITEM
3.     KEY INFORMATION

A.          Selected
Financial Data.

We have
derived the following selected consolidated financial data as of
December 31, 2002 and 2003 and for each of the years ended
December 31, 2001, 2002 and 2003 from our consolidated financial
statements and notes included elsewhere in this annual report.  We have derived the selected consolidated
financial data as of December 31, 1999, 2000, and 2001 and for each of the
years ended December 31, 1999, and 2000 from our audited consolidated
financial statements not included in this annual report.  We prepare our consolidated financial statements
in conformity with Israeli GAAP.  As
described in note 21 to our consolidated financial statements included
elsewhere in this annual report, Israeli GAAP differs in certain respects from
U.S. GAAP.  Our financial statements are
presented in NIS adjusted to reflect changes in the Israeli consumer price
index, or the CPI.  Consequently, all
NIS amounts set forth in our historical financial statements are adjusted each
time we publish new financial statements in order to reflect changes in the CPI
as of the date of the latest balance sheet presented in these financial
statements.  In accordance with Israeli
Accounting Standards No. 12 and No. 17 adopted by the Israeli Accounting
Standards Board, our financial statements will cease to be adjusted for
inflation in Israel for periods beginning on or after January 1, 2004.   See Item 5.  Operating and Financial Review Critical Accounting
Policies.  You should read the selected
consolidated financial data together with the section of this annual report
entitled Item 5.  Operating and
Financial Review and Prospects and our consolidated financial statements
included elsewhere in this annual report.

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|                                                                          |  | 1999                                                               |           | 2000 |  | 2001      |   | 2002 |           | 2003 |  | 2003      |  
|------------------------------------------------------------------------- |  | ------------------------------------------------------------------ | --------- | ---- |  | --------- | - | ---- | --------- | ---- |  | --------- | -
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|                                                                          |  | Adjusted NIS (In thousands, except per ordinary share or ADS data) |           | $(1) | 
|                                                                          |  |                                                                    |           |      | 
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Income Data                                                               |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Sales                                                                     |  |                                                                    | 5,223,323 |      |  | 5,508,946 |   |      | 5,828,391 |      |  | 5,444,306 |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Cost
  of sales                                                           |  |                                                                    | 3,840,251 |      |  | 3,976,589 |   |      | 4,215,439 |      |  | 3,974,628 |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Gross
  profit                                                            |  |                                                                    | 1,383,072 |      |  | 1,532,357 |   |      | 1,612,952 |      |  | 1,469,678 |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Selling, general and administrative
     expenses                         |  |                                                                    | 1,148,912 |      |  | 1,244,934 |   |      | 1,296,217 |      |  | 1,250,662 |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Operating
  income                                                        |  |                                                                    | 234,160   |      |  | 287,423   |   |      | 316,735   |      |  | 219,016   |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Financial
  income (expenses), net                                        |  |                                                                    | (28,244   | )    |  | (44,227   | ) |      | (13,109   | )    |  | 15,900    |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Amortization
  of goodwill                                                |  |                                                                    | 6,146     |      |  | 5,953     |   |      | 5,277     |      |  | 5,277     |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Other
  income (expenses), net                                            |  |                                                                    | (7,527    | )    |  | 20,280    |   |      | (18,152   | )    |  | (174,004  | )
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Taxes
  on income                                                         |  |                                                                    | 75,422    |      |  | 95,872    |   |      | 107,823   |      |  | 42,078    |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Equity
  in net earnings (loss) of
     affiliates                        |  |                                                                    | 628       |      |  | 1,383     |   |      | 3,561     |      |  | (363      | )
|Minority
  interest                                                       |  |                                                                    | 21,369    |      |  | 23,305    |   |      | 25,123    |      |  | 5,953     |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Loss
  from discontinued operation                                        |  |                                                                    | 10,225    |      |  | 2,649     |   |      | -         |      |  | -         |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Net
  income (loss)                                                       |  |                                                                    | 85,855    |      |  | 137,081   |   |      | 150,812   |      |  | 7,241     |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Earnings (loss) per ordinary share or
     ADS from continuing Operations |  |                                                                    | 2.50      |      |  | 3.64      |   |      | 3.93      |      |  | 0.19      |  
|Losses
  per ordinary share or ADS
     from discontinued Operations      |  |                                                                    | (0.26     | )    |  | (0.07     | ) |      | -         |      |  | -         |  
|Total
  Earnings (loss) per ordinary
     share or ADS                    |  |                                                                    | 2.24      |      |  | 3.57      |   |      | 3.93      |      |  | 0.19      |  
|Cash
  dividends per ordinary share
     or ADS                           |  |                                                                    | 0.98      |      |  | 1.08      |   |      | 1.35      |      |  | 3.33      |  
|U.S. GAAP:                                                                |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Net
  income (loss)                                                       |  |                                                                    | 79,432    |      |  | 133,787   |   |      | 151,393   |      |  | 62,596    |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Earnings (loss) per ordinary share or
   ADS from continuing operation    |  |                                                                    | 2.38      |      |  | 3.65      |   |      | 3.94      |      |  | 1.63      |  
|Losses
  per ordinary share or ADS
     from discontinued 
  operations   |  |                                                                    | (0.27     | )    |  | (0.17     | ) |      | -         |      |  | -         |  
|Total
  Earnings (loss) per ordinary
  share or ADS                       |  |                                                                    | 2.11      |      |  | 3.48      |   |      | 3.94      |      |  | 1.63      |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Selected Operating Data:                                                  |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Number
  of stores (at year end)                                          |  |                                                                    | 165       |      |  | 168       |   |      | 171       |      |  | 173       |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Decrease
  in same store sales                                            |  |                                                                    | 3.4       | %    |  | 4.4       | % |      | 3.2       | %    |  | 11.2      | %
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Total
  square meters (at year end)                                       |  |                                                                    | 239,000   |      |  | 258,000   |   |      | 279,000   |      |  | 292,600   |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Sales
  per square meter (in NIS)(2)                                      |  |                                                                    | 23,068    |      |  | 22,095    |   |      | 22,017    |      |  | 19,229    |  
|                                                                          |  |                                                                    |           |      |  |           |   |      |           |      |  |           |  
|Sales
  per employee (in thousands)                                       |  |                                                                    | 719       |      |  | 743       |   |      | 743       |      |  | 732       |  

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|(1) | The
  translation of the adjusted NIS amounts into dollars has been made for the
  convenience of the reader at the representative exchange rate prevailing at
  December 31, 2003 (NIS 4.379=$1.00), as published by the Bank of Israel.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                          
|(2) | Based
  on an average total square meters at month end.                                                                                                                                                                                  

2

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|                                                 |  | December 31,                |          
|------------------------------------------------ |  | --------------------------- | ---------
|                                                 |  |                             |          
|                                                 |  | 1999                        |          
|                                                 |  |                             |          
|                                                 |  | Adjusted NIS (in thousands) |          
|                                                 |  |                             |          
|Balance Sheet Data:                              |  |                             |          
|Israeli GAAP:                                    |  |                             |          
|Working
  capital deficit                        |  |                             | (489,694 
|Total
  assets                                   |  |                             | 3,200,392
|Short-term
  credit from
       banks and others |  |                             | 389,582  
|Long-term
  debt                                 |  |                             | 257,679  
|Shareholders
  equity                           |  |                             | 1,258,732
|U.S. GAAP:                                       |  |                             |          
|Total
  assets                                   |  |                             | 3,180,978
|Shareholders
  equity                           |  |                             | 1,251,456

|(1) | The
  translation of the adjusted NIS amounts into dollars has been made for the
  convenience of the reader at the representative exchange rate prevailing at
  December 31, 2003 (NIS 4.379 = $1.00), as published by the Bank of Israel.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B.      Capitalization
and Indebtedness.

Not
applicable.

C.
     Reasons for the Offer and Use of Proceeds.

Not
applicable.

D.
     Risk Factors.

Our
business, operating results and financial condition could be seriously harmed
due to any of the following risks.  If
we do not successfully address any of the risks described below, we could
experience a material adverse effect on our business, operating results and
financial condition and the share and ADS price of Blue Square may
decline.  We cannot assure you that we
will successfully address any of these risks.

We are engaged in a highly competitive
business.  If we are unable to compete
effectively, particularly against low-priced private supermarkets, our business
will be materially adversely affected.

The food
retailing industry in Israel is highly competitive and is characterized by high
turnover and narrow operating margins. 
We compete with other supermarket chains, independent grocers, open air
markets, and other retailers selling supermarket goods.  Competitive pressures increase as the
supermarket sector in Israel approaches higher saturation levels and continue
to increase as our competitors expand their operations and new companies enter
the market with hard discount formats.

3

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The year
2003 increased competitive pressures on us. 
Israels economic environment worsened during the year, resulting in
continued high unemployment and a depressed retail market.  This impacted the food retailing industry.  As a result of the recession and in response
to the success of the hard discount formats, other major chains, including us,
expanded their own hard discount store formats. In addition, recognizing the
growing opportunity as a result of the recession, a class of private
supermarkets expanded their presence in selected areas, increasing competition
in an already difficult market. These private supermarkets have been able to
capture a significant part of the sales from the major chains in their areas by
using lower cost non-unionized labor and having lower operating costs and, in
some cases by operating on Saturdays and offering non-kosher food. Large
supermarket chains in Israel, including us, are kosher and therefore do not
offer non-kosher food or operate on Saturdays. 
As a result, in 2003, these private supermarkets took market share from
the major chains, contributing to an approximately 5% reduction in our revenues
as compared to 2002. As a result of the change in the business environment and
these developments, we relocated some of our stores and closed 17
underperforming stores in 2003.  In
addition, we estimate that our market share dropped from approximately 30% of
the Israeli supermarket chain market during 2002 to approximately 28% during 2003.
Our sales dropped from approximately NIS 5,444 million, or $1,243.2 million, in
2002 to approximately NIS 5,171 million, or $1,180.8 million, in 2003.

If our
current level of sales continues to decline or if we continue losing market
share to our competitors, our negotiating position with suppliers, which is
based in part on our market share in the Israeli retail market, and our
revenues may be adversely affected, with a corresponding impact on
profitability. We cannot assure you that we will be able to maintain our sales
and market share.

We have a history of quarterly fluctuations
in our operating results and expect these fluctuations to continue due to
seasonality.  This may cause the share
and ADS price of Blue Square to be volatile.

Our
business is subject to fluctuations in quarterly sales and profits.  These fluctuations are primarily
attributable to increased sales and higher operating income in the holiday
seasons occurring in different quarters from year to year.  Thus, for example, increased sales
attributable to Passover, which occurs in either March or April, may be
realized in either the first or the second quarter, and sales attributable to
the Jewish New Year, which occurs in either September or October, may be
realized in either the third or the fourth quarter.  However, the timing of the holidays does not affect our
semiannual results.

Many of our
expenses are unrelated to the level of sales. 
Therefore, a relatively modest increase or decrease in sales, whether or
not related to the timing of holidays, tends to have a disproportionately large
impact on our profitability.

Because of
the fluctuations that we have experienced in our quarterly operating results,
we do not believe that period-to-period comparisons of our operating results
are necessarily meaningful or should necessarily be relied upon as indicators
of future performance.  Accordingly, our
operating results may be below public expectations in future periods.  Our failure to meet these expectations may
cause the share and ADS price of Blue Square to decline.

4

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---

We are dependent to a significant extent on a
limited number of key suppliers.  If
these suppliers raise prices or encounter difficulties in providing their
products, our operating results will be adversely affected.

We purchase
most of our dairy, fresh produce and poultry products from the Tnuva
Cooperative, or Tnuva, an Israeli food cooperative, which holds a leading
position in the domestic dairy and poultry markets.  In 2003, Tnuvas products accounted for approximately 14.3% of
all the products sold at our supermarkets. 
In addition, Elite, which merged with Strauss in 2003, an Israeli food
manufacturer, accounted in 2003 for approximately 10% of all products sold at
our supermarkets, and the Osem group accounted for approximately 7.6% of all
products sold at our supermarkets in 2003. Because of our status as a leading
food retailer in Israel and the fact that we maintain an excellent and
long-standing relationship with Tnuva, Elite and Osem, we do not believe that
there is a material risk of future stoppage of supply of products of these key
suppliers.  However, we do not have a
written contract with Tnuva, Elite or Osem obligating them to supply products
to us.  The ten largest suppliers
accounted for approximately 50% of our product purchases in 2003.  We cannot assure you that, in the future,
Tnuva, Elite, Osem or any of these other suppliers will not significantly raise
the prices of the products they supply us, or encounter difficulties in
providing these products to us, in either of which cases our operating results
might be adversely affected.

Bronfman-Alon is able to control the outcome
of matters requiring shareholder approval.

Bronfman-Alon
Ltd. (Bronfman-Alon) currently owns approximately 77.60% of Blue Squares
ordinary shares following the conversion by other investors of approximately
NIS 9.5 million in principal amount of our 5.9% convertible debentures in April
2004.  So long as Bronfman-Alon, or any
successor to its shareholdings in Blue Square, continues to own beneficially
more than 50% of our outstanding ordinary shares and voting power, it will be
able to control the outcome of matters requiring shareholder approval,
including the election of all Blue Square directors, other than Blue Square two
external directors whose election, under the Israeli companies law, requires
that at least one-third of the non-controlling shareholders who participate in
the vote, vote for their nomination, or that less than one percent of the
non-controlling shareholders voted against their nomination.

We own a majority interest in most of our
subsidiaries.  As a majority
shareholder, we owe fiduciary duties to the minority shareholders of our
subsidiaries and have to share dividends and distributions with these minority
shareholders.

We directly
operate all of the supermarkets that Blue Square owns directly and those that
are owned by its partially owned subsidiaries. 
As of December 31, 2003, Blue Square owned directly 102 supermarkets;
the balance of our operations were owned by its partially owned subsidiaries,
each of which has its own board of directors and management.  These subsidiaries include BSIP, in which
Blue Square owns an 80.73% interest, and the Blue Square Chain (Hyper Hyper)
Ltd., or Hyper Hyper, in which BSIP owns a 100% interest and, therefore, Blue
Square indirectly owns an 80.73% interest. The ordinary shares of BSIP that are
not owned by Blue Square are publicly held and traded on the Tel Aviv Stock
Exchange.  The consolidated sales of
BSIP and its subsidiaries in 2003 aggregated approximately NIS 3,540 million,
or $808.4 million, representing approximately 68.4% of our consolidated sales
for 2003, and the consolidated sales of BSIP and its subsidiaries in the three
months ended March 31, 2004 aggregated approximately NIS 873.5 million, or
$192.9 million, representing approximately 
67.9% of our consolidated sales for the three months ended March 31,
2004.  At December 31, 2003, the
total consolidated assets of BSIP and its subsidiaries aggregated approximately
NIS 1.3 billion, or $299 million, constituting approximately 40.9% of our total
consolidated assets at December 31, 2003, and at March 31, 2004, the total
consolidated assets of BSIP and its subsidiaries aggregated approximately NIS
1.3 billion, or $293.1 million, constituting approximately 40.1% of our total
consolidated assets at March 31, 2004.

5

---

---

In order to
satisfy whatever fiduciary obligations we may have under applicable law to the
minority shareholders of our partially owned subsidiaries, we endeavor to deal
with these subsidiaries at arms-length. 
Some transactions between Blue Square and a subsidiary, including any
investment by Blue Square in, and any long-term loan by Blue Square to, a
subsidiary, require the approval of the audit committee, the directors, and,
under certain circumstances, approval of the shareholders of the subsidiary by
special vote and are subject to the receipt of applicable permits and approvals.  In addition, any dividend or distribution
from a subsidiary requires the approval of the directors of that subsidiary,
and may be subject to restrictions imposed by loan and other agreements to
which they are parties.

Failure to obtain or maintain permits
required for our operations may adversely affect our operating results.

Our
operation of supermarkets in Israel requires permits from municipal
authorities, which are conditioned on the prior approval of various agencies,
including the health and environment ministries, and the police and fire
departments.  Approximately twenty of
these permits are currently in the name of the Co-Op Blue Square Services
Society, or the Co-Op, our former controlling shareholder, and entities other
than us, and have not yet been transferred or re-issued to us.  Also, some of our stores require permits
that have not yet been obtained, or have expired or require renewal.  Furthermore, as a result of the hostilities
between Israel and the Palestinians, the relevant authorities, including the
police, have required us to adopt various security measures.  These safety requirements may prescribe
extensive investment in safety equipment, the retaining of security personnel
and may lengthen the time dedicated for obtaining permits from the municipal
authorities. If we are unable to obtain or maintain one or more required
permits, we may be required to close one or more stores or to take other
remedial action to obtain or maintain these permits.  We are not currently aware of any impending closing of any of our
stores due to a lack of a required permit.

6

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Increase in employee minimum wage in Israel
may adversely affect our operating results.

A
substantial portion of our employees wages is adjusted upon a change in the
minimum wage in Israel. Under Israeli law, minimum wage equals 47.5% of the
average wage for an employee in Israel. The minimum monthly wage since January
2003 has been NIS 3,335, or $762.  The
minimum wage in Israel increased in January 2003 despite a decrease in the
average wage for an employee in Israel due to temporary legislation
enacted by the Knesset, the Israeli parliament, and due to a cost of living
increase to which all employees in Israel are entitled. An increase in minimum
wage will increase our labor costs and thus adversely affect our operating
results.

Volatility of Blue Squares share and ADS
price could adversely affect its shareholders.

The market
price of Blue Squares ordinary shares and ADSs could be volatile and could be
subject to fluctuations in response to numerous factors, including the
following:

| | actual or
  anticipated variations in our quarterly operating results or those of our
  competitors;
|- | ----------------------------------------------------------------------------------------------------
|  |                                                                                                     
| | changes in
  financial estimates by securities analysts;                                            
|  |                                                                                                     
| | conditions
  or trends in our business;                                                             
|  |                                                                                                     
| | changes in
  the market valuations of our competitors;                                              
|  |                                                                                                     
| | announcements
  by us or our competitors of significant acquisitions;                               
|  |                                                                                                     
| | entry into
  strategic partnerships or joint ventures by us or our competitors;                     
|  |                                                                                                     
| | the
  political, economic, security and military conditions in Israel;                              
|  |                                                                                                     
| | additions or
  departures of key personnel; and                                                     
|  |                                                                                                     
| | sales of
  ordinary shares by Blue Squares controlling shareholder.                                

Many of
these factors are beyond our control and may materially adversely affect the
market price of Blue Squares ordinary shares and ADSs, regardless of our
performance.

Since 1996,
Blue Squares ADSs have been listed for trading on the New York Stock
Exchange.  Since November 2000, Blue
Squares ordinary shares have also been listed for trading on the Tel Aviv
Stock Exchange.  Volatility of the price
of Blue Squares securities on either market is likely to be reflected in the
price of Blue Squares securities on the other market.  In addition, fluctuations in the exchange
rate between the NIS and the dollar may affect the price of Blue Squares
ordinary shares on the Tel Aviv Stock Exchange and, as a result, may affect the
market price of Blue Squares ADSs on the New York Stock Exchange.

7

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Restrictions on the payment of dividends may
limit our ability to pay cash dividends on our ordinary shares.

In
connection with our issuance of NIS 400 million in aggregate principal amount
of unsecured 5.9% convertible and nonconvertible debentures in August 2003, our
Board of Directors resolved that we would not distribute dividends in any
quarter if the ratio of our financial obligations (as defined by Maalot, an
Israeli rating agency, and affiliate of S&P) (Maalot) to EBITDA for any
quarter exceeds 3.5 until June 30, 2006 or exceeds 3.0 thereafter.  Our Board also resolved that we would not
distribute dividends in any quarter from August 1, 2003 until October 5, 2014
if the ratio of the cost of unencumbered fixed assets as set forth on our
financial statements (following depreciation) to financial obligations (as
defined by Maalot) for any quarter is below 120%. Maalot has informed us that a
change in this Board resolution may lead to a downgrading of the rating on our
5.9% unsecured debentures.  Following
the dividends distributions of 2003 and 2004 the retain earnings of Blue Square
decreased significantly. As a result of this Board resolution and the other
restrictions, we may not be able to pay cash dividends on our ordinary shares
in the same amount as in 2003 and the first half of 2004, and you may not be
able to receive adequate return on your shares through the payment of
dividends.

Future issuances of our ordinary shares could
reduce our share price.

Out of the
NIS 400 million in aggregate principal amount of unsecured 5.9% debentures that
we issued in August 2003, NIS 200 million in aggregate principal amount were
convertible debentures with maturity dates of seven to eleven years, which are
currently convertible into Blue Square ordinary shares at per share price of
NIS 35.184. This conversion ratio is subject to adjustments in the event of
distribution of bonus shares, cash dividends and the issuances of rights. On
June 15, 2004, the closing price per share of our ordinary shares on the Tel
Aviv Stock Exchange was NIS 46.98.

In
addition, we are currently considering the adoption of an incentive plan. This
incentive plan may include the grant or issuance of options or ordinary shares
to certain employees.  The price of such
shares, if issued, or the exercise price of such options may be below the
market price of our shares.

Our
issuance of ordinary shares to holders of our convertible debentures or under
an option plan, or the perception that those issuances may occur in the future,
could materially and adversely affect the market price for our ordinary shares.

The Israeli Antitrust Authority
may take actions that limit our ability to
execute our business strategy or otherwise affect our profitability.

Our
strategy includes expanding our market presence in existing retail food markets
and by entering into new retail food markets. 
The Israeli Antitrust Authority may limit our ability to execute our
strategy.    The Commissioner of the
Israeli Antitrust Authority may limit our ability to acquire existing stores or
enter into mergers to acquire existing stores.

8

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On May 29,
2003, the Commissioner of the Israeli Antitrust Authority announced that it had
concluded its investigation into alleged restrictive trade arrangement between
major supermarket chains in Israel and large suppliers.  The Commissioner publicized a document of
direction, which contains his view
of the legality of certain commercial conduct between the large supermarket
chains (which consists of Super Sol, ClubMarket and us) and the large
suppliers, which was exposed during the investigation.  The document of direction also contains the
Commissioners proposal as to how the large supermarket chains and suppliers
should act in the future.  The major
supermarket chains and large suppliers have provided their comments to the
Commissioners document of direction, but as of June 15, 2004 the Commissioner
of the Israeli Antitrust Authority had not responded to these comments or
otherwise taken any measures or imposed any restrictions against us or
implemented the proposal.  If the
Commissioner of the Israeli Antitrust Authority takes any action against us and
limits our ability to conduct business with our suppliers, our profits could be
adversely affected.

For more
information on this and other action taken by the Israeli Antitrust Authority,
please see Item 4. Information On The Company  Government Regulation.

The proposed
amendment to the Law for Deposits on Beverage Containers, 1999, would impose significant
expenses and costs on us, which could have a material adverse effect on our
results of operations.

The Knesset, the Israeli parliament, is
considering amending the Law for Deposits on Beverage Containers, 1999, which would require us to charge a deposit
for drink containers of more than 1.5 liters and less than 5 liters and accept
the return of empty containers for refund. 
This would also require us to store the containers until collected by
the plastic recycling companies.  The
current law only applies to containers of less than 1.5 litres. This proposed
amendment to the law would impose on us significant expenses and costs, which
could have an adverse effect on our results of operations.

Our profit margin would be adversely affected
if our ability to utilize our 
distribution center were limited.

We have one
distribution center in Rishon Letzion from which we distribute to our
supermarkets a large portion of the products they carry. The products
distributed by our distribution center generated approximately 23.1% of our
total percentage sales during 2003.  Our
inability to utilize the distribution center for any reason, may significantly impair
our ability to distribute our products to our supermarkets and would adversely
affect our profit margin.

9

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Risks Relating to Our Location in Israel

A new published
Israeli Accounting Standard could have an adverse effect on our results of
operations.

In accordance with Israeli Accounting
Standards No. 12 and No. 17 adopted by the Israeli Accounting Standards Board,
our financial statements will cease to be adjusted for inflation in Israel for
periods beginning on or after January 1, 2004. The amounts included in our
financial statements as of December 31, 2003 will serve as the starting point
for nominal financial reporting beginning January 1, 2004. The adoption of
Standard No. 12 could have material adverse effect on our results of
operations. As a result of the adoption of these standards, our assets and
shareholders equity will cease to be adjusted for inflation in Israel, while
the repayment of interest and principal under most of our loans and all
debentures will continue to be linked to the Israeli CPI as provided in our
loan and debenture agreements. As a result, an increase in inflation would have
the effect of increasing our financial expenses without any offsetting increase
in our assets and revenues on our financial statements, leading to lower
reported earnings and shareholders equity. The extent of this effect on our
financial statement would be dependent on the rate of inflation in Israel.

Political conditions in Israel affect our
operations and may limit our ability to sell our products.

We and all
of our subsidiaries are incorporated under Israeli law and our principal
offices and operations are located in the State of Israel.  Political, economic, security and military
conditions in Israel directly affect our operations.  Since the establishment of the State of Israel in 1948, a number
of armed conflicts have taken place between Israel and its Arab neighbors and a
state of hostility, varying, from time to time, in intensity and degree, has
led to security and economic problems for Israel.  We could be adversely affected by hostilities involving Israel,
the interruption or curtailment of trade between Israel and its trading
partners, a significant increase in inflation, or a significant downturn in the
economic or financial condition of Israel.

The future
of Israels relations with its Arab neighbors and the Palestinians is
uncertain, and several countries, companies and organizations continue to
restrict business with Israel and with Israeli companies.  We could be adversely affected by adverse developments
in Israels relationship with its Arab neighbors and the Palestinians or by
restrictive laws, policies or practices directed towards Israel or Israeli
businesses.

In the last
few years, hostilities between Israel and the Palestinian Authority have
substantially increased.  These
hostilities include terrorist acts in Israel and military operations in the
West Bank and Gaza.

Many of our
officers and employees are currently obligated to perform annual reserve duty
and are subject to being called to active duty at any time under emergency
circumstances.  We cannot assess the
full impact of these requirements on our workforce or business if conditions
should change, and we cannot predict the effect on us of any expansion or reduction
of these obligations.

10

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Hostilities between Israel and the
Palestinians have adversely affected our operating results.

The 
hostilities between Israel and the Palestinians referred to above has
affected our business in a number of ways.  First, we have incurred additional costs to maintain the security
of our customers.  As a condition of the
receipt of permits of municipal authorities, depending on the size of the
store, we are required to hire security personnel and security equipment for
each store.  In addition, the police may
impose new security demands, based on the location and size of each store.   Second, security concerns have decreased
traffic in our stores, especially in stores located in malls.  The occurrence of violence at any of our
stores or at any of the stores of our competitors may further discourage our
customers from visiting our supermarkets. 
It is difficult to predict when the hostilities between Israel and the
Palestinians will terminate and to what extent the hostilities will affect our
operating results.

Economic conditions in Israel affect our
financial performance.

All of our
sales are made in Israel and a substantial majority of the goods that we sell
are grown, manufactured or processed in Israel.  Consequently, our financial performance is dependent to a
significant extent on the economy of Israel. 
During the year 2001, 2002, and 2003, Israels Gross Domestic Product
declined by 0.9%, 1% and 1%, respectively. The economic slowdown during these
years adversely affected our financial performance. Initial reports indicate
that the Israeli economy will grow by approximately 3% in 2004. We cannot be
sure how any growth or decline in the Israeli economy will affect our financial
performance.

Government-imposed price controls may have a
material adverse effect on our operating results.

The Israeli
government is authorized to control the prices of goods and services offered in
Israel.  At present, some of the
products we offer in our stores, including bread, flour, eggs, milk and
margarine are subject to government-imposed price controls.  In addition, during periods of high
inflation in the past, more extensive price controls have been imposed
throughout Israel.  We do not believe
that current price controls have any
material adverse effect on our business or operating results.  However, any imposition of more extensive
price controls in the future may have a material adverse effect on our
operating results.  Although we do not
anticipate the imposition of additional price controls, we cannot assure you
that broader price controls will not be imposed in the future.

11

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It may be difficult to enforce a U.S.
judgment against us and some of our officers and directors, to assert U.S.
securities laws claims in Israel or serve process on our officers and
directors.

We are incorporated in Israel.  Most of our executive officers and directors
are nonresidents of the United States, and substantially all of our assets and most of the assets of
these persons are located outside the United States.  Therefore, it may be difficult to enforce a judgment obtained in
the United States based upon the civil liabilities provisions of the U.S.
federal securities laws against us or any of these non-residents of the United
States or to effect service of process upon these persons in the United
States.  Additionally, it may be
difficult for you to enforce civil liabilities under U.S. federal securities
laws in actions instituted in Israel.

ITEM
4.     INFORMATION ON THE COMPANY

A.          History
and Development of Blue Square.

Blue
Square-Israel Ltd. was incorporated in June 1988 as a company under the
laws of the State of Israel.  Blue
Squares principal executive offices are located at 2 Hamal Street, Rosh
Haayin 48092, Israel and its telephone number is 972-3-928-2222.

Effective
January 1, 1996, we and our former controlling shareholder, the Co-Op,
completed a reorganization of holdings, pursuant to which the Co-Op transferred
to Blue Square in consideration for 29,789,000 of Blue Squares ordinary
shares, its then 67% interest in BSIP and other shareholdings and rights. In
1996, Blue Square completed its initial public offering and its ADSs were
listed for trading on the New York Stock Exchange.  In November 2000, Blue Squares ordinary shares were listed
for trading on the Tel Aviv Stock Exchange.

In June
2003, Bronfman  Alon acquired 78.1% of the outstanding shares of Blue Square
from the Co-Op.  See - Change in
Control below.  Bronfman-Alon currently
owns approximately 77.60% of the outstanding shares following to the conversion
by other investors of approximately NIS 9.5 million in principal amount of our
5.9% convertible debentures in April 2004. After the acquisition by
BronfmanAlon, these significant events have occurred:

| | The
  appointment of new directors to the Board of Directors to replace those who
  had resigned immediately following the acquisition by Bronfman-Alon of
  control of Blue Square;                          
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                               
| | The
  appointment of a new management team, including Mr. Gil Unger as our Chief
  Executive Officer and President and Mr. Emanual Avner as our Vice President
  and Chief Financial Officer of Blue
  Square;

12

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| | The issuance
  of NIS 400 million in aggregate principal amount of unsecured 5.9% debentures
  with maturity dates of seven to eleven years, half of which were originally
  convertible into Blue Square ordinary shares at per share price of NIS 49.5.  This conversion ratio has been
  subsequently adjusted to a per share conversion price of NIS 35.184 as of
  June 15, 2004 for cash dividends distributed since August 2003 and is subject
  to further adjustment for cash dividends that may distributed from time to
  time. The debentures were rated AA by Maalot (an Israeli rating agency), so
  long as the limitations on the distribution of dividends are in accordance
  with the decisions of the Board of Directors (see Item 3. Key Information - Risk Factors.  Restrictions on the payment of dividends
  may limit our ability to pay cash dividends on our ordinary shares);
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The payment
  of dividends from June 2003 to June 2004 totaling approximately $123 million,
  equal to approximately $3.20 per share (see Item 3. Key Information - Risk Factors.  Restrictions on the payment of dividends
  may limit our ability to pay cash dividends on our ordinary shares); and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The
  implementation of an efficiency plan, including the dismissal of
  approximately 20% of our headquarters staff (approximately 100 employees) and
  another 150 store employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

Capital Expenditures

A key
component of our business strategy is the establishment and relocation of new
stores, the remodeling of existing stores and the improvement of our
distribution facilities.  During the
three months ended March 31, 2004, we invested NIS 16.2 million, or $3.6
million in fixed and other assets. In 2003, we invested NIS 138.7 million,
or $31.7 million in fixed and other assets, a 43% decrease from our 2002
investment of NIS 243.2 million, or $55.5 million. This decrease is
primarily attributable to our continued strategy of leasing store sites with an
option to renew the lease, rather than to purchase store sites and our opening
of fewer stores than in 2002. Of our fixed asset investment in 2003, we
invested NIS 27.2 million, or $6.2 million in land, leaseholds and
buildings, as compared with NIS 110 million, or $25.1 million in
2002.  In 2001, we invested
NIS 287.1 million, or $65.6 million in fixed and other assets.  As of December 31, 2003, we had entered
into agreements for the purchase of real estate and equipment in an aggregate
of NIS 49 million, or $11.2 million.

For additional information pertaining to our
principal capital expenditures and divestitures for the last three financial
years and those of which are currently in progress, and the method of
financing, see Item 5.  Operating and
Financial Review and ProspectsLiquidity and Capital Resources.

Due to our
strategic plan to focus our business on supermarket goods, we made the
following investments and divested the following interests in 2001:

| | In February
  2001, Blue Square completed the sale to the Co-Op of Blue Squares interest
  in the issued and outstanding share capital of Blue Square Furniture Ltd.,
  which holds the franchise to sell furniture and accessories in Israel under
  the brand name IKEA, for $1.3 million.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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| | In November
  2001, BSIP sold its holdings (50%) in Regba Properties Ltd. and Regba Streets
  Ltd., which are engaged in the construction of a commercial center near
  Naharia, for approximately NIS 29.5 million or $6.3 million.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Change in Control

On April
10, 2003, the District Court of Tel Aviv declared Bronfman-Alon as the winning
bid of the tender for the sale of the holdings of Co-Op in Blue Square, in a
court-supervised sale of the Co-Ops 78.1% interest in Blue Square. In June
2003, BronfmanAlon acquired the shares for the amount of NIS 1,337 million
(the equivalent of $288.3 million on the date of the submission of the bid)
plus interest to the date of purchase.

As part of
the agreement between the Co-Op and Bronfman-Alon pursuant to which
Bronfman-Alon has agreed to acquire all of the shares in Blue Square owned by
the Co-Op, Bronfman-Alon agreed that Blue Square will honor all existing
collective agreements and arrangements with employees of Blue Square and to
respect all rights of employees of Blue Square granted under applicable
law.

In
addition, as part of the agreement between the Co-Op and Bronfman-Alon,
Bronfman-Alon agreed to cause Blue Square to purchase, for a period of seven
years, a directors and officers liability insurance policy (Contemplated
Policy) for directors and officers of Blue Square and those who serve(d) as
directors and officers of its subsidiaries on behalf of Blue Square.  The Contemplated Policy would cover such
current and former directors and officers for actions or omissions that
occurred during the seven-year period prior to the acquisition of the Blue
Square shares by Bronfman-Alon from the Co-Op. 
It was agreed that the maximum coverage of the Contemplated Policy will
be in such amount as is customary for other companies comparable in size and
business to us and whose shares are listed on the New York Stock Exchange, but
in any event not less than $15 million per event and per twelve-month
period.

Bronfman-Alon
also agreed that the letters of exemption and indemnification granted to
directors and officers of Blue Square since September 2000 will not be
challenged.

For a
description of the ownership in Bronfman-Alon, please see Item 7.  Major Shareholders and Related Party
Transactions  A. Major Shareholders.

14

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B.          Business
Overview.

General

We are a
leading food retailer in the State of Israel. 
Through our supermarkets, we offer a wide range of food and beverages
products and also housewares and cosmetics. 
As of December 31, 2003, we owned and operated 161 supermarkets
under the brand names Mega, Super Center, Super Center City, Shefa Shuk, Co-Op
and other formats.

Our
activities are carried out via Blue Square and its consolidated subsidiaries,
the largest of which is BSIP.  As of
March 31, 2004, Blue Square owned 80.73% of the outstanding shares of
BSIP, the balance of which were publicly held and traded on the Tel Aviv Stock
Exchange.  BSIP and its direct and
indirect subsidiaries, including Blue Square Chain (Hyper Hyper) Ltd., are the
owners of 59 of our supermarkets.  The
consolidated sales of BSIP and its subsidiaries in 2003 aggregated
approximately 68.4% of our consolidated sales for that period.  As of March 31, 2004, the total
consolidated assets of BSIP and its subsidiaries aggregated approximately NIS
1.3 billion, or $293.1 million, constituting approximately 40.1% of our total
consolidated assets at that date.

The
following table sets forth the change in the number of our stores (net of store
closures) and store space as of the dates indicated:

|                          |  | No. of Stores |  | Store Space
  (square meters)
|------------------------- |  | ------------- |  | -----------------------------
|                          |  |               |  |                              
|                          |  |               |  |                              
|As
  of December 31, 1999 |  | 165           |  | 239,000                      
|As
  of December 31, 2000 |  | 168           |  | 258,000                      
|As
  of December 31, 2001 |  | 171           |  | 279,000                      
|As
  of December 31, 2002 |  | 173           |  | 292,600                      
|As
  of December 31, 2003 |  | 161           |  | 290,800                      

We believe
that, by reason of our position as a leading food retailer in Israel, we can
realize significant economies of scale and synergies in these areas such as
financing, purchasing and distribution, frequent buyer customer programs and
store site selection.  For example, we
operate a central distribution facility, which provides our supermarkets with a
variety of services, including centralized product purchasing, warehousing and
distribution.

We expect
to begin the process of streamlining our store brands to just three  Mega,
Super Center and Shefa Shuk  from our current seven, although such a process
will likely take more than one year. In the Mega chain stores, which are
located primarily outside the city centers, we offer the widest selection of
food and household items at reduced prices. 
In the Super Center chain stores, which are usually smaller than
Mega stores and are located primarily in local neighborhoods and city
centers, we offer a more limited selection of food and household items at competitive
prices.  Our Shefa Shuk chain stores
are hard discount stores with a selection of products specially oriented
towards Israels growing ultra-orthodox population. As of December 31, 2003, we
operated 29 Mega Stores, consisting of approximately 131,561 square meters
space, 20 Super Center and 47 Super Center City stores, consisting of
approximately 84,779 square meters space, and 10 Shefa Shuk stores, consisting
of approximately 18,973 square meters space, and 42 Co-Op stores consisting of
approximately 38,479.  Under the other
store formats, we operated 13 stores, consisting of approximately 17,008 square
meters space.

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We operate
a Buy & Bonus frequent-buyer incentive program and a Mega
frequent-buyer incentive program, which allow our customers to earn free gifts
by earning points in any of our stores. 
We offer the Buy & Bonus program in all of our stores (other than
Mega stores) and our Mega program in all of our Mega stores to increase
consumer traffic and encourage customers to patronize our stores.

Industry Overview

We estimate
that sales in Israel of supermarket goods totaled approximately NIS 36 to 37
billion, or $8.2 to $8.5 billion in 2003. 
Precise data on sales of supermarket goods in Israel are not available.  In Israel, supermarket goods are sold in
supermarkets, independent groceries and open-air markets. The supermarket
retail chain market consists of three large chains: Super Sol, ClubMarket and
us, as well as other smaller but developing chains.

We estimate
that significant growth opportunities for supermarkets in Israel remain as more
households  increase purchasing of
supermarket goods at supermarkets rather than smaller grocery stores and open-air
markets.  We estimate that approximately
52% of the total sales of supermarket goods in Israel in 2003 were made by
organized supermarket chains, a percentage that is considerably lower than the
estimated market shares prevailing in Europe and the United States.  Accordingly, we believe that there is an
opportunity for us to grow correspondingly with the general growth of the
supermarket sector in Israel.

Our Supermarkets

We operate
several supermarket formats, tailoring store sizes and product ranges to meet
the preferences of each formats target customers. Our supermarket formats are
among the most recognized in Israel. According to data published by the Israeli
Central Bureau of Statistics, total retail sales of food, drinks and tobacco in
Israel was approximately NIS 37 billion during the year 2002. According to this
data, supermarket chains in Israel during 2002 accounted for
approximately 50.4%, or the NIS 18.6 billion, of the retail sales of food,
drinks and tobacco in Israel and our supermarkets accounted for approximately
30% of the retail sales of food, drinks and tobacco in Israel. We estimate that
our market share of supermarkets chains in Israel during the year 2003
decreased to approximately 28%.

See Our
Operations for a description of our supermarket formats as of December 31,
2003.

16

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Seasonality

Our
business is subject to fluctuations in quarterly sales and profits.  These fluctuations are primarily
attributable to increased sales and higher operating income in the holiday
seasons occurring in different quarters from year to year.  Thus, for example, increased sales
attributable to Passover, which occurs in either March or April, may be
realized in either the first or the second quarter, and sales attributable to
the Jewish New Year, which occurs in either September or October, may be
realized in our financial report in either the third or the fourth
quarter.  However, the timing of the
holidays does not affect our semiannual results.

Many of our
expenses are unrelated to the level of sales, and therefore a relatively modest
increase or decrease in sales, whether or not related to the timing of
holidays, tends to have a disproportionately large impact on our profitability.

Our Strategy

Our
strategy is to take advantage of our position as a leading food retailer in
Israel, by expanding our market presence in existing retail food markets and by
entering into new retail food markets. 
To achieve this goal, we intend to pursue a number of operating and
growth strategies, which include:

| | increasing
  our market share by opening additional store locations,  improving and enlarging existing stores
  and closing underperforming stores;                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | exploring
  various alternatives to maximize the potential value of our real estate
  assets, including unused building rights;                                                                    
| | streamlining
  our store brands to three  Mega, Super Center and Shefa Shuk;                                                                                                                      
| | differentiating
  our store brands and products from those of our competitors;                                                                                                                     
| | increasing
  operational efficiency; and                                                                                                                                                           
| | synergies
  with our affiliated entities, such as our procurement agreement with Dor Alon
  Operating Service Stations Ltd., in which we agreed to procure products for
  their convenience stores.

Competition

The Israeli
food retailing industry is highly competitive and is characterized by high
turnover and narrow operating margins. 
We compete with other supermarket chains, such as Super Sol and
ClubMarket, independent grocers, open air markets, and other retailers selling
supermarket goods.  Competitive
pressures increase as the supermarket sector in Israel approaches higher
saturation levels and will continue to increase in the event that our
competitors expand their operations or new companies enter the market with hard
discount formats.

17

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We and
other major chains have expanded their own hard discount formats. In addition,
a class of private supermarkets has expanded in selected areas. These private
supermarkets have been able to capture a significant part of the sales from the
major chains in their areas by using lower cost non-unionized labor and having
lower operating costs and, in some cases, by operating on Saturdays and
offering non-Kosher food.   Large
supermarket chains in Israel, including us, are kosher and therefore do not
offer non-kosher food or operate on Saturdays. 
As a result, in 2003 these private supermarkets took market share from
the major chains, contributing to an approximately 5% reduction in our revenues
as compared to 2002.

Our Operations

Our
supermarket operations are conducted under a number of store formats, including
Mega, Super Center, Super Center City, Shefa Shuk, Co-Op and other formats,
which are among the most well-recognized retail names in Israel.    Our supermarkets offer a wide selection of
supermarket goods.  The mix of products
of each supermarket format varies to address the preferences of its target
customers.  Many of our supermarkets
offer specialty departments such as full service bakeries, delicatessens, fresh
meat and prepared food departments; certain supermarkets also contain
concession operations, which sell a variety of goods.  Sixteen of our supermarkets also include drugstores, which sell
medications, prescription medicines, cosmetics, perfume and personal hygiene
items.

A portion
of our stores operations is owned directly by Blue Square, and the other
portion is owned by Blue Squares subsidiary, BSIP and its subsidiaries.  The stores which are owned directly by Blue
Square generally are less than 1,500 square meters, and the stores which are
operated by BSIP and its subsidiaries generally are more than 1,500 square
meters.

18

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The
following table provides certain information regarding the Blue Square stores
and the BSIP stores as of December 31, 2003:

|                    |  | Blue Square Israel  |     | BSIP                            |  | Total           |        
|------------------- |  | ------------------- | --- | ------------------------------- |  | --------------- | -------
|                    |  |                     |     |                                 |  |                 |        
|                    |  |                     |     |                                 |  |                 |        
|Retail Format       |  | Number
  of  Stores |     | Store Space
  (square
  meters) |  | Number ofStores |        
|                    |  |                     |     |                                 |  |                 |        
|Mega(1)             |  |                     | 1   |                                 |  |                 | 7,000  
|                    |  |                     |     |                                 |  |                 |        
|SuperCenter(2)      |  |                     | 6   |                                 |  |                 | 8,804  
|                    |  |                     |     |                                 |  |                 |        
|SuperCenter City(3) |  |                     | 45  |                                 |  |                 | 42,359 
|                    |  |                     |     |                                 |  |                 |        
|Co-Op(4)            |  |                     | 39  |                                 |  |                 | 35,238 
|                    |  |                     |     |                                 |  |                 |        
|ShefaShuk(5)        |  |                     | 4   |                                 |  |                 | 5,190  
|                    |  |                     |     |                                 |  |                 |        
|Others(6)           |  |                     | 7   |                                 |  |                 | 3,857  
|                    |  |                     |     |                                 |  |                 |        
|Total               |  |                     | 102 |                                 |  |                 | 102,448

(1)Large
stores (average size of 4,500 square meters), primarily located outside of city
centers, offering a wide selection of food items and other departments at
reduced prices.

(2) Medium
size stores (generally over 1,500 square meters) primarily located in city
centers and local neighborhoods offering a more limited selection of food and
household items at competitive prices.

(3) 8001500
square meters size stores, similar to Super Center but offering a more limited variety
of items.

(4) Small and medium
full service convenience stores.

(5) Hard discount
supermarkets with a selection of products oriented to ultra-orthodox Jewish
population.

(6) Including King Center and ZilVaZol.

Purchasing and Distribution

We purchase products for our supermarkets through a central purchasing
office that selects products for all of our supermarkets and negotiates prices,
promotions and terms of payment with individual suppliers on a company-wide
basis.  We believe that our large volume
of purchases and our ability to offer chain-wide exposure for our suppliers
products and promotions, enable us to avail ourselves of attractive
volume-buying opportunities and manufacturers discounts.

19

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Through our
distribution center, we can distribute products from suppliers,  manufacturers and importers, thus reducing
prices and broadening the range of available products.  The distribution center is operated on a
40,000 square meter site.  At this site,
we operate approximately 19,000 square meters as warehouse space.  We conduct the administration of the
warehouses and distribution by means of a computerized system that consolidates
orders from all the branches while giving consideration to inventory levels,
store requests and company planning.

We purchase
products for our supermarkets from more than 1,100 suppliers, including
manufacturers, importers and distributors. 
Approximately 82% of our grocery items and 88% of our meat and fish are
delivered directly by suppliers to some of our stores.  For certain other items, including 88% of
fruits and vegetables, we provide distribution to our supermarkets through our
distribution center.  For the year ended
December 31, 2003, approximately 23.1% of our sales were of products distributed
from the distribution center.

We actively
seek to diversify our suppliers. 
However, we purchase most of our dairy, fresh produce and poultry
products from Tnuva, an Israeli food cooperative, which holds a leading
position in the domestic dairy and poultry markets.  In 2003, Tnuvas products accounted for approximately 14.3% of
all the products sold at our supermarkets. 
In addition, Elite, which merged with Strauss, an Israeli food
manufacturer, accounted in 2003 for approximately 10% of all products sold at
our supermarkets, and the Osem group accounted for approximately 7.6% of all
products sold at our supermarkets in 2003.  
Because of our status as a leading food retailer in Israel and the fact that
we maintain an excellent and long-standing relationship with Tnuva, Elite and
Osem, we do not believe that there is a material risk of future stoppage of
supply of products of these key suppliers. 
However, we do not have a written contract with Tnuva,  Elite or Osem obligating them to supply
products to us.  In addition, in recent
years, there has been a process of consolidation among our suppliers.  As a result, our largest suppliers now
account for a larger percentage of our product purchasers.  The ten largest suppliers for our supermarkets
accounted for approximately 50% of our product purchases in 2003.  We do not believe that our supermarket
business is dependent on any one supplier or group of suppliers and, in the
past, we have not experienced any material problems in obtaining products of
the quantity and type required.

Marketing

We endeavor
to create an awareness of our supermarkets as offering a combination of broad
selection, high-quality service and competitive prices.  Our primary advertising outlets, in addition
to point-of-sale marketing, are television, newspapers, radio, billboards and
direct mail.    Store promotions are
conducted, from time to time, in all our supermarkets, in specific chains or in
individual stores.  These promotions
include our Mega club, Buy & Bonus incentive program, price reductions,
gifts, coupons or deferred payment terms. 
We believe that Mega and Buy & Bonus are two of the leading customer
clubs in Israel. We have joint advertising and sales initiatives
together with some of our suppliers. 
The stores accept cash, checks, credit cards and gift certificates.  We provide extended payment terms for
supermarket purchases.  During the High
Holiday and Passover seasons, we run gift certificates programs, under which we
issue and sell gift certificates to institutions, companies and
individuals.  The gift certificates can
be used in our stores as well as other stores with which we entered into
collaboration agreements.

20

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From time
to time, we also operate joint marketing promotions with our affiliate
companies.

Government Regulation

Our
operation of supermarkets in Israel requires permits from municipal
authorities, which are conditioned on the prior approval of various agencies,
including the health and environment ministries, the police and fire
departments.  If we are unable to obtain
or maintain one or more required permits, we may be required to close one or
more stores or to take other remedial action to obtain or maintain these
permits. We are not currently aware of any impending closing of any of our
stores due to lack of required permits. 
See Item 3. Key Information- Risk Factors- Failure to obtain or
maintain permits required for our operations may adversely affect our operating
results for more information.

The Israeli
government is authorized to control the prices of goods and services offered in
Israel.  Any imposition of more
extensive price controls in the future than those that currently exist may have
a material adverse effect on our operating results. See Item 3. Key
Information- Risk Factors- Government-imposed price controls may have a
material adverse to effect on our operating results for more information.

A law
effective October 1, 2001 requires stores to charge a deposit for drink
containers of less than 1.5 liters and more than 0.1 liter and accept the
return of empty containers for refund. 
The Knesset, the Israeli parliament, is considering an amendment to this
law which would require stores to also charge a deposit for drink containers of
1.5 liters and more and accept the return of empty containers for refund.  See Item 3. Risk Factors  The proposed
amendment to the Law of Deposits on Beverage Containers, 1999, would impose
significant expenses and costs on us, which could have a material adverse
effect on our results of operations. 
Blue Square is no longer a participant in the activities of a recycling
corporation whose purpose is to set up and operate a mechanism to implement the
provisions of the law.  We have commenced
a lawsuit against the recycling corporation for the reimbursement of expenses
that the recycling corporation was obligated to reimburse Blue Square under the
agreement between the founders of the recycling corporation and the recycling
corporation.  We have incurred expenses
to allocate storage space for the empty containers and dedicate special
cashiers for returning the deposits.  We
have also incurred expenses for additional personnel and equipment, including
equipment in some of our stores that enable consumers to automatically receive
their deposits while bringing back the empty containers without the need for
store personnel.  For information
regarding a claim under the new law, See Item 8. Financial information-Legal
Proceedings.

21

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Our
business is subject to the jurisdiction of the Israeli Antitrust
Authority.  In 2002, the director of the
Antitrust Authority announced that the arrangements relating to the gift
certificates issued by Blue Square and other supermarket chains apparently
constitute a restrictive arrangement pursuant to the Israeli antitrust
law.  At this stage, we cannot assess
the impact of the aforementioned announcement on our business.  Following the announcement, we decided to
cease issuing the gift certificates jointly with other supermarket chains and
is presently issuing its own gift certificates.

The Israeli
Antitrust Authority may limit our ability to execute our strategy of expanding
our market presence.  The Commissioner
of the Israeli Antitrust Authority may limit our ability to acquire existing
stores or enter into mergers to acquire existing stores.

As a
condition to its acceptance of certain of the trade practices of the Israeli
credit card companies regarding the interchange commission (amount paid by one
credit card company to another for clearing the charges made by customers of
the paying credit card company), the Israeli Antitrust Authority has demanded
that Israeli credit card companies narrow the interchange commission rates charged
in respect of different retailers.  As a
result, the commission that credit card companies charge us was increased
substantially, and a one percent standard commission rate to all food
establishments was set. This action of the Israeli Antitrust Authority is being
challenged in the Israeli Court of Restrictive Trades by other retailers.  We cannot predict the outcome of this
challenge.

In March
2003, the Israeli Antitrust Authority notified us that the previous agreement
between a subsidiary and another party with respect to a partnership at Malkha
Shopping Center branch constitutes a restrictive arrangement. Prior to the
aforementioned notification, the partnership was dissolved through the  acquisition of the other partys share of
the partnership by our subsidiary. We are presently unable to estimate the
effect of the notification of the Israeli Antitrust Authority and its ultimate
outcome.

From April
2000 to May 2003, the Israeli Antitrust Authority conducted an investigation
into alleged restrictive trade arrangements between major supermarkets chains
in Israel and large suppliers. During the investigation, an inquiry was
conducted in our offices and our former CEO and other senior officers were
interrogated.

On May 29,
2003, the Commissioner of the Israeli Antitrust Authority announced that it had
concluded its investigation of the above issue. The Commissioner of the Israeli
Antitrust Authority notified us that due to the findings, the Israeli Antitrust
Authority is considering taking enforcement actions against those who had
violated the law. In addition, the Commissioner publicized a document of
direction, which contains his view
of the legality of certain commercial conduct between the large supermarket
chains (which consists of Super Sol, ClubMarket and us) and the large
suppliers, which was exposed during the investigation.  The document of direction also contains the
Commissioners proposal as to how the large supermarket chains and suppliers
should conduct certain of their activities in the future.

22

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The main
directions in the document of direction were the following:

| | Any decision
  as to the identity of the suppliers and the number of products of each
  supplier of any supermarket chain must be made independently by each chain
  without the involvement of the suppliers. A large supermarket chain may not
  receive any benefit from a supplier for reducing the total number of
  suppliers or for reducing the shelf space of products sold by competing
  suppliers.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any decision
  by a supermarket chain whether to sell private label products or parallel
  import should be made independently by each supermarket chain without the
  involvement of the suppliers.                                                                                                                                                                                                          
| | The document
  imposes certain limitations on arrangements by which dominant suppliers are
  provided allotments of display space greater than 50% in dominant products.                                                                                                                                                                                                                                      
| | Independent
  category management may only be managed by the supermarket chains, and not by
  the suppliers, except under special permit.                                                                                                                                                                                                                                                                     
| | Positioning
  of products will be done by the supermarket chain.                                                                                                                                                                                                                                                                                                                                              
| | The document
  imposes limitations on the ability of suppliers to grant benefits to
  supermarket chains based on achieving certain sales targets.                                                                                                                                                                                                                                                            
| | The document
  imposes prohibitions on arrangements between suppliers and supermarket chain
  which require that a certain percentage of the supermarket chains sales of a
  product be manufactured by certain suppliers.                                                                                                                                                                                   
| | The document
  imposes prohibitions on arrangements between a supplier and a large
  supermarket that limit the ability of competing suppliers from offering
  competing promotions.                                                                                                                                                                                                                          
| | The document
  imposes prohibitions on the ability of a supplier to demand that any of its
  products have a particular sale price in a supermarket chain.                                                                                                                                                                                                                                                    
| | The document
  imposes prohibition on the ability of any large supermarket chain to demand
  that a suppliers products have a particular sale price in a competitors
  store, including a prohibition on the ability of a supermarket chain to
  demand a retroactive discount from a supplier based on the sale price of the
  suppliers products in a competing supermarket chain.                       
| | The document
  imposes certain limitations on the exchange of information between the
  supermarket chains and their suppliers.                                                                                                                                                                                                                                                                               

The major
supermarket chains and large suppliers have provided their comments to the
Commissioners document of direction, but as of June 15, 2004, the Commissioner
of the Israeli Antitrust Authority had not responded to these comments or
otherwise taken any measures against us or implemented the proposal.  If the Commissioner of the Israeli Antitrust
Authority take any action against us and limit our ability to conduct business
with our suppliers, our profits could be adversely affected.

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We are obligated to label prices on our
products on the basis of two main laws: The Consumer
Protection Law, 1981, and the Commodities
and Services (Control) Law, 1957. 
Contravention of these laws constitutes a criminal offense.  As a result, we expect to be charged in
connection with discrepancies between the prices appearing on products, and the
prices charged by the cash register at the point of sale. These discrepancies
are the result of human error by personnel responsible for labeling our
products. In any event, we are making our best efforts to minimize these
errors, including directing store management, in situations where a discrepancy
is found between the price on a product and the price appearing at the cash
register, to charge the lower price.

We are also obligated under these laws to
advertise and conduct our business in a manner that is not misleading to our
customers.  Our obligations include,
among other things, ensuring that our advertised prices are the prices that are
actually charged by the cash registers in our stores, and ensuring that our
coupons may be used in our stores as advertised.

C.          Organizational
Structure

We operate
all of the supermarkets, including 102 of the supermarkets that are directly
owned by Blue Square, and the remaining supermarkets which  are owned by its partially owned
subsidiaries.  Stores owned by BSIP and
its subsidiaries generated approximately 68.4% of our sales during 2003.  Each of BSIP and its subsidiaries has its
own board of directors.  We appoint all
or a majority of the board of directors of each of these companies and
typically our appointee serves as the chairman of the board of directors of
each company.  Although we appoint all
or most of the board of directors of each company, each companys board of
directors has independent fiduciary obligations to all of its shareholders and
to the company itself.  Blue Square is
obligated to deal with its partially owned subsidiaries at arms-length.  Moreover, in the case of BSIP, which is
publicly traded on the Tel Aviv Stock Exchange, the board of directors must
include two external directors appointed under Israeli law.  These external directors must satisfy all
the requirements of external directors under the Israeli Companies Law,
5759-1999, referred to as the Israeli Companies Law.

Our largest
subsidiary is BSIP, of which Blue Square owned approximately 80.73% of the
outstanding shares as of December 31, 2003.  The balance of BSIPs outstanding shares are publicly held and
traded on the Tel Aviv Stock Exchange. 
BSIP, in turn, owns all of the outstanding shares of Hyper Hyper, which,
as indicated in the table set forth below, is the owner of our interests in a
number of its other subsidiaries and affiliates.  Blue Square receives management fees from its subsidiaries,
including BSIP and Hyper Hyper, as payment for the management and consulting
services it provides to them for purchasing, marketing, finance, store
development, budgets and control, accounting and financial reporting, taxation,
law, internal auditing and data processing services.  For information concerning the flow of funds between Blue Square
and its direct and indirect subsidiaries, see also Item 5.  Operating and Financial Review and
ProspectsLiquidity and Capital Resources.

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Set forth
below is a list of our material holdings as of June 15, 2004.  The company marked with an asterisk is not
consolidated in our financial statements.

|Company(1)                                          |  | Operations                     |  | % Ownership
  Held by Blue
  Square
|--------------------------------------------------- |  | ------------------------------ |  | -----------------------------------
|                                                    |  |                                |  |                                    
|                                                    |  |                                |  |                                    
|The  Blue Square Chain Investments  Properties Ltd. |  | Real
  estate and supermarkets |  | 80.73%(2)                          
|The  Blue Square Chain (Hyper Hyper) Ltd.           |  | Supermarkets                   |  | 80.73%(3)                          
|Radio
  Non Stop Ltd.*                              |  | Local
  radio station          |  | 28.98%(4)                          
|Teco
  Ltd.                                         |  | Plastic
  packaging materials  |  | 80.73%(3)                          

| | (1) | All companies are
  incorporated under Israeli law.                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                               
| | (2) | The remaining shares of
  BSIP are held by the public and traded on the Tel Aviv Stock Exchange.                                                                                                              
| |     |                                                                                                                                                                                                               
| | (3) | BSIPs wholly owned
  subsidiary.                                                                                                                                                                             
| |     |                                                                                                                                                                                                               
| | (4) | Hyper Hyper holds its
  interest in this company through a wholly owned subsidiary, which holds a
  35.8% equity interest in Radio Non-Stop Ltd. 
  The remaining interests are held by unaffiliated entities.

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D.          Property,
Plants and Equipment.

As of
December 31, 2003, we owned or leased approximately 475,600 square meters
of space.   The following table provides
certain details regarding the properties that we own and lease.

|Properties                                                        |  | Number |     | Space (sq. meters)(1) | 
|----------------------------------------------------------------- |  | ------ | --- | --------------------- | 
|                                                                  |  |        |     |                       | 
|Total Existing Stores                                             |  |        |     |                       | 
|Owned (including long term lease from1Israel Land Administration) |  |        | 87  |                       | 
|Leased under 5 years                                              |  |        | 31  |                       | 
|Leased between 6-10 years                                         |  |        | 27  |                       | 
|Leased over 10 years                                              |  |        | 16  |                       | 
|                                                                  |  |        |     |                       | 
|                                                                  |  |        | 161 |                       | 
|                                                                  |  |        |     |                       | 
|Stores in Development                                             |  |        |     |                       | 
|Owned                                                             |  |        | 3   |                       | 
|Leased between 5-25 years                                         |  |        | 8   |                       | 
|                                                                  |  |        |     |                       | 
|                                                                  |  |        |     |                       | 
|                                                                  |  |        |     |                       | 
|Owned Offices (Rosh Haayin,
  Givataim)                          |  |        | 2   |                       | 
|Owned Warehouses (Rishon
  Letzion, Kiriat Gat)                   |  |        | 2   |                       | 
|Leased Warehouses (Barkan,
  Ramla, Rosh Haayin)                 |  |        | 3   |                       | 
|                                                                  |  |        |     |                       | 
|                                                                  |  |        |     |                       | 
|                                                                  |  |        |     |                       | 
|Undeveloped Land (1)                                              |  |        |     |                       | 
|                                                                  |  |        |     |                       | 
|Leased to Third Party (2)                                         |  |        |     |                       | 
|                                                                  |  |        |     |                       | 
|Unutilized Properties                                             |  |        |     |                       | 
|                                                                  |  |        |     |                       | 
|                                                                  |  |        |     |                       | 
|TOTAL                                                             |  |        |     |                       | 
|                                                                  |  |        |     |                       | 

| | (1) | These figures do not
  include square meters for which we have building rights.                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                       
| | (2) | Including a 50% interest
  owned by Blue Square in a 17,000 square meter shopping mall in Jerusalem, in
  which we operate a 5,000 square meter store.

26

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In 2004, we
plan to open approximately 78 additional supermarkets, totaling approximately
15,000-20,000 square meters of store space, in localities whose populations are
currently under-served by supermarkets or in localities in which we do not have
sufficient market presence.During
2004, we also plan to close approximately 4 stores, totaling approximately
5,000 square meters of store space.  In addition, we plan to continue to
remodel some of our supermarkets to give them a more upscale orientation,
offering improved product selection and increased focus on customer
service.  Remodeling typically includes
the installation of new display fixtures, additional shelf space, specialty
departments and checkout counters.  Our
experience has been that supermarket remodeling, which is conducted in each
store every eight to twelve years, usually improves sales per square
meter.  We currently plan to spend more
than NIS 100million, or
$22.8 million on the acquisition and development of new supermarkets and the
remodeling of our existing supermarkets through the end of 2004.

ITEM 5:
OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The
following discussion and analysis should be read together with Item 3.  Key InformationSelected Financial Data and
our consolidated financial statements and notes included elsewhere in this
annual report.  This discussion contains forward-looking statements
that involve risks and uncertainties. 
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth in Item 3. 
Key InformationRisk Factors.

General

The year
2003 saw a worsening of Israels economic environment, which impacted the food
retailing industry.  As a result of the
recession, we and other major chains continued our expansion into hard discount
store formats.  In addition, recognizing
the growing opportunity as a result of the recession, a class of private
supermarkets expanded their presence in selected areas. These private
supermarkets have been able to capture a significant part of the sales from the
major chains in their areas by using lower cost non-unionized labor and having
lower operating costs and, in some cases by operating on Saturdays and offering
non-kosher food. Large supermarket chains in Israel, including us, are kosher
and therefore do not offer non-kosher food or operate on Saturdays.  As a result of this competition and the
recession, our revenues were down approximately 5% as compared to 2002.  The sales decline was most severe during the
first quarter of the year, moderated during the second and third quarters, and
in the fourth quarter sales were down just 0.5% as compared to the fourth
quarter of 2002.

As part of
our strategy during 2003, we elected to close 17 underperforming stores to
maintain our operating margin.

27

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Over the
last few years, in order to lower our costs and meet the challenges posed by
our competition, including private supermarkets, we have implemented an
efficiency plan.  This plan has included
among others, dismissal of employees and efforts to reduce our electricity and
communications costs.  In 2003 and 2004,
we dismissed approximately 20% of our headquarters staff (approximately 100
employees) as well as another 150 store employees. In 2004, we are taking steps
to decrease our security and cleaning and laundry costs and reduce inventory
shrinkage.

In
addition, we expect to begin the process of streamlining our store brands to
just three  Mega, Super Center and Shefa Shuk - from our current seven,
although such a process will likely take more than one year.  Although the investment required to carry
out this program is likely to reduce our margins in the short term, we believe
that we will be able to focus our marketing efforts more effectively with fewer
store brands.

Operating Results.

The
following table sets forth certain statement of income data as a percentage of
sales for the periods indicated:

|                                                 |  | Year Ended December 31, |       
|------------------------------------------------ |  | ----------------------- | ------
|                                                 |  |                         |       
|                                                 |  | 2001                    |       
|                                                 |  |                         |       
|                                                 |  | %                       |       
|Sales                                            |  |                         | 100.00
|Gross
  profit                                   |  |                         | 27.67 
|Selling,
  general and administrative
  expenses |  |                         | 22.24 
|Operating
  income                               |  |                         | 5.43  
|Taxes
  on income                                |  |                         | 1.85  
|Minority
  interest in subsidiaries, net         |  |                         | 0.43  
|Net
  income (loss)                              |  |                         | 2.59  

Year Ended December 31, 2003 compared with
year ended December 31, 2002

Sales.Sales
in 2003 were approximately NIS 5,171 million, or $1,181 million, a decrease of
approximately 5% compared with sales of approximately NIS 5,444 million, or
$1,243 million in 2002. This decrease in sales is primarily attributable to the
recession in the Israeli economy in 2003, competition and the closing of
underperforming stores. In 2003, same store sales decreased by 11.2% due to the
opening of additional stores by our competitors and us, competition and a
slowdown in general economic growth in the Israeli economy.

Gross
profit.   Gross
profit in 2003 was approximately NIS 1,393 million, or $318 million, a decrease
of 5.2% compared with gross profit of approximately NIS 1,470 million, or $336
million in 2002.   This decrease in
gross profit is primarily attributable to the decrease in our sales.   As a percentage of sales, gross profit
decreased to 26.9% in 2003 from 27.0% in 2002. This decrease is primarily
attributable to the increased share of sales from our discount stores and to
the increased competition in the food retail chains in Israel.  The reduction in gross profit was mitigated
by the effect of the CPI on our opening inventory; the CPI decreased by 1.9% in
2003 as compared to an increase of 6.5% in 2002.  In general, a rise in the CPI erodes the gross profit.  From periods beginning or following January
2004, this effect will be disregarded as our financial statements will cease to
be adjusted for inflation in Israel going forward in accordance with Israeli
Accounting Standards No. 12 and No. 17.

28

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Operating
and administrative expenses. Operating and
administrative expenses in 2003 were approximately NIS 1,190 million, or $272
million, a decrease of 4.8% compared with operating and administrative expenses
of approximately NIS 1,251 million, or $286 million in 2002. This decrease in
expenses was primarily the result of our ongoing efforts to increase our
operating efficiency, and a decrease in depreciation as a result of the write
down of fixed assets at the end of 2002 offset by increases in credit card
charges and electricity costs due to an increase in electricity rate charges.

Operating
income.  
Operating income in 2003 was approximately NIS 202 million, or $46
million, a decrease of 7.5% compared with approximately NIS 219 million, or $50
million in 2002.   As a percentage of
sales, operating income in 2003 was 3.9% compared with 4% in 2002.   This decrease in operating income is
primarily attributable to the decrease in sales and gross profit.

Financial
income (expense), net.   Financial expenses, net in 2003 was approximately NIS 48.8
million, or $11 million, compared with financial income, net of approximately
NIS 15.9 million, or $3.6 million in 2002.  
The majority of this increase in financial expense, net is attributable
to the substantial difference in the CPI for the two years: during 2003 the CPI
declined by 1.9%, resulting in an appreciation of our net monetary unlinked
liabilities leading to an increase in financial expenses, while in 2002 it
increased by 6.5%, resulting in financial income. In addition the increase also
reflects our issuance of debenture and payment of dividends during the year.
The effect of any change in the CPI will be disregarded in future periods as
our financial statements will cease to be adjusted for inflation in Israel in
accordance with Israeli Accounting Standards No. 12 and No. 17.

Other
expenses, net.  
Other expenses, net in 2003 were approximately NIS 137 million, or $31.3
million, compared with other expenses, net of approximately NIS 174 million, or
$40 million in 2002.  The 2003 charges
consisted primarily of the following:

| | a provision of approximately NIS 26 million in respect of the
  dismissal of approximately 250 employees as described above                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                
| | a provision of NIS 41.6 million in respect of impairment of fixed
  assets and the planned closure of unprofitable stores                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                
| | a one-time
  expense of NIS 63.9 million recorded in the second quarter related to
  agreements reached between Blue Square and its employees after the change in
  Blue Squares control, according to which Blue Squares employees are
  entitled to receive certain bonuses and additional future benefits.

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Taxes
on income.  
Taxes on income in 2003 were NIS 8.4 million, or $1.9 million, a
decrease of 80% compared with approximately NIS 42.1 million, or $9.6 million
in 2002.   As a percentage of income
before taxes on income, taxes on income decreased to approximately 73.4% in
2003, compared with 75.6% in 2002.  
This high effective tax rate is primarily attributable to an increase in
taxes resulting from nondeductible expenses.

Minority
interest in subsidiaries, net.Minority
interest in subsidiaries, net in 2003 was approximately NIS 10.9 million, or
$2.5 million, an increase of 82% compared with approximately NIS 6.0 million,
or $1.4 million in 2002.   This increase
in minority interest in subsidiaries, net is primarily attributable to the
increase in the net income of BSIP in 2003.

Net
income (loss).Net loss in 2003 was
approximately NIS 7 million, or  $1.6
million, compared with a net income of approximately NIS 7.2 million, or  $1.6 million in 2002.

Year Ended December 31, 2002 compared with
year ended December 31, 2001

Sales.Sales
in 2002 were approximately NIS 5,444 million, or $1,243 million, a decrease of
6.6% compared with sales of approximately NIS 5,828 million, or $1,331 million
in 2001. This decrease in sales is primarily attributable to the recession in
the Israeli economy in 2002. In 2002, same store sales decreased by 11.2% due
to the opening and the timing of the opening of additional stores by our
competitors and us, and a slowdown in general economic growth in the Israeli
economy.

Gross
profit.   Gross
profit in 2002 was approximately NIS 1,470 million, or $336 million, a decrease
of 8.9% compared with gross profit of approximately NIS 1,613 million, or $368
million in 2001.   This decrease in
gross profit is primarily attributable to the decrease in our sales and the
substantial increase in the CPI in 2002.  
As a percentage of sales, gross profit decreased to 27% in 2002 from
27.7% in 2001. This decrease is primarily attributable to the increased share
of discount stores and to the increased competition in the food retail chains
in Israel.

Operating
and administrative expenses. Operating and
administrative expenses in 2002 were approximately NIS 1,251 million, or $286
million, a decrease of 3.5% compared with operating and administrative expenses
of approximately NIS 1,296 million, or $296 million in 2001. This decrease in
expenses was primarily the result of our ongoing efforts to increase our
operating efficiency, and was despite the sharp increase in expenses for
security, electricity and credit card charges for commission. As a percentage
of sales, operating and administrative expenses amounted to 23% in 2002
compared with 22.2% in 2001.

Operating
income.  
Operating income in 2002 was approximately NIS 219 million, or $50
million, a decrease of 31% compared with approximately NIS 317 million, or
$72.4 million in 2001.   As a percentage
of sales, operating income in 2002 was 4% compared with 5.4% in 2001.   This decrease in operating income is
primarily attributable to the decrease in sales and gross profit, and to the
increased competition in the food retail chains in Israel.

30

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Financial
income (expense), net.   Financial income, net in 2002 was approximately NIS 15.9
million, or $3.6 million, compared with financial expense, net of approximately
NIS 13.1 million, or $3 million in 2001.  
This decrease in financial expense, net is primarily attributable to the
following:  changes in Israels CPI,
which increased by 6.5% in 2002 compared with 1.4% in 2001; since our financial
statements are adjusted for inflation according to Israeli GAAP, our net
unlinked monetary liabilities appreciate as a result of a decrease in the CPI
and depreciate as a result of an increase in the CPI.   In 2002, the CPI increased by 6.5%, resulting in a depreciation
of our net monetary unlinked liabilities and generating financial income.   However, in 2001, the CPI increased only by
1.4% and as a result, the financial income was lower.

Other
income (expenses), net.   Other expenses, net in 2002 were approximately NIS 174 million,
or $39.7 million, compared with other expenses, net of approximately NIS 18.1
million, or $4.1 million in 2001.   This
change is primarily attributable to the impairment losses in respect of fixed
assets due to the per initial implementation of Accounting Standard No. 15,
Impairment of Assets, and includes an expense of NIS 11 million, or $2.5
million, in connection with a final settlement of an arbitration dispute with
the Co-Op regarding our obligation to pay social benefits to employees.  For further information, please see notes
2n, 7b and 18c to the financial statements.

Taxes
on income.  
Taxes on income in 2002 were approximately NIS 42.0 million, or $9.6
million, a decrease of 61% compared with approximately NIS 107.8 million, or
$24.6 million.   As a percentage of
income before taxes on income, taxes on income increased to approximately 75.6%
in 2002, compared with 38.4% in 2001. This increase is primarily attributable
to an increase in taxes resulting from nondeductible impairment losses in
respect of fixed assets due to the initial implementation of Accounting
Standard No. 15, Impairment of Assets.

Minority
interest in subsidiaries, net.   Minority interest in subsidiaries, net in
2002 was approximately NIS 6.0 million, or $1.4 million, a decrease of 76.3%
compared with approximately NIS 25.1 million, or $5.7 million in 2001.   This decrease in minority interest in subsidiaries,
net is primarily attributable to the decrease in the net income of BSIP in
2002.

Net
income.   Net
income in 2002 was approximately NIS 7.2 million, or  $1.6 million, a decrease of 95.2% compared with approximately NIS
150.8 million, or  $34.4  million in 2001 principally due to the
initial implementation of Accounting Standard No. 15, as described above . As a
percentage of sales, net income decreased to 0.1% in 2002 compared with 2.6% in
2001.

Quarterly Fluctuations

Our
business is subject to fluctuations in quarterly sales and profits.  These fluctuations are primarily
attributable to increased sales and higher operating income in the holiday
seasons occurring in different quarters from year to year.  Thus, for example, increased sales
attributable to Passover, which occurs in either March or April, may be
realized in either the first or the second quarter, and sales attributable to
the Jewish New Year, which occurs in either September or October, may be
realized in either the third or the fourth quarter.

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Many
of our expenses are unrelated to the level of sales, and therefore a relatively
modest increase or decrease in sales, whether or not related to the timing of
holidays, tends to have a disproportionately large impact on our profitability.

The following table sets forth certain
quarterly information:

|               |  | Net sales      |           | Operating income            | 
|-------------- |  | -------------- | --------- | --------------------------- | 
|               |  |                |           |                             | 
|               |  | Adjusted NIS   |           | Percentage
  of
  Full Year | 
|               |  |                |           |                             | 
|               |  | (In thousands) |           |                             | 
|2003           |  |                |           |                             | 
|First quarter  |  |                | 1,192,691 |                             | 
|Second quarter |  |                | 1,342,792 |                             | 
|Third quarter  |  |                | 1,339,060 |                             | 
|Fourth quarter |  |                | 1,295,967 |                             | 
|               |  |                |           |                             | 
|2002           |  |                |           |                             | 
|First quarter  |  |                | 1,407,846 |                             | 
|Second quarter |  |                | 1,360,993 |                             | 
|Third quarter  |  |                | 1,373,798 |                             | 
|Fourth quarter |  |                | 1,301,669 |                             | 
|               |  |                |           |                             | 

Exchange Rates

At
December 31, 2003, the representative rate of exchange of the NIS to the
dollar, as published by the Bank of Israel, was NIS 4.379 = $1.00.At June 15, 2004, the representative rate
of exchange of the NIS to the dollar, as published by the Bank of Israel, was
NIS 4.528 = $1.00. The table below sets forth, for the periods and dates
indicated, certain information concerning the representative exchange rate of
the NIS to the dollar, as published by the Bank of Israel for the years ended
December 31, 1999 through 2003:

|Year Ended
  December 31, |  | Period End |  | Average Rate(1) |  | High |  | Low  | 
|------------------------- |  | ---------- |  | --------------- |  | ---- |  | ---- | 
|                          |  |            |  |                 |  |      |  |      | 
|                          |  |            |  | (NIS per $1.00) |  |      |  |      | 
|1999                      |  | 4.15       |  | 4.14            |  | 4.29 |  | 4.01 | 
|2000                      |  | 4.04       |  | 4.08            |  | 4.20 |  | 3.97 | 
|2001                      |  | 4.42       |  | 4.21            |  | 4.42 |  | 4.07 | 
|2002                      |  | 4.74       |  | 4.74            |  | 4.99 |  | 4.44 | 
|2003                      |  | 4.38       |  | 4.55            |  | 4.92 |  | 4.28 | 

(1)  The
average of the daily exchange rates in each year.

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The following table sets forth certain information concerning the
representative exchange rate of the NIS to the dollar, as published for the
months January through May, 2004.

|Month    |  | Period End |  | Average Rate(1) |      | High |  | Low  | 
|-------- |  | ---------- |  | --------------- | ---- | ---- |  | ---- | 
|         |  |            |  |                 |      |      |  |      | 
|         |  |            |  | (NIS per $1.00) |      |      |  |      | 
|         |  |            |  |                 |      |      |  |      | 
|January  |  | 4.48       |  |                 | 4.42 |      |  | 4.48 | 
|February |  | 4.49       |  |                 | 4.47 |      |  | 4.49 | 
|March    |  | 4.53       |  |                 | 4.50 |      |  | 4.54 | 
|April    |  | 4.59       |  |                 | 4.55 |      |  | 4.60 | 
|May      |  | 4.56       |  |                 | 4.60 |      |  | 4.63 | 

(1) The average of
the daily exchange rates.

Impact
of Inflation and Currency Fluctuations

Inflation
in Israel increases our expenses, which, because of competitive pressures, are
generally not offset, fully or as quickly, by increases in our selling prices
and revenues.  In addition, any
devaluation of the NIS against various non-Israeli currencies in which we or
our suppliers pay for imported goods, has the effect of increasing the NIS cost
of these goods.  The periodic adjustment
of all NIS amounts set forth in our historical financial statements to reflect
changes in the CPI serves to minimize the impact of inflation on any
period-to-period comparison of our financial statements.  Beginning January 1, 2004, our financial
statements will cease to be adjusted for inflation in accordance with Israeli
Accounting Standards No. 12 and No. 17 adopted by the Israeli Accounting
Standards Board.

Although
substantially all of our revenues are received in NIS and a substantial
majority of our expenses is incurred in NIS, that portion of expenses which is
attributable to goods that are imported into Israel is incurred and payable in
currencies other than NIS, especially Euro. 
As a result, our operating results are affected by exchange rate
fluctuations of the NIS vis-à-vis other currencies, especially the Euro.   See also Item 11. Quantitative and
Qualitative Disclosure about Market Risks.

Political Conditions

We and all
of our subsidiaries are incorporated under Israeli law and our principal
offices and operations are located in the State of Israel.  Political, economic, security and military
conditions in Israel directly affect our operations.  Since the establishment of the State of Israel in 1948, a number
of armed conflicts have taken place between Israel and its Arab neighbors. A
state of hostility, varying from time to time, in intensity and degree, has led
to security and economic problems for Israel. 
Israel signed a peace treaty with Egypt in 1979 and a peace treaty with
Jordan in 1994. Israel has not entered into any peace agreement with Syria and
Lebanon.  Since October 2000,
hostilities between Israel and the Palestinians, including the Palestinian
Authority, have substantially increased. 
These hostilities include terrorist acts in Israel and military
operations in the West Bank and Gaza. 
Those hostilities had a negative effect on the Israeli economy, the
future effect of the continuance of these hostilities on the Israeli economy
and our operations is unclear.

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The future
of Israels relations with its Arab neighbors and the Palestinians is uncertain
and several countries, companies and organizations continue to restrict
business with Israel and with Israeli companies.  We believe that in the past, these practices have not had a
material adverse effect on us.  However,
we could be adversely affected by adverse developments in Israels
relationships with its Arab neighbors and the Palestinians, or by restrictive
laws, policies or practices directed towards Israel or Israeli businesses.

All male
adult citizens and permanent residents of Israel under the age of 48 are, unless
exempt, obligated to perform up to 36 days of military reserve duty
annually.  Additionally, these residents
are subject to being called to active duty at any time under emergency
circumstances.  Many of our officers and
employees are currently obligated to perform annual reserve duty and are
subject to being called to active duty at any time under emergency
circumstances.  While we have operated
effectively under these requirements since we began operations, we cannot
assess the full impact of these requirements on our workforce or business if
conditions should change, and we cannot predict the effect on us of any
expansion or reduction of these obligations.

Economic Conditions

Israels
economy has been subject to numerous destabilizing factors, including a period
of rampant inflation in the early to mid-1980s, low foreign exchange reserves,
fluctuations in world commodity prices, military conflicts and civil
unrest.  The Israeli Government has
intervened in various sectors of the economy by utilizing fiscal and monetary
policies, import duties, foreign currency restrictions and controls of wages,
prices and foreign currency exchange rates. 
The Israeli Government has periodically changed its policies in all
these areas.

All of our
sales are made in Israel and a substantial majority of the goods that we sell
are grown, manufactured or processed in Israel.  Consequently, our financial performance is dependent to a
significant extent on the economy of Israel. 
During the year 2000, Israels Gross Domestic Product rose by 7.5% while
during the years 2001 and 2002 it declined by 0.9% and 0.8%, respectively, and
in 2003 rose by 1.2%.  Initial reports indicate that the Israeli
economy will grow by approximately 3% in 2004.   We cannot be sure how any growth or decline in the Israeli
economy will affect our financial performance.

Trade Agreements

Israel
is a member of the United Nations, the International Monetary Fund, the
International Bank for Reconstruction and Development and the International
Finance Corporation.  Israel is a
signatory to the General Agreement on Tariffs and Trade, which provides for
reciprocal lowering of trade barriers among its members.  In addition, Israel has been granted
preferences under the Generalized System of Preferences from the United States,
Australia, Canada and Japan.  These
preferences allow Israel to export the products covered by these programs
either duty-free or at reduced tariffs.

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In
addition, Israel, the EU, known as the European Union, and the European Free
Trade Association have a free trade agreement. 
In recent years, Israel has established commercial and trade relations
with a number of other nations, including China, India, Russia, Turkey and
other nations in Eastern Europe and Asia.

Corporate Tax Rate

We are
subject to income tax in Israel at the rate of 36% of taxable income.

For further
tax information, see Item 10. 
Additional Information-Taxation-Israeli Tax Considerations.

Critical Accounting Estimates

We prepare
our consolidated financial statements in conformity with accounting principles
generally accepted in Israel and include reconciliation to accounting
principles generally accepted in the United States. In preparing our financial
statements, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the periods presented. To fully
understand and evaluate our reported financial results, we believe it is
important to understand the following estimates and judgments we use in
applying our accounting policies:

Impairment
of Assets

Effective
December 31, 2002, we apply Accounting Standard No. 15, Impairment of Assets.
The Standard prescribes the accounting treatment and disclosure for impairment
of assets. The Standard applies to all assets appearing in the balance sheet
other than: (1) inventories, (2) assets arising from construction contracts,
(3) assets arising from employee benefits, (4) deferred tax assets and (5)
financial assets (except investments in investee companies that are not
subsidiaries).  According to the new
Standard, if there is any indication that an asset may be impaired, we
determine if there has been an impairment of the asset by comparing the
carrying amount of the asset to its recoverable amount. If it is not possible
to estimate the recoverable amount of the individual asset, we determine the
recoverable amount of the cash generating unit (i.e., the smallest identifiable group of assets that
independently generates cash inflows from continuing use) to which the asset
belongs.  Recoverable amount is defined
as the higher of an assets selling price and its value in use. Value in use is
the present value of estimated future cash flows expected to arise from the
continuing use of an asset and from its disposal at the end of its useful
life.  If the carrying amount of an
asset in the balance sheet exceeds its recoverable amount, an impairment loss
should be recognized in the amount by which the carrying amount of the asset
exceeds its recoverable amount. An impairment loss previously recognized should
be reversed only if there has been a change in the estimates used to determine
the assets recoverable amount since the impairment loss was recognized.

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We evaluate
impairment separately for each store or other cash-generating unit. In
evaluating impairment, we consider corporate assets relating to the stores or
other cash-generating units as well as indirect costs that are directly
attributable, or that can be reasonably allocated, to the cash-generating
units.

In
determining the value in use of an asset, we use best available estimates as to
the conditions that will prevail during the remaining useful life of the asset
and as to the current condition of the asset. The current discount rate used by
us is 8%.  We rely on external experts
to determine the appropriate discount rate. 
In determining the net selling price of an asset, management relies on
estimates of internal and external experts.

The results
of impairment tests are subject to managements estimates and assumptions of
projected cash flows, operating results and the discount rate to be used in
discounting projected cash flows. We estimate future cash flows based on our
experience and knowledge of the market in which the stores are located as well
as on external experts. However, these estimates project cash flow several
years into the future and are affected by variable factors such as inflation, the
strength of the real estate markets and economic conditions. A change in
assumptions or market conditions could result in a change in estimated future
discounted cash flows and the likelihood of materially different reported
results.

According
to U.S. GAAP (SFAS 144  Accounting for the Impairment or Disposal of
Long-Lived Assets) an impairment loss is recognized only if the carrying
amount of an asset is not recoverable. The carrying amount is not recoverable
if it exceeds the estimated undiscounted future cash flows expected to result
from the use of the asset. If the carrying amount is not recoverable, an
impairment loss should be recorded for the amount by which the carrying value
of the asset exceeds its fair value.  As
a result, certain circumstances which would require an impairment loss to be
recorded under Israeli GAAP would not require an impairment loss to be recorded
under U.S. GAAP.

Rebates
from suppliers

Rebates due
from suppliers for which we have no obligation to meet specified purchasing
targets are recorded in the financial statements as purchases from these
suppliers are made.

We are also
entitled to certain rebates upon meeting specified purchasing targets, such as
the fulfillment of a minimum annual purchase quota (in quantitative or monetary
amounts), or an increase in purchases in comparison with purchases made in
previous periods. The rebates are recognized in the financial statements as
earned based on a systematic calculation of the extent to which we have reached
the target, provided it is probable that the final target will be met and the
total rebate can be reliably estimated. Estimates as to whether the final
target will be met are based, among others, on past experience, our relationship
with the supplier, and the amount of the anticipated purchases for the
remaining period. The effect of our estimate is more significant on our
quarterly financial statements. At year-end upon achievement of final targets,
we adjust the interim estimates according to the actual results of the targets.

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Inventory

We value
our inventories using the first-in, first-out (FIFO) method for all of our
stores, except in our logistics center where we value our inventories based on
moving average.

We provide
for estimated inventory losses (shrinkage) between physical inventory counts on
the basis of percentage of sales.  The
provision is adjusted annually to reflect the historical trend of the actual
physical inventory count results on a store-by-store basis.  Historically, shrinkage has not been
volatile.

We reduce
the value of our inventory annually on a percentage basis based on the rebates
that we receive from our suppliers.

Unutilized
Sick Leaves

We record
as an expense in the financial statements our employees unutilized sick
leaves.  These expenses are recorded in
the financial statements based on estimates that we receive from an external
actuary, who makes estimates based on variety of factors, including retirement
age and interest rates.

Critical Accounting Policies

To fully understand and evaluate our reported financial results, we
believe it is important to understand the following accounting policies:

Goodwill

Goodwill,
under Israeli GAAP, is presented at cost and is amortized over the estimated
period of benefit of 10 and 20 years (mainly 20 years). We amortized the
goodwill generated from the acquisition of our subsidiary, BSIP, for a period
of 20 years for the following reasons:

| | 1. | The operations of BSIP have been in existence for over 20 years and
  BSIP has developed a reputation as a leading company in the operation of
  supermarket chains in Israel.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                               
| | 2. | Supermarket chains in Israel have a growth potential as a result of
  the development of the consumer market in Israel.                                                       

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| |    |                                                                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | Usually, the market value of BSIP, according to its
  share market price, indicates goodwill amount greater than the book value of
  its recorded goodwill.

Goodwill
is reviewed for impairment when circumstances indicate the possibility that
impairment exists.

Under U.S.
GAAP (SFAS 142 - Goodwill and other intangible assets), goodwill was
amortized until December 31, 2001, on a straight-line basis over the estimated
period of benefit and thereafter is no longer amortized. Goodwill is to be
tested for impairment on adoption of SFAS 142 and at least annually thereafter
or between annual tests in certain circumstances, and written down when
impaired. Goodwill is tested for impairment on the reporting unit level.  Fair value of the reporting unit is
determined by us based on market capitalization of the reporting unit.

Recently
issued accounting pronouncements in Israel

In 2001,
the Israeli Accounting Standards Board issued Accounting Standard No. 12,
Cessation of Adjustment of Financial Statements.  Under the provisions of this Standard, financial statements will
cease to be adjusted for the effect of changes in the general purchasing power
of the Israeli currency. As a result of the issuance of Accounting Standard No.
17 in December 2002, implementation of Accounting Standard No. 12 has been
deferred until periods commencing after December 31 2003. Until December 31,
2003, we prepare adjusted financial statements in accordance with the provisions of
Opinion No. 36 of the Institute of Certified Public Accountants in Israel.  The adjusted amounts in the financial
statements as of December 31, 2003, will serve as the basis for nominal
financial reporting as of January 1, 2004.

The
adoption of Standard No. 12 could have an adverse effect on the results of our
operations. The extent of the effect is dependent on the rate of inflation and
the composition of the assets and sources of our financing.  The major ramification will be reflected in
the long-term liability.  As of March
31, 2004, we had approximately NIS 682 million of liabilities linked to the
CPI. Based on this amount of liabilities, any 1% increase in the CPI would
reflect approximately NIS 6.8 million of financial expenses in our financial
reports with respect to these liabilities.

Liquidity and Capital Resources.

Sources
and Uses of Cash

Our
principal source of liquidity is the cash generated by our operations.  Both Blue Square and its partially owned
subsidiaries have generally generated sufficient cash from their operations to
satisfy their respective operating requirements.  Thus, at the operating level, there have generally been few, if
any, requirements for cash flow from Blue Square to its subsidiaries or from
these subsidiaries to Blue Square, except for cash payable to Blue Square under
management and other agreements.  The
available cash resources of BSIP and its subsidiaries have historically been
used, and are expected to continue to be used, to finance the expansion of
these companies.

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Cash
generated by operations was approximately NIS 259 million, or  $59.1 million, in 2003, a decrease of 11%
compared with approximately NIS 291 million, or $66.5 million, in 2002, which,
in turn, represented an decrease of 9.6% compared with approximately NIS 322
million or $73.5 million, in 2001.  This
decrease was mainly the result of the recession in the Israeli economy and the
competition from low-priced private supermarkets.   In 2003, approximately 36.8% of our sales were paid for with
cash and cash equivalents at the point-of-sale, approximately 62.1% of sales
were paid for with credit cards and approximately 1.1% of sales were paid for
with other short-term credit arrangements.

During
2003, the average time period within which our accounts receivable are paid was
30 days.  By contrast, as of such date
the average time period for payment of our accounts payable was 57 days.  Accordingly, increased capital resources are
not required to support an increase in our receivables or inventories because
we generally sell our products before we pay our suppliers.  Inasmuch as we can anticipate, with relative
certainty, that we will receive a substantial in-flow of cash when payments are
made to us by credit card companies at the beginning of the month following the
month in which the related credit card purchases were made, we often permit our
cash balance to become negative by the end of each month.

Other
sources of liquidity are long-term and short-term borrowing from banks.  During 2003, we received long-term
borrowings of NIS 109.6 million, or $25.0 million.  During 2003, we repaid NIS 203.4 or $46.5 million in long-term
borrowings and NIS 86 million or $19.6 million in short-term borrowings.  In the first quarter of 2004, we received a
long term loan in the amount of NIS 100 million, half of which bears interest
at a rate of 5.4% linked to the CPI, and other half of which is at a variable
unlinked rate based on prime.  In
addition, during 2003, we issued NIS 400 million in aggregate principal amount
of unsecured 5.9% convertible and nonconvertible debentures with maturity dates
of seven to eleven years.

In 2003 and
until June 2004, we paid three dividends totaling approximately $123 million,
equal to approximately $3.20 per share.

In May
2004, BSIP paid a dividend totaling NIS 400 million, approximately NIS 320
million of which was distributed to Blue Square, and approximately NIS 80
million was distributed to other shareholders.

In April
2004, BSIP also received a loan in the amount of NIS 100 million.

In
March 2000, Blue Square sold all of its holdings in Home Centers to Bilu
Enterprise (H.C.) Ltd. for $24.7 million and recorded a capital gain before
income tax of approximately NIS 34.14 million, or $7.4 million.

In
April 2001, we received proceeds of $1.3 million from the sale of our
interests in IKEA.  In December 2001, we
sold all of our holdings (50%) in Regba Properties Ltd. and Regba Streets Ltd.,
which are engaged in the construction of a commercial center, for approximately
NIS 29.5 million or $6.3 million. The consideration was received in 2002.

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In recent
years, we funded our renovation, remodeling and expansion programs primarily
from cash generated by our operations and from long and short term loans from
banks.  During 2003, we invested
approximately NIS 139 million, or  $31.7
million in fixed and other assets, in the development of new stores and in
existing store renovation and remodeling, a decrease of 43% compared with
approximately NIS 243 million, or  $55.5
million during 2002 which, in turn, represents a decrease of 15.3% compared
with approximately NIS 287 million, or $65.5 million during 2001.  This decrease is primarily attributable to
our continued strategy of leasing store sites with option to renew the leases
other than to purchase store sites and our opening of fewer stores than in
2002. We currently plan to spend in excess of NIS 100 million, or $22.8 million
for the development or acquisition of new supermarkets and consolidation of our
retail formats and the renovation and remodeling of our existing supermarkets
through the end of 2004.  We intend to
finance our store development, renovation, modeling, expansion and acquisitions
mainly from cash generated by our operations and from borrowing from bank and
financial institutions.

The
following table sets forth certain information concerning our obligations and
commitments to make future payments under contracts, such as debt and lease
agreements:

Contractual Obligations

|                                   |  | December 31, 2003                    |        
|---------------------------------- |  | ------------------------------------ | -------
|                                   |  | Expected Maturity (NIS in thousands) |        
|                                   |  |                                      |        
|                                   |  | 2004                                 |        
|                                   |  |                                      |        
|                                   |  |                                      |        
|Long
  term loans
  from banks     |  |                                      | 173,148
|                                   |  |                                      |        
|Debentures 
  (1)                  |  |                                      | -      
|Convertible
  Debentures (2)       |  |                                      | -      
|Non-cancelable
  Long term leases  |  |                                      | 104,591
|                                   |  |                                      |        
|Total contractual cash obligations |  |                                      | 277,739



| | (1) | The principal is repayable
  in three equal annual installments on August 5 of each of the years 2012 to
  2014.  Notwithstanding the above, on
  August 5 of each of the years 2006, 2008 and 2010, the holders of the debentures
  will be entitled to early redemption of the principal provided that on each
  of the said dates, we will not repay more than one third of the par value of
  the debentures outstanding as of that date.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (2) | The principal is repayable
  in three equal annual installments on August 5 of each of the years 2007,
  2009, and 2011.                                                                                                                                                                                                                                                                                                                     

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As of
December 31, 2003, Blue Square had entered into agreements for the purchase of
real estate and equipment in the aggregate amount of approximately NIS 49 million,
or $11.2 million.

Dividends

From
January 2004 to June 15 2004, Blue Square distributed to its shareholders a
dividend of $1.48 per share in an aggregate amount of NIS 252 million or $55.7
million.

During 2003
Blue Square distributed to its shareholders a dividend of $1.72 per share in
aggregate amount of NIS 295 million or $67.3 million.

During
2002, Blue Square distributed to its shareholders a dividend of $0.72 per share in an aggregate amount of
NIS 128 million, or $29.2 million.

During
2001, Blue Square distributed to its shareholders a dividend of $0.31 per share
in an aggregate amount of approximately NIS 51.9 million, or $11.9 million.

Our Board
of Directors has resolved that we will not distribute dividends in any quarter
if the ratio of our financial obligations (as defined by Maalot, an Israeli
rating agency) to EBITDA for any quarter exceeds 3.5 until June 30, 2006 or
exceeds 3.0 thereafter.  Our Board also
resolved that we will not distribute dividends in any quarter from August 1,
2003 until October 5, 2014 if the ratio of the cost of unencumbered fixed
assets as set forth on our financial statements (following depreciation) to
financial obligations (as defined by Maalot) for a quarter is below 120%.

41

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Short-Term
Credit from Banks

The
following table sets forth the principal terms of our short-term credit from
banks and others:

| |                                                  |  | December 31      |        
| | ------------------------------------------------ |  | ---------------- | -------
| |                                                  |  |                  |        
| |                                                  |  | 2002             |        
| |                                                  |  | NIS in thousands |        
| |                                                  |  |                  |        
| | Short-
  term credit from banks-                 |  |                  |        
| | Unlinked
  (1)                                   |  |                  | 125,411
| |                                                  |  |                  |        
| | Linked to
  the Yen(2)                           |  |                  | -      
| | Current
  maturities of
  long-term liabilities: |  |                  |        
| | Loans                                            |  |                  | 185,013
| | Debentures                                       |  |                  | 8,000  
| |                                                  |  |                  |        
| |                                                  |  |                  | 318,424

| | (1) | The balance
  as of December 31, 2003 bears variable interest at a weighted average annual
  rate of 9.6%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (2) | The loan
  bears an annual interest rate of 0.8%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (*) | Current
  maturities include an amount of approximately NIS 7.2 million, in respect of
  long-term loans received by a proportionately consolidated company from banks
  and in respect of which the proportionately consolidated company did not meet
  the financial covenants as of December 31, 2003. Accordingly, for reasons of
  prudence, the abovementioned loans were classified as current maturities.
  Non-fulfillment of the financial covenants relates also to short-term credit
  received by the proportionately consolidated company in the amount of NIS 4.6
  million.

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Long-Term
Loans from Banks

The
following table sets forth the principal terms of our long-term loans from
banks:

| |                             |  | December 31      |         | Annual
  Interest Rate
  % | 
| | --------------------------- |  | ---------------- | ------- | -------------------------- | 
| |                             |  |                  |         |                           
| |                             |  | 2002             |         | 2003                       | 
| |                             |  | NIS in thousands |         |                           
| |                             |  |                  |         |                            | 
| | Linked
  to the Israeli CPI |  |                  | 271,714 |                            | 
| | Unlinked(2)                 |  |                  | 268,619 |                            | 
| |                             |  |                  |         |                            | 
| |                             |  |                  | 540,333 |                            | 
| |                             |  |                  |         |                            | 
| | Less-
  current maturities  |  |                  | 185,013 |                            | 
| |                             |  |                  |         |                            | 
| |                             |  |                  | 355,320 |                            | 
| |                             |  |                  |         |                            | 

(1)
Average fixed rate as of December 31, 2003

(2)
As of December 31, 2003, includes NIS 107 million at variables interest
(average annual rate as of December 31, 2003- 6.7%). The balance of NIS 110
million is at a fixed annual interest rate of 7.4%.

Debentures

The
following table summarizes our outstanding debentures in 2002 and 2003:

| |                                     |  | December
  31,                |      
| | ----------------------------------- |  | ----------------------------- | -----
| |                                     |  |                               |      
| |                                     |  | 2002                          |      
| |                                     |  |                               |      
| |                                     |  | Adjusted
  NIS in
  thousands |      
| |                                     |  |                               |      
| |                                     |  |                               |      
| | Debentures (Series A)               |  |                               | -    
| | Debentures issued by subsidiary     |  |                               | 8,000
| |                                     |  |                               |      
| |                                     |  |                               | 8,000
| | Less - current maturities           |  |                               | 8,000
| |                                     |  |                               |      
| |                                     |  |                               |      
| |                                     |  |                               | -    
| |                                     |  |                               |      
| |                                     |  |                               |      
| | Convertible debentures (Series
  B) |  |                               | -    
| |                                     |  |                               |      

In August
2003, we issued to institutional investors NIS 400 million in aggregate
principal amount of unsecured 5.9% debentures, half of which (Series B) are
currently convertible into our ordinary shares.  All the debentures are linked (principal and interest) to the
Israeli CPI, but in the event the Israeli CPI is less than the base index
(index known at date of issuance), the amount of the debentures will not be
adjusted below the base index.

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Series
A Debentures

The principal
of the Series A Debentures is repayable in three equal annual installments on
August 5 of each of the years 2012 to 2014, and the interest is payable
semiannually.  Notwithstanding the
above, on August 5 of each of the years 2006, 2008 and 2010, the holders of the
Series A Debentures will be entitled to early redemption of the principal
provided that on each of such dates we do not repay more than one third of the
par value of the Series A Debentures outstanding as of that date.

Series
B Debentures

The
principal of the Series B Debentures is repayable in three equal annual
installments on August 5 of each of the years 2007, 2009 and 2011, and the
interest is payable semiannually.  The
Series B Debentures are convertible into our ordinary shares at a conversion
ratio that is subject to adjustment in the event of distribution of bonus
shares and cash dividends and the issuance of rights.  As of December 31, 2003 each NIS 41.8 par value of debentures was
convertible to one ordinary share of 1 NIS par value. This conversion ratio is
after adjustment for cash dividends distributed from the date of issuance of
the Series B Debentures until December 31, 2003. Subsequent to December 31,
2003, we declared an additional dividend, which further reduced the conversion
ratio such that each NIS 35.184 par value of debentures are convertible to one
Ordinary shares of 1 NIS par value as of June 15, 2004.

Other
terms of the Series A and Series B 
Debentures

The terms of
the debentures (Series A and Series B) provide that in the event that our
ordinary shares are delisted from trading on the TASE, and/or in the event that
our ordinary shares are no longer held by the public and/or in the event that
Maalot reduces our rating to BBB or lower, then within three months from one of
the abovementioned events we, subject to the then prevailing law, will offer to
acquire the debentures at a price equivalent to the price of debentures of the
same type reflecting a return of 2.5% in excess of the return on Israeli
Government debentures with an average life similar to the remaining average
life of the debentures of that series as of the date of the offer, but in no
event will the price exceed the adjusted carrying value of the debentures of
that series.

In
addition, our rating from Maalot may be adversely affected by a change in the
resolutions of our Board described under - Dividends above.

For
additional information on charges pertaining to the collateralized long-term
loans, see note 12b to our consolidated financial statements.

Commitments for Capital Expenditures

As of
December 31, 2003, we had entered into agreements for the purchase of real
estate and equipment in the total amount of NIS 49 million, or $11.2
million.  We intend to finance the
purchase of this real estate and equipment from cash generated by our
operations and from borrowings from banks and financial institutions.

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C. Research and Development, Patents and Licenses.

Not
applicable.

D. Trend Information.

In recent
years, we have divested interest in businesses that are unrelated to the food
and supermarket goods industry. 
Accordingly we disposed of most of our businesses in other retail areas.

We estimate
that growth opportunities for supermarkets in Israel remain as more households
increase purchasing of supermarket goods at supermarkets rather than smaller
grocery stores and open-air markets.  We
estimate that approximately 52% of the total sales of supermarket goods in
Israel in 2003 were made by organized supermarket chains, a percentage that is
considerably lower than the estimated market shares prevailing in Europe and
the United States.  Accordingly, we
believe that there is an opportunity for us to grow correspondingly with the
general growth of the supermarket sector in Israel.

The food
retailing industry has been subject to increased competition in recent
years.  Smaller chains have merged or
been acquired.  In addition, as a result
of the recession, we and other major chains have continued our expansion into
hard discount store formats. Also, a new class of very low-priced private
supermarkets have expanded their presence in selected areas.   The increased competition has led to
increased downward pressure on prices. 
As a result of the change in the 
business environment and these developments, we relocated some of our
stores and closed 17 underperforming stores in 2003.  However, we opened five new stores to compete in selective areas
in which we did not believe we had sufficient market presence.

In order to
compete effectively in the food retailing market, we believe we must identify
new store locations and opportunities to expand and improve existing store
locations.  However, sales in new stores
or in expanded or improved existing stores may increase at the expense of sales
in other existing stores of ours due to geographical proximity.  As the supermarket industry grows, the
likelihood that sales of one store will adversely affect the sales of a nearby
store increases.

During
previous years, we continued our adjustment to meet the needs of a more
price-sensitive customers.  As a result,
we have  emphasized our Mega supermarket
format, a chain of discount stores. 
During 2003, we converted 8 supermarkets of other formats to Megas and
opened 4 new Mega stores.  During 2003,
we expanded a new supermarket chain called Shefa Shuk. Shefa Shuk stores are
hard discount stores with a selection of products specially oriented towards
Israels growing ultra-orthodox population. From February 2003 until May 2004,
we converted 16 Super Center and King Center and Shefa Mehadrin supermarkets
into Shefa Shuk stores.

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In 2004, we
currently plan to increase our emphasis on increasing our sales, partially in
anticipation of an improving Israeli economy. 
This may include increasing our marketing activities and lowering our
prices.  The investment required to
carry out this program is likely to increase our expenses and reduce our
margins in the short term.  However, we
believe it will pay off over the long term.

In
addition, we expect to begin the process of streamlining our store brands to
just three  Mega, Super Center and Shefa Shuk - from our current seven,
although such a process will likely take more than one year.  Although the investment required to carry
out this program is likely to reduce our margins in the short term, we believe
that we will be able to focus our marketing efforts more effectively with fewer
store brands.

Some of our
largest suppliers have completed a series of consolidations, while the trend of
consolidation among our suppliers continues.  
These suppliers may attempt to leverage their negotiating power as their
size and market share grow.

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ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.          Directors
and Senior Management.

The
following table lists the name, age and position of the directors and executive
officers of Blue Square as of June 15, 2004.

|Name                          |  | Age |  | Position                                            
|----------------------------- |  | --- |  | ----------------------------------------------------
|                              |  |     |  |                                                     
|Matthew Bronfman (1)          |  | 44  |  | Chairman of the Board of
  Directors                
|David Wiessman (1)            |  | 49  |  | Deputy and Vice Chairman
  of the Board of Directors
|Yitzhak Bader                 |  | 58  |  | Director                                            
|Yaakov Shalom Fisher          |  | 47  |  | Director                                            
|Pinchas Cohen                 |  | 53  |  | Director                                            
|Shlomo
  Zohar                |  | 52  |  | Director                                            
|Avraham Meron                 |  | 64  |  | Director                                            
|Davidi Marom                  |  | 51  |  | Director                                            
|David Brodet                  |  | 60  |  | Director                                            
|Shlomo Even (2)               |  | 47  |  | Director                                            
|Ron Hadassi (2)               |  | 39  |  | Director                                            
|Merav Gold                    |  | 40  |  | Director                                            
|Elisha Eitani                 |  | 55  |  | Director                                            
|David
  Vinshel (1) (2) (3)   |  | 68  |  | Director                                            
|Zeev
  Vurembrand (1) (2) (3) |  | 53  |  | Director                                            
|Gil
  Unger                   |  | 50  |  | President
  and Chief Executive Officer             
|Emanuel
  Avner               |  | 43  |  | Vice
  President and Chief Financial Officer        
|Uri
  Falach                  |  | 47  |  | Vice
  President for Trade                          
|Michael
  (Miki) Lev          |  | 53  |  | Vice
  President for Operations                     
|Sandrine
  Montsma            |  | 35  |  | Vice
  President for Marketing                      
|Avi
  Belfer                  |  | 54  |  | Head
  of Planning and Maintenance Division         
|Moshe
  Shatz                 |  | 56  |  | Head
  of Human Resources Division                  
|Odelia
  Levanon              |  | 41  |  | Head
  of Information Technology Division           
|Iris  Penso                   |  | 43  |  | General
  Counsel and Corporate Secretary           
|Shay
  Lifshitz               |  | 50  |  | Head
  of Trade Headquarters                        
|Oren
  Lahat                  |  | 56  |  | Head
  of Real Estate Development Division          

(1)  Member of the Compensation Committee.
(2)  Member of the Audit Committee.
(3)  External directors.

Matthew
Bronfman has served as the chairman of our board of
directors from June 2003.  Mr. Bronfman
is currently managing director of ACI Capital American Fund, is Deputy and Vice
Chairman of the Board of Bronfman-Alon, Deputy and Vice Chairman of the Board
of BSIP and is on the board of directors of Tweeter  Home Entertainment Group
(TWTR). Mr. Bronfman is a member of the Compensation Committee of Blue Square.

David
Wiessman has served as a deputy and vice Chairman of
our board of directors from June 2003. 
Mr. Wiessman is currently the Chairman of the board of directors of
BSIP.  In addition, Mr. Wiessman is
currently the President and Chief Executive Officer of Alon Israel Oil Company
Ltd. and Dor Energy (1988) Ltd., Chief Executive Officer of Bielsol Investments
(1987) Ltd. and Chairman of the Board of Bronfman-Alon, Alon U.S.A. Energy,
Inc. and other companies. Mr. Wiessman is a member of the Compensation
Committee of Blue Square.

47

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Yitzhak Bader has served as our director
from June 2003.  Mr. Bader is currently
Chief Executive Officer of Granot, a purchasing organization of the kibbutzim.
He is also Chairman of the Board of Directors of Alon Israel Oil Company Ltd.
and Dor Energy (1988) Ltd., and a director in Bronfman-Alon, BSIP, Dor Gas
Ltd., Dor Alon Operating Service Stations Ltd., Pri-Gat Ltd., entities under
control of Granot, and One Technologies Software (ASD) Ltd.

Yaakov Shalom Fisher has served as our
director from June 2003.  Mr. Fisher is
currently President of Palace Candles Inc., a manufacturer and marketer of
candles, aluminum and disposable products in Israel and in the United States,
and a director in Bronfman-Alon and BSIP.

Pinchas Cohen has served as our director
from June 2003.  Mr. Cohen is currently
Chief Executive Officer of Africa Israel Investments Ltd., a director in
Bronfman-Alon and a director of subsidiaries and affiliates of Africa Israel
Investment Group Ltd., Alon Israel Oil Company Ltd. and Alon U.S.A. Energy.

Shlomo Zoharhas served as our director
since March 8, 2004, and he is also currently a director of BSIP.  Mr. Shlomo Zohar is a certified C.P.A. in
Israel and has served for the last 25 years as C.P.A at Zohar, Zohar & Co. Mr.
Zohar holds a B.A degree in Accounting and Business Administration from
Bar-Ilan University and M.B.A. in Business Administration from McGill
University in Canada. Mr. Zohar specified in the last years in the area of
mergers & acquisitions in Israel and abroad.

Avraham Meron has served as our director
from June 2003.  Mr. Meron is currently
Chief Financial Officer of Africa Israel Investments Ltd., and a director of
subsidiaries and affiliates of Africa Israel Investment Group Ltd., Alon Israel
Oil Company Ltd., Dor Energy (1988) Ltd., Alon Dor Operating Service Stations
Ltd and other companies of Dor Alon Group and Alon U.S.A. Energy.

Davidi Marom has served as our director
since June 2003.  Mr. Marom is currently
CEO of Jordan Valley Economies and Zemach Leasing (1993) Ltd., and a director
of Zemach Regional Industries-Jordan Valley Ltd., other Zemach affiliated
entities, Alon Israel Oil Company Ltd., Dor Energy (1988) Ltd., Alon Dor
Operating Service Stations Ltd. and other companies.

David Brodet served as our chairman of the
board of directors from September 2000 to June 2003.  From1998
to2000, Mr. Brodet served as the
Chairman of the board of directors of WIS (Space). Mr. Brodet currently serves
as the chairman of the board of directors of Yes (DBS Satellite Service),
chairman of The University Hospital of Hadassah, and as a director of Amanat,
Direct Insurance.Mr. Brodet also
currently serves as the chairman of the board of directors of numerous
organizations engaged in financial, economic, academic and civic activities.

48

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Shlomo Even has served as our director
since June 2003.  Mr. Even is currently
an accountant and partner of the accounting firm of Tiroshi Even, and a
director of Super Sol Bielsol Investments Ltd., Alon Israel Oil Company Ltd.,
Dor Energy (1988) Ltd. and Alon Dor Operating Service Stations Ltd. and other
companies. Mr. Even is a member of the Audit Committee of Blue Square.

Ron Hadassi has served as our director
since June 2003. Ms. Hadassi is currently an employee of Palace Group, a
lecturer for banking and financing at the Interdisciplinary Center in Herzilya,
a director in Bronfman-Alon, BSIP and one of its subsidiaries, and an external
director in Naaman Porzelon Ltd. and Bet Shemesh Engines Holdings Ltd. Mr.
Hadassi is a member of the Audit Committee of Blue Square.

Merav Goldhas served as our director since
June 2003, and she is also currently a director of BSIP. Ms. Gold is currently
Chief Executive Officer of Palace Candles Inc., a director in Bronfman-Alon, an
external director of Liberties Properties Ltd, and Vita Pri-Galil Ltd..

Elisha Eitani has served as our director
since June 2003.  Mr. Eitani is
currently Chief Executive Officer of Hechal  Haner Ltd.

David Vinshelhas served as our director
since January 6, 2004.  David Vinshel is
currently a private businessman and the Chairman of the Public Committee for
the Shares of Bank Leumi LYisrael Ltd. From 1998 to 2001, Mr. Vinshel was the
Chairman of the Board of Migdal Insurance Company, from 1997 to 1991, Mr.
Vinshel was the Chief Executive Officer of Clal Israel, and from 1981 to 1991,
he was the Chief Executive Officer of Super Sol. Mr. Vinshel holds a B.A. in
economics from Hebrew University and an M.A. in social science from the
Institute of Social Studies in Hague, Holland.

Zeev Vurembrandhas served as our director
since February 2001.  In October, 2002, Mr. Vurembrand was appointed
Chief Executive Officer of Clalit Health Services, the leading health care
institution in Israel, which provides comprehensive medical care to 3.7 million
members, some 60% of the Israeli population.  Mr. Vurembrand also holds
the position of Chairman of the Board of Directors of the Mor Institute for
Medical Data Ltd., Clalit Bio-Medical Engineering Ltd., and Shilah Dental
Services, all Clalit Health Services subsidiaries. From 1995 until his new
appointment, Mr. Vurembrand served as Deputy Director General and Head of the
Finance and Health Insurance Division of Clalit Health Services (formerly Kupat
Holim Clalit) as well as the Head of Clalit Mushlam.From 1993 to 1995, Mr. Vurembrand served as
the Deputy Director General of Finance and Business Development of Shekem
Ltd., a retail stores chain.    Mr. Vurembrand holds a degree in
Industrial Engineering and Management from the Technion-Israel Institute of
Technology, in Haifa, Israel.

49

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Gil
Unger has served has our Chief Executive Officer and
President since March 2004.  From 2001
to 2004, he served as the Chief Executive Officer of IKEA Israel.  From 2000 to 2001, Mr. Unger served as
Senior Vice President Marketing & Commerce of Office Depot Israel and
between 1998  2000 served as Vice President Marketing & Commerce of Visa
Credit Cards.  Previously, for a period
of 8 years, he held the position of Marketing Director of Israels largest
chain of drug stores (Superpharm) and later he served as President of
Israels second largest chain of drug stores (New  Pharm).  Mr. Unger holds a B.A. degree in Economics
from Tel Aviv University.

Emanuel
Avner has served as our Vice President and Chief
Financial Officer since November 2, 2003. 
Mr. Avner served from 1999 until October 2003 as Chief Financial Officer
of Ericsson Israel. From 1993 to 1999, he served as Corporate Controller and
Deputy CFO of Super Sol Ltd.  Mr. Avner
is a CPA (member of the American and Israeli Institute of Certified Public
Accountants) and holds a Masters in Business Administration (1st Class
Honors) and a BA in Economics and Accounting from the Hebrew University of
Jerusalem.

Uri
Falach has served as our Vice President for Trade as
of December 15, 2003.  Mr. Falach holds
an MBA degree in Business Administration. From 1994 until today Mr. Falach
served as manager of the agricultural production and was responsible for all
the chain of supply of the agricultural production to Blue Squares Stores.

Michael
(Miki) Lev has served as our Vice President for
Operations, as of November 2, 2003. 
From January 1997 until November 2003, Mr. Lev served as head of the
Human Resources and Quality Division of Blue Square. From 1994 to 1996, Mr. Lev
served as the director general of the Lahav School of Management at the
Recanati School of Business Administration in Tel-Aviv University. From 1992 to
1994, Mr. Lev served as a Management Consultant in the Private and Public
Sectors. Mr. Lev holds a MSc degree in Administration from Naval Post-Graduate
School, Monterey, California, USA.

Sandrine
Montsma has served as our Vice President for Marketing
since June 1, 2004.  From January 2003
to March 2004, Mrs. Montsma served as Vice President Marketing, Strategy and
New Business of Elite Industries Ltd, Israel. Previously she served as head of
the Bakery Division of Elite Confectionary and later served as the General
Manager of Elite Bakery in Israel. From 1994-1999 Mrs. Montsma served in
several positions in Proctor & Gamble AG, Geneve, Switzerland, such as the
head of Brand Equity Team of Pringles Europe and Head of Category of Hair Care
Israel.   Mrs. Montsma graduated with
distinction the M.B.A. Programme of Insead, Fontainebleau in France and holds a
B.A. degree (1st Class Honours) in Economics & Business Administration from
the Hebrew University in Israel.

Avi
Belfer has been head of the planning and maintenance
division of Blue Square since 1996, having served in that same position with
the Co-Op since August 1994.  From
1983 to 1994, Mr. Belfer served as produce manager of the Co-Op. Mr.
Belfer also serves as a director in various subsidiaries and affiliates of Blue
Square.

Moshe
Shatz has served as our head of the Human Resources
Division as of November 17, 2003. Mr. Shatz replaces Mr. Michael (Miki)
Lev.  Mr. Shatz served as a manager in
the Tel-Aviv Municipality from 1999 until today. From 1993 to 1998, he served
as the manager of personnel and administration division of UMI  Universal
Motors Israel Ltd. Mr. Shatz holds a BA in Political Science from Bar Ilan
University.

50

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Odelia
Levanon has served as our chief information officer
since April 2000.  From 1998 to
2000, Ms. Levanon served as assistant director general for system
integration in Amigur.  From 1996 to
1998, Ms. Levanon was a consultant engaged in the establishment process of
Data Warehouse and is an external lecturer in Business Administration and Exact
Sciences at Tel Aviv University. Between the years 1983 and 1996, Ms. Levanon
served in the Israeli army. During her army service between the years 1983 and
1994, Ms. Levanon managed the establishment of large systems in a heterogeneous
surrounding. From 1994 to 1996, Ms. Levanon managed the computerization of
the five draft centers of the Israeli Army, a project that won the Adams prize
for management information systems. Ms. Levanon has an M.Sc. degree in computer
science, a B.Sc. in mathematics and computer science, and also is a lecturer
and a candidate for a doctorate in business school.

Iris
Penso, Adv. has served as our general counsel and
corporate secretary since October 2001. Mrs. Penso is serving as head of the
Legal Department and as General Counsel and Corporate Secretary of various Blue
Square subsidiaries. From 2000 to 2001, Mrs. Penso served as General Legal
Counsel and Corporate Secretary and Assistant Director General to the President
and Chief Executive Officer of Ace Marketing Chains Consumer Products Ltd.  From 1997 to 2000, Mrs. Penso served as
General Legal Counsel and Corporate Secretary and Management Member of Tempo
Beer Industries Ltd., and its subsidiaries. Ms. Penso has an LLB from Tel Aviv
University.

Shay Lifshitz has served as our Head Trade
Headquarters since June 1, 2004.  Prior
to that since 1999, Mr. Lifshitz served as Assistant to CEO.  Mr. Lifshitz holds an MBA degree in
Strategic Management from Hebrew University and a BA in Economic and Business
Administration from Bar Ilan University.

Oren
Lahathas served as our head of Real Estate
Development Division since May 16, 2004. 
Prior to that, he served from 1992-2003 as Head of the Stations
Development Division and a member of the managing team of Sonol Israel
Ltd.

Yoram
Dar served as President and Chief Executive Officer
until February 10, 2004, Zvi Bochman
served as Vice President and Chief Financial Officer until September 30, 2003, Haim Gerson served as Vice President and
Chief Operation Officer until October 2004, Ilana
Kaufman served as Vice President and Chief Trading and Marketing
Officer until December 12, 2003, and Dov
Carmeli served as Head of Property and Development Division until
December 31, 2003, and General Manager of BSIP and Hyper Hyper until June 24,
2003.

Arrangements for the Election of Directors

Bronfman 
Alon owns approximately 77.60% of our ordinary shares following the conversion
by other investors of approximately NIS 9.5 million in principal amount of our
5.9% convertible debentures.  So long as
Bronfman  Alon continues to own beneficially more than 50% of our outstanding
ordinary shares and voting power, it will be able to control the outcome of
matters requiring shareholder approval, including the election of all Blue
Square directors, other than Blue Square two external directors whose election,
under the Israeli companies law, requires that at least one-third of the
non-controlling shareholders who participate in the vote, vote for their
nomination, or that less than one percent of the non-controlling shareholders
voted against their nomination.

51

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B.          Compensation.

The
following table sets forth the aggregate compensation we paid or accrued on
behalf of all persons who served as Blue Square directors or executive officers
for services they rendered Blue Square, for the year ended December 31,
2003.  The table also includes
compensation to individuals who cease to serve as directors or executive
officer during the year.

|                                                      |  | Salaries, fees, expenses,
  directorsfees, commissions and
  bonuses |           | Pension, retirement
  and similar benefits | 
|----------------------------------------------------- |  | --------------------------------------------------------------------- | --------- | ------------------------------------------ | 
|                                                      |  |                                                                       |           |                                            | 
|                                                      |  |                                                                       |           |                                            | 
|All
  directors and
  executive officers as a
  group |  | $                                                                     | 4,560,000 |                                            | 
|                                                      |  |                                                                       |           |                                            | 

We agreed
to pay to each director (including our external directors), other than the
Chairman of the Board of Directors, the sum of NIS 45,392 per year and a
meeting attendance fee of NIS 1,746, which amounts are equivalent to the
amounts allowed to be paid to external directors of companies of comparable
size under the second and third supplements to the Companies Regulations. The
fees referred to above will be adjusted from time to time based on changes to
the Israeli Consumer Price Index in the same manner as the fees described in
the Regulations are adjusted. The directors would also be entitled to
reimbursement of expenses incurred by them in connection with their service as
directors.

We
also agreed to pay our chairman, Matthew Bronfman a monthly payment of NIS
42,000 plus VAT commencing from June 24, 2003, the date Mr. Bronfman became Blue
Square Chairman of the Board.
The compensation would be linked to changes in Israels consumer price index
since May 2003, and would be updated every three months. No additional fees
would be paid to Mr. Bronfman for attending meetings of the Board of Directors
or any committee of the Board of Directors. Mr. Bronfman would also be entitled
to reimbursement of actual expenses (upon submission of receipts) incurred by
him in connection with his service as the Chairman of the Board of up to
$50,000 per year.  Our audit committee,
board of directors and shareholders meeting approved this arrangement.

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In
December 1999, the Registrar of Cooperative Societies appointed an
investigator to investigate certain activities of the Co-Op, our former
controlling shareholder, and certain aspects of the Co-Ops business relationship
with us, including the 1996 grant of options to purchase Blue Square ordinary
shares under the 1996 Blue Square-Israel Share Incentive Plan.  In his report, published in July 2000,
the investigator alleged that the 1996 grant of options to certain officers,
directors and employees of Blue Square and its affiliates, including the Co-Op,
was improper.  The investigator
recommended that the management committee of the Co-Op consider commencing
legal proceedings with respect to the grant of these options.  The Co-Op and Blue Square have responded to
the report.  In August 2000, the
Registrar of Cooperative Societies appointed a management committee to the
Co-Op following his decision to nullify the elections to the governing body of
the Co-Op.    The Co-Op Management
Committee has resolved not to commence legal proceedings against our officers,
directors and employees who received options in 1996, except for Mr. Benny
Gaon, who at the time in which such options were granted, served as the
Chairman of the Co-OPs governing body. 
See Item 8. Financial Information- Legal Proceedings. Blue Square is
examining its legal rights in the event that Mr. Gaon and the Co-Op reach a
settlement agreement.

C.          Board
Practices

Appointment of Directors and Terms of
Officers

Our
directors, other than our external directors, are elected by our shareholders
at an annual general shareholders meeting and hold office until the next
annual general shareholders meeting which is required to be held at least once
in every calendar year, but not more than fifteen months after the last
preceding annual general shareholders meeting.  Until the next annual general shareholders meeting, the board of
directors or shareholders may elect new directors to fill vacancies on, or
increase the number of, members of the board of directors in a special meeting
of the shareholders.  Our board of
directors may appoint any other person as a director.  Any director so appointed may hold office until the first general
shareholders meeting convened after the appointment and may be
re-elected.  The appointment and terms
of office of all our executive officers are determined by the board of
directors.  The terms of office of the
directors must be approved, under the Israeli Companies Law, by the audit
committee, the board of directors and the shareholders meeting.

We and our
subsidiaries have no service contract with any of our directors that provide
for benefits upon termination of their employment as directors.

Independent and External Directors

Israeli
Companies Law Requirements

We are
subject to the provisions of the Israeli Companies Law, which became effective
on February 1, 2000. The Minister of Justice has adopted regulations
exempting companies, like Blue Square, whose shares are traded outside of
Israel from some provisions of the Israeli Companies Law.

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Under the
Israeli Companies Law, companies incorporated under the laws of Israel whose
shares have been offered to the public in or outside of Israel (Public Company)
are required to appoint two external directors.  The Israeli Companies Law provides that a person may not be
appointed as an external director if the person or the persons relative,
partner, employer or any entity under the persons control, has, as of the date
of the persons appointment to serve as external director, or had, during the
two years preceding that date, any affiliation with us, any entity controlling
us or any entity controlled by or under common control with us.  The term affiliation includes:

| |  | an
  employment relationship;                                           
| | - | ------------------------------------------------------------------------
| |  | a business
  or professional relationship maintained on a regular basis;
| |  | control; and                                                            
| |  | service as
  an office holder.                                          

No person
can serve as an external director if the persons position or other business
create, or may create, conflict of interests with the persons responsibilities
as an external director.  Until the
lapse of two years from termination of office, a company may not engage an
external director to serve as an office holder and cannot employ or receive
services from that person, either directly or indirectly, including through a
corporation controlled by that person.

External
directors are to be elected by a majority vote at a shareholders meeting,
provided that either (1) the majority of shares voted at the meeting,
including at least one-third of the shares of non-controlling shareholders (as
defined in the Israeli Companies Law) voted at the meeting, vote in favor of
the election of the director without taking abstentions into account; or
(2) the total number of shares of non-controlling shareholders voted
against the election of the external director does not exceed one percent of
the aggregate voting rights in us.

The initial
term of an external director is three years and may be extended for an
additional three years.  External directors may be removed only in a
general meeting, by the same percentage of shareholders as is required for
their election, or by a court, and in both cases only if the external directors cease to meet the statutory
qualifications for their appointment or if they violate their duty of loyalty
to us.  Each committee of our board of directors is required to
include at least one external director and its audit committee is required to
include all of the external directors.

David
Vinshel and Zeev Vurembrand currently serve as our external directors.

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New
York Stock Exchange Requirements

Our ADSs
are listed on the New York Stock Exchange, and we are subject to the rules of
the NYSE applicable to listed companies. 
Under the current NYSE rules, we are required to have an audit committee
consisting of at least three directors, all of who must be independent.  The independence standard under the NYSE
rules generally excludes (1) any person who is an employee of a company or its
affiliates or any person who is an immediate family member of an executive
officer of a company or its affiliates, until the lapse of three years from the
termination of such employment, (2) any person who is a partner, controlling
shareholder or executive officer of an organization that has a business
relationship with us or who has direct business relationship with a company,
unless the board of directors of us determines that the business relationship
does not interfere with such persons independent judgment, or unless three
years have lapsed from the termination of such relationship or his status as a
partner, controlling shareholder or executive officer, and (3) any person who
is employed as an executive of another corporation where any of our executives
serves on that corporations compensation committee.

Audit Committees

Israeli Companies Law Requirements

Under the
Israeli Companies Law, the board of directors of public company must appoint an
audit committee, comprised of at least three directors including all of the
external directors, but excluding a:

| |  | chairman of
  the board of directors;                                        
| | - | -----------------------------------------------------------------------------
| |  | controlling
  shareholder or his relative; and                               
| |  | any director
  employed by or who provides services to us on a regular basis.

The role of
the audit committee is to examine flaws in the business management of ours, in
consultation with the internal auditor and our independent accountants and
suggest appropriate course of action. 
In addition, the approval of the audit committee is required to effect
specified actions and transactions with interested parties.

An
interested party is defined in the Israeli Companies Law as a 5% or greater
shareholder, any person or entity who has the right to designate one director
or more or the general manager of ours or any person who serves as a director
or as a general manager.

An audit
committee may not approve an action or a transaction with an interested party
unless at the time of approval the two external directors are serving as
members of the audit committee and at least one of whom was present at the
meeting in which an approval was granted.

New
York Stock Exchange Requirements

Under the
current New York Stock Exchange rules, Blue Square is required to maintain an
audit committee consisting of independent directors, all of whom are
financially literate and one of whom has accounting or related financial
management expertise.  Blue Squares
audit committee complies with these requirements.  The responsibilities of the audit committee under New York Stock
Exchange rules include evaluating the independence of a companys outside
auditors.

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Pursuant to
the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission (the
SEC) has issued new rules which, among other things, require the New York Stock
Exchange to impose independence requirements on each member of the audit
committee. The New York Stock Exchange has adopted rules that would comply with
the SECs requirements.

The
requirements implement two basic criteria for determining independence: (i)
audit committee members would be barred from accepting any consulting, advisory
or other compensatory fee from the issuer or an affiliate of the issuer, other
than in the members capacity as a member of the board of directors and any board
committee, and (ii) audit committee members of an issuer that is not an
investment company may not be an affiliated person of the issuer or any
subsidiary of the issuer apart from his or her capacity as a member of the
board and any board committee.

The SEC has
defined affiliate for non-investment companies as a person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with, the person specified. The term control is
intended to be consistent with the other definitions of this term under the
Securities Exchange Act of 1934, as the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by contract, or
otherwise. A safe harbor has been adopted by the SEC, under which a person who
is not an executive officer, director or 10% shareholder of the issuer would be
deemed not to have control of the issuer. The SEC has also provided certain
limited exceptions for an audit committee member, who also sits on the board of
directors of an affiliate to a listed issuer, so long as, except for being a
director on such board of directors, the audit committee member otherwise meets
the independence requirements for each entity.

As of June
15, 2003, David Vinshel, Zeev Vurembrand, Shlomo Even and Ron Hadassi  served as a members of our audit committee.

The role of
the audit committee for New York Stock Exchange purposes includes assisting the
Board of Directors in fulfilling its responsibility for oversight of the
quality and integrity of the accounting, auditing and reporting practices of
Blue Square.

Internal Auditor

Under the
Israeli Companies Law, the board of directors must also appoint an internal
auditor proposed by the audit committee. 
The role of the internal auditor is to examine whether our actions
comply with the law, integrity and orderly business procedure.  Under the Israeli Companies Law, the
internal auditor may not be an interested party, an office holder, or a
relative of an interested party, an office holder or an interested party, nor
may the internal auditor be our independent accountant or its representative.  We comply with this requirement.  As of June 15, 2004, Shmuel Tal was our
internal auditor.

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Duties of Office Holders and Approval of
Specified Related Party Transactions Under Israeli Law

Fiduciary Duties of Office Holders

The Israeli
Companies Law imposes a duty of care and a duty of loyalty on all office
holders of a company, including directors and executive officers.  The duty of care requires an office holder
to act with the level of care, which a reasonable office holder in the same position
would have acted under the same circumstances. 
The duty of care includes a duty to use reasonable means to obtain:

| |                                                              | information
  on the appropriateness of a given action brought for his approval or
  performed by him by virtue of his position; and                                  
| | ------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                               |                                                                                                                                                                       
| |                                                              | all other
  important information pertaining to the previous actions.                                                                                                 
| |                                                               |                                                                                                                                                                       
| | The duty of
  loyalty of an office holder includes a duty to:
| |                                                               |                                                                                                                                                                       
| |                                                              | refrain from
  any conflict of interest between the performance of his duties in the company
  and his personal affairs;                                              
| |                                                               |                                                                                                                                                                       
| |                                                              | refrain from
  any activity that is competitive with the company;                                                                                                     
| |                                                               |                                                                                                                                                                       
| |                                                              | refrain from
  usurping any business opportunity of the company to receive a personal gain
  for himself or others; and                                               
| |                                                               |                                                                                                                                                                       
| |                                                              | disclose to
  the company any information or documents relating to a companys affairs
  which the office holder has received due to his position as an office holder.

Under the
Israeli Companies Law, directors compensation arrangements require audit
committee approval, board of directors approval and shareholder approval.

The Israeli
Companies Law requires that an office holder of a company promptly disclose any
personal interest that he may have and all related material information known
to him, in connection with any existing or proposed transaction by the
company.  A personal interest of an
office holder includes an interest of a company in which the office holder is,
directly or indirectly, a 5% or greater shareholder, director or general
manager, or in which he or she has the right to appoint at least one director
or the general manager.  In the case of
an extraordinary transaction, the office holders duty to disclose applies also
to a personal interest of the office holders relative.  The office holder must also disclose any
personal interest held by the office holders spouse, siblings, parents,
grandparents, descendants, spouses descendants and the spouses of any of the
foregoing.

Under
Israeli law, an extraordinary transaction is a transaction:

| |  | other than in
  the ordinary course of business;
| | - | ------------------------------------------------

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| |  | other than
  on market terms; or                                                                   
| | - | ---------------------------------------------------------------------------------------------------
| |  | that is
  likely to have a material impact on the companys profitability, assets or
  liabilities.

Under the
Israeli Companies Law, once an office holder complies with the above disclosure
requirement, the board of directors may approve a transaction between the
company and an office holder, or a third party in which an office holder has a
personal interest, unless the Articles of Association provide otherwise.  A transaction that is adverse to the
companys interest cannot be approved.

If the
transaction is an extraordinary transaction, both the audit committee and the
board of directors must approve the transaction.  Under specific circumstances, shareholders approval may also be
required.  An office holder who has a
personal interest in a matter, which is considered at a meeting of the board of
directors or the audit committee, may not be present at this meeting or vote on
this matter. If most of the directors have a personal interest in a
matter, a director who has the personal interest in this matter may be present
at this meeting or vote on this matter, but the board of directors decision
requires the shareholder approval.

Controlling
Shareholder Transactions and Actions

Under the
Israeli Companies Law, the disclosure requirements which apply to an office
holder also apply to a controlling shareholder of a public company.  A controlling shareholder includes a
shareholder that holds 25% or more of the voting rights in a public company if
no other shareholder owns more than 50% of the voting rights in the
company.  Extraordinary transactions
with a controlling shareholder or in which a controlling shareholder has a
personal interest, and the terms of compensation of a controlling shareholder
who is an office holder, require the approval of the audit committee, the board
of directors and the shareholders of the company.  The shareholder approval must include either:

| |  | at least
  one-third of the shareholders who have no personal interest in the
  transaction and are present and voting, in person, by proxy or by written
  ballot, at the meeting; or                                                               
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                      
| |  | a majority
  of the voting power present and voting, provided that the shareholders who
  have no personal interest in the transaction who vote against the transaction
  do not represent more than one percent of the voting rights in the company.

For
information concerning the direct and indirect personal interests of certain of
our office holders and principal shareholders in certain transactions with us,
see Item 7.  Major Shareholders and
Related Party Transactions.

The Israeli
Companies Law requires that every shareholder that participates, either by
proxy or in person, in a vote regarding a transaction with a controlling
shareholder indicate whether or not that shareholder has a personal interest in
the vote in question, the failure of which results in the invalidation of that
shareholders vote.

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However,
under Regulations, promulgated pursuant to the Israeli Companies Law, certain
transactions between a company and its controlling shareholder(s) do not
require shareholder approval.

The Israeli
Companies Law further provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a holder of 45% of the voting rights of
the company, unless there is a holder of 50% of the voting rights of the
company or would become a holder of 25% of the voting rights unless there is
another person holding 25% of the voting rights.  Regulations under the Israeli Companies Law provide that the
Israeli Companies Laws tender offer rules do not apply to a company whose
shares are publicly traded outside of Israel, if, pursuant to the applicable
foreign securities laws or stock exchange rules, there is a restriction on the
acquisition of any level of control of the company, or if the acquisition of
any level of control of the company requires the purchaser to make a tender
offer to the public shareholders.

The Israeli
Companies Law further provides that a shareholder shall refrain from oppressing
other shareholders.  In addition, any
controlling shareholder, any shareholder who knows that it possesses power to
determine the outcome of a shareholder vote and any shareholder who, pursuant
to the provisions of a companys Articles of Association, has the power to
appoint or prevent the appointment of an office holder in the company, or has
any other power over the company, is under a duty to act with fairness towards
the company.  A breach of the above duty
of fairness will be considered as a breach of the fiduciary duty of an office
holder as described above.

Exemption, Insurance and Indemnification of
Directors and Officers

Under the
Israeli Companies Law, an Israeli company may not exempt an office holder from
liability with respect to a breach of his duty of loyalty, but may exempt in
advance an office holder from his liability to the company, in whole or in
part, with respect to a breach of his duty of care.

Office
Holder Insurance

The Israeli
Companies Law and our Articles of Association provide that, subject to the
provisions of the Israeli Companies Law, we may enter into a contract for the
insurance of the liability of any of our office holders with respect to:

| |  | a breach of
  his duty of care to Blue Square or to another person;                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a breach of
  his duty of loyalty to Blue Square, provided that the office holder acted in
  good faith and had reasonable cause to assume that his act would not
  prejudice Blue Squares interests; or
| |  | a financial
  liability imposed upon him in favor of another person concerning an act
  performed by him in his capacity as an office holder.                                                            
| |  | a breach of
  any duty or any other obligation, to the extent insurance may be permitting
  by law.                                                                                                      

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Exemption
and Indemnification of Office Holders

The Israeli
Companies Law and our Articles of Association provide that we may indemnify an
office holder against:

| |  | a monetary
  liability imposed on him in favor of another person pursuant to a judgment,
  including a judgment given in a settlement or an arbitrators award approved
  by the court concerning an act performed in his capacity as an office holder;
  and                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | reasonable
  litigation expenses, including counsel fees, incurred by an office holder or
  a former office holder or which he is ordered to pay by a court, in
  proceedings Blue Square institutes against him or instituted on Blue Square
  behalf or by another person, or in a criminal charge from which he was
  acquitted, or a criminal charge in which he was convicted for a criminal
  offense that does not require proof of intent, in each case relating to an
  act performed in his capacity as an office holder.

The Israeli
Companies Law provides that a company may exempt an office holder prospectively
from liability, in whole or in part, for damage resulting from a breach of his
duty of care towards the company, if its Articles of Association so provide.
Blue Squares Articles of Association so provides.

In
February 2001, our shareholders approved amendments to our Articles of
Association enabling us to provide  our
office holders with prospective indemnification in relation to events that will
occur or have occurred since February 1, 2000.  The aggregate amount of the indemnification may not exceed 25% of
our shareholders equity as stated in our consolidated financial statements for
the year ended December 31, 2000 for all persons and all events to be
indemnified.

Limitations
on Insurance and Indemnification

The Israeli
Companies Law and our Articles of Association provide that a company may not
indemnify an office holder nor enter into an insurance contract, which would
provide coverage for any monetary liability incurred as a result of any of the
following:

| |  | a breach by
  the office holder of his duty of fiduciary unless the office holder acted in
  good faith and had a reasonable basis to believe that the act would not
  prejudice the company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                              
| |  | a breach by
  the office holder of his duty of care if the breach was done intentionally or
  recklessly;                                                                                    

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| |  | any act or
  omission done with the intent to derive an illegal personal benefit; or
| | - | ------------------------------------------------------------------------------------
| |   |                                                                                     
| |  | any fine
  imposed on the office holder.                                            

Under the
Israeli Companies Law, the shareholders of a company may include or amend its
articles of association to include either of the following provisions, which
were approved by our shareholders:

| |  | a provision
  authorizing the company to grant in advance an undertaking to indemnify an
  office holder, provided that the undertaking is limited to specified classes
  of events which the board of directors deem foreseeable at the time of grant
  and is limited to an amount determined by the board of directors to be
  reasonable under the circumstances; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                         
| |  | a provision
  authorizing the company to retroactively indemnify an office holder.                                                                                                                                                                                                                                                                                      

In
addition, under the Israeli Companies Law, indemnification of, and procurement
of insurance coverage for, our office holders must be approved by our audit
committee and board of directors and, in specified circumstances, by Blue
Squares shareholders.  Our audit
committee, board of directors and general shareholders meeting approved in
February 2001 the grant of indemnification and exemption letters to our
directors and officers, including those directors and officers whose term of service ended on or after
September 1, 2000.  In April 2002,
the general shareholders meeting approved the grant of a new letter of
indemnification and exemption to the officers and directors of the
company.  The aggregate amount of the
indemnification (in addition to any insurance proceeds received) may not exceed
25% of our shareholders equity (in U.S. dollars) as stated in our consolidated
financial statements for the year ended December 31, 2000, for all persons
and events.  Under the indemnification
and exemption letters, we agreed to indemnify these directors and officers,
retroactively with respect to events occurring after February 1, 2000, the
date on which the Israeli Companies Law became effective and prospectively, in
connection with the following issues:

| |  | The issuance
  of securities, including the offering of securities to the public according
  to a prospectus, a circular, a private offering or any other manner of
  security offering;                                                                                                  
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                           
| |  | Any
  transaction, as defined in section 1 of the Israeli Companies Law, including
  a transfer, sale or purchase of assets or liabilities, including securities
  or the receipt of any right in any of the above, and any action related,
  directly or indirectly, to such transaction;
| |   |                                                                                                                                                                                                                                                                                           
| |  | An action,
  including handing over information and papers, in connection with sale of our
  shares or assets, by the Co-Op;                                                                                                                                                              

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| |  | The filing
  of a report or announcement required by the Israeli Companies Law or the
  Israeli Securities Law, 1968, the rules and regulations of a stock exchange
  in or outside Israel, or any law of any other country pertaining to these
  issues, and/or omission to file such a report or announcement;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                 
| |  | Any change
  of reorganization of us, including any related decision, including without
  limiting the generality of the foregoing, splitting, dividing or modifying
  our share capital, establishment of subsidiaries or their liquidation or sale
  and issuance of shares;                                  
| |   |                                                                                                                                                                                                                                                                                                                 
| |  | Oral or
  written statements, including the expression of an opinion or a position
  conveyed in good faith by an office holder, in his capacity as such, during his
  term of office, including statements made in meetings of the board of
  directors or any committee;                                      
| |   |                                                                                                                                                                                                                                                                                                                 
| |  | An action in
  the line of business of us in relation with the following issues: building
  and planning, licensing of businesses, safety in work places, environment and
  recycling and protection of the consumer; or                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                 
| |  | Each one of
  the circumstances stated above, all in connection with the officeholders
  service on behalf of our subsidiaries or affiliated companies.                                                                                                                                                        

We are
obligated to indemnify a director or officer for a specific loss only if the
director or officer has not been compensated for that loss from another source,
including from proceeds of insurance policy.

We agreed
to indemnify our directors and officers to the fullest extent permissible by
the Israeli Companies Law, against all amounts they may be obligated to pay as
a result of a court decision or a settlement or an arbitrator ruling approved
by a court decision in connection with and in the scope of their activities as
directors and officers of the company and actions taken by a director or
officer as an office holder of the company or its subsidiary or affiliated
companies.

We will
indemnify our directors and officers for all costs or expenses, including
reasonable legal expenses, that they may incur as a result of any financial
obligation borne in connection with any threatened or pending civil proceeding
or criminal proceeding in which the directors and officers are acquitted or (to
the extent permitted by law) in which they are convicted, provided however,
that the crime for which they are convicted does not require a finding of
criminal intent.

We further
agreed to exempt these directors and officers to the fullest extent permitted by
the Israeli Companies Law from any liability towards us with respect to any
damage caused or that will be caused to the company by its directors and
officers if caused or will be caused following a breach of the duty of care
towards the company.

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The
letter will not apply in respect of liability or an expense imposed in respect
of an action instituted by the Co-Op and/or by the appointed committee of the
Co-Op or in respect of an action instituted by the Israeli Registrar of
Cooperative Societies and/or by the State of Israel in connection with the
allotment of options by us in accordance with the options allotment scheme of
1996.

The letter will not include exemption or
indemnification in the following cases:

|1. | A breach of fiduciary duty, which was acted not in good faith or that
  the officer had reasonable grounds to believe that the act would cause the
  company any harm;
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                       
|2. | A violation of the duty of care, which was committed intentionally or
  recklessly;                                                                                   
|   |                                                                                                                                                                       
|3. | An act committed with the intention to realize a personal illegal
  profit; or                                                                                        
|   |                                                                                                                                                                       
|4. | A fine or monetary composition imposed on him.                                                                                                                        

Under the
resolution from February 2001, we obtained and will continue to hold a
directors and officers liability insurance policy.  Coverage under our policy has been set at $30 million (including
its subsidiaries). We have purchased directors and officers liability
insurance policy for our directors and officers and those of our subsidiaries,
which includes BSIP and its
subsidiaries. The Insurance Policy is for a period beginning on October 1, 2003
and ending on September 30, 2004 (Policy Period), for the maximum coverage of
US$30 million per claim and in the aggregate during the Policy Period.  Our audit committee, Board of Directors and
shareholders have approved any renewal and/or extension of the Insurance Policy
and the purchase of any other insurance policy, provided that any such renewal,
extension or purchase is for the benefit of Blue Squares previous and/or
current and/or future directors and officers and on terms substantially similar
to those of the Insurance Policy and on condition that the premium will not
increase by more than 25% in any year, as compared to the previous year.  Our current insurance policies comply with
these terms.

In the
event that the Insurance Policy covers our directors and officers and
those   of BSIP and their respective
subsidiaries, the payment of the Annual Premium will be divided between Blue
Square and BSIP in such a manner as to be in the same proportion as the equity
of each of them relates to the sum of our equity and that of BSIP and their
respective subsidiaries, as presented in their respective current annual
audited consolidated Financial Statements.

Committees

Our board
of directors has established a compensation committee and an audit
committee.  Our compensation committee,
which consists of Matthew Bronfman, David Wiessman and David Vinshel,
administers issues relating to employee compensation for senior management.  Our audit committee, which consists of Zeev
Vurembrand, David Vinshel, Shlomo Even and Ron Hadassi, examines flaws in our
business management and its approval is required to effect specified actions
and transactions with interested parties. 
The audit committee also assists the Board of Directors in overseeing
the quality and integrity of our accounting, auditing and reporting practices.

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D.      Employees.

As of
December 31, 2003, we employed 6,650 employees, counting multiple
employees sharing a single position as a single employee.  645 of our employees were employed in
central management and administration and 6,005 in our stores.

As of
December 31, 2002, we employed 7,200 employees, counting multiple
employees sharing a single position as a single employee.  767 of our employees were employed in
central management and administration and 6,433 in our stores.

As of
December 31, 2001, we employed 7,549 employees, counting multiple
employees sharing a single position as a single employee.  911 of our employees were employed in
central management and administration and 6,638 in our stores.

On November
5, 2003, pursuant to our agreement with the Histadrut (General Federation of
Labor in Israel) (Histadrut), we announced the dismissal of approximately 100
employees from our headquarter staff and another 150 store employees.  As of June 15, 2004, we were still
implementing our efficiency program, in particular with respect to the
dismissal of employees.

We are subject to labor laws and regulations in
Israel.  Most of our employees are subject to collective bargaining labor agreements.

Under a
Special Collective Bargaining Agreement, referred to as the Special Agreement,
from May 1996, among the Co-Op, Blue Square, the Histadrut, the National
Committee of the Co-Op Union Employees and the Co-Op Union, all the Co-Op
employees became employees of Blue Square. 
The collective bargaining agreements in effect as of that date apply to
Blue Square as if Blue Square and these employees were originally parties to
these agreements.  Blue Square became
responsible for the payment of all employee benefits that had been accrued in
respect of these employees during the term of employment of these employees
with the Co-Op, to the extent these benefits were recorded on the Co-Ops
records.  Since 1996, we entered into
new labor agreements with the Histadrut and the Co-Op union, which determines
our employees wages structure, the employment conditions of new employees and a
wage increase to the existing employees.

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During
2003, we agreed to make good will grants to management and employees. In
respect of grants to our employees, we entered into a collective bargaining
arrangement with the Histadrut and
the National Committee of the Co-Op Blue Square Employees in August 2003.  Under that agreement, we agreed (i) to grant
to our permanent employees a good will grant of NIS 37.5 million in the
aggregate in two installments, the first of which in August 2003 and the second
in April 2004; (ii) to grant NIS 2 million to employees allocated in the manner
determined by our chairman and the chairman of an employees committee;  (iii) to grant an additional NIS 1 million
to our temporary employees; (iv) to pay to our permanent employees 1% of any
cash dividend distributed to our shareholders, but not more than $2.5 million
in the aggregate to our employees; and (v) in any public issuance of our shares
after the date of the agreement, our permanent employees will be entitled to purchase
up to 10% of any such offering with a 20% discount over the minimum offering
price.  With respect to such a purchase
by our employees of our shares in a public offering, we have agreed to make
loans to our employees to enable them to pay the purchase price for the shares,
and these loans are to be repaid by the employees with interest and linkage
upon the sale of the shares following the expiration of the appropriate tax
holding period for the shares or, if desired by the employee, until the earlier
of five years from the expiration of the holding period or the end of the
employees employment with us.

As a result
of the above mentioned benefits, we recorded a one-time expense of NIS 63.9
million in the second quarter of 2003.

In October
2003, we entered into a collective bargaining arrangement with the Histadrut and the National
Committee of Blue Square-Israel.  Under
this agreement, the parties agreed to certain employee rights in the context of
the implementation of our efficiency plan, including the severance package
associated with any termination of employees. 
The initial term of the agreement is until December 31, 2004, and it
will be automatically renewed for an additional two year period, unless
terminated by other side three month prior to its expiration.

In
addition, we and our employees are also subject to certain provisions of the
general collective bargaining agreements between the Histadrut and the
Coordination Bureau of Economic Organizations (including the Industrialists
Association) by virtue of an extension order of the Israeli Ministry of Labor
and Welfare.  These agreements concern,
among other things, the maximum length of the work day and the work week,
contributions to a pension fund, insurance for work-related accidents,
procedures for dismissing employees, determination of severance pay and other
conditions of employment.

Israeli law
generally requires the payment by employers of severance pay upon the
retirement or death of an employee or upon termination of employment by the
employer or, in some circumstances, by the employee.  We currently fund ongoing severance obligations by making monthly
payments to pension funds, employee accounts in a provident fund and insurance
policies.  In addition, Israeli
employees and employers are required to pay specified amounts to the National
Insurance Institute, which is similar to the U.S. Social Security
Administration.  Since January 1,
1995, these amounts also include payments for national health insurance payable
by employees.  Most of our employees are
covered by a pension fund.  Our senior
employees are covered by general and/or individual life and pension insurance
policies providing customary benefits to employees, including retirement and
severance benefits.

The number
of temporary employees on an average during 2003 was approximately 3,500.

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E.     Share
Ownership.

As of June
15, 2004, other than indirect ownership through Bronfman  Alon, none of our
directors or officers owned more than 1% of our outstanding equity securities.

ITEM
7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.     Major
Shareholders.

The
following table sets forth certain information regarding the beneficial
ownership of our ordinary shares as of June 15, 2004, by each
person or entity known to own beneficially 5% or more of our outstanding ordinary shares based on
information provided to us by the holders or disclosed in public filings with
the Securities and Exchange Commission. 
Our major shareholders do not have voting rights different from the
voting rights of our other shareholders.

|Name            |  | Number of OrdinaryShares
  Beneficially
  Owned |  | Percentage
  of
  Outstanding Ordinary
  Shares(1) | 
|--------------- |  | ----------------------------------------------- |  | -------------------------------------------------- | 
|                |  |                                                 |  |                                                    | 
|Bronfman  Alon |  | 29,999,993                                      |  | 77.60%                                             | 

|    |                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------
|(1) | The
  percentage of outstanding ordinary shares is based on 38,659,458 ordinary
  shares outstanding as of June
  15, 2004.
|    |                                                                                                                            

As of May
4, 2004, Blue Square had approximately 23 shareholders of record with a United
States address.  As of May 4, 2004,
these United States record holders held approximately 711,578 ordinary shares
in the form of ADSs, representing approximately 1.84% of our then outstanding
share capital.

BronfmanAlon
acquired a 78.1% interest in Blue Square from the Co-Op in June, 2003 (see
Item 4. Information on Blue Square - Change in Control.).  Bronfman-Alons percentage interest in Blue
Square was reduced to 77.60% due to the conversion by other investors of
approximately NIS 9.5 million in principal amount of our 5.9% convertible
debentures in April 2004.

BronfmanAlon
is a wholly owned subsidiary of Nissan Alon Retail Holdings Ltd., which is a
wholly owned subsidiary of the Nissan Dor Chains Ltd. (Grandparent Company).  Dor Food Chains Holdings Ltd. (Dor Food)
holds 50% of the equity interest of the Grandparent Company, and the other 50%
of the equity interest is held by M.B.I.S.F. Holdings Ltd. (M.S.). Dor Food
is a wholly owned subsidiary of Dor Energy (1988) Ltd., which is wholly owned
by Alon-Israel Oil Company Ltd. (Alon). 
Alon is owned 35% by the purchasing entities of kibbutzim in Israel, 26%
by Africa Israel Trade and Agencies Ltd., a subsidiary of Africa Israel Investments
Ltd., a public company traded on the Tel Aviv Stock Exchange, and 39% by
Bielsol Investments (1987) Ltd.  Mr. Lev
Leveiv is the controlling shareholder of Africa Israel.  Bielsol Investments (1987) Ltd. is wholly
owned by David Wiessman and the Biran family.

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M.S. is a
wholly owned subsidiary of Bronfman-Fisher Investments Ltd.
(Bronfman-Fisher), Matthew Bronfman owns approximately 51% of the equity of
Bronfman-Fisher, the Bronfman Family Trusts own approximately 5.5% and Yaakov
Shalom Fisher owns the remaining 43.5% of the equity.

To the best
of our knowledge, Blue Square is not directly or indirectly owned or controlled
by any foreign government.   Our major
shareholder has the same voting rights as our other shareholders.

B.          Related
Party Transactions.

Procurement
Agreement with Dor Alon

Dor Alon
Operating Service Station Ltd., a subsidiary of Dor Energy (1988) Ltd. (Dor
Alon Stations), operates convenience stores in fuel service stations that sell
various food and non-food products. 
Under the terms of the agreement between us and Dor Alon Stations, we
agreed to procure products that will be supplied to the convenience stores,
either directly from suppliers or from our distribution center.  In consideration of the procurement of
products, Dor Alon Stations has agreed pay to us (i) for products sent directly
from suppliers, an amount equal to the cost of such products to us as
determined under the Procurement Agreement plus 2%, and (ii) for products sent
from our distribution center, an amount equal to the cost of such products to
us as determined under Procurement Agreement plus 2.75%, in each case plus
VAT.  The cost of the products to us
will be audited by our independent public accountants.  In the event that our revenues generated
from the Procurement Agreement minus related expenses from the sale of products
to Dor Alon Stations is less than NIS 1 million linked to the Israeli consumer
price index in any year without VAT, Dor Alon Stations will pay us additional
amounts in order that our income from such year will reach such NIS 1 million
amount.  To secure Dor Alon Stations
payment and other obligations to us under the Procurement Agreement, Dor Alon
agreed to provide us with a floating lien or pledge, unlimited in amount, on
all inventory in the convenience stores, subject to any legal prevention, and
Dor Energy (1988) Ltd. and Alon Israel Oil Company Ltd, indirect 100%
shareholders of Dor Alon Stations, will guarantee all obligations of Dor Alon
Stations under the agreement. Under the terms of the Procurement Agreement, we
and Dor Alon Stations will share certain expenses relating to computerization,
which include a one-time expense for converting programs, currently estimated
to be NIS 1.2 million; the final amount of the expense will be agreed upon
between the parties.  The parties will
also share the cost of annual maintenance for the computer system that the
parties currently estimate to be 17% of the one-time expense; the final amount
for the maintenance expense will also be agreed upon between the parties.

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All
necessary approvals from the appropriate organs of Blue Square with respect to
this agreement have been obtained.  The
term of the Procurement Agreement is for five years commencing from March 1,
2004, and will automatically be extended for additional one-year periods unless
either party gives notice to the other party of its desire to terminate the
Procurement Agreement 90 days prior to the expiration of the term of the
Procurement Agreement or such year, as the case may be.  However, (i) either party may terminate the
Procurement Agreement on 90 days notice given at any time after 24 months have
elapsed from the date the Procurement Agreement is effective, and (ii) Dor Alon
Stations may terminate the Procurement Agreement on 180 days notice with
respect to particular Stores in the event of the economic failure (a
situation on which the parties must agree) and closure of such convenience
store by Dor Alon Stations as a result of such economic failure.

In
addition, with respect to convenience stores located in Dor Alon fuel service
stations that are operated by third parties, we have agreed that upon Dor
Alons request, we may enter into separate agreements with respect to such
stores with the third party operators of such stores on substantially similar
terms as the Procurement Agreement described above.  Dor Energy (1988) Ltd. and Alon Israel Oil Company Ltd. would
also guarantee the obligations of such third party operators and Dor Alon
Stations, under these related separate agreements.

Consulting
Agreement with Shlomo Zohar

Effective
March 1, 2004, we entered into a consulting agreement with S. Zohar Consulting
and Management Ltd. (S. Zohar), an entity controlled by Shlomo Zohar, one of
our directors, as an independent contractor to provide us, our subsidiaries
and/or our affiliated companies accounting consulting services in various
areas, including accounting consulting to our management group, tax planning and
advice, due diligence, accounting analyses, internal accounting control over
our activities and transactions, accounting implications for recovery plans,
accounting advice with respect to the issuance of debentures and the like. S.
Zohar provides the services through Shlomo Zohar, CPA.  The services provided under the consulting
agreement through Mr. Shlomo Zohar are unrelated to the services provided by
Mr. Shlomo Zohar to us in his capacity as a director.

In
consideration for the services, we will pay S. Zohar the NIS equivalent of US
$20,000 per month plus VAT.

Either
party has the right to terminate the agreement for any reason upon 60 days
written notice. In the event that S. Zohar does not provide the services
through Shlomo Zohar, we have the right to terminate the agreement immediately.

Special
Collective Bargaining Agreement

Under the
Special Agreement among the Co-Op, Blue Square the Histadrut, the National
Committee of the Co-Op Union Employees and the Co-Op Union, all the Co-Op
employees became employees of Blue Square. 
The collective bargaining agreements in effect as of that date apply to
Blue Square as if Blue Square and these employees were originally parties to
these agreements.  Blue Square became
responsible for the payment of all employee benefits that had been accrued in
respect of these employees during the term of employment of these employees
with the Co-Op, to the extent these benefits were recorded on the Co-Ops
records.

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Benefits
for Employees

In respect
of payment for certain benefits in the amount of NIS 11 million for employees
previously employed by the Co-Op and transferred to us, different
interpretations have arisen between us and the Co-Op.  As previously agreed by the parties in respect of such matters,
this issue had been submitted for arbitration. 
In March 2003, the arbitrator decided that the above mentioned amounts
is payable entirely by us.

Inter-Company
Accounts

We, BSIP
and Hyper Hyper agreed to maintain inter-company accounts for day-to-day
operations which bore interest at a rate equivalent to that charged by banks on
short-term loans, provided that the rate is not lower than the monthly increase
in the CPI.  The average rate was 6.0%
in 2003, 6.9% in 2002 and 7.0% in 2001.

Lease Agreements with the Co-Op

In the past
we used to lease supermarkets facilities from the Co-Op, our former controlling
shareholder.  These facilities were sold
to third parties and we currently lease these facilities from them.

Management
Agreement with Co-Op

The Co-Op
provided us with management and other services.  The service agreement became effective in April 1996 and
expired in June 2003.  Under the agreement,
the annual fee was determined to be $1.25 million until 2000 and that the sum
would be discussed between us and the Co-Op commencing with the year 2001. The
annual management fee for 2001 was decreased to $750,000, and the annual
management fee for 2002 was decreased to $600,000.  For the period starting January 2003 until expiration in June
2003, we paid the Co-Op $ 250,000.

Arrangements between Blue Square and various
subsidiaries

Employee
Lending Agreement

Hyper Hyper
has entered into an employee lending agreement with Blue Square according to
which Blue Square agreed to make employees available to Hyper Hyper according
to Hyper Hypers needs.  Approximately
3,682 employees are working for Hyper Hyper under that arrangement as of
December 31, 2003.  In consideration for
the use of these borrowed employees, Hyper Hyper pays Blue Square the full
amount to be made to, or on account of, these employees according to the terms
of the collective labor agreement between Blue Square and the Histadrut.  Blue Square is responsible for paying the
salaries and other benefits to the borrowed employees.

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Service
and Management Agreements

Blue Square
acts as the exclusive purchaser for Hyper Hyper, purchasing supermarket goods
for which no mark-up is charged to Hyper Hyper.  In addition, Blue Square provides Hyper Hyper with storage,
distribution, logistics, maintenance and advertising services, for which these
companies generally pay their proportionate share of expenses.  Under a management agreement, Blue Square
provides Hyper Hyper and its subsidiaries with administrative, management and
site selection services for which Hyper Hyper pays a fee calculated based on
its net sales.  The fee is subject to
modification every three years.  The fee
commencing from January 2003 was 1.95% of Hyper Hypers sales, which
amounted to approximately 69.6 million in 2003.

Blue Square
provides certain services to BSIP pursuant to a management agreement in
consideration for annual management fees of NIS 103,500, or $23,636 linked to
the July 1996 CPI.

Lease
Arrangements

Pursuant to
an arrangement adopted in October 1996, Blue Square purchases real
property which subsidiaries of BSIP identify as appropriate for their use as a
store location.  Such BSIP subsidiaries
lease that property from Blue Square. Some of the lease agreement provide for a
fixed annual rent. Most of the leases provide for an annual rent equal to the highest
of:

| |  | 9% of the
  amount invested in that store by Blue Square;          
| | - | -------------------------------------------------------------------
| |  | 2% of the
  annual turnover of that store, for discount stores; and
| |  | 3% of the
  annual turnover of that store, for other stores.       

No
BSIP subsidiary is obligated to lease the property.  In the event a BSIP subsidiary elects not to lease the property,
the property may be used by Blue Square.

Hyper Hyper
leased from Blue Square and certain of its subsidiaries 24 facilities in which
it operated different formats of supermarkets. 
The leases were for varying terms, generally for a period of 119 months,
but have since expired.

Agreements to Identify Store
Locations

Blue Square
and Hyper Hyper have an agreement according to which Blue Square identifies
facilities suitable for the Hyper stores. 
In the event Hyper Hyper elects not to use, acquire or lease such
facilities, Blue Square may elect to do so. Hyper Hyper has rights to acquire
or lease facilities of approximately 1,500 square meters or more with
approximately 80 parking spaces, and Blue Square has the same rights in
connection with all other facilities.

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Blue
Center Agreement

In 2003 the
audit committee, the board of directors and the shareholders meeting of BSIP
approved an agreement between BSIPs fully owned subsidiary, Hyper Hyper, and
Blue Square for the joint operation of Blue Center, which is owned by Blue
Square. Under this agreement, Hyper Hyper is obligated to pay Blue Square
certain amounts for its investments in Blue Center, for the development costs and
for operational costs of Blue Center, in consideration for the use of the Blue
Center website by Hyper Hyper.

Ordinary Course Transactions

From time
to time, Blue Square enters into agreements and engages in transactions in the
ordinary course of business with its subsidiaries and affiliates.  Some subsidiaries enter into agreements and
engage in transactions with other subsidiaries and affiliates of Blue Square.  The terms and conditions of all of these
agreements and transactions are at arms-length.  We intend to enter into similar agreements and to engage in
similar transactions in the future. In addition to ordinary course agreements
and transactions, Blue Square and certain of its affiliates have entered into
other agreements and transactions, as described below.

C.      Interests of Experts and Counsel.

Not
applicable.

ITEM
8.         FINANCIAL INFORMATION

A.          Consolidated
Statements and Other Financial Information.

The
financial statements required by this item are found at the end of this annual
report, beginning on page F-1.

Legal Proceedings

We
may be subject to class actions filed against Israeli supermarkets under the
Israeli Consumer Protection Act of 1981.

On April 9,
2003, a suit for NIS 320 million was filed against Blue Square, Super Sol Ltd.,
Club Market Marketing Chain Ltd. and Kol Bo Half Price Ltd, together with an
application for the suit to be recognized as a class action. The suit
stipulated that the portion of the suit attributable to us amounts to
approximately NIS 108 million.

The
plaintiff is claiming compensation from us and the other supermarket chains for
overcharges that result from the weighing of products in bulk, together with
the packaging materials. According to the plaintiff, the customer is charged an
aggregate amount that including a charge for the packaging materials, which
charge, the plaintiff alleges, is illegal.

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We are
currently negotiating a settlement to this claim. We anticipate that the amount
that we will be required to pay will not be material.

In June
2003, a separate petition to approve a class action suit in the aggregate
amount of NIS 25 million was filed against us in the Tel Aviv District Court.
The petitioner claimed damages allegedly incurred in respect of the unlawful
rounding of amounts due from customers for products sold by weight in the
stores of the companies.  The petition
to approve a class action suit has been rejected by the District Court, and
petitioner is appealing this decision. We believe, based on the opinion of
legal counsel, that it is unlikely that the appeal will be accepted, and
accordingly no provision with respect to the above suit has been recorded in
the financial statements.

We
may be subject to a class action in connection with the Law for Deposits on
Beverage Containers, 1999.

In November
2001 a claim was filed against Blue Square, the Company for Drink Containers
Collection Corporation Ltd., and other supermarket chains in connection with
fulfillment by these defendants of provisions of the Law for Deposits on
Beverage Containers, 1999 (which became effective on October 1, 2001).  The plaintiffs have requested approval of
the claim as a class action in the amount of approximately NIS 250
million.  On January 13, 2003, the Tel
Aviv District Court dismissed the request to recognize the said claim as a
class action. The plaintiffs have appealed to the Supreme Court. We believe,
based on the opinion of legal counsel, that the likelihood of the appeal being
accepted is minimal and accordingly no provision has been included in the
financial statements in respect thereof.

We
may be required to pay amounts in connection with tax assessments.

In February
2004, we received tax assessments for the years 1999-2001, according to which
we are required to pay approximately NIS 8 million. These assessments relate to
the non-deductibility of certain expenses that were claimed by us. We disagree
with the standpoint of the tax authorities and submitted an objection to these
assessments. In our opinion, we will not be required to pay material amounts,
if any, in connection with these assessments, in excess of the accruals
included in the financial statements.

Dispute
with Former Chairman of the Board of Directors

The
Co-Op submitted a monetary claim in the amount of approximately NIS 11 million
against the former acting chairman of the board of directors of Blue Square, Mr.
Benny Gaon, in respect of the benefit he derived in connection with the grant
of options for shares of Blue Square. 
According to Co-ops claim, Mr. Gaon was not entitled to the options on
the date of the grant since he was not an officer of Blue Square on that
date.  In addition, the procedure for
the approval of the grant of the options was not proper, and appropriate
disclosure was not made.  Mr. Gaon
approached Blue Square with a demand for receipt of indemnification, as a
former officer, in connection with the above claim in the event that he is
required to repay any amounts.  The
audit committee of the board of directors of Blue Square decided to reject the
demand for indemnification, among other reasons, because at the time the
options were granted, the former acting chairman was not serving as an officer
of Blue Square.  Therefore, without the
approval of the audit committee, the letter of indemnity provided to him while
a board member is not in effect. 
Accordingly, no provision was included in the financial statements in
connection with the said demand. Mr. Gaons attorneys have notified Blue Square
that any officers of Blue Square will be considered personally liable for any
damage or expense incurred by Mr. Gaon as a result of the audit committees
decision. Blue Square is examining its legal rights in the event that Mr. Gaon
and the Co-op reach a settlement agreement.

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Restrictive
Trade Practices Inquiry

Please see
Item 4. Information on Blue Square  Government Regulation for information
regarding an inquiry made in connection with alleged restrictive trade
arrangement between major supermarkets chains in Israel and large suppliers.

In January
2003, the Director of the Antitrust Authority notified us that, in
circumstances of intense domestic competition, the practice whereby the
marketing chains automatically and unilaterally reduce suppliers purchase
prices, in the absence of prior mutual agreement, is apparently, a restrictive
arrangement. Prior to evaluating the actions to be taken pursuant to the law in
respect of these matters, the Director has instructed us to immediately cease the
aforementioned practice or any similar practice. Our management and our legal
counsel are presently unable to estimate the effect of the Authoritys
notification in respect of this matter.

We are
involved in various other legal or other proceedings incidental to the ordinary
course of our business.  We do not
believe that any of these proceedings, individually or in the aggregate, will
have a material adverse effect on our business, financial position or operating
results.

Board Resolution on Dividend Distributions

Our Board
of Directors has resolved that Blue Square will not distribute dividends in any
quarter if the ratio of our financial obligations (as defined by Maalot) to
EBITDA for any quarter exceeds 3.5 until June 30, 2006 or exceeds 3.0
thereafter.  The Board also decided that
we will not distribute dividends in any quarter from August 1, 2003 until
October 5, 2014 if the ratio of the cost unencumbered fixed assets as set forth
on our financial statements (following depreciation) to financial obligations
(as defined by Maalot) for any quarter is below 120%.  These Board resolutions are not the dividend policy of Blue
Square and they may be amended at any time by our Board of Directors.

Change of Independent Accountants

On January
6, 2004, Blue Square shareholders approved the appointment of Kesselman &
Kesselman, certified public accountants in Israel and a member of
PriceWaterhouseCoopers International Limited, as our auditors for the year
ending December 31, 2004.  Kesselman
& Kesselman has no relationship with us or with any affiliate of us, except
as auditors.

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Pursuant to
an agreement among the shareholders of Bronfman-Alon, it was agreed that the
two shareholder groups would each be entitled to request Blue Square to
nominate one firm as our auditors.  The
two shareholder groups have agreed on the appointment of Kesselman &
Kesselman as our auditors for the year ending December 31, 2004.  Our previous auditors, Kost Forer Gabbay
& Kasierer, a member of Ernst & Young Global, were responsible for the
audit of our 2003 financial statements.

B.          Significant
Changes.

Except as
otherwise disclosed in this annual report, no significant change has occurred
since December 31, 2003.

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ITEM
9.         THE OFFER AND LISTING

A.          Offer
and Listing Details.

ADSs

The
following table sets forth the annual high and low closing prices for Blue
Squares ADSs for the five most recent full financial years as reported by the
New York Stock Exchange.

|Year |  | High |      | Low |  
|---- |  | ---- | ---- | --- | -
|     |  |      |      |     |  
|     |  |      |      |     |  
|1999 |  | $    | 16.9 |     | $
|2000 |  | $    | 13.9 |     | $
|2001 |  | $    | 17.3 |     | $
|2002 |  | $    | 15.0 |     | $
|2003 |  | $    | 11.5 |     | $

The
following table sets forth the quarterly high and low closing prices for Blue
Squares ADSs for each quarter of the two most recent full financial years and
the subsequent quarterly period, as reported by the New York Stock Exchange.

|Year             |  | High |      | Low |  
|---------------- |  | ---- | ---- | --- | -
|                 |  |      |      |     |  
|                 |  |      |      |     |  
|2002             |  |      |      |     |  
|First
  quarter  |  | $    | 14.8 |     | $
|Second
  quarter |  | $    | 15.0 |     | $
|Third
  quarter  |  | $    | 12.3 |     | $
|Fourth
  quarter |  | $    | 9.7  |     | $
|                 |  |      |      |     |  
|2003             |  |      |      |     |  
|First
  quarter  |  | $    | 8.2  |     | $
|Second
  quarter |  | $    | 10.1 |     | $
|Third
  quarter  |  | $    | 10.0 |     | $
|Fourth
  quarter |  | $    | 11.5 |     | $
|                 |  |      |      |     |  
|2004             |  |      |      |     |  
|First
  quarter  |  | $    | 13.1 |     | $

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The
following table sets forth the monthly high and low closing prices for Blue
Squares ADSs for the last six months, as reported by the New York Stock
Exchange.

|         |  | High |      | Low |  
|-------- |  | ---- | ---- | --- | -
|         |  |      |      |     |  
|2003     |  |      |      |     |  
|December |  | $    | 11.5 |     | $
|         |  |      |      |     |  
|2004     |  |      |      |     |  
|January  |  | $    | 13.1 |     | $
|February |  | $    | 11.4 |     | $
|March    |  | $    | 11.9 |     | $
|April    |  | $    | 11.9 |     | $
|May      |  | $    | 11.2 |     | $

For
additional information on Blue Squares ADSs, see Item 10.  Additional InformationMemorandum and
Articles of AssociationDescription of SecuritiesAmerican
Depositary Receipts.

Ordinary Shares

The
following table sets forth the annual high and low closing prices for Blue
Squares ordinary shares for the years 2000, 2001, 2002 and 2003 as reported by
the Tel Aviv Stock Exchange. 
Shares are traded on the Tel Aviv Stock Exchange in NIS, and the
translation of the NIS to dollars has been made at the representative exchange
rate of exchange on the last day of each period , as published by the Bank of
Israel.

|Year                                   |  | High |  | Low  | 
|-------------------------------------- |  | ---- |  | ---- | 
|                                       |  |      |  |      | 
|                                       |  | NIS  |  | $    | 
|2000
  commencing on November 19, 2000 |  | 53.4 |  | 13.7 | 
|2001                                   |  | 78.5 |  | 17.8 | 
|2002                                   |  | 78.8 |  | 16.6 | 
|2003                                   |  | 50.2 |  | 11.5 | 

The
following table sets forth the quarterly high and low closing price for Blue
Squares ordinary shares for the quarters set forth below, as reported by the
Tel Aviv Stock Exchange.  The
translation into dollars has been made at the representative rate of exchange
on the last day of each period, as published by the Bank of Israel.

|2002             |  | High |  | Low  | 
|---------------- |  | ---- |  | ---- | 
|                 |  |      |  |      | 
|                 |  | NIS  |  | $    | 
|First Quarter    |  | 78.8 |  | 16.9 | 
|Second
  quarter |  | 71.2 |  | 14.9 | 
|Third
  quarter  |  | 57.5 |  | 11.8 | 
|Fourth
  quarter |  | 45.4 |  | 9.6  | 
|                 |  |      |  |      | 
|2003             |  | High |  | Low  | 
|                 |  |      |  |      | 
|                 |  | NIS  |  | $    | 
|First
  Quarter  |  | 38.5 |  | 8.2  | 
|Second
  Quarter |  | 44.6 |  | 10.4 | 
|Third
  Quarter  |  | 43.9 |  | 9.9  | 
|Fourth
  Quarter |  | 50.2 |  | 11.5 | 

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|2004            |  | High |  | Low  | 
|--------------- |  | ---- |  | ---- | 
|                |  |      |  |      | 
|                |  | NIS  |  | $    | 
|First
  Quarter |  | 57.8 |  | 12.8 | 

The
following table sets forth the monthly high and low closing prices for Blue
Squares ordinary shares for the last six months, as reported by the
Tel Aviv Stock Exchange.  The
translation into dollars is based on the representative rate of exchange on the
last day of each period, as published by the bank of Israel.

|         |  | High |  | Low  | 
|-------- |  | ---- |  | ---- | 
|         |  |      |  |      | 
|         |  | NIS  |  | $    | 
|2003     |  |      |  |      | 
|December |  | 50.2 |  | 11.5 | 
|         |  |      |  |      | 
|2004     |  |      |  |      | 
|January  |  | 57.8 |  | 12.9 | 
|February |  | 49.5 |  | 11.0 | 
|March    |  | 52.9 |  | 11.7 | 
|April    |  | 52.9 |  | 11.5 | 
|May      |  | 51.1 |  | 11.2 | 

For
additional information on our ordinary shares, see Item 10.  Additional InformationMemorandum and
Articles of Association Description of SecuritiesOrdinary Shares.

B.      Plan of Distribution.
          Not applicable.

C.      Markets.

Our ADSs,
each representing one ordinary share and evidenced by an American depositary
receipt, or ADR, have been traded on the New York Stock Exchange, Inc. under
the symbol BSI since July 1996. 
The ADRs were issued pursuant to a Depositary Agreement Blue Square
entered into with The Bank of New York.

On November 2000,
our ordinary shares began trading also on the Tel Aviv Stock Exchange.

D.      Selling Shareholders.

Not
applicable.

E.      Expenses of the Issue.

Not
applicable.

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ITEM
10.       ADDITIONAL INFORMATION

A.          Share
Capital.

Not
applicable.

B.          Memorandum
and Articles of Association.

Securities Registers

Our transfer agent and register is The Bank of New
York and its address is 1 Wall Street, New York, New York 10286.

Objects and Purposes

According
to Section 4 of our Articles of Association the company shall engage in any
legal business.  Article 3 of our
Articles of Association provides that our purpose is to act pursuant to
business consideration to make profit. The company may contribute a reasonable
amount for an appropriate object even if the contribution is not within the
said business considerations.

Private Placements

Under our
Articles of Association, resolutions of the board of directors regarding a
private placement of our shares constituting, or securities convertible into,
more than ten percent of our outstanding share capital require the approval of
Blue Squares shareholders.

Board of Directors

Under our
Articles of Association the board of
directors shall not, without the affirmative vote of at least seventy five
percent (75%) of the members of the board of directors who participate and vote
at a meeting of the board of directors, resolve to do any of the following: a)
approve the annual budget of the Blue Square group;  b) approve any material transaction and material action involving
the Blue Square group; c) appoint the senior officers of the Blue Square group
and determine their terms of employment; d) appoint the chairman of the board
of directors of Blue Square and determine the terms of his or her service; e)
approve the issuance of securities of Blue Square or securities of other
companies of the Blue Square group; f) approve the entering into new lines of
business by the Blue Square group;  or
g) determine the signatory rights in the Blue Square group.

In
addition, the Israeli Companies Law requires that certain transactions, actions
and arrangements be approved as provided for in a companys articles of association
and in certain circumstances by the audit committee and by the board of
directors itself.  Those transactions
that require such approval pursuant to a companys articles of association must
be approved by its board of directors. 
In certain circumstances, audit committee and shareholder approval is
also required.  The vote required by the
audit committee and the board of directors for approval of such matters, in
each case, is a majority of the directors participating in a duly convened
meeting, except as described in the previous paragraph.  Under the Israeli Companies Law, the audit
committee is to be comprised of at least three members appointed by the board
of directors, which members must include all of the external directors, but
excluding the chairman of the board of directors, a controlling shareholder or
his relative and any director employed by the company or who provides services
to the company on a regular basis.

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The
Israeli Companies Law requires that a member of the board of directors or
senior management of the company promptly disclose any personal interest that
he or she may have (either directly or by way of any corporation in which he or
she is, directly or indirectly, a 5% or greater shareholder, director or general
manager or in which he or she has the right to appoint at least one director or
the general manager) and all related material information known to him or her,
in connection with any existing or proposed transaction by the company.  In addition, if the transaction is an
extraordinary transaction (that is, a transaction other than in the ordinary
course of business, otherwise than on market terms, or is likely to have a
material impact on the companys profitability, assets or liabilities), the
member of the board of directors or senior management must also disclose any
personal interest held by his or her spouse, siblings, parents, grandparents,
descendants,spouses descendants and the spouses of any of the
foregoing.

Once
the member of the board of directors or senior management complies with the
above disclosure requirement, a company may approve the transaction in
accordance with the provisions of its articles of association.  Further, under our articles of association,
subject to the provisions of the Companies Law, (i) a transaction between us
and an our officer or a person that controls us or (ii) a transaction between
us and another person in which an officer of ours or a person that controls us
has a personal interest, which transaction is not in any such case
extraordinary (Ordinary Interested Transactions), will be approved by us in the
following manner:

By
the Board of Directors, or by the Audit Committee, or by the Chief Executive
Officer with two directors that have no personal interest in the transaction,
or by another body authorized by the Board of Directors, whether such body is
authorized by the Board of Directors by means of a specific resolution or by
board practice, or whether such body is granted authority by means of a general
authorization, an authorization for a particular type of transaction or an
authorization for a particular transaction.

The
approval of Ordinary Interested Transactions by the bodies or persons may be
done by means of an approval of a particular type of transaction or an approval
of a particular transaction. The approval must confirm that the transaction is
not adverse to the companys interest. 
Furthermore, if the transaction is an extraordinary transaction, then,
in addition to any approval stipulated by the articles of association, it also
must be approved by the companys audit committee and then by the board of
directors, and, under certain circumstances, by a meeting of the shareholders
of the company.  Under the
provisions of the Israeli Companies Law, an office holder who has a personal
interest in a matter, which is considered at a meeting of the board of
directors or the audit committee, may not be present at this meeting or vote on
this matter, unless it is not an extraordinary transaction  as defined in the Israeli Companies Law.
However, if the majority of the directors have a personal interest in a matter,
they shall be allowed to participate and vote on this matter, but an approval of
the transaction by the shareholders in the general meeting shall be required.

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Our Articles of Association provide that, subject to
the Israeli Companies Law, all actions executed by the board of directors or by
a committee thereof or by any person acting as a director or a member of a
committee of the board of directors or by the general manager will be deemed to
be valid even if, after their execution, it is discovered that there was a flaw
in the appointment of these persons or that any one of these persons was
disqualified from serving at his or her office.

The
Articles of Association provide that the board of directors may delegate all of
its powers to such committees of the board of directors as it deems
appropriate, subject to the provisions of the Israeli Companies Law, and they
may from time to time widen, narrow or cancel the delegation of such
power.  The Israeli Companies Law
provides that certain powers of the board of directors may not be delegated by
the board of directors. See Item 6. 
Directors, Senior Management and EmployeesBoard PracticesCommittees.

According to
the Israeli Companies Law, a contract of a company with its directors,
regarding their conditions of service, including the grant to them of exemption
from liability from certain actions, insurance, and indemnification as well as
the companys contract with its directors on conditions of their employment, in
other capacities, require the approval of the audit committee, the board of
directors, and the shareholders.

Description of Securities

Ordinary Shares

The
following is a description of our ordinary shares.  Our authorized share capital is 100,000,000 ordinary
shares, par value NIS 1.0 per share.

The
ordinary shares do not have preemptive rights, preferred right or any other
right to purchase the companys security. Neither our Articles of Association
nor the laws of the State of Israel restrict the ownership or voting of
ordinary shares by non-residents of Israel, except for subjects of countries
which are enemies of Israel.

Transfer of Shares.  Fully paid ordinary shares are issued in
registered form and may be freely transferred pursuant to our Articles of Association unless that transfer is
restricted or prohibited by another instrument.

Notices. 
Under the Israeli Companies Law and our Articles of Association, we are
required to publish notices in two daily newspapers at least 14 calendar days
prior notice of an ordinary shareholders meeting and at least 21 calendar
days prior notice of any shareholders meeting in which the agenda includes
matters which may be voted on through voting instruments. According
to the Israeli Companies Law and its regulations for purposes of determining
the shareholders entitled to notice and to vote at such meeting, the board of
directors may fix the record date not more than 40 nor less than four calendar
days prior to the date of the meeting, provided that an announcement regarding
the general meeting shall be given prior to the record date.

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Election of Directors.  Our ordinary shares do not have cumulative
voting rights in the election of directors. 
As a result, the holders of ordinary shares representing more than 50%
of our ordinary shares and voting power have the power to elect all of our
directors, other than our external directors, whose election requires, in
addition to the vote of a majority of shareholders, that at least one-third of
the non-controlling shareholders who participate in the vote, vote for their
nomination, or that less than one percent of the non-controlling shareholders
vote against their nomination. 
Currently, Bronfman-Alon has the power to elect all of our directors
other than our two external directors. 
See Item 3.  Key
InformationRisk FactorsBronfman-Alon is able to control the outcome of
matters requiring shareholder approval.

Dividend and Liquidation Rights.  Our profit, in respect of
which resolution was passed to distribute them as dividend or bonus shares,
shall be paid on account of the nominal value of shares held by the
shareholders. In the event of Blue Squares liquidation, the liquidator may,
with the general meetings approval, distribute parts of the companys property
In specie among the shareholders and he may, with similar approval, deposit any
part of the companys property with trustees in favor of the shareholders as
the liquidate, with the approval mentioned above deems fit.

Voting, Shareholders Meetings and Resolutions.  Holders of ordinary shares are entitled to
one vote for each ordinary share held on all matters submitted to a vote of
shareholders.  The quorum
required for an ordinary meeting of shareholders consists of at least two
shareholders present, in person or by proxy, or who has sent the company a voting
instrument indicating the way in which he is voting, who hold or represent, in
the aggregate, 50% or more of the voting rights of our outstanding share
capital.  A meeting adjourned for lack
of a quorum is adjourned to the same day in the following week at the same time
and place or any time and place as prescribed by the board of directors in
notice to the shareholders. At the reconvened meeting one shareholder at least,
present in person or by proxy constitute a quorum subject to the provisions of
section 79 of the Israeli Companies Law.

With the
agreement of a meeting at which a quorum is present, the chairman may, and on
the demand of the meeting he must, adjourn the meeting from time to time and
from place to place, as the meeting resolves. If a meeting is adjourned for
more than 21 days, notice of the adjourned meeting shall be given in the same
way in which notice is given of a first meeting.

Annual
general shareholders meetings of shareholders are held once every year within
a period of not more than 15 months after the last preceding annual general
shareholders meeting. The meeting shall be held at the companies registered
offices, unless the board of directors has determined otherwise. The board of
directors may call special general meetings of shareholders and is obligated to
do so upon a written request in accordance with the Israeli Companies Law. The
Israeli Companies Law provides that a 
special general meeting of shareholders may be called by the board of
directors or by a request of two directors or 25% of the directors in office,
or by shareholders holding at least 5% of the issued share capital of the
company and at least 1% of the voting rights, or of shareholders holding at
least 5% of the voting rights of the company.

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An ordinary
resolution requires approval by the holders of a majority of the voting rights
present, in person or by proxy, at the meeting and voting on the resolution.

Modification of Class Rights.  Under Blue Squares Articles of Association,
unless otherwise provided, the rights attached to any class, may be varied
after a resolution is passed by general meetings of the shareholders of each
class of shares separately or after obtaining the written consent of the
holders of all the classes of shares.

Allotment of Shares.  Blue Squares board of directors has the
power to allot or to issue shares to any person, with restrictions and
condition, for their nominal value or with a premium, as it deems fit.

Private Placements

Under the
Israeli Companies Law and regulations, if the private placement will acquire
20% or more of the voting rights, then the allotment must be approved by the
board of directors and by the shareholders in the general shareholders meeting.

If a
substantial placement is made to a director, the chief executive officer or any
placement to a controlling shareholder or to any person that will become a
controlling shareholder after the issuance, the allotment must be approved by
the board of directors and by the shareholders in a general shareholders
meeting.  A substantial private placement of securities is defined as a
private placement that will increase the relative holdings of a shareholder
that holds five percent or more of the companys outstanding share capital,
assuming the exercise of all of the securities convertible into shares held by
that person, or that will cause any person to become, as a result of the
issuance, a holder of more than five percent of the companys outstanding share
capital. Any placement of securities that does not fit the above description
may be issued at the discretion of the board of directors.

Under our
Articles of Association, a private placement of Blue Squares shares
constituting, or securities convertible into, more than ten percent of Blue
Squares outstanding share, requires the approval of the board of directors and
Blue Squares shareholders.

American Depositary Receipts

The following is a summary of the material provisions
of the Deposit Agreement, into whichBlue Square entered
with The Bank of New York, referred to as Depositary, and all owners and
holders from time to time of ADRs issued under that agreement.  This summary does not purport to be complete
and is qualified in its entirety by reference to the Deposit Agreement, a copy
of which has been filed as an exhibit to Blue Squares Registration Statement
under the Securities Law of 1933, as amended (Registration No. 333-05024).  Additional copies of the Deposit Agreement
are available for inspection at the corporate trust office of the Depositary in
New York, currently located at 101 Barclay Street, New York, New York
10286, referred to as the Corporate Trust Office.

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ADRs
evidencing ADSs were issued by the Depositary under the Deposit Agreement.  Each ADS represents one ordinary share
deposited with the Custodian (as defined in the Deposit Agreement), as agent of
the Depositary.  A single ADR may
evidence any number of ADSs.  Only
persons in whose names ADRs are registered on the books of the Depositary are
treated by Blue Square and the Depositary as owners and holders of ADSs.

Deposit and Withdrawal of Securities

Ordinary
shares that are represented by the ADSs were deposited with the Custodian and
registered in the name of the Depositary, or its nominee or the Custodian or
its nominee.  The Depositary or its
nominee or the Custodian or its nominee is the holder of record of all the
ordinary shares on behalf of the holders of ADRs.  Subject to the terms and conditions of the Deposit Agreement,
upon deposit of ordinary shares with the Custodian, the Depositary issued ADSs
and executed and delivered the applicable ADS or ADRs.

Upon
surrender of ADRs at the Corporate Trust Office of the Depositary, and upon
payment of the taxes, fees and charges provided in the Deposit Agreement and
subject to their terms, ADR holders are entitled to delivery, at the office of
the Custodian in Israel, of ordinary shares, and any other property or documents
of title that the surrendered ADRs evidence the right to receive.

Under
the Deposit Agreement, the Depositary may execute and deliver ADRs prior to the
receipt of ordinary shares, referred to as a Pre-Release, and deliver ordinary
shares upon the receipt and cancellation of ADRs which have been Pre-Released,
whether or not that cancellation is made prior to the termination of such
Pre-Release or the Depositary knows that these ADRs have been
Pre-Released.  The Depositary may
receive ADRs in lieu of ordinary shares in satisfaction of a Pre-Release.  Each Pre-Release is (a) preceded or
accompanied by a written representation from the person to whom ADRs are to be
delivered that the person, or its customer, owns the ordinary shares or ADRs to
be remitted, as the case may be, (b) at all times fully collateralized
with cash or such other collateral as the Depositary deems appropriate,
(c) terminable by the Depositary on not more than five business days
notice, and (d) subject to such further indemnities and credit regulations
as the Depositary deems appropriate. 
The number of ADSs which are outstanding at any time as a result of
Pre-Releases is required to not normally exceed 30% of the ordinary shares deposited
under the Deposit Agreement; provided, however, that the Depositary reserves
the right to change or disregard that limit from time to time as it deems appropriate.  The Depositary may retain for its own
account any compensation received by it in connection with the foregoing.

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Dividends, Other Distributions and Rights

Whenever
the Depositary shall receive foreign currency, the Depositary shall, subject to
any restrictions imposed by Israeli laws, regulations or applicable exchange
control permits issued by the Israeli Controller of Foreign Exchange, convert
or cause to be converted all cash dividends and other cash distributions that
it receives in respect of the underlying ordinary shares into dollars and
distribute the amount received, net of any conversion commissions or expenses
of the Depositary, to the holders of ADRs in proportion to the number of ADSs
representing these shares held by each of them.  The amount distributed also will be reduced by any amounts
required to be withheld by Blue Square, the Depositary or the Custodian for
applicable taxes.  If the Depositary
determines that any foreign currency received by it cannot be so converted on a
reasonable basis and transferred to the United States, the Depositary may
distribute, or in its discretion hold, such foreign currency, without liability
for interest thereon, for the respective accounts of the ADR holders entitled
to receive the same.

If
a distribution by Blue Square consists of a dividend in or free distribution of
ordinary shares, the Depositary, shall, unless otherwise instructed by Blue
Square, distribute to the holders of outstanding ADRs, in proportion to their
holdings, additional ADRs evidencing an aggregate number of ADSs that represent
the number of ordinary shares received as such dividend or free distribution,
net of any expenses, fees, taxes or applicable charges.  If additional ADRs are not so distributed,
each ADS shall thereafter also represent the additional ordinary shares
distributed in respect of the ordinary shares represented by that ADS prior to
the dividend or free distribution.

If
Blue Square offers, or causes to be offered, to holders of ordinary shares any
rights to subscribe for additional ordinary shares or any rights of any other
nature, the Depositary, after consultation with Blue Square, shall have
discretion as to the procedures to be followed in making these rights available
to any holder of ADRs or in disposing of these rights and making the net
proceeds available to that holder.  If
the Depositary determines in its discretion that it is lawful and feasible to
make these rights available to all holders of ADRs or certain holders of ADRs
but not others, the Depositary may make these rights available to those holders
of ADRs to whom it determines the distribution to be lawful and feasible in
proportion to the number of ADSs held by them by means of warrants or
otherwise.  If making these rights
available to all or certain holders of ADRs is determined by the Depositary in
its discretion not to be lawful or feasible, the Depositary may sell these
rights or warrants or other instruments in proportion to the number of ADSs
held by owners to whom it has determined it may not lawfully and feasibly make
these rights available, and allocate the proceeds of these sales, net of fees,
expenses, taxes and any other applicable charge, for the account of the holders
of ADRs otherwise entitled to these proceeds, upon an averaged or other
practicable basis without regard to any distinctions among these holders
because of exchange restrictions, or the date of delivery of any ADR or ADRs,
or otherwise.  The net proceeds so
allocated to the holders of ADRs entitled thereto will be distributed to the
extent practicable as in the case of a distribution of cash.  If, by the terms of the rights offering or
for any other reason, the Depositary may not either make these rights available
to any holders of ADRs or dispose of these rights and make the proceeds
available to these holders, then the Depositary will allow the rights to lapse.

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The
Depositary will not offer rights to holders of ADRs unless both the rights and
the securities to which these rights relate are either exempt from registration
under the Securities Act with respect to a distribution to these holders or are
registered under the provisions of the Securities Act.  However, nothing in the Deposit Agreement
will create, or be construed to create, any obligation on the part of Blue
Square to file a registration statement with the Securities and Exchange
Commission or endeavor to have a registration statement declared effective in
order to allow rights to be made available to owners.  If a holder of ADRs requests distribution of warrants or other
instruments, notwithstanding that there has been no such registration under that
Act, the Depositary will not make a distribution unless it has received an
opinion from recognized counsel in the United States for Blue Square, upon
which the Depositary may rely, stating that the distribution to that holder is
exempt from registration.

If
the Depositary determines that any distribution of property (other than cash),
ordinary shares or rights to subscribe to ordinary shares cannot be made
proportionately among the holders of the ADRs entitled to the distribution or
that any such distribution is not feasible for any reason, including any
requirement that the Depositary or Blue Square is obligated to withhold any
taxes or other governmental charges or that these securities must be registered
under the Securities Act in order to be distributed, the Depositary may dispose
of all or a portion of that property, ordinary shares or rights in these
amounts and in that manner, including by public or private sale, as the
Depositary deems equitable and practicable, and the Depositary shall distribute
the net proceeds of any sale, after deduction of the fees of the Depositary as
provided in the Deposit Agreement, to the ADR holders entitled to these
proceeds in a manner similar to a cash distribution.

Record Dates

Whenever
any cash dividend or other cash distribution becomes payable, any distribution
other than cash shall be made, or rights shall be issued with respect to the
ordinary shares, or whenever the Depositary receives notice of any meeting of
holders of the ordinary shares or shareholders generally, the Depositary shall
fix a record date.  The record date
shall be the same as the record date fixed by Blue Square applicable to the
ordinary shares, or, if that record date is different, fixed after consultation
with Blue Square, if practicable. 
Holders of ADRs as of the record date are entitled to receive these
dividend, distribution or rights, or net proceeds of the sale thereof, or to
give instructions for the exercise of voting rights at any meeting, subject to
the provisions of the Deposit Agreement.

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Value of the Underlying Deposited Securities

Upon
receipt of notice of any meeting or solicitation of consents or proxies of
holders of ordinary shares, the Depositary has agreed to mail to holders of
ADRs registered on the books of the Depositary, a notice in English containing
(a) the information contained in the notice received by the Depositary,
(b) a statement that each holder of ADRs at the close of business on a
specified record date will be entitled, subject to the applicable provisions of
law and to Blue Squares Articles of Association, to instruct the Depositary as
to the exercise of the voting rights, if any, pertaining to the ordinary shares
represented by the ADSs evidenced by that holders ADRs, and (c) a
statement as to the manner in which instructions may be given, including, when
applicable, an express indication that instructions may be given, or, if
applicable, deemed given in accordance with the Deposit Agreement to the
Depositary to give a discretionary proxy to a person designated by Blue
Square.  Upon the written request of a
holder of ADRs on the record date received on or before the date established by
the Depositary for such purpose, the Depositary has agreed to endeavor, insofar
as practicable and subject to the applicable provisions of law, the Deposit
Agreement and Blue Squares Articles of Association, to vote or cause to be
voted the ordinary shares represented by the ADSs in accordance with any
instruction set forth in such request. 
Blue Square has agreed, without increasing its obligations or potential
liability to the holders of ADRs, to provide notice, to the extent practicable,
of any meeting of holders of ordinary shares or shareholders generally to the
Depositary sufficiently in advance of such meeting in order to enable the
Depositary to vote or cause to be voted the ordinary shares represented by ADSs
in accordance with the Deposit Agreement. 
The Depositary shall not vote or attempt to exercise the right to vote
that attaches to the ordinary shares or other deposited securities, other than
in accordance with such instructions or deemed instructions.  If after complying with the procedures set
forth in this paragraph, the Depositary either (a) does not receive
instructions from the owner of an ADR, or (b) receives instructions that have
been left blank on or before the date established by the Depositary for such
purposes, the Depositary gives a discretionary proxy to vote the ordinary
shares evidenced by that ADR to a person designated by Blue Square; provided, however, that in the case of (a)
above, no such discretionary proxy shall be given with respect to any matter as
to which Blue Square informs the Depositary, and Blue Square agrees to provide
such information as promptly as practicable in writing that (1) Blue Square
does not wish such proxy given or the proxy would not be valid under applicable
Israeli law, (2) such proposition involves any solicitation of opposing
proxies, or (3) such proposition authorizes the liquidation or dissolution of
Blue Square or any merger or consolidation or other transaction involving the
acquisition of a majority of Blue Squares outstanding ordinary shares which
requires the consent of the holders of Blue Squares ordinary shares, including
the deposited securities.

Amendment and Termination of the Deposit
Agreement

The
form of the ADRs and the Deposit Agreement may at any time be amended by
agreement between Blue Square and the Depositary.  Any amendment that imposes or increases any fees or charges,
other than taxes and other governmental charges, registration fees, cable,
telex or facsimile transmission costs or other such expenses, or that otherwise
prejudices any substantial existing right of ADR owners, will not apply to
outstanding ADRs until the expiration of 30 days after notice of the amendment
has been given to the record holders of outstanding ADRs.  Every holder of ADRs at the time the
amendment becomes effective will be deemed, by continuing to hold the ADR, to
consent and agree to the amendment and to be bound by the Deposit Agreement or
the ADR as amended.  In no event may any
amendment impair the right of any ADR holder to surrender his ADR and receive
the ordinary shares and other property represented by the ADR, except to comply
with mandatory provisions of applicable law.

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The
Depositary has agreed to terminate the Deposit Agreement, whenever so directed
by Blue Square, by giving notice of termination to the holders of all ADRs then
outstanding at least 30 days prior to the date fixed in the notice of
termination.  The Depositary likewise
may terminate the Deposit Agreement by giving Blue Square and the holders of
ADRs notice at any time 30 days after the Depositary shall have delivered to
Blue Square a notice of its election to resign, provided that a successor
depositary shall not have been appointed and accepted its appointment before
the end of the 30-day period.  If any
ADRs remain outstanding after the date of termination, the Depositary will
discontinue the registration of transfer of ADRs, will suspend the distribution
of dividends to the holders of ADRs and will not give any further notices or
perform any further acts under the Deposit Agreement, except that the
Depositary will continue (a) the collection of dividends and other
distributions pertaining to ordinary shares and any other property represented
by these ADRs, (b) the sale of rights or property,as provided in the Deposit Agreement, and (c) the delivery of
ordinary shares, together with any dividends or other distributions received
and the net proceeds of the sale of any rights or other property, after
deducting applicable fees, expenses and taxes, in exchange for surrendered
ADRs.  At any time after the expiration
of one year from the date of termination, the Depositary may sell the ordinary
shares and any other property represented by the ADRs and hold the net
proceeds, together with any other cash then held, uninvested and without
liability for interest, for the pro rata benefit of the holders of ADRs that
have not surrendered their ADRs.  After
effecting the sale, the Depositary shall be discharged from all obligations
under the Deposit Agreement, except to account for net proceeds and other cash,
after deducting applicable fees of the Depositary, expenses and taxes and
except for specified obligations for indemnification set forth in the Deposit
Agreement.  Upon the termination of the
Deposit Agreement, Blue Square will also be discharged from all its obligations
under the agreement, except for specified obligations to the Depositary.

General

The
transfer of the ADRs is registerable on the books of the Depositary.  However, the Depositary may close the
transfer books at any time or from time to time when it deems expedient in
connection with the performance of its duties. 
As a condition precedent to
the execution and delivery, registration of transfer, split-up, combination or
surrender of any ADR or the withdrawal of any ordinary shares or any property
represented by the ADR, the Depositary, the Custodian or the registrar may
require from the holder or the presenter of the ADR or the depositor of the
shares (a) payment of a sum sufficient to pay or reimburse it for any tax or
other governmental charge and any stock transfer or registration fee or any
charge of the Depositary upon delivery of the ADR or upon surrender of the ADR,
as set forth in the Deposit Agreement, and (b) proof satisfactory to the
Depositary or Custodian of identity or genuineness of any signature and proof
of citizenship, residence, exchange control approval, legal or beneficial
ownership, compliance with all applicable laws and regulations, compliance with
all other applicable provisions of or governing the ordinary shares and the
terms of the Deposit Agreement or other information as the Depositary may deem
necessary or proper.  The delivery and
transfer of ADRs and registration of transfers of outstanding ADRs generally
may be suspended during any period when the transfer books of the Depositary
are closed, or if any such action is deemed necessary or advisable by the
Depositary or Blue Square at any time or from time to time.

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Notwithstanding
anything in the Deposit Agreement or the ADRs to the contrary, the surrender of
the ADRs and withdrawal of deposited securities may not be suspended except for
(a) temporary delays caused by closing transfer books of the Depositary or
Blue Square or the deposit of shares in connection with voting at a
shareholders meeting or the payment of dividends, (b) the payment of
fees, taxes and similar charges and (c) compliance with any laws or
governmental regulations relating to ADRs or to the withdrawal of deposited
securities.

C.          Material
Contracts.

Pursuant to
an Agreement, dated January 31, 2001, with HID International Distribution
France (HID), as amended, we have been granted the exclusive rights in Israel
to distribute products under the private label, Leader Price, owned by a
leading French retailer which markets its products in 30 countries around the
world. These exclusivity rights are dependent on HID continuing to have the
exclusive rights granted to it by Geimax SA, the owner of the Leader Price
trademark.  The initial term of the agreement
is for seven years, and it will be automatically renewed for an additional
period of nine years unless either party notifies the other of its intention
not to renew the agreement for reasonable cause within one year prior to the
expiration of the initial term.

The amount
purchased under this agreement has decreased substantially in the year, and
therefore this agreement is no longer material to us.

For a
summary of other material contracts, see Item 4.  Information on Blue SquareProperty, Plants and Equipment, Item
4.  Information on Blue Square  Change
in Control, Item 5.  Operating and
Financial Review and Prospects  Liquidity and Capital Resources  Debentures,
Item 6.  Directors, Senior Management
and EmployeesBoard PracticesExculpation, Insurance and Indemnification of
Directors and OfficersLimitations on Insurance and Indemnification, Item
6.  Directors, Senior Management and
Employees  C. Employees, Item 7. 
Major Shareholders and Related Party TransactionsRelated Party
Transactions, Item 10.  Additional
InformationMemorandum and Articles of AssociationDescription of
SecuritiesAmerican Depositary Receipts and our consolidated financial
statements and notes included elsewhere in this annual report.

D.          Exchange
Controls.

Israeli law
and regulations do not impose any material foreign exchange restrictions on
non-Israeli holders of our ordinary shares. 
In May 1998, a new general permit was issued under the Israeli
Currency Control Law, 1978, which removed most of the restrictions that
previously existed under the law and enabled Israeli citizens to freely invest
outside of Israel and freely convert Israeli currency into non-Israeli
currencies.

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Dividends,
if any, paid to holders of our ordinary shares, and any amounts payable upon
our dissolution, liquidation or winding up, as well as the proceeds of any sale
in Israel of our ordinary shares to an Israeli resident, may be paid in
non-Israeli currency or, if paid in Israeli currency, may be converted into
freely repatriable dollars at the rate of exchange prevailing at the time of
conversion.

E.          Taxation

Israeli Tax Considerations

General

The
following is a summary of the current tax laws of the State of Israel as they
relate to us and to our shareholders. Also included is a discussion of the
material Israeli tax consequences to for persons purchasing our ordinary shares
or ADSs (Shares).

The
discussion is based on legislation yet to be subject to judicial or
administrative interpretation, there can be no assurance that the views
expressed herein will accord with any such interpretation in the future. This
discussion is not intended and should not be construed as legal or professional
tax advice and does not cover all possible tax considerations.

Israeli Tax Reform

On
July 24, 2002, the Israeli Parliament enacted income tax reform legislation
(Tax Reform). The Tax Reform introduced fundamental and comprehensive changes
to Israeli tax laws. Most of the legislative changes took effect on January 1,
2003. The Tax Reform introduced a transition from a primarily territorial-based
tax system to a personal-based system of taxation with respect to Israeli
residents, and resulted in significant amendment of the international taxation
provisions, and in new provisions concerning the taxation of capital markets
including the abolishment of currently exempt investment routes (e.g.,
capital gains generated by individuals from the sale of securities traded on
the Tel-Aviv Stock Exchange).

It
should be noted that various issues related to the Tax Reform remain unclear in
view of the legislative language utilized. The analysis below is therefore
based on our current understanding of the new legislation.

It
should be noted that, as stipulated and derived from the dual listing and due
to the Tax Reform legislation, the Shares are no longer regarded and defined as
foreign traded securities and thus certain associated Israeli tax aspects
will accordingly be subject to change as discussed below.

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Corporate Tax
Structure

General

Israeli
companies are subject to company tax at the rate of 36% of taxable income.
Dividends received by an Israeli corporation from Israeli subsidiaries are
generally exempt from company tax.

Corporate Taxation Under Inflationary Conditions

The Income
Tax Law (Inflationary Adjustments), 1985, generally referred to as the
Inflationary Adjustments Law, represents an attempt to overcome the problems
presented to a traditional tax system by an economy undergoing rapid inflation.
The Inflationary Adjustments Law is highly complex. Its features which are
material to us pertain to a special tax adjustment for the preservation of
equity as follows:

| |  | Where a companys equity, as calculated under the Inflationary
  Adjustments Law, exceeds the depreciated cost of fixed assets, a deduction
  from taxable income is permitted equal to the excess multiplied by the
  applicable annual rate of inflation. The maximum deduction permitted in any
  single tax year is 70% of taxable income, with the unused portion permitted
  to be carried forward. | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | Where a companys depreciated cost of fixed assets exceeds its
  equity, then the excess multiplied by the applicable annual rate of inflation
  is added to taxable income.                                                                                                                                                                                                                              | 
| |  | Subject to specified limitations, depreciation deductions on fixed
  assets and losses carried forward are adjusted for inflation based on the
  increase in the CPI.                                                                                                                                                                                                                                     | 
| |  | Gains on traded securities are taxable when realized.  However, securities dealers are subject to
  the regular tax rules applicable to business income in Israel.                                                                                                                                                                                                                                        | 

Under the
Inflationary Adjustments Law, results for tax purposes are measured in real
terms in accordance with the changes in the CPI.  Since a portion of our expenses accrues in dollars,
the discrepancy between the change in the CPI and the change in the exchange
rate of the NIS to the dollar, each year and cumulatively, may result in a
significant difference between taxable income and the income denominated in NIS
reflected in our financial statements.

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Capital Gains Tax

General

Israeli
law imposes a capital gains tax on the sale of capital assets by an Israeli
resident and on the sale of capital assets located in Israel or the sale of
direct or indirect rights to assets located in Israel, including on the sale of
the Shares by some of our shareholders (see discussion below). The Israeli Tax
Ordinance distinguishes between Real Gain and Inflationary Surplus. Real
Gain is the excess of the total capital gain over Inflationary Surplus computed
on the basis of the increase in the Israeli CPI between the date of purchase
and the date of sale. The Real Gain accrued upon the sale of an asset, other
than trading securities, purchased on or after January 1, 2003 is taxed at an
applicable 25% rate, both for individuals and for corporations, as opposed to
the previous 36% rate applicable to corporations, and to the marginal tax rate
of up to 50% (49% as of January 1, 2004) applicable to individuals with respect
to sale transactions effected prior to January 1, 2003.

Real Gains
derived from the disposal after January 1, 2003 of an asset, other than trading securities, purchased
prior to that date will be subject to capital gains tax at a blended rate. The
previous capital gains tax rate (36% for a corporation and a marginal tax rate
of up to 50% (49% as of January 1, 2004) for individuals) will apply to the
total gain amount realized in the same ratio as the ratio which the holding
period commencing on the acquisition date and terminating on January 1, 2003
bears to the total holding period. The remainder of the gain realized will be
subject to capital gains tax at the beneficial 25% rate.

Inflationary
Surplus is exempt from any tax.

Upon
the sale of an asset subject to capital gains tax, a tax advance of 25% of the
capital gain is payable within 30 days of the transaction. The Assessing
Officer may accept the actual amount of tax payable, if this is lower, provided
that a detailed return which includes a computation of the tax return, which
includes a computation of the tax due, is filed within that period. Capital
gains are also reportable on annual income tax returns.

Taxation
of investors engaged in a business of trading securities

Individual
and corporate shareholders dealing in securities in Israel are taxed at the tax
rates applicable to business income.

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Taxation
of Israeli Residents

| |  | Israeli Resident Shareholders subject to
  the Inflationary Adjustments Law.
| | - | ----------------------------------------------------------------------------

The
Inflationary Adjustments Law includes provisions concerning taxation on gains
derived from the sale of traded securities. These provisions apply to most
corporate shareholders and to certain individuals. There is some uncertainty as
to whether these provisions also apply to foreign corporations that hold our
shares because non-resident companies are not expressly exempt from them. A
shareholder who is subject to the Inflationary Adjustments Law will be taxed,
upon the sale of his or her Shares, on the full amount of his or her gain at
the tax rate applicable to that shareholder (36% for a corporation and a
marginal tax rate of up to 50% (49% as of January 1, 2004) for individuals). It should be noted that the Tax
Reform has not altered significantly the legal situation concerning this
aspect.

| |  | Israeli Resident Shareholders not subject
  to the Inflationary Adjustments Law.
| | - | --------------------------------------------------------------------------------

As
mentioned above, in November 2000 our ordinary shares were listed for trading
on the Tel Aviv Stock Exchange. As a result of our dual listing and due to the
Tax Reform (inclusion of new provisions concerning the taxation of capital
markets) and that since our ordinary shares are not considered foreign traded
securities, the tax treatment of our shareholders under Israeli law has
changed.

The
following is a summary of the most significant Israeli capital gains tax
implications arising with respect to the sale of our Shares by shareholders that
are not engaged in the business of trading securities or who are not subject to the Inflationary Adjustments Law. As
demonstrated below, shareholders purchase date may determine the tax outcomes
in this regard.

It
should be noted that our analysis is based partially on guidelines published by
the Israeli Tax Authorities prior to the legislation of the Tax Reform
concerning the tax treatment of securities traded in the Tel Aviv Stock
Exchange and on foreign stock exchanges abroad. Accordingly, the analysis may
change should new legislation or amended guidelines concerning this aspect be
published in the future.

| |  | Sale of Shares Purchased after January 1, 2003
| | - | ----------------------------------------------

The
shareholder will be subject to tax at a rate of 15% on realized real capital
gain. To the extent that the shareholder claims a deduction of financing
expenses or the sale is to a relative as defined in the Israeli Tax Ordinance,
the gain will be subject to tax at a rate of 25%.

| |  | Sale of Shares Purchased after the listing on the Tel Aviv Stock
  Exchange and before January 1, 2003
| | - | ------------------------------------------------------------------------------------------------------

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The
shareholder will be subject to tax on the gain derived commencing from January
1, 2003 at a rate of 15%. The cost value of the shares for the purpose of the
gain computation will be based on the average price of the shares during the
last three trading days preceding January 1, 2003 or the adjust original cost
of the shares, whichever is higher. In the last case, the capital loss that
might be offset is the difference between the adjusted average value and the
value of the shares at the date of the sale. To the extent that the taxpayer
claims a deduction of financing expenses or the sale is to a relative as
defined in the Israeli tax Ordinance, the gain will be subject to tax at a rate
of 25%.

The
remainder of the gain realized (i.e., the real gain attributed to the period
from the purchase date until January 1, 2003) will be exempt from Israeli tax.

| |  | Sale of Shares Purchased prior to the listing on the Tel Aviv Stock
  Exchange                                                                           
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                          
| |  | A shareholder who elected to recognize a tax event at the listing
  date on the Tel Aviv Stock Exchange or rescinded an election to defer the tax
  event

If
the shareholder elected to recognize a tax event on the date of the listing of
the shares on the Tel Aviv Stock Exchange, or rescinded an election to defer
the tax event until the date of actual sale of the shares on the Tel-Aviv Stock
Exchange, the profit realized will be allocated to three separate components:
(i) profit or loss determined at the date of listing on the Tel Aviv Stock
Exchange; (ii) profit or loss accrued from the date of listing the shares
on the Tel Aviv Stock Exchange until January 1, 2003 and (iii)  Gain (or loss) accrued from January
1, 2003 until the actual sale of the shares.

Regarding
profits determined at the listing date, the shareholder generally will be taxed
at a rate of 35% for an individual shareholder or 36% for a corporate
shareholder. If such a shareholder elected not to pay the tax at the date of
listing, the shareholder will be required to pay interest and linkage on the
tax amount from the date of listing.

Profits
accrued from the date of listing of the shares on the Tel Aviv Stock Exchange
until January 1, 2003 may enjoy a capital gains tax exemption.

Gain
(or loss) accrued from January 1, 2003 until the actual sale of the shares will
be subject to tax at a rate of 15%. The cost value of the shares for purposes
of gain computation will be based on the average price of the shares during the
last three trading days preceding January 1, 2003. To the extent that the
taxpayer claims a deduction of financing expenses or the sale is
to a relative as defined in the Israeli tax Ordinance, the gain will be subject to tax at a rate of 25%.

| |  | A shareholder who elected to defer the tax event until the actual
  sale of the shares
| | - | --------------------------------------------------------------------------------------

If
the shareholder elected to defer the tax event until the date of the actual
sale of the securities and has notified the tax authorities about the election,
the shareholder will generally be taxed at the rates of up to 50% for an
individual shareholder or 36% for a corporate shareholder for the total gain
amount realized in the same ratio as the ratio which the holding period
commencing on the acquisition data and terminating on January 1, 2003 bears to
the total holding period. The remainder of the gain realized will be subject to
capital gains tax at the beneficial 25% rate (both for individuals and
corporations).

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The
subsidiary legislation has not completed yet such that reduced tax rates may be
imposed.

Capital Taxation of Non-Israeli Residents.

As
mentioned above, Israeli law generally imposes a capital gains tax on sales of
capital assets, including securities and any other direct or indirect rights to
capital assets located in Israel. This tax is also applicable to non-residents
of Israel as follows:

| |  | Foreign investors (individuals and corporations) that are not engaged
  in a business of trading securities through a permanent establishment in
  Israel and are not subject to the Inflationary Adjustments Law, who purchased
  the shares after the listing on the Tel Aviv Stock Exchange will be exempt
  from tax on capital gains derived from the sale of the Shares. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

Under
interpretations of the law and according to the Israeli tax authorities, the
above exemption will occur also on foreign investors (individuals and
corporations) that are not engaged in a business of trading securities and are
not subject to the Inflationary Adjustments Law, who purchased securities
before the listing on the Tel Aviv Stock Exchange.

Withholding
at source from capital gains upon the sale of traded securities

As
of the commencement of the Tax Reform, Israeli stockbrokers are obliged to
withhold tax upon the sale of traded securities. The applicable withholding tax
rate is 15% from the real gain. 
According to the Israeli tax guidelines, certain assessees could elect
that the 0.5% or 1% tax rate will be a final tax without the ability to set off
losses, exemptions, etc.

Dividends

The distribution of dividend income, other than bonus
shares (stock dividends), to Israeli residents who purchased our Shares will
generally be subject to income tax at a rate of 25% for individuals and will be
exempt from income tax for resident corporations.

Non-residents
of Israel (both individuals and corporations) are subject to income tax on
income accrued or derived from sources in Israel, including dividends from
Israeli corporations. The distribution of dividend income, other than bonus
shares (stock dividends), to non-residents of Israel will generally be subject
to income tax at a rate of 25% by way of a tax withholding, unless a lower rate
is stipulated by a treaty between Israel and the shareholders country of
residence.

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Taxation of Residents
of the United States Under the US Treaty

Residents of the United States will generally be
subject to withholding tax in Israel on dividends paid, if any, on Shares.
Generally, under the Convention between the Government of the United States and
the Government of the State of Israel with respect to Taxes on Income (US
Treaty), the maximum rate of withholding tax on dividends paid to a holder of
Shares who is a resident of the United States (as defined in the US Treaty)
will be 25%.

The
US Treaty exempts from taxation in Israel any capital gain realized on the
sale, exchange or other disposition of Shares by a holder that is a resident of
the United States for purposes of the US Treaty, unless the above holder owns
directly or indirectly, 10% or more of our voting stock at all times during the
12-month period preceding such sale, exchange or other disposition or unless
the above shareholder is an individual and was present in Israel for more than
183 days during the relevant taxable year. However, under the US treaty,
residents of the United States (as defined in the US Treaty) would be permitted
to claim a credit for this tax against U.S. federal income tax imposed on the
sale, exchange or other disposition, subject to the limitations in U.S. laws
applicable to foreign tax credits. The US treaty does not relate to U.S. state
or local taxes.

As
mentioned above, according to interpretation of the law, and according to the
interpretation of the Israeli tax authorities, effective January 1, 2003 a
non-Israeli resident will not be subject to tax on the sale of shares listed
both on Israeli Stock Exchange and on NYSE.

The
application of the US Treaty provisions to dividends and capital gains
described above is conditioned upon the fact that such income is not
effectively connected with a permanent establishment (as defined in the US
Treaty) maintained by the non-Israeli resident in Israel.

A
non-resident of Israel that has dividend income derived from or accrued in
Israel, from which tax was withheld at the source, is generally exempt from the
duty to file tax returns in Israel in respect of such income, provided such
income was not connected to or derived from a trade or business conducted in
Israel by the tax payer.

Repatriation

Non-residents
of Israel who acquire any of the Shares of Blue Square will be able to
repatriate dividends, liquidation distributions and the proceeds from the sale
of such ADSs or ordinary shares, into in non-Israeli currencies at the rate of
exchange prevailing at the time of repatriation, provided that any applicable
Israel income tax has been paid, or withheld, on such amounts if applicable.

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United States Federal Income Tax
Considerations

Subject to
the limitations described in the next paragraph, the following discussion
describes the material United States federal income tax consequences to a
holder of Blue Squares ordinary shares, referred to for purposes of this
discussion as a U.S. holder, that is:

| |  | a citizen or
  resident of the United States;                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a
  corporation created or organized in the United States or under the laws of
  the United States or of any State;                                                                                                               
| |  | an estate,
  the income of which is includible in gross income for United States federal
  income tax purposes regardless of its source; or                                                                                       
| |  | a trust, if
  a court within the United States is able to exercise primary supervision over
  the administration of the trust and one or more U.S. persons have the
  authority to control all substantial decisions of the trust.

In
addition, certain material aspects of United States federal income tax relevant
to a holder other than a U.S. holder, referred to as a Non-U.S. holder, are
discussed below.

This
summary is for general information purposes only.  It does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to each persons decision to
purchase ordinary shares.

This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended, current and proposed Treasury regulations promulgated thereunder,
and administrative and judicial decisions as of the date hereof, all of which
are subject to change, possibly on a retroactive basis.  This discussion does not address all aspects
of United States federal income taxation that may be relevant to any particular
shareholder based on such shareholders individual circumstances.  In particular, this discussion considers
only U.S. holders that will own ordinary shares as capital assets and does not
address the potential application of the alternative minimum tax or United
States federal income tax consequences to U.S. holders that are subject to
special treatment, including U.S. holders that:

| |  | are
  broker-dealers or insurance companies;                                                                                                              
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | have elected
  mark-to-marketing accounting;                                                                                                              
| |  | are
  tax-exempt organizations;                                                                                                                           
| |  | are
  financial institutions or financial services entities;                                                                                            
| |  | hold ADSs or
  ordinary shares as part of a straddle, hedge or conversion transaction
  with other investments;                                       
| |  | own
  directly, indirectly or by attribution at least 10% of Blue Squares shares
  representing at least 10% of Blue Squares shareholders voting power;
| |  | have a
  functional currency that is not the dollar.                                                                                                      

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In
addition, this discussion does not address any aspect of state, local or
non-United States tax laws.

Additionally,
the discussion does not consider the tax treatment of persons who hold ADSs or
ordinary shares through a partnership or other pass-through entity or the
possible application of United States federal gift or estate tax.  Material aspects of United States federal
income tax relevant to a holder other than a U.S. holder are also discussed
below.

Each
holder of ADSs or ordinary shares is advised to consult such persons own tax
advisor with respect to the specific tax consequences to such person of
purchasing, holding or disposing of Blue Squares ADSs or ordinary shares.

Taxation of Dividends Paid on Ordinary Shares

A U.S.
holder will be required to include in gross income as ordinary income the
amount of any distribution paid on ordinary shares, including any Israeli taxes
withheld from the amount paid, on the date the distribution is received to the
extent the distribution is paid out of our current or accumulated earnings and
profits as determined for United States federal income tax purposes.  Distributions received by a U.S. holder who
is an individual from a qualified foreign corporation are taxed at the top
rate of 15%. The individual must hold the ordinary shares for more than 60 days
during the 120 day period beginning 60 days before the ex-dividend date in
order for the distribution to be eligible for this rate of tax. A qualified
foreign corporation is (1) a foreign corporation with shares that are readily
tradable on an established securities market in the United States including
ordinary shares and ADSs or (2) a foreign corporation that is eligible for
benefits under a comprehensive income tax treaty with the United States. A
qualified foreign corporation does not include any foreign corporation which
for the taxable year of the corporation in which the dividend was paid or the
preceding taxable year is a passive foreign investment company.  Distributions made by a foreign corporation
that is not a qualified foreign corporation are taxed at a maximum rate of
35%. Distributions in excess of these earnings and profits will first be
applied against and will reduce the U.S. holders tax basis in the ordinary
shares and, to the extent the distribution is in excess of such tax basis, will
be treated as gain from the sale or exchange of the ordinary shares.

97

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U.S.
holders will have the option of claiming the amount of any Israeli income taxes
withheld at source either as a deduction from gross income or as a
dollar-for-dollar credit against their United States federal income tax
liability.  Individuals who do not claim
itemized deductions, but instead utilize the standard deduction, may not claim
a deduction for the amount of the Israeli income taxes withheld, but such
amount may be claimed as a credit against the individuals United States
federal income tax liability.  The
amount of foreign income taxes which may be claimed as a credit in any year is
subject to complex limitations and restrictions, which must generally be
determined on an individual basis by each shareholder.  The limitations set out in the Code include,
among others, rules which limit foreign tax credits allowable with respect to
specific categories  of income to the
United States federal income taxes otherwise payable with respect to each specific
category  of income.  Distributions of current or accumulated
earnings and profits will be foreign source passive income for United States
foreign tax credit purposes and will not qualify for the dividends received
deduction available to corporations. 
The total amount of allowable foreign tax credits in any year cannot
exceed regular U.S. tax liability for the year attributable to foreign source
taxable income.  However, a U.S. holder
who is an individual may elect not to be subject to the foreign tax credit
limitation rules if all of that U.S. holders foreign source income is
qualified passive income and his or her creditable foreign taxes do not exceed
$300, or $600 for joint returns, in a taxable year.  Qualified passive income includes dividends and other amounts,
but only to the extent the U.S. holder receives a Form 1099 or similar payee
statement with respect to that qualified passive income.  A U.S. holder will be denied a foreign tax
credit with respect to Israeli income tax withheld from dividends received on
the ordinary shares to the extent such U.S. holder has not held the ordinary
shares for at least 16 days of the 30-day period beginning on the date which is
15 days before the ex-dividend date or to the extent such U.S. holder is under
an obligation to make related payments with respect to substantially similar or
related property.  Any days during which
a U.S. holder has substantially diminished its risk of loss on the ordinary
shares are not counted toward meeting the 16-day holding period required by the
statute.

Taxation of the Disposition of Ordinary Shares

Upon the
sale, exchange or other disposition of ordinary shares, a U.S. holder will
recognize capital gain or loss in an amount equal to the difference between
such U.S. holders basis in the ordinary shares, which is usually the cost of
such shares, and the amount realized on the disposition.  Capital gain from the sale, exchange or
other disposition of ordinary shares held more than one year is long-term capital
gain, and is eligible for a maximum 20% rate of taxation for individuals. The
maximum rate of 15% applies to sales or exchanges that occur on or after May 6,
2003.  Capital gain from the sale,
exchange or other disposition of ordinary shares held for one year or less is
short-term capital gain and taxed as ordinary income at a maximum rate of 35%.
Gains and losses recognized by a U.S. holder on a sale, exchange or other
disposition of ordinary shares will be treated as United States source income
or loss for United States foreign tax credit purposes.  The deductibility of a capital loss
recognized on the sale, exchange or other disposition of ordinary shares is
subject to limitations.

Tax Consequences if Blue Square is a Passive Foreign
Investment Company

Blue Square
will be a passive foreign investment company, or PFIC, if 75% or more of its
gross income in a taxable year, including the pro rata share of the gross
income of any company, U.S. or foreign, in which Blue Square is considered to
own 25% or more of the shares by value, is passive income.  Alternatively, Blue Square will be
considered to be a PFIC if at least 50% of its assets in a taxable year,
averaged over the year and ordinarily determined based on fair market value and
including the pro rata share of the assets of any company in which Blue Square
is considered to own 25% or more of the shares by value, are held for the
production of, or produce, passive income. 
Passive income includes amounts derived by reason of the temporary
investment of funds raised in our public offerings.  If Blue Square were a PFIC, and a U.S. holder did not make an
election to treat us as a qualified electing fund (as described below):

98

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| |  | excess
  distributions by Blue Square to a U.S. holder would be taxed in a special
  way.  Excess distributions are
  amounts received by a U.S. holder with respect to Blue Squares securities in
  any taxable year that exceed 125% of the average distributions received by that
  U.S. holder from Blue Square in the shorter of either the three previous
  years or that U.S. holders holding period for ordinary shares before the
  present taxable year.  Excess
  distributions must be allocated ratably to each day that a U.S. holder has
  held Blue Squares securities.  A U.S.
  holder must include amounts allocated to the current taxable year, and any
  prior taxable year in which Blue Square was not a PFIC, in its gross income
  as ordinary income for that year.  A
  U.S. holder must pay tax on amounts allocated to each prior taxable year in
  which Blue Square was PFIC at the highest rate in effect for that year on
  ordinary income and the tax is subject to an interest charge at the rate
  applicable to deficiencies for income tax.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | the entire
  amount of gain that was realized by a U.S. holder upon the sale or other
  disposition of ordinary shares will also be rated as excess distribution and
  will be subject to tax as described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | a U.S.
  holders tax basis in Blue Squares shares that were acquired from a decedent
  would not receive a step-up to fair market value as of the date of the
  decedents death but would instead be equal to the decedents basis, if
  lower.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

The special
PFIC rules described above will not apply to a U.S. holder if the U.S. holder
makes an election to treat us as a qualified electing fund, or QEF, in the
first taxable year in which the U.S. holder owns ordinary shares and if Blue
Square complies with certain reporting requirements.  Instead, a shareholder of a qualified electing fund is required
for each taxable year to include in income a pro rata share of the ordinary
earnings of the qualified electing fund as ordinary income and a pro rata share
of the net capital gain of the qualified electing fund as long-term capital
gain, subject to a separate election to defer payment of taxes, which deferral
is subject to an interest charge.  Blue
Square has agreed to supply U.S. holders with the information needed to report
income and gain pursuant to a QEF election in the event Blue Square is
classified as PFIC.  The QEF election is
made on a shareholder-by-shareholder basis and can be revoked only with the
consent of the Internal Revenue Service, or IRS.  A shareholder makes a QEF election by attaching a completed IRS
Form 8621, including the PFIC annual information statement, to a timely filed
United States federal income tax return and by filing that form with the IRS
Service Center in Philadelphia, Pennsylvania. 
Even if a QEF election is not made, a shareholder in a PFIC who is a
U.S. person must file a completed IRS Form 8621 every year.

99

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Alternatively,
a U.S. holder of PFIC stock which is publicly traded could elect to mark the
stock-to-market annually, recognizing as ordinary income or loss each year an
amount equal to the difference as of the close of the taxable year between the
holders fair market value of the PFIC stock and the adjusted basis in the PFIC
stock.  Losses would be allowed only to
the extent of net mark-to-market gain previously included by the U.S. holder
under the election for prior taxable years. 
If the mark-to-market election were made, then the rules set forth above
would not apply for periods covered by the election.  However, the character of any gain or loss realized by a U.S.
holder on the disposition of ordinary shares of a foreign corporation that does
not qualify as a PFIC for the year of disposition (but for which an election to
apply the mark-to-market regime had been made in a prior year) is capital.

Blue Square
believes that it was not a PFIC in 2003. 
However, the tests for determining PFIC status are applied annually and
it is difficult to make accurate predictions of future income and assets, which
are relevant to this determination. 
Accordingly, there can be no assurance that Blue Square will not become
a PFIC.  If Blue Square determines that
it has become a PFIC, Blue Square will notify its U.S. holders and provide them
with the information necessary to comply with the QEF rules.  U.S. holders who hold ordinary shares during
a period when Blue Square is a PFIC will be subject to the foregoing rules,
even if Blue Square ceases to be a PFIC, subject to certain exceptions for U.S.
holders who made a QEF election.  U.S.
holders are urged to consult their tax advisors about the PFIC rules, including
the consequences to them of making a mark-to-market or QEF election with
respect to Blue Squares ordinary shares and ADSs in the event that Blue Square
qualifies as a PFIC.

Tax Consequences for Non-U.S. Holders of Ordinary
Shares

Except as
described in Information Reporting and Back-up Withholding below, a Non-U.S.
holder of ADSs or ordinary shares will not be subject to U.S. federal income or
withholding tax on the payment of dividends on, and the proceeds from the
disposition of, ordinary shares, unless:

| |  | such item is
  effectively connected with the conduct by the Non-U.S. holder of a trade or
  business in the United States and, in the case of a resident of a country
  which has a treaty with the United States, such item is attributable to a
  permanent establishment or, in the case of an individual, a fixed place of
  business in the United States;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                 
| |  | the Non-U.S.
  holder is an individual who holds ADSs or the ordinary shares as a capital
  asset and is present in the United States for 183 days or more in the taxable
  year of the disposition and does not qualify for an exemption; or                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                 
| |  | the Non-U.S.
  holder is subject to tax pursuant to the provisions of United States tax law
  applicable to U.S. expatriates.                                                                                                                                                                                                                                   

100

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Information Reporting and Back-up Withholding

U.S.
holders generally are subject to information reporting requirements with
respect to dividends paid in the United States on ADSs or ordinary shares.  U.S. holders are also generally subject to
back-up withholding at a rate of up to 25% on dividends paid in the United
States on ordinary shares unless the U.S. holder provides IRS Form W-9 or
otherwise establishes an exemption. 
U.S. holders are subject to information reporting and back-up
withholding at a rate of up to 25% on proceeds paid from the disposition of
ADSs or ordinary shares unless the U.S. holder provides IRS Form W-9 or
otherwise establishes an exemption.

Non-U.S.
holders generally are not subject to information reporting or back-up withholding
with respect to dividends paid on, or upon the disposition of, ADSs or ordinary
shares, provided that the non-U.S. holder provides a taxpayer identification
number, certifies to its foreign status, or otherwise establishes an exemption.

The
amount of any back-up withholding will be allowed as a credit against a U.S. or
Non-U.S. holders United States federal income tax liability and may entitle
such holder to a refund, provided that certain required information is
furnished to the IRS.

F.          Dividends
and Paying Agents.

Not
applicable.

G.          Statement
by Experts.

Not
applicable.

H.          Documents
on Display.

Blue
Square is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, applicable to foreign private issuers and fulfills the
obligation with respect to these requirements by filing reports with the
Securities and Exchange Commission (SEC). 
You may read and copy any document Blue Square files with the SEC
without charge at the SECs public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549.  Copies of that
material may be obtained by mail from the Public Reference Branch of the SEC at
such address, at prescribed rates. 
Please call the SEC at l-800-SEC-0330 for further information on the
public reference room.  Recent reports
filed by Blue Square with the SEC can also be accessed at the SECs web site,
www.sec.gov.

As
a foreign private issuer, Blue Square is exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements, and
its officers, directors and principal shareholders are exempt from the
reporting and short-swing profit recovery provisions contained in Section 16
of the Exchange Act.  In addition, Blue
Square is not required under the Exchange Act to file periodic reports and
financial statements with the Securities and Exchange Commission as frequently
or as promptly as United States companies whose securities are registered under
the Exchange Act.  A copy of each report
submitted in accordance with applicable United States law is available for
public review at Blue Squares principal executive offices.

I.          Subsidiary
Information.

Not
applicable.

101

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ITEM
11.       QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

The
table below provides information about Blue Squares financial instruments that
are sensitive to changes in interest rates.

|                                                                                                         |  | December 31, 2003                    | 
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | 
|                                                                                                         |  |                                      | 
|                                                                                                         |  | Expected Maturity (NIS in thousands) | 
|                                                                                                         |  |                                      | 
|                                                                                                         |  | 2004                                 | 
|                                                                                                         |  |                                      | 
|Long
  term loans from banks
  Linked to the CPI  4.9%
  (average fixed rate as of
  December 31, 2003) |  | 64,575                               | 
|                                                                                                         |  |                                      | 
|Long
  term loans from Bank unlinked                                                                    |  |                                      | 
|Average
  Fixed Rate(7.4%)                                                                               |  | 33,683                               | 
|                                                                                                         |  |                                      | 
|Variable
  Rate                                                                                          |  | 74,890                               | 
|                                                                                                         |  |                                      | 
|                                                                                                         |  |                                      | 
|                                                                                                         |  | 108,573                              | 
|                                                                                                         |  |                                      | 
|Debentures
  - Linked to the
  CPI - fixed rate (5.9%) (1)                                               |  | -                                    | 
|                                                                                                         |  |                                      | 
|Convertible
  Debentures (1)                                                                             |  | -                                    | 

(1)  See
also Item 5. Operating and Financial Review and Prospects  Liquidity and
Capital Resources  Debentures.

Inflation Risks and Exchange Rate Risks

In
accordance with Israeli Accounting Standards No. 12 and No. 17 adopted by the
Israeli Accounting Standards Board, our financial statements will cease to be
adjusted for inflation in Israel for periods beginning on or after January 1,
2004. The amounts included in our financial statements as of December 31, 2003
will serve as the starting point for nominal financial reporting beginning
January 1, 2004. The adoption of Standard No. 12 could have material adverse
effect on our results of operations. As a result of the adoption of these
standards, our assets and revenues will cease to be adjusted for inflation in
Israel, while the repayment of interest and principal under most of our loans
and all debentures will continue to be linked to the Israeli CPI as provided in
our loan and debenture agreements. As a result, an increase in inflation would
have the effect of increasing our financial expenses without any offsetting
increase in our assets and revenues on our financial statements, leading to
lower reported earnings and shareholders equity. The extent of this effect on
our financial statement would be dependent on the rate of inflation in Israel.

102

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The
table below provides information about the CPI and the known index:

|     |  | CPI   |   | The known index |  
|---- |  | ----- | - | ----------------- | -
|     |  |       |   |                   |  
|     |  |       |   |                   |  
|2001 |  | 1.41  | % | 1.41              | %
|2002 |  | 6.5   | % | 6.7               | %
|2003 |  | (1.9) | % | (2)               | %

The
table below provides an analysis of monetary assets and liabilities by currency
and linkage as of December 31, 2003:

|                                                          |  | Israeli Currency |  | Other
  Currencies
  especially the
  Yen | 
|--------------------------------------------------------- |  | ---------------- |  | ----------------------------------------- | 
|                                                          |  |                  |  |                                           | 
|                                                          |  | Unlinked         |  | Linked to the
  Israeli CPI               | 
|                                                          |  |                  |  |                                           | 
|                                                          |  | NIS in thousands | 
|                                                          |  |                  | 
|                                                          |  |                  |  |                                           | 
|Cash
  and cash equivalents                               |  | 61,204           |  | -                                         | 
|Marketable
  securities                                   |  | 15,137           |  | -                                         | 
|Trade
  receivables                                       |  | 510,532          |  | -                                         | 
|Other
  accounts receivables                              |  | 64,002           |  | 46,809                                    | 
|Investments
  in affiliates                               |  | -                |  | 2,041                                     | 
|                                                          |  |                  |  |                                           | 
|                                                          |  | 650,875          |  | 48,850                                    | 
|                                                          |  |                  |  |                                           | 
|Short-term
  credit from banks                            |  | 6,653            |  | -                                         | 
|                                                          |  |                  |  |                                           | 
|Trade
  payables                                          |  | 698,076          |  | -                                         | 
|                                                          |  |                  |  |                                           | 
|Other
  accounts payables                                 |  | 356,740          |  | 5,183                                     | 
|                                                          |  |                  |  |                                           | 
|Long
  term loans from banks including current maturities |  | 217,498          |  | 241,734                                   | 
|                                                          |  |                  |  |                                           | 
|Debentures
  including current maturities                 |  | -                |  | 400,000                                   | 
|                                                          |  |                  |  |                                           | 
|                                                          |  |                  |  |                                           | 
|                                                          |  | 1,278,967        |  | 646,917                                   | 
|                                                          |  |                  |  |                                           | 
|                                                          |  |                  |  |                                           | 
|Monetary
  liabilities, net                               |  | 628,092          |  | 598,067                                   | 
|                                                          |  |                  |  |                                           | 
|                                                          |  |                  |  |                                           | 

ITEM
12.       DESCRIPTION OF SECURITIES OTHER
THAN EQUITY SECURITIES

Not
applicable.

103

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PART II

ITEM
13.       DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES

Not
applicable.

ITEM
14.       MATERIAL MODIFICATIONS TO THE
RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

A. to E.Not applicable.

ITEM
15.      CONTROLS AND PROCEDURES

Quarterly Controls Evaluation

(a)
Disclosure Controls and Procedures. We performed an evaluation of the effectiveness
of our disclosure controls and procedures that are designed to ensure that the
material financial and non-financial information required to be disclosed on
Form 20-F and filed with the Securities and Exchange Commission is recorded,
processed, summarized and reported timely. Based on our evaluation, our
management, including our Chief Executive Officer and Chief Financial Officer,
have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15(d) 15(e) of the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this report are effective.
Notwithstanding the foregoing, there can be no assurance that our disclosure
controls and procedures will detect or uncover all failures of persons within
Blue Square to disclose material information otherwise required to be set forth
in our reports.

(b)
Internal Control Over Financial Reporting. There were no changes in our
internal control over financial reporting that occurred during the year ended
December 31, 2003 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

ITEM
16.       [RESERVED]

ITEM16A.   AUDIT COMMITTEE FINANCIAL EXPERT

The
Board of Directors has determined that Zeev Vurembrand is an audit committee
financial expert as defined in Item 16A of Form 20-F.

104

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ITEM16B.   CODE
OF ETHICS

As
of the date of this annual report, we have not adopted a code of ethics that
applies to our Chief Executive Officer, President, Chief Financial Officer,
Corporate Controller and employees. We expect to adopt a code of ethics in the
very near future.

ITEM 16C.   ACCOUNTANTS FEES AND
SERVICES

Kost Forer
Gabbay & Kasierer (Kost Forer), a member of Ernst & Young Global and
Luboshitz Kasierer, an affiliate member of Ernst & Young International,
have served as our independent public accountants for each of the fiscal years
in the two-year period ended December 31, 2003, for which audited financial
statements appear in this Annual Report on Form 20-F.

The
following table presents the aggregate fees for professional services and other
services rendered by such accountants to us in 2003 and 2002.

|                   |  | 2003 (1)           |           | 2002 (2)           | 
|------------------ |  | ------------------ | --------- | ------------------ | 
|                   |  |                    |           |                    | 
|                   |  | (In Thousands NIS) |           | (In Thousands NIS) | 
|                   |  |                    |           |                    | 
|Audit Fees (3)     |  |                    | 707,999   |                    | 
|Tax Fees (4)       |  |                    | 300,000   |                    | 
|All Other Fees (5) |  |                    | 394,567   |                    | 
|                   |  |                    |           |                    | 
|TOTAL              |  |                    | 1,402,566 |                    | 

| | (1) | Fees paid to Kost Forer                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (2) | Fees paid to Luboshitz
  Kasierer                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (3) | Audit Fees consist of fees
  billed for the annual audit services 
  engagement and other audit services, which are those services that
  only the external auditor can reasonably provide, and include the group
  audit; statutory audits; comfort letters and consents; attest services; and
  assistance with and review of documents filed with the SEC.                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (4) | Tax Fees
  include fees billed for tax compliance services, including the preparation of
  original and amended tax returns and claims for refund; tax consultations,
  such as assistance and representation in connection with tax audits and
  appeals, tax advice related to mergers and acquisitions, transfer pricing,
  and requests for rulings or technical advice from taxing authority; tax
  planning services; and expatriate tax planning and services.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (5) | All
  Other Fees include fees billed for data security reviews, treasury control
  reviews and process improvement and advice.                                                                                                                                                                                                                                                                                                                                       

105

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Audit Committee Pre-Approval Policies and Procedures

Our
audit committees main role is to assist the Board of Directors in fulfilling
its responsibility for oversight of the quality and integrity of the
accounting, auditing and
reporting practices of the Company. The Audit Committee oversees the
appointment, compensation, and oversight of the public accounting firm engaged
to prepare or issue an audit report on the financial statements of the Company.
Our audit committee expects to adopt a pre-approval policy for non-audit
services in the very near future.

106

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PART III

ITEM
17.       FINANCIAL STATEMENTS

The
financial statements required by this item are found at the end of this annual
report, beginning on page F-1.

ITEM
18.       FINANCIAL STATEMENTS

We have
responded to Item 17 in lieu of this item.

ITEM
19.       EXHIBITS

The
exhibits filed with or incorporated into this annual report are listed in the
index of exhibits below.

| | Exhibit No. |     | Description
| | ----------- | --- | -----------
| |             |     |            
| |             |     |            
| |             | 1.1 |            
| |             |     |            
| |             | 1.2 |            
| |             |     |            
| |             | 1.3 |            
| |             |     |            
| |             | 2.1 |            
| |             |     |            
| |             | 4.1 |            
| |             |     |            
| |             | 4.2 |            
| |             |     |            
| |             | 4.3 |            
| |             |     |            
| |             | 4.4 |            
| |             |     |            
| |             | 4.5 |            

107

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| |             |      |            
| | ----------- | ---- | -----------
| | Exhibit No. |      | Description
| |             |      |            
| |             |      |            
| |             | 4.6  |            
| |             |      |            
| |             | 4.7  |            
| |             |      |            
| |             | 4.8  |            
| |             |      |            
| |             | 4.9  |            
| |             |      |            
| |             | 4.10 |            
| |             |      |            
| |             | 4.11 |            
| |             |      |            
| |             | 4.12 |            
| |             |      |            
| |             | 4.13 |            

108

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| |             |          |            
| | ----------- | -------- | -----------
| | Exhibit No. |          | Description
| |             |          |            
| |             |          |            
| |             | 4.14     |            
| |             |          |            
| |             | 4.15     |            
| |             |          |            
| |             | 4.16     |            
| |             |          |            
| |             | 4.17     |            
| |             |          |            
| |             | 4.18     |            
| |             |          |            
| |             | 4.19     |            
| |             |          |            
| |             | 4.20     |            
| |             |          |            
| |             | 4.21     |            
| |             |          |            
| |             | 8        |            
| |             |          |            
| |             | 12.(a).1 |            
| |             |          |            
| |             | 12.(a).2 |            
| |             |          |            
| |             | 13.(a).1 |            

109

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SIGNATURE

The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.

|                    | BLUE SQUARE-ISRAEL LTD. |                  
|------------------- | ----------------------- | -----------------
|                    |                         |                  
|                    |                         |                  
|                    | By:                     | /s/ Gil Unger    
|                    |                         |                  
|                    |                         | Name:            
|                    |                         | Title:           
|                    |                         |                  
|                    |                         |                  
|                    | By:                     | /s/ Emanuel Avner
|                    |                         |                  
|                    |                         | Name:            
|                    |                         | Title:           
|                    |                         |                  
|Date: June 30, 2004 |                         |                  

---

---

BLUE SQUARE - ISRAEL LTD.

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003

ADJUSTED TO THE NIS OF DECEMBER 2003

INDEX

|                                                                                  | Page  
|--------------------------------------------------------------------------------- | ------
|                                                                                  |       
|                                                                                  |       
|Reports of Independent
  Auditors                                                 | 2     
|                                                                                  |       
|Consolidated Balance
  Sheets                                                     | 3 - 4 
|                                                                                  |       
|Consolidated Statements
  of Operations                                           | 5     
|                                                                                  |       
|Consolidated Statements
  of Changes in Shareholders Equity                      | 6     
|                                                                                  |       
|Consolidated Statements
  of Cash Flows                                           | 7 - 8 
|                                                                                  |       
|Notes to Consolidated
  Financial Statements                                      | 9 - 43
|                                                                                  |       
|Appendix to the
  Financial Statements - Schedule of Principal Investee Companies | 44    

- - - - - - - - - - -
- - - - - - - - - - - - -

---

---

| |  | Kost Forer Gabbay & Kasierer
  3 Aminadav St.
  Tel-Aviv 67067, Israel |  | Phone: 972-3-6232525
  Fax:     972-3-5622555
| | - | ---------------------------------------------------------------------- | - | ---------------------------------------------

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

BLUE SQUARE - ISRAEL LTD.

We have
audited the accompanying consolidated balance sheet of Blue Square - Israel
Ltd. (the Company) and  subsidiaries
as of December 31, 2003, and the related consolidated statements of operations,
changes in shareholders equity and cash flows for the year then ended. These
financial statements are the responsibility of the Companys Board of Directors
and management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Board of Directors and
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiaries as of December 31, 2003, and the consolidated results
of operations, changes in shareholders equity and cash flows for the year then
ended, in conformity with accounting principles generally accepted in Israel,
which differ in certain respects from those generally accepted in the United
States (see Note 21 to the consolidated financial statements).

|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|---------------- | --------------------------------
|March 8, 2004    | A Member of Ernst & Young Global

F-2

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---

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders ofBLUE SQUARE  ISRAEL LTD.

We
have audited the accompanying consolidated balance sheet of BLUE SQUARE -
ISRAEL LTD. (the Company) and subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, changes in shareholders equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Companys Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of the Company and
subsidiaries for the year ended December 31, 2001, were audited by other
auditors who have ceased operations as a foreign associated firm of the
Securities and Exchange Commission Practice Section of the American Institute
of Certified Public Accountants and whose report dated March 12, 2002,
expressed an unqualified opinion on those financial statements.

We
conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiaries as of December 31, 2002, and the consolidated results
of operations, changes in shareholders equity and cash flows for the year then
ended, in conformity with accounting principles generally accepted in Israel,
which differ in certain respects from those generally accepted in the United
States (see Note 21 to the consolidated financial statements).

| | LUBOSHITZ KASIERER                                  
| | ----------------------------------------------------
| | An affiliate member of Ernst & Young
  International

Tel-Aviv, Israel 
March 24, 2003

F-2a

---

---

This is a copy of the previously issued Independent Public Accountants
report of Arthur Andersen. The report has not been reissued by Arthur Andersen.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders ofBLUE SQUARE  ISRAEL LTD.

We have audited the accompanying consolidated balance sheet of BLUE
SQUARE - ISRAEL LTD. (the Company) and subsidiaries as of December 31, 2001,
and the related consolidated statements of income, changes in shareholders
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Companys Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards in the United States and in Israel, including those prescribed under
the Auditors Regulations (Auditors Mode of Performance), 1973. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by the Board of Directors
and management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company and subsidiaries as of December 31, 2001, and the consolidated
results of operations, changes in shareholders equity and cash flows for the
year then ended, in conformity with accounting principles generally accepted in
Israel, which differ in certain respects from those generally accepted in the
United States (see Note 21 to the consolidated financial statements).

As described in Note 2a, the consolidated financial statements referred
to above are presented in values adjusted for the changes in the general
purchasing power of the Israeli currency, in accordance with pronouncements of
the Institute of Certified Public Accountants in Israel.

| | LUBOSHITZ KASIERER
| | ------------------
| | Arthur Andersen   

Tel-Aviv,
Israel 
March 12, 2002

F-2b

---

---

|BLUE SQUARE -
  ISRAEL LTD.         
|------------------------------------
|                                    
|CONSOLIDATED BALANCE SHEETS         
|                                    
|Adjusted to the NIS of December 2003

|                                           |  |      |  | December
  31,   |              | Convenience
  translation
  (Note 2o) | 
|------------------------------------------ |  | ---- |  | ---------------- | ------------ | ------------------------------------- | 
|                                           |  |      |  |                  |              |                                      
|                                           |  |      |  |                  |              | December
  31,
  2003                 | 
|2002                                       |  | 2003
|                                           |  |      |  |                  |              |                                       | 
|                                           |  | Note |  | Adjusted
  NIS   |              | U.S.
  dollars                        | 
|                                           |  |      |  |                  |              |                                       | 
|                                           |  |      |  | (In
  thousands) |             
|ASSETS                                     |  |      |  |                  |              |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|CURRENT
  ASSETS:                          |  |      |  |                  |              |                                       | 
|Cash
  and cash equivalents                |  |      |  |                  | 13,707       |                                       | 
|Marketable
  securities                    |  |      |  |                  | -            |                                       | 
|Trade
  receivables                        |  | 3    |  |                  | 517,563      |                                       | 
|Other
  accounts receivable                |  | 4    |  |                  | 96,624       |                                       | 
|Inventories                                |  | 5    |  |                  | 330,307      |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|                                           |  |      |  |                  | 958,201      |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|INVESTMENTS
  IN INVESTEE
       COMPANIES |  | 6    |  |                  | 2,902        |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|FIXED
  ASSETS, NET                        |  | 7    |  |                  | *) 2,163,634 |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|OTHER
  ASSETS, NET:                       |  | 8    |  |                  |              |                                       | 
|Goodwill                                   |  |      |  |                  | *) 83,556    |                                       | 
|Deferred
  charges                         |  |      |  |                  | 24,440       |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|                                           |  |      |  |                  | 107,996      |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|                                           |  |      |  |                  |              |                                       | 
|                                           |  |      |  |                  | 3,232,733    |                                       | 
|                                           |  |      |  |                  |              |                                       | 

*)     Reclassified.

The accompanying notes and the appendix are an integral part of the
consolidated financial statements.

F-3

---

---

|BLUE SQUARE -
  ISRAEL LTD.         
|------------------------------------
|CONSOLIDATED BALANCE SHEETS         
|                                    
|Adjusted to the NIS of December 2003

|                                                                                                                                                                                                                                     |  |      |  | December
  31, |  | Convenience
  translation
  (Note 2o) | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- |  | -------------- |  | ------------------------------------- | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                      
|                                                                                                                                                                                                                                     |  |      |  |                |  | December
  31,
  2003                 | 
|2002                                                                                                                                                                                                                                 |  | 2003
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  | Note |  | Adjusted NIS   |  | U.S. dollars                          | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  | (In thousands) | 
|LIABILITIES
  AND SHAREHOLDERS
                 EQUITY                                                                                                                                                                              |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|CURRENT LIABILITIES:                                                                                                                                                                                                                 |  |      |  |                |  |                                       | 
|Short-term
  credit from banks and others                                                                                                                                                                                            |  | 9    |  | 318,424        |  | 212,521                               | 
|Trade
  payables                                                                                                                                                                                                                     |  |      |  | 716,147        |  | 700,626                               | 
|Other
  accounts payable and accrued
            expenses                                                                                                                                                                            |  | 10   |  | 311,807        |  | 361,923                               | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  | 1,346,378      |  | 1,275,070                             | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|LONG-TERM
  LIABILITIES:                                                                                                                                                                                                             |  |      |  |                |  |                                       | 
|Long-term
  loans from banks                                                                                                                                                                                                         |  | 11   |  | 355,320        |  | 286,084                               | 
|Debentures                                                                                                                                                                                                                           |  | 12   |  | -              |  | 200,000                               | 
|Convertible
  debentures                                                                                                                                                                                                             |  | 12   |  | -              |  | 200,000                               | 
|Deferred
  taxes                                                                                                                                                                                                                     |  | 13b  |  | 15,858         |  | 15,322                                | 
|Accrued
  severance pay                                                                                                                                                                                                              |  | 14   |  | 23,666         |  | 25,599                                | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  | 394,844        |  | 727,005                               | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|MINORITY
  INTEREST                                                                                                                                                                                                                  |  |      |  | 152,095        |  | 160,265                               | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|CONTINGENT
  LIABILITIES AND
       COMMITMENTS                                                                                                                                                                                      |  | 15   |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|SHAREHOLDERS
  EQUITY:                                                                                                                                                                                                              |  |      |  |                |  |                                       | 
|Share
  capital -                                                                                                                                                                                                                    |  |      |  |                |  |                                       | 
|Ordinary
  shares of NIS 1 par value -
            Authorized:
  100,000,000 shares at
            December 31, 2003
  and 2002; Issued
            and outstanding:
  38,400,000 shares at
            December 31, 2003
  and 2002 |  | 16   |  | 52,121         |  | 52,121                                | 
|Additional
  paid-in capital                                                                                                                                                                                                         |  |      |  | 741,008        |  | 741,008                               | 
|Retained
  earnings:                                                                                                                                                                                                                 |  |      |  |                |  |                                       | 
|Dividend
  declared after balance sheet date                                                                                                                                                                                         |  |      |  | -              |  | 198,421                               | 
|Unappropriated                                                                                                                                                                                                                       |  |      |  | 546,287        |  | 45,790                                | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  | 1,339,416      |  | 1,037,340                             | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 
|                                                                                                                                                                                                                                     |  |      |  | 3,232,733      |  | 3,199,680                             | 
|                                                                                                                                                                                                                                     |  |      |  |                |  |                                       | 

The accompanying
notes and the appendix are an integral part of the consolidated financial
statements.

|March 8, 2004                                  |  |                                                        |  |                                                                                  |  |                                                             
|---------------------------------------------- |  | ------------------------------------------------------ |  | -------------------------------------------------------------------------------- |  | ------------------------------------------------------------
|                                               |  |                                                        |  |                                                                                  |  |                                                             
|Date of approval of the
  financial statements |  | Mathew Bronfman
  Chairman of the
  Board of Directors |  | David Weissman
  Vice Chairman and Acting
  Chairman of the Board of
  Directors |  | Emanuel Avner
  Vice President and
  Chief Financial Officer

F-4

---

---

|BLUE SQUARE -
  ISRAEL LTD.          
|-------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS
|                                     
|Adjusted to the NIS of December 2003 

|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   | Convenience
  translation
  (Note 2o) |  
|-------------------------------------------------------------------------------------- |  | ---- |  | ----------------------------------------------- | ------------------------------- | ------------ | - | ---------- | - | ------------------------------------- | -
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                      
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                      
|                                                                                       |  |      |  | Year ended
  December 31                        |                                 |              |  
|                                                                                       |  |      |  |                                                 | Year ended
  December 31
  2003 |             
|                                                                                       |  |      |  |                                                 |                                 |             
|                                                                                       |  |      |  | 2001                                            |                                 | 2002         |   | 2003       |   |                                      
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|                                                                                       |  | Note |  | Adjusted
  NIS                                  |                                 | U.S. dollars |  
|                                                                                       |  |      |  |                                                 |                                 |              |  
|                                                                                       |  |      |  | (In thousands, except share and per share data) |                                
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|Sales                                                                                  |  |      |  | 5,828,391                                       |                                 | 5,444,306    |   | 5,170,510  |   | 1,180,751                             |  
|Cost of
  sales                                                                        |  |      |  | 4,215,439                                       |                                 | 3,974,628    |   | 3,777,411  |   | 862,619                               |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|Gross profit                                                                           |  |      |  | 1,612,952                                       |                                 | 1,469,678    |   | 1,393,099  |   | 318,132                               |  
|Selling,
  general and administrative
       expenses                                  |  | 18a  |  | 1,296,217                                       |                                 | 1,250,662    |   | 1,190,425  |   | 271,849                               |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|Operating
  income                                                                     |  |      |  | 316,735                                         |                                 | 219,016      |   | 202,674    |   | 46,283                                |  
|Financial
  income (expenses), net                                                     |  | 18b  |  | (13,109                                         | )                               | 15,900       |   | (48,813    | ) | (11,147                               | )
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|                                                                                       |  |      |  | 303,626                                         |                                 | 234,916      |   | 153,861    |   | 35,136                                |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|Amortization
  of goodwill                                                             |  |      |  | (5,277                                          | )                               | (5,277       | ) | (5,740     | ) | (1,311                                | )
|Other
  expenses, net                                                                  |  | 18c  |  | (18,152                                         | )                               | (174,004     | ) | (136,612   | ) | (31,197                               | )
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|Income
  before taxes on income                                                        |  |      |  | 280,197                                         |                                 | 55,635       |   | 11,509     |   | 2,628                                 |  
|Taxes on
  income                                                                      |  | 13c  |  | 107,823                                         |                                 | 42,078       |   | 8,445      |   | 1,928                                 |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|Income after
  taxes on income                                                         |  |      |  | 172,374                                         |                                 | 13,557       |   | 3,064      |   | 700                                   |  
|Equity in earnings (losses) of
       affiliates, net                                  |  |      |  | 3,561                                           |                                 | (363         | ) | 742        |   | 169                                   |  
|Minority
  interest                                                                    |  |      |  | (25,123                                         | )                               | (5,953       | ) | (10,852    | ) | (2,478                                | )
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|Net income
  (loss)                                                                    |  |      |  | 150,812                                         |                                 | 7,241        |   | (7,046     | ) | (1,609                                | )
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|Earnings
  (loss) per Ordinary share or
       ADS                                     |  |      |  | 3.93                                            |                                 | 0.19         |   | (0.18      | ) | (0.04                                 | )
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  
|Weighted
  average number of shares
       or ADS outstanding during the
       period |  |      |  | 38,400,000                                      |                                 | 38,400,000   |   | 38,400,000 |   | 38,400,000                            |  
|                                                                                       |  |      |  |                                                 |                                 |              |   |            |   |                                       |  

The
accompanying notes and the appendix are an integral part of the consolidated
financial statements.

F-5

---

---

|BLUE SQUARE - ISRAEL LTD.                    
|---------------------------------------------
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|                                             
|Adjusted to the NIS of December 2003         

|                                                                                          |  |                  |  |                                |  | Retained
  earnings                              |   |                |  
|----------------------------------------------------------------------------------------- |  | ---------------- |  | ------------------------------ |  | ------------------------------------------------ | - | -------------- | -
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|                                                                                          |  | Share
  capital  |  | Additional
  paid-in
  capital |  | Dividend
  declared after
  balance sheet
  date |   | Unappropriated |  
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|                                                                                          |  | Adjusted
  NIS   | 
|                                                                                          |  |                  | 
|                                                                                          |  | (In
  thousands) | 
|                                                                                          |  |                  | 
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|Balance
  as of January 1, 2001                                                           |  | 52,121           |  | 734,556                        |  | -                                                |   | 567,896        |  
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|Additional paid-in capital for transaction with
            previous parent
  cooperative |  | -                |  | 6,452                          |  |                                                  |   | -              |  
|Dividend
  paid                                                                           |  | -                |  | -                              |  | -                                                |   | (51,984        | )
|Dividend declared after balance sheet date                                                |  | -                |  | -                              |  | 58,477                                           |   | (58,477        | )
|Net
  income                                                                              |  | -                |  | -                              |  | -                                                |   | 150,812        |  
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|Balance as of December 31, 2001                                                           |  | 52,121           |  | 741,008                        |  | 58,477                                           |   | 608,247        |  
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|Dividend
  paid                                                                           |  | -                |  | -                              |  | (58,477                                          | ) | (69,201        | )
|Net
  income                                                                              |  | -                |  | -                              |  | -                                                |   | 7,241          |  
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|Balance as of December 31,
  2002                                                         |  | 52,121           |  | 741,008                        |  | -                                                |   | 546,287        |  
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|Dividend
  paid                                                                           |  | -                |  | -                              |  | -                                                |   | (295,030       | )
|Dividend declared after balance sheet date                                                |  | -                |  | -                              |  | 198,421                                          |   | (198,421       | )
|Net
  loss                                                                                |  | -                |  | -                              |  | -                                                |   | (7,046         | )
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  
|Balance as of December 31,
  2003                                                         |  | 52,121           |  | 741,008                        |  | 198,421                                          |   | 45,790         |  
|                                                                                          |  |                  |  |                                |  |                                                  |   |                |  

|                                           |  | Convenience translation into U.S. dollars (Note 2o) | 
|------------------------------------------ |  | --------------------------------------------------- | 
|                                           |  |                                                     | 
|                                           |  | (In thousands)                                      | 
|                                           |  |                                                     | 
|Balance as of January 1,
  2003            |  | 11,902                                              | 
|                                           |  |                                                     | 
|Dividend
  paid                            |  | -                                                   | 
|Dividend declared after balance sheet date |  | -                                                   | 
|Net
  loss                                 |  | -                                                   | 
|                                           |  |                                                     | 
|                                           |  |                                                     | 
|Balance as of December 31,
  2003          |  | 11,902                                              | 
|                                           |  |                                                     | 

The
accompanying notes and the appendix are an integral part of the consolidated
financial statements.

F-6

---

---

|BLUE SQUARE -
  ISRAEL LTD.          
|-------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     
|Adjusted to the NIS of December 2003 

|                                                                                                          |  | Year ended
  December 31 |   | Convenience
  translation
  (Note 2o) |   |         
|--------------------------------------------------------------------------------------------------------- |  | ------------------------ | - | ------------------------------------- | - | --------
|                                                                                                          | 
|Year ended
  December 31
  2003                                                                           | 
|                                                                                                         
|2001                                                                                                      |  | 2002                     |   | 2003                                  |  
|                                                                                                          |  |                          |   |                                       |   |         
|                                                                                                          |  | Adjusted
  NIS           |   | U.S. dollars                          |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|                                                                                                          |  | (In
  thousands)         |   |                                      
|Cash flows from operating
  activities:                                                                   |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Net
  income (loss)                                                                                       |  | 150,812                  |   | 7,241                                 |   | (7,046  
|Adjustments to reconcile net income (loss) to net cash
            provided by
  operating activities (a) |  | 170,739                  |   | 283,964                               |   | 265,586 
|                                                                                                          |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Net cash provided by operating
  activities                                                               |  | 321,551                  |   | 291,205                               |   | 258,540 
|                                                                                                          |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Cash flows from investing
  activities:                                                                   |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Purchase
  of fixed assets                                                                                |  | (287,135                 | ) | (243,234                              | ) | (138,713
|Acquisition
  of minority interest in subsidiary                                                          |  | -                        |   | -                                     |   | (865    
|Acquisition
  of partners interest in partnership                                                        |  | -                        |   | (6,854                                | ) | -       
|Investment
  grants                                                                                       |  | -                        |   | 2,259                                 |   | -       
|Proceeds
  from sale of fixed assets                                                                      |  | 9,120                    |   | 13,707                                |   | 29,513  
|Proceeds
  from sale of investment in affiliate                                                           |  | 5,926                    |   | -                                     |   | -       
|Collection of receivables from sale of investment in
            previously
  consolidated companies (b)  |  | (26                      | ) | 29,445                                |   | -       
|Proceeds
  from sale of (investments in) marketable
            securities, net                           |  | 37,916                   |   | 5,563                                 |   | (11,572 
|Investment
  in other assets                                                                              |  | (398                     | ) | -                                     |   | -       
|                                                                                                          |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Net cash used in investing
  activities                                                                   |  | (234,597                 | ) | (199,114                              | ) | (121,637
|                                                                                                          |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Cash flows from financing
  activities:                                                                   |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Dividend
  paid                                                                                           |  | (51,984                  | ) | (127,678                              | ) | (295,030
|Dividend paid to minority shareholders of subsidiaries                                                    |  | (106                     | ) | (24,995                               | ) | -       
|Increase (decrease) in the balance with previous parent
            cooperative, net                      |  | (1,841                   | ) | 15,390                                |   | (5,471  
|Receipt
  of long-term loans                                                                              |  | 222,264                  |   | 203,724                               |   | 109,629 
|Repayments
  of long-term loans and debentures                                                            |  | (121,240                 | ) | (180,535                              | ) | (203,492
|Issuance of debentures and convertible debentures, net of
            issuance expenses                   |  | -                        |   | -                                     |   | 393,047 
|Short-term
  credit from banks, net                                                                       |  | (134,183                 | ) | 34,348                                |   | (86,038 
|                                                                                                          |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Net cash used in financing
  activities                                                                   |  | (87,090                  | ) | (79,746                               | ) | (87,355 
|                                                                                                          |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Increase (decrease) in cash
  and cash equivalents                                                        |  | (136                     | ) | 12,345                                |   | 49,548  
|Cash and cash equivalents at the beginning of the year                                                    |  | 1,498                    |   | 1,362                                 |   | 13,707  
|                                                                                                          |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Cash and cash equivalents
  at the end of the year                                                        |  | 1,362                    |   | 13,707                                |   | 63,255  
|                                                                                                          |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Supplemental disclosure of
  cash flow activities:                                                        |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Cash
  paid during the year for interest                                                                  |  | 40,109                   |   | 33,103                                |   | 31,462  
|                                                                                                          |  |                          |   |                                       |   |         
|                                                                                                          |  |                          |   |                                       |   |         
|Cash
  paid during the year for taxes                                                                     |  | 107,068                  |   | 108,159                               |   | 40,861  
|                                                                                                          |  |                          |   |                                       |   |         

The
accompanying notes and the appendix are an integral part of the consolidated
financial statements.

F-7

---

---

|BLUE SQUARE -
  ISRAEL LTD.          
|-------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     
|Adjusted to the NIS of December 2003 

|    |                                                                                                  |  |                          |                                 |              |   |         |   | Convenience
  translation
  (Note 2o) |  
|--- | ------------------------------------------------------------------------------------------------ |  | ------------------------ | ------------------------------- | ------------ | - | ------- | - | ------------------------------------- | -
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                      
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                      
|    |                                                                                                  |  | Year ended
  December 31 |                                 |              |  
|    |                                                                                                  |  |                          | Year ended
  December 31
  2003 |             
|    |                                                                                                  |  |                          |                                 |             
|    |                                                                                                  |  | 2001                     |                                 | 2002         |   | 2003    |   |                                      
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  | Adjusted
  NIS           |                                 | U.S. dollars |  
|    |                                                                                                  |  |                          |                                 |              |  
|    |                                                                                                  |  | (In
  thousands)         |                                
|(a) | Adjustments to reconcile net income (loss) to net cash     provided by operating activities:     |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    | Income and expenses not
  involving operating cash
       flows:                                 |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    | Depreciation and
  amortization                                                                  |  | 149,697                  |                                 | 154,138      |   | 145,190 |   | 33,156                                |  
|    | Minority interest                                                                                |  | 25,123                   |                                 | 5,953        |   | 10,852  |   | 2,478                                 |  
|    | Equity in losses (earnings)
  of affiliates *)                                                   |  | (3,561                   | )                               | 2,736        |   | (742    | ) | (169                                  | )
|    | Loss from sale, disposal
  and impairment of fixed
       assets and investments                 |  | 13,847                   |                                 | 147,772      |   | 47,359  |   | 10,815                                |  
|    | Deferred taxes, net                                                                              |  | (3,126                   | )                               | (33,886      | ) | (16,571 | ) | (3,784                                | )
|    | Purchasing power loss (gain) on long-term loans and
       other liabilities, net                |  | (4,518                   | )                               | (15,804      | ) | 8,530   |   | 1,948                                 |  
|    | Increase (decrease) in
  severance pay, net                                                      |  | 4,682                    |                                 | (3,282       | ) | 14,735  |   | 3,365                                 |  
|    | Increase in value of
  marketable securities and
       deposits                                 |  | (3,830                   | )                               | (5,563       | ) | (3,565  | ) | (814                                  | )
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    | Changes in operating assets
  and liabilities:                                                   |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    | Decrease (increase) in
  trade receivables and other
       accounts receivable                  |  | (26,716                  | )                               | 31,900       |   | (22,025 | ) | (5,030                                | )
|    | Decrease (increase) in
  inventories                                                             |  | (29,667                  | )                               | 8,699        |   | 54,161  |   | 12,368                                |  
|    | Increase (decrease) in
  trade payables and other
       accounts payable                        |  | 48,808                   |                                 | (8,699       | ) | 27,662  |   | 6,317                                 |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  | 170,739                  |                                 | 283,964      |   | 265,586 |   | 60,650                                |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    | *)     Including
  profit distributions by partnership                                           |  | -                        |                                 | 2,373        |   | -       |   | -                                     |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|(b) | Increase (decrease) in cash from sale of investments     in
  previously consolidated companies: |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    | Assets and liabilities of
  the subsidiaries at date of
       sale:                             |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    | Working capital deficiency (excluding cash and cash
       equivalents)                          |  | (369                     | )                               | -            |   | -       |   | -                                     |  
|    | Fixed assets and
  investments                                                                   |  | 26,960                   |                                 | -            |   | -       |   | -                                     |  
|    | Collection of receivable
  (receivable in respect of 
       sale)                               |  | (29,445                  | )                               | 29,445       |   | -       |   | -                                     |  
|    | Gain on sale                                                                                     |  | 2,828                    |                                 | -            |   | -       |   | -                                     |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  | (26                      | )                               | 29,445       |   | -       |   | -                                     |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|(c) | Non-cash transactions:                                                                           |  |                          |                                 |              |   |         |   |                                       |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    | Sale of fixed assets on credit                                                                   |  | -                        |                                 | 2,765        |   | 21,861  |   | 4,992                                 |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    | Receivable from sale of
  investments in previously
       consolidated companies                |  | 29,445                   |                                 | -            |   | -       |   | -                                     |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    | Cancellation of purchase of
  fixed assets                                                       |  | -                        |                                 | 2,391        |   | -       |   | -                                     |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  
|    | Purchase of partners
  interest in partnership in
       consideration for deposit              |  | -                        |                                 | -            |   | 6,854   |   | 1,565                                 |  
|    |                                                                                                  |  |                          |                                 |              |   |         |   |                                       |  

The
accompanying notes and the appendix are an integral part of the consolidated
financial statements.

F-8

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 1:- | GENERAL                                                                                                                                                                                                                                                 
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                         
|         | a.                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         | b.                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         | The
  consolidated financial statements are prepared in accordance with generally
  accepted accounting principles (GAAP) in Israel, which differ in certain
  respects from those generally accepted in the United States, as described in
  Note 21.
|         |                                                                                                                                                                                                                                                         
|         | The
  significant accounting policies that were applied in the preparation of the
  financial statements, on a consistent basis, are as follows:                                                                                                        
|         |                                                                                                                                                                                                                                                         
|         | a.                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                         

F-9

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | b.                                     
|         |                                        
|         |                                        
|         |                                        
|         | c.                                     
|         |                                        
|         |                                        
|         |                                        
|         | d.                                     
|         |                                        
|         |                                        
|         |                                        
|         | e.                                     
|         |                                        
|         |                                        
|         |                                        
|         | f.                                     
|         |                                        
|         |                                        

F-10

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | g.                                     
|         |                                        
|         |                                        
|         |                                        
|         | h.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | i.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        

F-11

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | j.                                     
|         |                                        
|         |                                        
|         |                                        
|         | k.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | l.                                     
|         |                                        
|         |                                        
|         |                                        
|         | m.                                     
|         |                                        
|         |                                        

F-12

---

---

|BLUE SQUARE - ISRAEL
  LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         |                                        
|         |                                        
|         | n.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | o.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        

F-13

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | p.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        

| |                     |  | Israeli
  CPI |   | Exchange
  rate of
  U.S. dollar |      | Exchange
  rate of
  Euro | 
| | ------------------- |  | ------------- | - | -------------------------------- | ---- | ------------------------- | 
| |                     |  |               |   |                                  |      |                           | 
| | Year ended          |  | %             |  
| |                     |  |               |   |                                 
| |                     |  |               |   |                                  |      |                           | 
| | December
  31, 2003 |  | (1.9          | ) |                                  | (7.6 | )                         | 
| | December
  31, 2002 |  | 6.5           |   |                                  | 7.3  |                           | 
| | December
  31, 2001 |  | 1.4           |   |                                  | 9.3  |                           | 
| |                     |  |               |   |                                  |      |                           | 

| |    | The exchange
  rate of the U.S. dollar at December 31, 2003 - $1 = NIS 4.379 (2002 -
  NIS 4.737 and 2001 - NIS 4.416).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | q. | Advertising
  costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Advertising
  costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | r. | Club member
  awards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Expenses in
  respect of club awards are principally recorded in cost of sales in the
  period during which the awards are earned through purchases by club members.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | s. | Transactions
  with the previous parent cooperative:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The results
  of transactions with the previous parent cooperative involving investments
  and fixed assets were credited to additional paid-in capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | t. | Earnings
  (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Earnings
  (loss) per share are computed in accordance with guidelines prescribed in
  Opinion No. 55 of the Institute of Certified Public Accountants in Israel.
  Basic earnings (loss) per share are computed on the basis of the weighted
  average of the paid-up share capital outstanding during the year, assuming
  conversion of convertible securities as of the later of the beginning of the
  year or the date of issuance, if such conversion is probable. Diluted
  earnings (loss) per share are computed as stated above, plus the effect of the
  assumed conversion of those convertible securities not included in the
  computation of basic earnings (loss) per share. If the effect of the assumed
  conversion of convertible securities is anti-dilutive, they are not included
  in the computation.

F-14

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | u.                                     
|         |                                        
|         |                                        
|         |                                        
|         | v.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|NOTE 3:- | TRADE RECEIVABLES                      

| |                                          |  | December
  31,            |        
| | ---------------------------------------- |  | ------------------------- | -------
| |                                          |  |                           |        
| |                                          |  | 2002                      |        
| |                                          |  |                           |        
| |                                          |  | Adjusted NIS in thousands |        
| |                                          |  |                           |        
| |                                          |  |                           |        
| | Credit
  card receivables                |  |                           | 477,585
| | Open
  accounts and checks receivables   |  |                           | 57,940 
| |                                          |  |                           |        
| |                                          |  |                           |        
| |                                          |  |                           | 535,525
| | Less
  - allowance for doubtful accounts |  |                           | 17,962 
| |                                          |  |                           |        
| |                                          |  |                           |        
| |                                          |  |                           | 517,563
| |                                          |  |                           |        

F-15

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 4:- | OTHER ACCOUNTS RECEIVABLE
|-------- | -------------------------

|         |                                                                                             |  | December
  31,              |       
|-------- | ------------------------------------------------------------------------------------------- |  | --------------------------- | ------
|         |                                                                                             |  |                             |       
|         |                                                                                             |  | 2002                        |       
|         |                                                                                             |  |                             |       
|         |                                                                                             |  | Adjusted
  NIS in thousands |       
|         |                                                                                             |  |                             |       
|         |                                                                                             |  |                             |       
|         | Deferred
  taxes (see Note 13b)                                                             |  |                             | 22,220
|         | Prepaid
  expenses                                                                          |  |                             | 13,579
|         | Government
  agencies                                                                       |  |                             | 31,986
|         | Receivables
  from sale of fixed assets and cancellation of
       purchase of fixed assets |  |                             | 5,250 
|         | Deposit
  *)                                                                                |  |                             | 6,854 
|         | Other                                                                                       |  |                             | 16,735
|         |                                                                                             |  |                             |       
|         |                                                                                             |  |                             |       
|         |                                                                                             |  |                             | 96,624
|         |                                                                                             |  |                             |       
|         | *)     As
  for acquisition of partners
           interest in
  partnership, see Note 6d.
|         |                                                                                            
|NOTE 5:- | INVENTORIES                                                                                

| | Merchandise                         |  |  | 319,670 |  |  | 268,897 | 
| | ----------------------------------- |  |  | ------- |  |  | ------- | 
| | Parts,
  raw materials and supplies |  |  | 10,637  |  |  | 7,216   | 
| |                                     |  |  |         |  |  |         | 
| |                                     |  |  |         |  |  |         | 
| |                                     |  |  | 330,307 |  |  | 276,113 | 
| |                                     |  |  |         |  |  |         | 

|NOTE 6:- | INVESTMENTS IN INVESTEE COMPANIES
|-------- | ---------------------------------
|         |                                  
|         | a.                               

| |                                  |  | December
  31,              |      
| | -------------------------------- |  | --------------------------- | -----
| |                                  |  |                             |      
| |                                  |  | 2002                        |      
| |                                  |  |                             |      
| |                                  |  | Adjusted
  NIS in thousands |      
| |                                  |  |                             |      
| | Shares:                          |  |                             |      
| |                                  |  |                             |      
| | Cost
  of shares                 |  |                             | 270  
| | Post-acquisition
  earnings, net |  |                             | 946  
| |                                  |  |                             |      
| |                                  |  |                             |      
| |                                  |  |                             | 1,216
| | Perpetual
  capital notes (1)    |  |                             | 1,259
| | Long-term
  loans (2)            |  |                             | 427  
| |                                  |  |                             |      
| |                                  |  |                             |      
| |                                  |  |                             | 2,902
| |                                  |  |                             |      

| | (1) | Perpetual capital notes are linked to the Israeli
  CPI and bear interest at an annual rate of 5%.                                    
| | --- | --------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                       
| | (2) | The loans
  are linked to the Israeli CPI and bear interest at an annual rate of 5%. The
  repayment date has not yet been determined.

F-16

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 6:- | INVESTMENTS IN INVESTEE COMPANIES (Cont.)
|-------- | -----------------------------------------
|         |                                          
|         | b.                                       

| |                                             |  | Adjusted NIS
  in thousands |      
| | ------------------------------------------- |  | --------------------------- | -----
| |                                             |  |                             |      
| |                                             |  |                             |      
| | Balance
  as of January 1, 2003             |  |                             | 2,902
| |                                             |  |                             |      
| | Equity
  in earnings of affiliates, net     |  |                             | 742  
| | Changes
  in loans and capital
  notes, net |  |                             | 355  
| |                                             |  |                             |      
| |                                             |  |                             |      
| | Balance
  as of December 31, 2003           |  |                             | 3,999
| |                                             |  |                             |      

| | c. | Companys
  share of assets, liabilities, revenues and expenses of jointly controlled
  entities that are consolidated by the proportionate consolidation method:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         |  | December
  31,              |       
| | ----------------------- |  | --------------------------- | ------
| |                         |  |                             |       
| |                         |  | 2002                        |       
| |                         |  |                             |       
| |                         |  | Adjusted
  NIS in thousands |       
| |                         |  |                             |       
| |                         |  |                             |       
| | Current
  assets        |  |                             | 8,557 
| | Non-current
  assets    |  |                             | 86,076
| | Current
  liabilities   |  |                             | 13,697
| | Long-term
  liabilities |  |                             | 7,309 

| |                      |  | Year ended
  December 31,   |       
| | -------------------- |  | --------------------------- | ------
| |                      |  |                             |       
| |                      |  | 2001                        |       
| |                      |  |                             |       
| |                      |  | Adjusted
  NIS in thousands |       
| |                      |  |                             |       
| |                      |  |                             |       
| | Revenues,
  net      |  |                             | 14,609
| | Costs and
  expenses |  |                             | 14,117

| | d. | A subsidiary
  owns 50% of the shares of Teco Ltd. (a company consolidated by the
  proportionate consolidation method), which is engaged in the production and
  marketing of packaging materials, among others, for Group companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | As of the
  date of the approval of the Companys financial statements, there are some
  unclear matters between the subsidiary and the other shareholder of Teco
  regarding the provision of sources of financing to Teco by the shareholders
  and regarding its future business activities, as a result of which, there are
  doubts regarding Tecos ability to continue as a going concern. Furthermore,
  in view of these unclear matters, the financial statements of Teco as of
  December 31, 2003, have not yet been approved by the Board of Directors of
  Teco. The consolidated balance sheet of the Company as of December 31, 2003,
  includes assets of Teco in the amount of approximately NIS 12 million, and
  consolidated revenues of the Company for the year then ended include revenues
  of Teco amounting to approximately NIS 10.6 million. Companys management
  believes that following the approval of the aforementioned financial
  statements of Teco, no material changes, if any, will be required to be made
  in the consolidated financial statements of the Company in relation to the
  amounts included in respect of Teco.

F-17

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 6:- | INVESTMENTS IN INVESTEE COMPANIES (Cont.)
|-------- | -----------------------------------------
|         |                                          
|         | e.                                       
|         |                                          
|         |                                          
|         |                                          
|         |                                          
|         |                                          
|NOTE 7:- | FIXED ASSETS                             
|         |                                          
|         | a.                                       

| |                                                   |  | Land and
  buildings
  including
  leasehold
  land (1) |           | Leasehold
  improvements |  | Furniture,
  equipment
  and
  installations |   | Motor
  vehicles |           | Total | 
| | ------------------------------------------------- |  | ------------------------------------------------------- | --------- | ------------------------ |  | -------------------------------------------- | - | ---------------- | --------- | ----- | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| |                                                   |  | Adjusted
  NIS in thousands                             |          
| |                                                   |  |                                                         |          
| | Cost:                                             |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| | Balance at January 1, 2003
  (*)                  |  |                                                         | 1,826,179 |                          |  | 397,864                                      |   |                  | 1,192,246 |       | 
| | Additions                                         |  |                                                         | 27,190    |                          |  | 31,257                                       |   |                  | 79,833    |       | 
| | Disposals                                         |  |                                                         | (52,117   | )                        |  | (10,373                                      | ) |                  | (55,137   | )     | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| | Balance at December 31,
  2003                    |  |                                                         | 1,801,252 |                          |  | 418,748                                      |   |                  | 1,216,942 |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| | Accumulated depreciation:                         |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| | Balance at January 1, 2003
  (*)                  |  |                                                         | 229,649   |                          |  | 211,455                                      |   |                  | 677,140   |       | 
| | Provision                                         |  |                                                         | 22,902    |                          |  | 28,628                                       |   |                  | 92,542    |       | 
| | Eliminated on disposals                           |  |                                                         | (7,807    | )                        |  | (9,345                                       | ) |                  | (33,935   | )     | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| | Balance at December 31,
  2003                    |  |                                                         | 244,744   |                          |  | 230,738                                      |   |                  | 735,747   |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| | Impairment of fixed assets
  (see
       b below) |  |                                                         | (87,105   | )                        |  | (14,612                                      | ) |                  | (56,171   | )     | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| | Net book value at
       December 31, 2003        |  |                                                         | 1,469,403 |                          |  | 173,398                                      |   |                  | 425,024   |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 
| | Net book value at
       December 31, 2002 (*)    |  |                                                         | 1,531,919 |                          |  | 174,080                                      |   |                  | 450,935   |       | 
| |                                                   |  |                                                         |           |                          |  |                                              |   |                  |           |       | 

| | *)  | Reclassified.                                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                              
| | (1) | Certain real
  estate assets which had been transferred to the Company from the previous
  parent cooperative in 1996 are in the process of being registered under the
  name of the Company.

F-18

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 7:- | FIXED ASSETS (Cont.)
|-------- | --------------------
|         |                     
|         | b.                  
|         |                     
|         | c.                  
|         |                     
|NOTE 8:- | OTHER ASSETS, NET   

| |                                                      |  | December
  31,              |       
| | ---------------------------------------------------- |  | --------------------------- | ------
| |                                                      |  |                             |       
| |                                                      |  | 2002                        |       
| |                                                      |  |                             |       
| |                                                      |  | Unamortized
  balance       |       
| |                                                      |  |                             |       
| |                                                      |  | Adjusted
  NIS in thousands |       
| |                                                      |  |                             |       
| |                                                      |  |                             |       
| | Goodwill                                             |  |                             | 83,556
| |                                                      |  |                             |       
| |                                                      |  |                             |       
| | Debenture
  issuance expenses                        |  |                             | 24    
| | Prepaid
  rental expenses and
       acquisition tax |  |                             | 10,154
| | Deferred
  taxes (see Note 13b)                      |  |                             | 14,262
| |                                                      |  |                             |       
| |                                                      |  |                             |       
| |                                                      |  |                             | 24,440
| |                                                      |  |                             |       

F-19

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 9:- | SHORT-TERM CREDIT FROM BANKS AND OTHERS
|-------- | ---------------------------------------
|         |                                        
|         | a.                                     

| |                                                |  | December
  31,              |        
| | ---------------------------------------------- |  | --------------------------- | -------
| |                                                |  |                             |        
| |                                                |  | 2002                        |        
| |                                                |  |                             |        
| |                                                |  | Adjusted
  NIS in thousands |        
| |                                                |  |                             |        
| | Short-term
  credit from banks:                |  |                             |        
| |                                                |  |                             |        
| | Not
  linked (1)                               |  |                             | 125,411
| | In
  Japanese Yen (2)                          |  |                             | -      
| |                                                |  |                             |        
| | Current
  maturities of long-term liabilities: |  |                             |        
| |                                                |  |                             |        
| | Loans                                          |  |                             | 185,013
| | Debentures
  (3)                               |  |                             | 8,000  
| |                                                |  |                             |        
| |                                                |  |                             |        
| |                                                |  |                             | 318,424
| |                                                |  |                             |        

| | (1) | The balance
  as of December 31, 2003 bears variable interest at a weighted average annual
  rate of 9.6%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (2) | The loan
  bears an annual interest rate of 0.8%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (3) | During 2003,
  a subsidiary repaid the remaining debentures, which were issued to the public
  in 1988.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | *)  | Current
  maturities include an amount of approximately NIS 7.2 million, in respect of
  long-term loans received by a proportionately consolidated company from banks
  and in respect of which the proportionately consolidated company did not meet
  the financial covenants as of December 31, 2003. Accordingly, for reasons of
  prudence, the abovementioned loans were classified as current maturities.
  Non-fulfillment of the financial covenants relates also to short-term credit
  received by the proportionately consolidated company in the amount of NIS 4.6
  million.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | b.  | Collateral -
  see Note 20.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-20

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 10:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|--------- | -------------------------------------------

| |                                                            |  | December
  31,            |        
| | ---------------------------------------------------------- |  | ------------------------- | -------
| |                                                            |  |                           |        
| |                                                            |  | 2002                      |        
| |                                                            |  |                           |        
| |                                                            |  | Adjusted NIS in thousands |        
| |                                                            |  |                           |        
| |                                                            |  |                           |        
| | Payroll
  and related expenses and other employee benefits |  |                           | 96,285 
| | Previous
  parent cooperative (*)                          |  |                           | 6,989  
| | Government
  authorities                                   |  |                           | 29,164 
| | Customer
  advances                                        |  |                           | 80,616 
| | Accrued
  expenses and other                               |  |                           | 98,753 
| |                                                            |  |                           |        
| |                                                            |  |                           |        
| |                                                            |  |                           | 311,807
| |                                                            |  |                           |        

|          | *)                         | The
  balance is not linked and bears variable interest. The average annual
  interest rate in 2003 was 6.0% (2002 - 6.9%).
|--------- | -------------------------- | ---------------------------------------------------------------------------------------------------------------------------
|          |                            |                                                                                                                            
|NOTE 11:- | LONG-TERM LOANS FROM BANKS
|          |                            |                                                                                                                            
|          | a.                         | Composition:                                                                                                               

|                            |                             |  |                          |  | December
  31, |        
|--------------------------- | --------------------------- |  | ------------------------ |  | -------------- | -------
|                            |                             |  |                          |  |                |        
|                            |                             |  |                          |  | 2002           |        
|                            |                             |  | Annual
  interest
  rate |  |                |        
|Adjusted
  NIS in thousands |                            
|                            |                             |  |                          |  |                |        
|                            |                             |  | %                        |  |                |        
|                            |                             |  |                          |  |                |        
|                            |                             |  |                          |  |                |        
|                            | Linked
  to the Israeli CPI |  | 4.9 (1)                  |  |                | 271,714
|                            | Not
  linked                |  | (2)                      |  |                | 268,619
|                            |                             |  |                          |  |                |        
|                            |                             |  |                          |  |                |        
|                            |                             |  |                          |  |                | 540,333
|                            | Less
  - current maturities |  |                          |  |                | 185,013
|                            |                             |  |                          |  |                |        
|                            |                             |  |                          |  |                |        
|                            |                             |  |                          |  |                | 355,320
|                            |                             |  |                          |  |                |        

| | (1) | Average rate
  as of December 31, 2003.                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                             
| | (2) | As of
  December 31, 2003 includes NIS 110 million at variable interest (average
  annual rate as of December 31, 2003 - 6.7%). The balance of NIS 107 million
  is at a fixed annual interest rate of 7.4%.

F-21

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 11:- | LONG-TERM LOANS FROM BANKS (Cont.)
|--------- | ----------------------------------
|          |                                   
|          | b.                                

| |                                   |  | Adjusted NIS
  in thousands |        
| | --------------------------------- |  | --------------------------- | -------
| |                                   |  |                             |        
| | First
  year - current maturities |  |                             | 173,148
| | Second
  year                     |  |                             | 115,279
| | Third
  year                      |  |                             | 156,678
| | Fourth
  year                     |  |                             | 14,127 
| |                                   |  |                             |        
| |                                   |  |                             |        
| |                                   |  |                             | 459,232
| |                                   |  |                             |        

| | c. | Collateral -
  see Note 20.
| | -- | ---------------------------

|NOTE 12:- | DEBENTURES AND CONVERTIBLE DEBENTURES
|--------- | -------------------------------------
|          |                                      
|          | a.                                   

| |                                         |  | December
  31,            |      
| | --------------------------------------- |  | ------------------------- | -----
| |                                         |  |                           |      
| |                                         |  | 2002                      |      
| |                                         |  |                           |      
| |                                         |  | Adjusted NIS in thousands |      
| |                                         |  |                           |      
| |                                         |  |                           |      
| | Debentures
  (Series A) (1)             |  |                           | -    
| | Debentures
  issued by subsidiary       |  |                           | 8,000
| |                                         |  |                           |      
| |                                         |  |                           | 8,000
| | Less
  - current maturities             |  |                           | 8,000
| |                                         |  |                           |      
| |                                         |  |                           |      
| |                                         |  |                           | -    
| |                                         |  |                           |      
| |                                         |  |                           |      
| | Convertible
  debentures (Series B) (2) |  |                           | -    
| |                                         |  |                           |      

| |  | In August
  2003, the Company issued to institutional investors NIS 400 million par value
  debentures in consideration for their par value as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                        
| |  | (1)                                                                                                                                                    
| |  |                                                                                                                                                        
| |  |                                                                                                                                                        
| |  |                                                                                                                                                        
| |  |                                                                                                                                                        

F-22

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 12:- | DEBENTURES AND CONVERTIBLE DEBENTURES (Cont.)
|--------- | ---------------------------------------------
|          |                                              
|          |                                              
|          |                                              
|          |                                              
|          |                                              
|          |                                              
|          |                                              
|          |                                              
|          |                                              
|          | b.                                           
|          |                                              
|          |                                              
|          |                                              
|          |                                              
|          |                                              
|          |                                              

F-23

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|NOTE 12:-                                 
|                                          
|                                          
|                                          
|                                          
|                                          
|NOTE 13:-                                 
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          

| |                                                 |  | December
  31,              |        
| | ----------------------------------------------- |  | --------------------------- | -------
| |                                                 |  |                             |        
| |                                                 |  | 2002                        |        
| |                                                 |  |                             |        
| |                                                 |  | Adjusted
  NIS in thousands |        
| |                                                 |  |                             |        
| | Temporary
  differences in respect of:          |  |                             |        
| |                                                 |  |                             |        
| | Provisions
  and accruals                       |  |                             | 31,193 
| | Tax
  loss carryforwards                        |  |                             | -      
| | Depreciable
  fixed assets and deferred charges |  |                             | (10,569
| |                                                 |  |                             |        
| |                                                 |  |                             |        
| |                                                 |  |                             | 20,624 
| |                                                 |  |                             |        
| | Presented
  in balance sheet as follows:        |  |                             |        
| |                                                 |  |                             |        
| | Other
  accounts receivable                     |  |                             | 22,220 
| | Intangible
  assets and deferred charges        |  |                             | 14,262 
| | Long-term
  liabilities                         |  |                             | (15,858
| |                                                 |  |                             |        
| |                                                 |  |                             |        
| |                                                 |  |                             | 20,624 
| |                                                 |  |                             |        

| |  | 2. | The Company
  and its subsidiaries have operating tax loss carryforwards of approximately
  NIS 56.1
  million. In addition, the Company and its subsidiaries have capital loss tax
  carryforwards of approximately NIS 16.0 million. The tax benefit in respect
  of operating tax loss carryforwards amounting to NIS 7.9 million and in
  respect of all of the capital tax loss carryforwards has not been recorded
  due to uncertainty of their realization.
| |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 13:- | TAXES ON INCOME (Cont.)
|--------- | -----------------------
|          |                        
|          | c.                     

| |                                                          |  | Year ended
  December 31,   |        
| | -------------------------------------------------------- |  | --------------------------- | -------
| |                                                          |  |                             |        
| |                                                          |  | 2001                        |        
| |                                                          |  |                             |        
| |                                                          |  | Adjusted
  NIS in thousands |        
| |                                                          |  |                             |        
| | In
  respect of the reported year:                       |  |                             |        
| |                                                          |  |                             |        
| | Current                                                  |  |                             | 108,930
| | Deferred                                                 |  |                             | (3,126 
| | Tax
  expense (benefit) in respect of prior
       years |  |                             | 2,019  
| |                                                          |  |                             |        
| |                                                          |  |                             |        
| |                                                          |  |                             | 107,823
| |                                                          |  |                             |        

| | d. | Effective
  tax:                                                                                                                                                                                                         
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                          
| |    | The
  difference between theoretical income tax expense computed on income before
  taxes at the statutory tax rate (36%) and the income tax expense as reflected
  in the financial statements, is explained as follows:

| |                                                                                                                              |  | Year ended December 31,   |        
| | ---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------
| |                                                                                                                              |  |                           |        
| |                                                                                                                              |  | 2001                      |        
| |                                                                                                                              |  |                           |        
| |                                                                                                                              |  | Adjusted NIS in thousands |        
| |                                                                                                                              |  |                           |        
| | Income
  before taxes on income, as reported
       in the statement of income                                               |  |                           | 280,197
| |                                                                                                                              |  |                           |        
| |                                                                                                                              |  |                           |        
| | Theoretical
  tax expense                                                                                                    |  |                           | 100,872
| |                                                                                                                              |  |                           |        
| | Increase
  (decrease) in taxes resulting from:                                                                               |  |                           |        
| |                                                                                                                              |  |                           |        
| | Nondeductible
  amortization and impairment
       losses in respect of goodwill and fixed
       assets                     |  |                           | 6,383  
| | Losses
  for which no tax benefit has been
       recorded (utilization of tax benefits not
       previously recorded), net |  |                           | (3,050 
| | Tax
  expense (benefit) in respect of prior
       years                                                                     |  |                           | 2,019  
| | Nondeductible
  expenses and other, net                                                                                      |  |                           | 1,599  
| |                                                                                                                              |  |                           |        
| |                                                                                                                              |  |                           |        
| | Income
  tax expense                                                                                                         |  |                           | 107,823
| |                                                                                                                              |  |                           |        

| | e. | Tax
  assessments:                                                                                                                                                                                                                                                                                                    
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                       
| |    | Blue Square
  has received final tax assessments, or assessments deemed to be final, for
  tax years through 1998. Some of the principal subsidiaries have received
  final assessments for tax years through 2001. For some of the subsidiaries,
  no final tax assessments have been received since their inception.
| |    |                                                                                                                                                                                                                                                                                                                       
| |    | Regarding
  tax assessments received subsequent to balance sheet date - see Note 15a(12).                                                                                                                                                                                                                             

F-25

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 14:- | ACCRUED SEVERANCE PAY
|--------- | ---------------------
|          |                      
|          | a.                   
|          |                      
|          |                      
|          |                      
|          |                      
|          |                      
|          | b.                   
|          |                      
|          |                      
|          |                      
|          |                      
|          |                      
|          |                      
|          |                      
|          |                      
|          |                      
|          |                      
|          |                      
|          | c.                   

| |                                                 |  | December
  31,              |       
| | ----------------------------------------------- |  | --------------------------- | ------
| |                                                 |  |                             |       
| |                                                 |  | 2002                        |       
| |                                                 |  |                             |       
| |                                                 |  | Adjusted
  NIS in thousands |       
| |                                                 |  |                             |       
| |                                                 |  |                             |       
| | Accrued
  severance pay                         |  |                             | 18,733
| | Less
  - amounts funded                         |  |                             | 12,758
| |                                                 |  |                             |       
| |                                                 |  |                             |       
| |                                                 |  |                             | 5,975 
| | Provision
  in respect of unutilized sick leave |  |                             | 17,691
| |                                                 |  |                             |       
| |                                                 |  |                             |       
| |                                                 |  |                             | 23,666
| |                                                 |  |                             |       

| | d. | Severance
  pay expense in the years ended December 31, 2001, 2002 and 2003 amounted to
  NIS 54 million, NIS 48 million and NIS 56 million, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

F-26

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 15:- | CONTINGENT LIABILITIES AND COMMITMENTS
|--------- | --------------------------------------
|          |                                       
|          | a.                                    
|          |                                       
|          |                                       
|          |                                       
|          |                                       
|          |                                       
|          |                                       
|          |                                       
|          |                                       
|          |                                       
|          |                                       
|          |                                       
|          |                                       
|          |                                       
|          |                                       

F-27

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 15:- | CONTINGENT LIABILITIES AND COMMITMENTS (Cont.)
|--------- | ----------------------------------------------
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               

F-28

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 15:- | CONTINGENT LIABILITIES AND COMMITMENTS (Cont.)
|--------- | ----------------------------------------------
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               

F-29

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 15:- | CONTINGENT LIABILITIES AND COMMITMENTS (Cont.)
|--------- | ----------------------------------------------
|          |                                               
|          |                                               
|          |                                               
|          | b.                                            
|          |                                               
|          |                                               
|          |                                               
|          |                                               

| |                             |  | Adjusted
  NIS
  in thousands |        
| | --------------------------- |  | ----------------------------- | -------
| |                             |  |                               |        
| |                             |  |                               |        
| | First
  year                |  |                               | 104,591
| | Second
  year               |  |                               | 99,953 
| | Third
  year                |  |                               | 94,830 
| | Fourth
  year               |  |                               | 88,866 
| | Fifth
  year                |  |                               | 75,289 
| | Sixth
  year and thereafter |  |                               | 332,605
| |                             |  |                               |        
| |                             |  |                               |        
| |                             |  |                               | 796,134
| |                             |  |                               |        

| |  | 2. | On
  October 1, 2001, the Law for Deposits on Beverage Containers, 1999, became
  effective. The Company and other supermarket chains have entered into an
  agreement with producers and importers of beverages to establish a recycling
  entity whose purpose is to set up and operate a mechanism to implement the
  provisions of the Law regarding refunds of deposits, collection of beverage
  containers and their recycling. The Company has provided a guarantee for the
  benefit of the recycling entity in the amount of NIS 333,000.
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |    | In
  January 2003, the Company disassociated from the Company for Drink Containers
  Collection Corporation Ltd. after giving notification of its decision to
  disassociate from the corporation.                                                                                                                                                                                                                                                                                                                                                 
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | 3. | As of
  December 31, 2003, the Company has entered into agreements for the purchase
  of real estate and equipment, in the aggregate amount of approximately NIS 49
  million.                                                                                                                                                                                                                                                                                                                                                                     

F-30

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 15:- | CONTINGENT LIABILITIES AND COMMITMENTS (Cont.)
|--------- | ----------------------------------------------
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          | c.                                            
|          |                                               
|          | d.                                            
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|NOTE 16:- | SHARE CAPITAL                                 
|          |                                               
|          | a.                                            
|          |                                               
|          |                                               
|          |                                               
|          |                                               

F-31

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 16:- | SHARE CAPITAL (Cont.)
|--------- | ---------------------
|          |                      
|          | b.                   
|          |                      
|          |                      
|          |                      
|          |                      
|          |                      
|NOTE 17:- | FINANCIAL INSTRUMENTS
|          |                      
|          | a.                   
|          |                      
|          |                      
|          |                      
|          |                      
|          |                      
|          | b.                   
|          |                      
|          |                      
|          |                      
|          | c.                   
|          |                      
|          |                      
|          |                      
|          | d.                   
|          |                      
|          |                      

F-32

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 18:- | SUPPLEMENTAL INFORMATION TO STATEMENTS OF OPERATIONS
|--------- | ----------------------------------------------------
|          |                                                     
|          | a.                                                  

| |                        |  | Year ended
  December 31,   |       
| | ---------------------- |  | --------------------------- | ------
| |                        |  |                             |       
| |                        |  | 2001                        |       
| |                        |  |                             |       
| |                        |  | Adjusted
  NIS in thousands |       
| |                        |  |                             |       
| |                        |  |                             |       
| | Includes
  advertising |  |                             | 43,246
| |                        |  |                             |       

| | b. | Financial income
  (expenses), net:  *)
| | -- | ---------------------------------------

| | In
  respect of:                                                                         |  |  |         |   |  |         |   |  |         |  
| | ---------------------------------------------------------------------------------------- |  |  | ------- | - |  | ------- | - |  | ------- | -
| | Long-term
  loans and debentures                                                         |  |  | (22,275 | ) |  | (14,965 | ) |  | (47,217 | )
| | Short-term
  loans, net                                                                  |  |  | (5,261  | ) |  | (1,405  | ) |  | (3,710  | )
| | Increase
  in value of marketable securities
       and short-term deposits, net         |  |  | 9,087   |   |  | 12,766  |   |  | 14,082  |  
| | Purchasing
  power gain (loss) in respect of
       other monetary items and others, net |  |  | 5,340   |   |  | 19,504  |   |  | (11,968 | )
| |                                                                                          |  |  |         |   |  |         |   |  |         |  
| |                                                                                          |  |  |         |   |  |         |   |  |         |  
| |                                                                                          |  |  | (13,109 | ) |  | 15,900  |   |  | (48,813 | )
| |                                                                                          |  |  |         |   |  |         |   |  |         |  
| | *)     Net
  of capitalization of borrowing costs
              capitalized              |  |  | 8,013   |   |  | 3,925   |   |  | 1,956   |  
| |                                                                                          |  |  |         |   |  |         |   |  |         |  

| | c. | Other
  expenses, net:
| | -- | ----------------------

| |                                                                                  |  | Year ended December 31,   |        
| | -------------------------------------------------------------------------------- |  | ------------------------- | -------
| |                                                                                  |  |                           |        
| |                                                                                  |  | 2001                      |        
| |                                                                                  |  |                           |        
| |                                                                                  |  | Adjusted NIS in thousands |        
| |                                                                                  |  |                           |        
| |                                                                                  |  |                           |        
| | Compensation and employee benefits (4)                                           |  |                           | -      
| | Termination benefits in respect of efficiency
       plan (3)                    |  |                           | -      
| | Capital gain from sale of investments in
       investees (1)                    |  |                           | 2,828  
| | Gain from sale of fixed assets, net                                              |  |                           | 1,201  
| | Impairment of fixed assets and goodwill (2)(3)                                   |  |                           | (5,179 
| | Costs in respect of closure of stores (lease
       termination costs and other) |  |                           | (17,002
| | Employee rights in respect of prior years (see
       Note 15a(6))               |  |                           | -      
| | Other, net                                                                       |  |                           | -      
| |                                                                                  |  |                           |        
| |                                                                                  |  |                           |        
| |                                                                                  |  |                           | (18,152
| |                                                                                  |  |                           |        

| |  | (1) | In
  December 2001, the Company sold its holdings (50%) in Regba Properties Ltd. and
  Regba Streets Ltd. (to a third party) which were previously consolidated by
  the proportionate consolidation method and which were engaged in the
  construction of a commercial center.
| |  | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |     |                                                                                                                                                                                                                                                                                 
| |  |     | The proceeds from the sale amounted to approximately
  NIS 30 million and the gain (before income taxes) amounted to approximately
  NIS 2.9 million. The proceeds from the sale were received in 2002.                                                                         
| |  |     |                                                                                                                                                                                                                                                                                 
| |  | (2) | 2002
  and 2003 - mainly impairment losses in respect of fixed assets, see Note 7b.                                                                                                                                                                                             

F-33

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 18:- | SUPPLEMENTAL INFORMATION TO STATEMENTS OF OPERATIONS (Cont.)
|--------- | ------------------------------------------------------------
|          |                                                             
|          |                                                             
|          |                                                             
|          |                                                             
|          |                                                             
|          |                                                             
|          |                                                             
|NOTE 19:- | TRANSACTIONS WITH RELATED PARTIES                           
|          |                                                             
|          | a.                                                          

| |                      |  | Year ended
  December 31,   |      
| | -------------------- |  | --------------------------- | -----
| |                      |  |                             |      
| |                      |  | 2001                        |      
| |                      |  |                             |      
| |                      |  | Adjusted
  NIS in thousands |      
| |                      |  |                             |      
| |                      |  |                             |      
| | Financial
  expenses |  |                             | 661  
| |                      |  |                             |      
| |                      |  |                             |      
| | Rent
  expense       |  |                             | 1,536
| |                      |  |                             |      
| |                      |  |                             |      
| | Management
  fees    |  |                             | 3,387
| |                      |  |                             |      

| | b. | In 2002, the
  Company assumed the liability of a former related party in connection with a
  previously joint club award program of the company and the former related party.
  In consideration for the assumption of the liability, the Company received
  NIS 5 million from the former related party.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-34

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 19:- | TRANSACTIONS WITH RELATED PARTIES (Cont.)
|--------- | -----------------------------------------
|          |                                          
|          | c.                                       

| |                             |  | Year ended
  December 31,   |  
| | --------------------------- |  | --------------------------- | -
| |                             |  |                             |  
| |                             |  | 2001                        |  
| |                             |  |                             |  
| |                             |  | Adjusted
  NIS in thousands |  
| |                             |  |                             |  
| |                             |  |                             |  
| | Management
  fees           |  |                             | -
| | Directors
  fees           |  |                             | -
| | Legal
  consulting          |  |                             | -
| | Purchase
  of merchandise   |  |                             | -
| | Purchase
  of fuel products |  |                             | -

|          |       | *)                                                                                                                                                                                                                                                                                                                                                                                                        | Represents
  payments to Bronfman  Alon in respect of directors fees for two directors
  of the Company and its subsidiary, in accordance with an agreement providing
  that each of the directors are entitled to monthly remuneration in the amount
  of NIS 42 thousand.
|--------- | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |       |                                                                                                                                                                                                                                                                                                                                                                                                          
|          | d.    | The Company
  and its subsidiary signed agreements to purchase from related parties fuel
  products and merchandise at market prices. Also, the companies entered into
  agreements according to which related parties will operate fast food services
  in their stores in consideration for a percentage of revenues described in
  the agreements.                                                    
|          |       |                                                                                                                                                                                                                                                                                                                                                                                                          
|          | e.    | In January
  2004 the shareholders of the Company approved an agreement according to which
  the Company will provide to a related party purchasing and supply services
  for stores operated by the related party. In consideration for these
  services, the Company is entitled to payment equivalent to the cost of the
  services provided with the addition of a margin as stated in the agreement.
|          |      
|NOTE 20:- | LIENS
|          |       |                                                                                                                                                                                                                                                                                                                                                                                                          
|          | a.    | As
  collateral for liabilities to banks, subsidiaries have registered fixed and
  floating charges on all of their current assets, fixed assets, goodwill,
  rights to insurance, receivables from credit companies and share capital. As
  of December 31, 2003, the balance of liabilities collateralized amounts to
  NIS 20.2 million.                                                              
|          |       |                                                                                                                                                                                                                                                                                                                                                                                                          
|          | b.    | To secure
  liabilities of a subsidiary in respect of benefits received in the framework
  of investments in its Approved Enterprise, the subsidiary recorded fixed
  charges on the machinery, equipment and insurance rights in favor of the
  State of Israel (total investment grants received amount to approximately NIS
  2.3 million).                                                           
|          |       |                                                                                                                                                                                                                                                                                                                                                                                                          
|          | c.    | Regarding
  financial covenants in respect of debentures - see Note 12b.                                                                                                                                                                                                                                                                                                                                 

F-35

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 21:- | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI GAAP AND U.S. GAAP
|--------- | -----------------------------------------------------------------------------------------------
|          |                                                                                                
|          | a.                                                                                             
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                
|          |                                                                                                

F-36

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 21:- | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        

F-37

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 21:- | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        

F-38

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 21:- | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        

F-39

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 21:- | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        
|          |                                                                                                        

F-40

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 21:- | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------
|          |                                                                                                        
|          | b.                                                                                                     
|          |                                                                                                        
|          |                                                                                                        

| |                                                                                                                 |  | Year ended
  December 31,                                       |           
| | --------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------- | ----------
| |                                                                                                                 |  |                                                                 |           
| |                                                                                                                 |  | 2001                                                            |           
| |                                                                                                                 |  |                                                                 |           
| |                                                                                                                 |  | Adjusted
  NIS in thousands
  (except share and per share data) |           
| |                                                                                                                 |  |                                                                 |           
| | Net
  income (loss) as reported,
       according to Israeli GAAP                                               |  |                                                                 | 150,812   
| | Amortization
  of goodwill                                                                                      |  |                                                                 | -         
| | Interest
  expense in respect of
       convertible debentures                                                  |  |                                                                 | -         
| | Impairment
  of long-lived assets, net
       of taxes                                                          |  |                                                                 | -         
| | Deferred
  taxes on income                                                                                      |  |                                                                 | 592       
| | Minority
  interest in respect of the
       above                                                              |  |                                                                 | (11       
| |                                                                                                                 |  |                                                                 |           
| | Net
  income (loss) according to U.S.
       GAAP                                                               |  |                                                                 | 151,393   
| |                                                                                                                 |  |                                                                 |           
| | Net
  income (loss) per share as
       reported, according to Israeli GAAP
       (primary and fully diluted): |  |                                                                 |           
| |                                                                                                                 |  |                                                                 |           
| | Net
  income (loss) per share                                                                                   |  |                                                                 | 3.93      
| |                                                                                                                 |  |                                                                 |           
| |                                                                                                                 |  |                                                                 |           
| | Per
  U.S. GAAP:                                                                                                |  |                                                                 |           
| |                                                                                                                 |  |                                                                 |           
| | Basic
  and diluted earnings (loss) per
       share                                                            |  |                                                                 | 3.94      
| |                                                                                                                 |  |                                                                 |           
| | Weighted
  average number of shares
       or ADS outstanding (basic and
       diluted)                        |  |                                                                 | 38,400,000
| |                                                                                                                 |  |                                                                 |           

| |  |  | *) | Includes:
| |  |  | -- | ---------
| |  |  |    |          
| |  |  |    | 1.       
| |  |  |    |          
| |  |  |    | 2.       
| |  |  |    |          
| |  |  |    | 3.       

F-41

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 21:- | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------
|          |                                                                                                        
|          |                                                                                                        

| |                                                            |  | December
  31, 2002         |            | December
  31, 2003 | 
| | ---------------------------------------------------------- |  | --------------------------- | ---------- | ------------------- | 
| |                                                            |  |                             |            |                     | 
| |                                                            |  | As
  reported               |            | Adjustment          | 
| |                                                            |  |                             |            |                     | 
| |                                                            |  | Adjusted
  NIS in thousands |           
| |                                                            |  |                             |           
| |                                                            |  |                             |            |                     | 
| | Severance
  pay fund (6)                                   |  |                             | -          |                     | 
| | Fixed
  assets, net (5)                                    |  |                             | (2,167,494 | )                   | 
| | Intangible
  assets and
       deferred charges (4)        |  |                             | (104,136   | )                   | 
| | Deferred
  taxes, net (1)                                  |  |                             | (20,624    | )                   | 
| | Accrued
  severance pay (6)                                |  |                             | 23,666     |                     | 
| | Convertible
  debentures (7)                               |  |                             | -          |                     | 
| | Minority
  interest (3)                                    |  |                             | 152,095    |                     | 
| | Additional paid-in capital (2)                             |  |                             | 741,008    |                     | 
| | Retained
  earnings (3)                                    |  |                             |            |                     | 
| | Dividend
  declared after
            balance sheet
  date |  |                             | -          |                     | 
| | Unappropriated                                             |  |                             | 546,287    |                     | 
| | Total
  shareholders equity                               |  |                             | 1,339,416  |                     | 

| |  | (1) | Effect of
  difference described in a(2) above and tax effect of difference described in
  a(6) above.                                                                                                                       
| |  | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |     |                                                                                                                                                                                                                              
| |  | (2) | Options
  issued to employees (see a(3) above), difference in capital gain, net of tax,
  from transactions with the previous parent cooperative, and difference in
  respect of convertible debentures (see a(13)(2) above).
| |  |     |                                                                                                                                                                                                                              
| |  | (3) | Net effect
  of reconciling items.                                                                                                                                                                                           
| |  |     |                                                                                                                                                                                                                              
| |  | (4) | As for
  amortization of goodwill, see a(5) above.                                                                                                                                                                           
| |  |     |                                                                                                                                                                                                                              
| |  | (5) | As for the
  effect of Standard No. 15, see a(6) above.                                                                                                                                                                      
| |  |     |                                                                                                                                                                                                                              
| |  | (6) | See a(10)
  above.                                                                                                                                                                                                           
| |  |     |                                                                                                                                                                                                                              
| |  | (7) | See a(13)(2)
  above.                                                                                                                                                                                                        

F-42

---

---

|BLUE SQUARE -
  ISRAEL LTD.               
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

|NOTE 21:- | EFFECT ON THE FINANCIAL STATEMENTS OF MATERIAL DIFFERENCES BETWEEN
  ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------
|          |                                                                                                        
|          |                                                                                                        

| |                                         |  | Year ended
  December 31,   |         
| | --------------------------------------- |  | --------------------------- | --------
| |                                         |  |                             |         
| |                                         |  | 2001                        |         
| |                                         |  |                             |         
| |                                         |  | Adjusted
  NIS in thousands |         
| |                                         |  |                             |         
| | Cash
  flows from operating activities: |  |                             |         
| |                                         |  |                             |         
| | As
  per Israeli GAAP                   |  |                             | 321,551 
| | Adjustment
  (1)                        |  |                             | 37,917  
| |                                         |  |                             |         
| |                                         |  |                             |         
| | As
  per U.S. GAAP                      |  |                             | 359,468 
| |                                         |  |                             |         
| |                                         |  |                             |         
| | Cash
  flows from investing activities: |  |                             |         
| |                                         |  |                             |         
| | As
  per Israeli GAAP                   |  |                             | (234,597
| | Adjustment
  (1)                        |  |                             | (37,917 
| |                                         |  |                             |         
| |                                         |  |                             |         
| | As
  per U.S. GAAP                      |  |                             | (272,514
| |                                         |  |                             |         

| | (1)     See
  a(11) above.
| | --------------------------

F-43

---

---

|BLUE SQUARE -
  ISRAEL LTD.         
|------------------------------------
|APPENDIX TO THE FINANCIAL STATEMENTS
|                                    

SCHEDULE OF PRINCIPAL INVESTEE COMPANIES

|Holding
  Company                                          |  | Name of
  Company                        |  | Percentage
  of
  ownership and control
  by holding company as
  of December 31,
  2003 |  |                               
|---------------------------------------------------------- |  | ---------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------------------------------
|                                                           |  |                                          |  |                                                                                          |  |                               
|                                                           |  |                                          |  |                                                                                          |  |                               
|Blue Square-Israel Ltd.                                    |  | The Blue Square Chain                    |  |                                                                                          |  |                               
|                                                           |  | Investments & Properties Ltd.            |  | 80.7%                                                                                    |  | Subsidiary                    
|                                                           |  |                                          |  |                                                                                          |  |                               
|                                                           |  | Kenyon Hadar Management                  |  |                                                                                          |  | Proportionately               
|                                                           |  | Company Ltd.                             |  | 50%                                                                                      |  | consolidated                  
|                                                           |  |                                          |  |                                                                                          |  |                               
|The Blue Square Chain
       Investments & Properties Ltd. |  | The Blue Square Chain (Hyper Hyper) Ltd. |  | 100%                                                                                     |  | Subsidiary                    
|                                                           |  |                                          |  |                                                                                          |  |                               
|                                                           |  | Teco Ltd.                                |  | 50%                                                                                      |  | Proportionately
  consolidated
|                                                           |  |                                          |  |                                                                                          |  |                               
|                                                           |  | Center Investments 1108 Ltd.             |  | 50%                                                                                      |  | Proportionately
  consolidated
|                                                           |  |                                          |  |                                                                                          |  |                               
|                                                           |  | Izdarehet Investments Company Ltd.       |  | 50%                                                                                      |  | Proportionately
  consolidated
|                                                           |  |                                          |  |                                                                                          |  |                               
|The Blue Square Chain (Hyper Hyper)  Ltd.                  |  | Hyper Lod Center Ltd.                    |  | 100%                                                                                     |  | Subsidiary                    
|                                                           |  |                                          |  |                                                                                          |  |                               
|                                                           |  | Kenyon Malha Jerusalem Partnership       |  | 100%                                                                                     |  | Subsidiary                    
|                                                           |  |                                          |  |                                                                                          |  |                               
|                                                           |  | Shefa Mehadrin Ltd.                      |  | 100%                                                                                     |  | Subsidiary                    
|                                                           |  |                                          |  |                                                                                          |  |                               
|                                                           |  | Radio Non-Stop Ltd.                      |  | 35.9%                                                                                    |  | Associated company            

-
- - - - - - - - - - - - - - - - - - - - - - -

F-44

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