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

FORM 20-F

|(Mark One)
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Commission
file number 1-14426

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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:

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Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:

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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.

xYesoNo

Indicate by check mark which financial statement item the registrant has elected to follow.

xItem 17oItem 18

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INTRODUCTION

Unless otherwise
indicated, as used in this annual report, (a) the term Blue Square or
the Company means Blue Square-Israel Ltd., and (b) the terms we, us
and our, mean Blue Square and its consolidated subsidiaries.

We are a leading
food retailer in the State of Israel. 
Through our supermarkets, we offer a wide range of consumer products,
including food and beverages and also apparel, housewares and cosmetics.  As of December 31, 2002, we owned and
operated 173 supermarkets under the brand names Mega, Super Center, Super
Center City, Co-Op, Shefa Mehadrin and King Center. Blue Square was
incorporated in June 1988.  In
1996, Blue Square completed its initial public offering and its American
Depositary Shares, or 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.

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, 2002, which was NIS 4.737 per $1.00, except figures for the
first quarter of 2003, which are based on the representative exchange rate
between the NIS and the dollar as published by the Bank of Israel for March 31,
2003, which was NIS 4.687 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, or 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                                                    | 11  
|         | ITEM 5.  | OPERATING
  AND FINANCIAL REVIEW AND 
  PROSPECTS                               | 28  
|         | ITEM 6.  | DIRECTORS,
  SENIOR MANAGEMENT AND EMPLOYEES                                    | 42  
|         | ITEM 7.  | MAJOR
  SHAREHOLDERS AND RELATED PARTY 
  TRANSACTIONS                          | 62  
|         | ITEM 8.  | FINANCIAL
  INFORMATION                                                         | 67  
|         | ITEM 9.  | THE OFFER
  AND LISTING                                                         | 70  
|         | ITEM 10. | ADDITIONAL
  INFORMATION                                                        | 73  
|         | ITEM 11. | QUANTITATIVE
  AND QUALITATIVE DISCLOSURES 
  ABOUT MARKET RISK                 | 98  
|         | ITEM 12. | DESCRIPTION
  OF SECURITIES OTHER THAN EQUITY 
  SECURITIES                     | 99  
|PART II  | 100     
|         | ITEM 13. | DEFAULTS,
DIVIDEND ARREARAGES AND 
DELINQUENCIES                                | 100 
|         | ITEM 14. | MATERIAL
MODIFICATIONS TO THE RIGHTS OF 
SECURITY HOLDERS AND USE OF PROCEDURES | 100 
|         | ITEM 15. | CONTROLS AND
PROCEDURES                                                         | 100 
|         | ITEM 16. | [RESERVED]                                                                      | 101 
|PART III | 102     
|         | ITEM 17. | FINANCIAL
STATEMENTS                                                            | 102 
|         | ITEM 18. | FINANCIAL
STATEMENTS                                                            | 102 
|         | ITEM 19. | EXHIBITS                                                                        | 102 
|         |          |                                                                                 |     

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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, 2001 and 2002 and for each of the years ended
December 31, 2000, 2001 and 2002 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, 1998, 1999, and 2000 and for each of the
years ended December 31, 1998, and 1999 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 22 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. The selected consolidated financial
data present our operating results after giving effect to the sale by our
subsidiary, The Blue Square Chain Investments & Properties Ltd., or BSIP,
of all of its holdings in Hamashbir Lazarchan Israel Ltd., or Hamashbir, to our
controlling shareholder, the Co-Op Blue Square Services Society Ltd., or the
Co-Op, as if it had occurred at the beginning of the earliest period presented
below.  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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|                                                                    |  | 1998                                                  |           | 1999      |  | 2000 |           | 2001 |  | 2002 |           | 2002 | 
|------------------------------------------------------------------- |  | ----------------------------------------------------- | --------- | --------- |  | ---- | --------- | ---- |  | ---- | --------- | ---- | 
|                                                                    |  |                                                       |           |           |  |      |           |      |  |      |           |      | 
|                                                                    |  | Adjusted NIS                                          |           | into $(1) | 
|                                                                    |  |                                                       |           |           | 
|                                                                    |  | (In thousands, except per ordinary share or ADS data)
|Income
  Data                                                       |  |                                                       |           |           |  |      |           |      |  |      |           |      | 
|Sales                                                               |  |                                                       | 5,047,168 |           |  |      | 5,323,696 |      |  |      | 5,614,807 |      | 
|Cost of sales                                                       |  |                                                       | 3,703,612 |           |  |      | 3,914,046 |      |  |      | 4,053,004 |      | 
|Gross profit                                                        |  |                                                       | 1,343,556 |           |  |      | 1,409,650 |      |  |      | 1,561,803 |      | 
|Selling, general and
  administrative
  expenses                    |  |                                                       | 1,062,893 |           |  |      | 1,170,990 |      |  |      | 1,268,857 |      | 
|Operating income                                                    |  |                                                       | 280,663   |           |  |      | 238,660   |      |  |      | 292,946   |      | 
|Financial income
  (expenses), net                                  |  |                                                       | 28,822    |           |  |      | (28,787   | )    |  |      | (45,077   | )    | 
|Amortization of goodwill                                            |  |                                                       | 3,736     |           |  |      | 6,264     |      |  |      | 6,067     |      | 
|Other income (expenses),
  net                                      |  |                                                       | (2,304    | )         |  |      | (7,672    | )    |  |      | 20,670    |      | 
|Taxes on income                                                     |  |                                                       | 115,982   |           |  |      | 76,871    |      |  |      | 97,714    |      | 
|Equity in net earnings (losses)
  of 
  affiliates                  |  |                                                       | 1,870     |           |  |      | 640       |      |  |      | 1,410     |      | 
|Minority interest                                                   |  |                                                       | 30,305    |           |  |      | 21,780    |      |  |      | 23,753    |      | 
|Losses from discontinued
  operation                                |  |                                                       | 21,059    |           |  |      | 10,421    |      |  |      | 2,700     |      | 
|Net income                                                          |  |                                                       | 137,969   |           |  |      | 87,505    |      |  |      | 139,715   |      | 
|Earnings per ordinary share
  or ADS 
  from continuing Operations  |  |                                                       | 4.28      |           |  |      | 2.55      |      |  |      | 3.71      |      | 
|Losses per ordinary share
  or ADS 
  from discontinued Operations  |  |                                                       | (0.55     | )         |  |      | (0.27     | )    |  |      | (0.07     | )    | 
|Earnings per ordinary share
  or ADS                                |  |                                                       | 3.73      |           |  |      | 2.28      |      |  |      | 3.64      |      | 
|Cash dividends per ordinary
  share
  or ADS                        |  |                                                       | 1.04      |           |  |      | 1.00      |      |  |      | 1.10      |      | 
|U.S. GAAP:                                                          |  |                                                       |           |           |  |      |           |      |  |      |           |      | 
|Net income                                                          |  |                                                       | 138,004   |           |  |      | 80,958    |      |  |      | 136,358   |      | 
|Earnings per
  ordinary share or ADS
    from continuing operation  |  |                                                       | 4.31      |           |  |      | 2.43      |      |  |      | 3.72      |      | 
|Losses
  per ordinary share or ADS
    from discontinued operations |  |                                                       | (0.58     | )         |  |      | (0.28     | )    |  |      | (0.17     | )    | 
|Earnings per
  ordinary share or ADS                                |  |                                                       | 3.73      |           |  |      | 2.15      |      |  |      | 3.55      |      | 
|Cash dividends per ordinary
  share 
  or ADS                       |  |                                                       | 1.04      |           |  |      | 1.00      |      |  |      | 1.10      |      | 
|Selected
  Operating Data:                                          |  |                                                       |           |           |  |      |           |      |  |      |           |      | 
|Total sales (NIS million)                                           |  |                                                       | 5,047     |           |  |      | 5,324     |      |  |      | 5,615     |      | 
|Number of stores (at year
  end)                                    |  |                                                       | 158       |           |  |      | 165       |      |  |      | 168       |      | 
|Decrease in same 
  store sales                                     |  |                                                       | 3.9       | %         |  |      | 3.4       | %    |  |      | 4.4       | %    | 
|Total square meters (at
  year end)                                 |  |                                                       | 218,200   |           |  |      | 239,000   |      |  |      | 258,000   |      | 
|Sales per square meter
  (NIS)(2)                                   |  |                                                       | 24,547    |           |  |      | 23,511    |      |  |      | 22,519    |      | 
|Sales per employee
  (thousands)                                    |  |                                                       | 743       |           |  |      | 733       |      |  |      | 757       |      | 
|                                                                    |  |                                                       |           |           |  |      |           |      |  |      |           |      | 

|   
|---
|(1)
|   
|(2)

2

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|                    |                                            | December 31,                | 
|------------------- | ------------------------------------------ | --------------------------- | 
|                    |                                            |                             | 
|                    |                                            | 1998                        | 
|                    |                                            |                             | 
|                    |                                            | Adjusted NIS (in thousands) | 
|                    |                                            |                             | 
|Balance Sheet Data: |                                            |                             | 
|Israeli
  GAAP:     |                                            |                             | 
|                    | Working capital deficit                    |                             | 
|                    | Total assets                               |                             | 
|                    | Short-term credit from 
  banks and others |                             | 
|                    | Long-term debt                             |                             | 
|                    | Shareholders equity                       |                             | 
|U.S. GAAP:          |                                            |                             | 
|                    | Total assets                               |                             | 
|                    | Shareholders equity                       |                             | 

|   
|---
|(1)

|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, our business will be materially adversely affected.

The food
retailing industry in Israel is highly competitive and is characterized by high
inventory turnover and narrow profit 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.

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The year 2002
increased competitive pressures on us. 
Israels economic and security environment worsened during the year,
resulting in 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
launched their own hard discount store formats to compete with our stores. In
addition, recognizing the growing
opportunity as the low-end of the market as a result of the recession, a new
class of very low-priced private supermarkets emerged in selected areas, increasing
competition in an already difficult market. 
Some of them, by operating on Saturdays and offering non-kosher food,
were able to capture a significant part of the sale from the major chains in
their areas. 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 these developments, and our
policy to close underperforming stores, we closed 8 underperforming stores in
2002 and an additional 11 stores from January 1, 2003 until June 15, 2003.  In addition, we estimate that our market
share dropped from approximately 33% of the Israeli supermarket chain market
during 2001 to approximately 30% during 2002. Our sales dropped from approximately
NIS 5,939 million, or $1,253.7 million, in 2001 to approximately NIS 5,548
million, or $1,171.2 million, in 2002.

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

We have a history of quarterly fluctuations
in our operating results and expect these fluctuations to continue.  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.

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 2002, Tnuvas products accounted for
approximately 15% of all the products
sold at our supermarkets.  In addition,
Strauss and Elite, two Israeli food manufacturers under common control,
accounted in 2002 for approximately 10% of all products sold at our
supermarkets, and the Osem group accounted for approximately 7% of all products
sold at our supermarkets in 2002. 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, Strauss, 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, Strauss, Elite or Osem regarding these supply
arrangements.  The ten largest suppliers
accounted for approximately 50% of our product purchases in 2002.  We cannot assure you that, in the future,
Tnuva, Strauss, 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.

The Co-Op or any successor to its
shareholdings is able to control the outcome of matters requiring shareholder
approval.

The Co-Op
currently owns approximately 78.1% of Blue Squares ordinary shares.  So long as the Co-Op, or any successor to
its shareholdings in Blue Square, continues to own beneficially more than 50%
of Blue Squares outstanding ordinary shares and voting power, it will be able
to control the outcome of matters requiring shareholder approval, including the
election of all of Blue Squares directors, other than Blue Squares two
external directors whose election 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
vote against their nomination.

On April 10, 2003
the District Court of Tel Aviv declared Bronfman-Alon Ltd. as the winning bid
of the tender for the sale of all of the holdings of the Co-Op in Blue Square.  The sale agreement and its execution has
been approved by the General Director of Israelis Antitrust Authority, and is
expected to be completed shortly. See Item 4. 
Information on the CompanyContemplated Change in Control for more
information regarding the contemplated sale of all of the shares of Blue Square
held by the Co-Op to Bronfman-Alon Ltd.

5

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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 our supermarkets, including those that Blue Square  owns directly and those that are owned by
Blue Squares partially owned subsidiaries. 
We operate directly 113 supermarkets; the balance of our operations is
owned by Blue Squares 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 2002 and the
three months ended March 31, 2003 aggregated approximately NIS 3,653
million, or $771.2 million and approximately NIS 832 million, or $175.6
million, respectively, representing approximately 65.8% of our consolidated
sales and 67.8% of our consolidated sales, respectively, for each of these
periods.  At December 31, 2002 and
March 31, 2003, the total consolidated assets of BSIP and its subsidiaries
aggregated approximately NIS 1.4 billion, or $295.5 million and NIS 1.4
billion, or $299 million, respectively, constituting approximately 42.4% and
41.5%, respectively, of our total consolidated assets at these dates.

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 loan by, Blue Square to a subsidiary,
require the approval of the corporate 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.  Some of these permits were issued in the
name of the Co-Op and entities other than us, and have not yet been transferred
or re-issued to us.  See Item 4.  Information on the CompanyContemplated
Change in Control for information regarding the contemplated sale of all of
the shares of Blue Square held by the Co-Op to Bronfman-Alon Ltd.  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.

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 then average
wage for an employee in Israel. The minimum monthly wage from April 2001 until
January 2003 was NIS 3,266, or $689, and the minimum monthly wage since January
2003 has been NIS 3,335, or $704.  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 and military conditions in Israel;                                                                                                                                                                                                                  
|  |  |                                                                                                                                                                                                                                                                               
| |  | additions or
  departures of key personnel; and                                                                                                                                                                                                                               
|  |  |                                                                                                                                                                                                                                                                               
| |  | sales of
  ordinary shares by Blue Squares controlling shareholder.  See Item 4.  Information on the CompanyContemplated Change in Control for
  information regarding the contemplated sale of all of the shares of Blue
  Square held by the Co-Op to Bronfman-Alon Ltd.

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.

7

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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.

The contemplated removal of the shares of Blue Square
and BSIP from the TASE 25 Index could materially adversely affect the volume
and market price of the Blue Square and BSIP shares

The shares of
Blue Square and of BSIP are currently included on the Tel Aviv Stock Exchange
25 Index, which represents the 25 shares traded on the Tel Aviv Stock Exchange
(TASE) with the largest market value (subject to a minimum volume
requirement).  We have been informed
that commencing from the beginning of July 2003, due to the decrease of the
market price in Blue Square shares and BSIP shares, the shares of Blue Square
and BSIP will be removed from the TASE 25 Index, but  will remain on the TASE 75 Index and on the TASE 100 Index.  The removal from the TASE 25 Index could
have a material adverse effect on the volume and market price of the shares of
Blue Square and BSIP due to the fact that certain institutional and other
investors will invest on the TASE only or partially in shares traded on the
TASE 25 Index.

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 Israeli Antitrust
Authority may not approve future expansions of Blue Squares market presence on
the grounds that it violates anti-trust law in Israel.

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
may materially affect our operating results. 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.

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 SuperSol, 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 document
of direction is open for comment for a period of 45 days from the date from its
publication. We are currently examining the impact of the document of direction
on our business.

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

Our profit margin would be adversely affected
if our ability to utilize our sole 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 24% of our total
percentage sales during 2002.  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.

Risks Relating to Our Location 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 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.

9

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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.

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 2000, Israels Gross Domestic Product rose by 7.4%, while during 2001
and 2002 it declined by 0.9% and 1%, respectively. The economic slowdown during
2001 and 2002 adversely affected our financial performance.  We cannot be sure if and for how long the
Israeli economy will continue in its slowdown and what affect this will have on
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.

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It may be difficult to enforce a U.S.
judgment against us and 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.  All of our
executive officers and directors are nonresidents of the United States, and
substantially all of our assets
and 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
persons 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 the Company.
|-- |  | -----------------------------------------

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 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, real property, rights to the trade names Co-Op and
Co-Op Blue Square and certain other trade names and trademarks.  We assumed all the rights and obligations
with respect to the transferred assets as of January 1, 1996 and agreed to
indemnify the Co-Op for any obligations with respect to these transferred
assets arising after that date.  The
Co-Op retained obligations with respect to the transferred assets through
December 31, 1995 and agreed to indemnify us for any obligations
(including taxes) arising prior to January 1, 1996.

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.

Capital Expenditures

A key component
of our business strategy is the establishment of new stores, the remodeling of
existing stores and the improvement of our distribution facilities.  During the three months ended March 31,
2003, we invested NIS 33.1 million, or $7.1 million in fixed and other assets.
In 2002, we invested NIS 248 million, or $52.4 million in fixed and other
assets, a 15.1% decrease from our 2001 investment of NIS 292 million,
or $61.6 million. This decrease is primarily attributable to our strategy of
leasing store sites with an option to renew the lease, rather than to purchase
store sites. Of our fixed asset investment in 2002, we invested
NIS 112 million, or $23.6 million in land, leaseholds and buildings,
as compared with NIS 146 million, or $30.8 million in 2001.  In 2000, we invested NIS 316
million, or $66.7 million in fixed and other assets.  As of December 31, 2002, we had entered into agreements for
the purchase of real estate and equipment in an aggregate of NIS 105
million, or $22.2 million.

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We seek to lease
or, if deemed necessary, purchase land in commercial centers.  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 have made the
following investments and divested the following interests since 1998:

| |  | In 1998,
  Blue Square invested NIS 168 million, or $35.5 million in BSIP to increase
  its share in its controlled subsidiaries.                                                                                                                                                            
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                                                                                                                              
| |  | In 1998,
  BSIP sold to the Co-Op its interest in Hamashbir, which operates a department
  store chain in Israel, for NIS 202 million, $42.6 million.                                                                                                                                        
|  |  |                                                                                                                                                                                                                                                                                              
| |  | In 1999, we
  sold our holdings in I.D. Design stores, which sell Danish furniture and home
  furnishings.                                                                                                                                                                                   
|  |  |                                                                                                                                                                                                                                                                                              
| |  | In
  March 2000, Blue Square sold its holdings in Home Centers (Do It
  Yourself) Ltd., or Home Centers, which sell do-it-yourself products, for
  $24.7 million;                                                                                                                            
|  |  |                                                                                                                                                                                                                                                                                              
| |  | 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.
|  |  |                                                                                                                                                                                                                                                                                              
| |  | 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 30 million or $6.3 million.                                                           

Contemplated Change in Control

At a meeting of
the members of Co-Op held in May 2002, a majority of more than 99.9% of the
members confirmed a proposed settlement providing for the sale of the assets of
the Co-Op, including approximately 78.1% of Blue Square Ordinary Shares. The
settlement was also approved by the audit committee of the Co-Op appointed by
the District Court of Tel Aviv and approved by the District Court of Tel Aviv.
In April 2003, following the submission of a number of bids for the holdings of
the Co-Op in Blue Square, Blue Square was informed that the highest bid,
submitted by Bronfman-Alon Ltd. (Bronfman-Alon), was 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.  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.  The sale agreement and its execution has
been approved by the Commissioner of the Israeli Antitrust Authority, and is
expected to be completed shortly.

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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 has agreed to 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, Bronfman-Alon has agreed that
(i) a goodwill grant will be made to members of management of Blue Square and
to employees of Blue Square and/or (ii) issuances of options to buy shares or
shares to members of management of Blue Square and to employees of Blue Square
concurrently with the issuance by Blue Square of shares to the public, in either
case as agreed upon with the Chief Executive Officer of Blue Square (in the
case of grants and/or issuances of options or shares to management) and with
representatives of the employees of Blue Square (in the case of grants and/or
issuances of options or shares to employees).  
Agreement on the foregoing grants and/or options or shares has not yet
been concluded among the relevant parties. 
Such good-will grant to members of management and employees of Blue
Square may be made by Blue Square and may be material in amount.  It is unclear at this time what effect such
grants and/or issuances will have on Blue Square and/or its shareholders.

In addition, as
part of the agreement between the Co-Op and Bronfman-Alon, Bronfman-Alon has agreed to
purchase, or 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 will 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 the Company 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 not to challenge letters of exemption and indemnification granted
to directors and officers of Blue Square since September 2000.

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Bronfman-Alon
is owned 50% by each of the following:

(i)          Alon
Israel Oil Company Ltd., an Israeli-based fuel company, which 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. (Africa
Israel), a public company traded on the Tel Aviv Stock Exchange, and 39% by
Bailsol Investments (1987) Ltd. (Bailsol). 
Mr. Lev Levayev is the controlling shareholder of Africa Israel.  David Wiessman and the Biran family are the
controlling shareholders of Bailsol.

(ii)
          Mr. Matthew Bronfman.

|B. |  | Business
  Overview.
|-- |  | --------------------

General

We are a leading
food retailer in the State of Israel. 
Through our supermarkets, we offer a wide range of consumer products,
including food and beverages and also apparel, housewares and cosmetics.  As of December 31, 2002, we owned and
operated 173 supermarkets under the brand names Mega, Super Center, Super
Center City, Co-Op,  Shefa Mehadrin and
King Center.  In addition, during 2003,
we began to operate supermarkets under the brand name Shefa Shuk, which are
small hard discount stores catering to Israels growing ultra-orthodox
population.

We are comprised
of Blue Square and its consolidated subsidiaries, the largest of which is
BSIP.  As of March 31, 2003, 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, in turn, owns all of the outstanding
shares of Blue Square Chain (Hyper Hyper). 
 BSIP and its direct and indirect subsidiaries are the owners of 59
of our supermarkets.  The consolidated
sales of BSIP and its subsidiaries in 2002 aggregated approximately 65.8% of
our consolidated sales for that period. 
As of March 31, 2003, the total consolidated assets of BSIP and its
subsidiaries aggregated approximately NIS 1.4 billion, or $299 million,
constituting approximately 41.5% of our total consolidated assets at that date.

The following
table sets forth the growth 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,
  1998 |  |  | 158           |  | 218,200                    | 
|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                    | 

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.

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In the Mega
chain stores, which are hard discount large stores, we offer special discount
prices to customers.  We believe this
marketing concept may have a significant influence on our business results. As
of December 31, 2002, we operated 17 Mega Stores, consisting of approximately
85,400 square meters space. These stores generated approximately  34% of our sales during 2002.

We operate a Buy
& Bonus frequent-buyer incentive program, which allows our customers to
earn free gifts.  We offer the Buy
& Bonus program in all of our 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 34 to 35
billion, or $7.2 to $7.4 billion in 2002. 
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: SuperSol,
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 begin to purchase supermarket goods at supermarkets rather than
smaller grocery stores and open-air markets. 
We estimate that approximately 51-52% of the total sales of supermarket
goods in Israel in 2002 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 34.6 billion during the year 2001. According to
this data, supermarket chains in Israel during 2001 accounted for
approximately 52%, or the NIS 17.9 billion, of the retail sales of food, drinks
and tobacco in Israel and our supermarkets accounted for approximately 31%, or
the NIS 5.6 billion, 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 2002 decreased to approximately 30%.

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See
- Our Operations for a description of our supermarket formats as of December
31,  2002.

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.

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:

| |  | maintaining
  a strong commitment to customer satisfaction;                                                        
|- |  | -------------------------------------------------------------------------------------------------------------------
| |  | opening
  additional store locations, improving and enlarging existing stores and
  closing underperforming stores;
| |  | improving
  commercial management;                                                                                 
| |  | increasing
  operational efficiency;                                                                               
| |  | increasing
  sales of non-food products in our stores; and                                                         
| |  | increasing
  sales of private label products.                                                                      

Maintaining
a Strong Commitment to Customer Satisfaction

An integral part
of our business strategy is to provide our customers with value and service at
competitive prices at each of our supermarkets.  We believe that maintaining this commitment is fundamental for
our continued growth.  For this reason,
we continuously monitor the prices of our competitors and adjust our prices to
meet customer expectations.  Similarly,
we constantly evaluate the quality and breadth of our product selection to
ensure customer satisfaction.

As part of our
commitment to customer service, we utilize an employee incentive program
designed to promote quality in each of our supermarkets.  During the last seven years, the program has
increased employee awareness of quality in the operation of the stores, such as
being sensitive to costs and changing trends in customer preferences.  The program involves a bonus
system that awards employees for implementing ideas and enhancing the quality
of service provided to customers.

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As part of our
business strategy, we aim to adjust ourselves to meet the needs of our
customers. We therefore began to adjust our stores to meet the needs of a more
price-sensitive customer base likely to reduce total purchases and to focus on
necessities. We have emphasized the hard discount Mega supermarket format. In
addition, we have taken other steps to meet the needs of our customers, such as
expanding the hours and parking areas for certain of our stores.

Opening
Additional Store Locations, Improving and Enlarging Existing Stores and Closing
Underperforming Stores

We believe that
opportunities exist to increase supermarket sales in localities whose
populations are currently under-served by supermarkets. We plan on opening
stores where opportunities exist, but at a somewhat slower pace compared to
previous years in light of the current unfavorable economic environment and the
increased competition.  For this reason,
by the end of 2003, we plan to open approximately 7 additional supermarkets
with an emphasis on Mega and other discount formats, totaling approximately
25,000  28,000 square meters of store space. In the year 2004, we are planning
to open 8-10 new branches with total store space of 20,000-22,000 square
meters. In addition, we plan to continue to remodel some of our supermarkets
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 approximately NIS 190 million, or $40 million on the opening and
development of new supermarkets and the remodeling of our existing supermarkets
through the end of 2003.

As part of our
strategy, we also aim to close underperforming stores.  From January 1, 2003 until June 15, 2003, we
closed 11 stores, and we expect to close an additional 3-4 stores by the end of
the year 2003.

The following
table illustrates the change in the number of our stores (net of store
closures) and store space during the periods indicated:

|                                  |  |  | No. of Stores |     | Store Space(square meters) | 
|--------------------------------- |  |  | ------------- | --- | -------------------------- | 
|                                  |  |  |               |     |                            | 
|                                  |  |  |               |     |                            | 
|As of December 31,
  1999         |  |  |               | 165 |                            | 
|Net increase in 2000              |  |  |               | 3   |                            | 
|Net increase in 2001              |  |  |               | 3   |                            | 
|Net increase in 2002              |  |  |               | 2   |                            | 
|                                  |  |  |               |     |                            | 
|Total (As of December 31,
  2001) |  |  |               | 173 |                            | 

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Improving Commercial Management

We seek to
increase sales per square meter and overall gross margins by improving the
selection of products offered at our supermarkets.  We believe that our management information systems provide a key
tool for improving product selection and that the continued upgrading of our
systems will help reduce operating costs and increase operating
efficiency.  We have adopted a category
management approach by which an internal category manager of ours is
responsible for the sale of a specific category of products across all of our
supermarkets and is accordingly afforded greater discretion in selecting the
specific products within that category to be sold at the stores.  The upgrading of the supermarkets
management information and point-of-sale systems enables category managers more
easily to obtain up-to-date information regarding the sales of particular
products and the demographics of their consumers.  All of our supermarkets are equipped with a point-of-sale system.

In addition, we
believe that consumers have shown an increased preference for food stores that
offer both a wide variety of traditional food and non-food items and an
expanded assortment of prepared food and produce.  In response, we continue to upgrade our supermarkets by adding
new food and non-food selections and new specialty departments, such as full
service bakeries, delicatessens, fresh meat, prepared food departments and
pharmacies, and certain supermarkets also contain concession operations, which
sell a variety of goods.  Sales of these
items typically yield higher margins.

Increasing operational efficiency

Due to
competitive pressures on supermarket goods prices, we endeavor to maximize our
operational efficiency.  During 2002, we
increased efficiency at our main office and at our distribution center by
ceasing several activities and cutting costs.  
In addition, we implement this strategy by consistently monitoring the
operations of each of our stores and their respective departments.  As a result of our monitoring, we identify
certain stores and specific departments with low profitability that are
candidates to be modified or closed. We also implement this strategy by
adjusting our employee headcount at our stores where necessary to meet each
stores potential performance.

Increasing sales of non-food
products in our stores

Due to the higher
average gross profits associated with the sale of non-food products as compared
to food products, part of our strategy is to increase the sale of our non-food
products in our supermarkets.  During
2002, the sales of non-food products constituted approximately 3.2% of our
sales.  Our goal is to increase sales of
non-food products to account for 5-6% of our total revenues.

Increasing sales of private label
products

In the beginning
of 2001, we received the exclusive distribution rights in Israel of the private
label products Leader Price, owned by a leading French retailer which markets its products in
30 countries around the world. By the end of 2002, sales of private label
products (excluding dairy and bakery products) accounted for approximately 9%
of our total revenues.  Our goal
is to increase sales of private label products to account for 15% of our total
revenues. Private label products provide customers with an attractive
alternative selection of products that are comparable in quality to brand name
products but are offered at substantially lower prices. Usually the average
gross profit from private label products is 10-15% higher than average gross
profit from other products.  We believe
that our private label products enhance customer loyalty and differentiate our
stores from those of our competitors.

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Competition

The Israeli food
retailing industry is highly competitive and is characterized by high inventory
turnover and narrow profit margins.  We
compete with other supermarket chains, such as SuperSol 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.

Other major
chains have launched their own hard discount formats. In addition, a new class
of very low-priced private markets has emerged in selected areas. Some of them,
by operating on Saturdays and offering non-kosher food, these operations have
been able to capture a significant part of the sale from the major chains.
Large supermarket chains in Israel, including us, are kosher and therefore do
not offer non-kosher food or operate on Saturdays.  As a result, we estimate that Blue Squares market share dropped
from approximately 33% to approximately 30%.

Our Operations

Our supermarket
operations are conducted under a number of store formats, including Mega, Super
Center, Super Center City, Co-Op, Shefa Mehadrin, King Center  and others, which are among the most
well-recognized retail names in Israel. 
During 2003 we began to operate supermarkets under the brand name Shefa
Shuk.  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, prepared food departments and pharmacies, and
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 operated 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.

19

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The
following table provides certain information regarding the Blue Square stores
and the BSIP stores as of December 31, 2002:

|                       |  | Blue Square Israel |     | BSIP                          |  | TOTAL              |        
|---------------------- |  | ------------------ | --- | ----------------------------- |  | ------------------ | -------
|                       |  |                    |     |                               |  |                    |        
|Retail Format          |  | Number of
  Stores |     | Store
  Space (square meters) |  | Number of
  Stores |        
|                       |  |                    |     |                               |  |                    |        
|                       |  |                    |     |                               |  |                    |        
|Mega(1)                |  |                    | 1   |                               |  |                    | 3,901  
|                       |  |                    |     |                               |  |                    |        
|Super Center(2)        |  |                    | 3   |                               |  |                    | 4,509  
|                       |  |                    |     |                               |  |                    |        
|SuperCenterCity(3)     |  |                    | 46  |                               |  |                    | 44,546 
|                       |  |                    |     |                               |  |                    |        
|Co-Op(4)               |  |                    | 45  |                               |  |                    | 41,001 
|                       |  |                    |     |                               |  |                    |        
|ShefaMehadrin(5)       |  |                    | 4   |                               |  |                    | 5,190  
|                       |  |                    |     |                               |  |                    |        
|KingCenter(6)          |  |                    | 1   |                               |  |                    | 1,372  
|                       |  |                    |     |                               |  |                    |        
|Other Local Formats(7) |  |                    | 13  |                               |  |                    | 8,017  
|                       |  |                    |     |                               |  |                    |        
|                       |  |                    |     |                               |  |                    |        
|Total                  |  |                    | 113 |                               |  |                    | 108,536
|                       |  |                    |     |                               |  |                    |        

| | (1)
  Hard discount prices, large stores (average size of 5,000 square meters),
  offer a wide variety of food items and other departments.            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                        
| | (2)
  Large size (generally over 1,500 square meters) offering wide selection of
  food and household items at reduced prices and fewer services.      
| |                                                                                                                                                        
| | (3)
  8001500 square meters size stores, similar to Super Center but offers a more
  limited variety of items.                                        
| |                                                                                                                                                        
| | (4)
  Full service convenience stores, offering wide selection of food and general
  merchandise.                                                      
| |                                                                                                                                                        
| | (5)
  Specialized supermarket concept oriented to ultra-orthodox Jewish population.                                                                    
| |                                                                                                                                                        
| | (6)
  Hard discount prices, medium sized stores (approximately 2,500 square meters)
  as compared to Mega, target a narrower geographic area than Mega.
| |                                                                                                                                                        
| | (7)
  Local stores, usually 400-1000 square meters, with low prices and a limited
  variety of items.                                                  

20

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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.

Through our
distribution center, we can distribute products from suppliers and
manufacturers, 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 81% of our grocery items and 87% of our meat and fish are
delivered directly by suppliers to some of our stores.  For certain other items, including 90% of
fruits and vegetables, we provide distribution to our supermarkets through our
distribution center.  For the year
ended  December 31, 2002,
approximately 23.8% 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 2002, Tnuvas products accounted for approximately 15% of all the products sold at our
supermarkets.  In addition, Strauss and
Elite, two Israeli food manufacturers under common control, accounted in 2002
for approximately 10% of all products sold at our supermarkets, and the Osem
group accounted for approximately 7% of all products sold at our supermarkets
in 2002.  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, Strauss, 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, Strauss, Elite or Osem regarding these
supply arrangements.  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 2002.  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.

21

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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 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.

Management Information Technology

In accordance
with our strategy to improve operational efficiency, we invested considerably
in building back-office systems for the branches, purchasing facilities and
inventory management, and in optical scanning technology to reduce the labor
costs attributable to product pricing and customer check-out.

Another way of
achieving efficiency is using electronic data interchange technology for
transferring information to and from the biggest suppliers of the chain.

All of our
supermarkets are equipped with a point-of-sale system, consisting of laser
scanners at check-out sales counters. 
Most of the items sold in our supermarkets are purchased by us with bar
codes already imprinted on their packaging. 
Bar code scanner information allows each supermarket to track inventory
and sales information on an automated real-time basis.  This technology facilitates immediate response
and action by management.  The
management information systems are also used extensively by the category
managers to continuously improve the product selection offered at each store
with the aim of increasing sales and enhancing gross margins.

We use
information technology to improve operational efficiency.  We also use information technology as a
means of generating a competitive and strategic advantage in our market.  In order to expand the services we provide
to our customers, we have implemented an Internet strategy.

Blue Center Home Buying Network

In 2002, we
launched Blue Center, a convenient home shopping program. This service enables
our customers to place orders through the Internet, by phone or by fax and to
have the goods delivered within a few hours. This service is available in the  Tel Aviv, central Israel and Jerusalem
areas. We intend to continue with the development of the Blue Center network.

22

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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. 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.  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. 
Blue Square has 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.

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 Blue Squares business.  Following the announcement, Blue Square
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 Israeli
Antitrust Authority may not approve future acquisitions of Blue Squares market
presence on the grounds that it violates anti-trust law in Israel.

23

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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
charged by credit cards companies to us was increased substantially and may
materially affect our operating results.  
See Item 3. Key Information- Risk Factors-The Israeli Antitrust
Authority may take actions that limit our ability to execute our business
strategy or otherwise affect our profitability for more information.

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 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. 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 SuperSol, 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.  The document of
direction was publicized and is open for comment for a period of 45 days from
the date of its publication.

| | The main
  directions in the document of direction were the following:
| | ----------------------------------------------------------------------
| |                                                                       
| |                                                                      
| |                                                                      
| |                                                                      

24

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| |  | Independent
  category management may only be managed by the large supermarket chains, and
  not by suppliers.                                                                                                                                                                                                                                                                         
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The document
  imposes limitations on the ability of suppliers to grant  benefits to large supermarket chains for
  achieving certain sales targets.                                                                                                                                                                                                                                   
| |  | The document
  imposes prohibitions on arrangements between suppliers and large supermarket
  chain which require the supermarket chain to sell a certain percentage of the
  suppliers products.                                                                                                                                                                                     
| |  | 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 large
  supermarket chains and their suppliers.                                                                                                                                                                                                                                                  

We
are currently examining the impact of the document of direction on our
business.

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 from 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.

|C. |  | Organizational
  Structure
|-- |  | --------------------------

Blue
Square operates all of the supermarkets, including those that are owned by its
partially owned subsidiaries, and is the direct operator of 113 of the
supermarkets.  Stores owned by BSIP
generated approximately 65.8% of our sales during 2002.   The remainder of our operations is owned by
Blue Squares partially owned subsidiaries, each of which has its own board of
directors and management.  Blue Square,
directly or indirectly, appoints all or a majority of the board of directors of
each of these subsidiaries and typically an appointee of Blue Square serves as
the chairman of the board of directors of each subsidiary.  Although Blue Square appoints all or most of
the board of directors of each subsidiary, each subsidiarys board of directors
has independent fiduciary obligations to all of its shareholders and to the
subsidiary 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.

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The largest
subsidiary of Blue Square is BSIP, of which Blue Square owned approximately
80.73% of the outstanding shares as of December 31, 2002.  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.

Set forth below
is a list of our material holdings.  The
Company marked with an asterisk is not consolidated in our financial
statements.

|Company(1)                                               |  |  | Operations                     |  |  | % Ownership Heldby 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)                      | 
|Shefa Mehadrin Ltd.                                      |  |  | Supermarkets                   |  |  | 72.66%(4)                      | 
|Radio Non Stop Ltd.*                                     |  |  | Local radio station            |  |  | 28.98%(5)                      | 
|Teco Ltd.                                                |  |  | Plastic packaging
  materials  |  |  | 40.37%(6)                      | 

| | (1) | All companies are
  incorporated under Israeli law.                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                               
| | (2) | Blue Square directly owned
  an 80.73% interest in BSIP as of December 31, 2002.  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 owns a 90%
  interest in this subsidiary.  An
  unaffiliated entity holds the remaining 10% interest.                                                                                             
| |     |                                                                                                                                                                                                               
| | (5) | Hyper Hyper holds its
  interest in this Company through a wholly owned subsidiary, which holds a
  35.9% equity interest in Radio Non-Stop Ltd. 
  The remaining interests are held by unaffiliated entities.
| |     |                                                                                                                                                                                                               
| | (6) | BSIP owns a 50% interest
  in Teco Ltd.  The remainder is owned
  by an unaffiliated entity.                                                                                                                  

|D. |  | Property,
  Plants and Equipment.
|-- |  | ---------------------------------

As
of December 31, 2002, we owned or leased approximately 488,443 square
meters of space.   The following table
provides certain details regarding the properties that we own and lease.

26

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|Properties                                                             |  | Number |     | Space (sq. meters) | 
|---------------------------------------------------------------------- |  | ------ | --- | ------------------ | 
|                                                                       |  |        |     |                    | 
|Total Existing Stores                                                  |  |        |     |                    | 
|Owned (including
  long term lease from 
  Israel Land Administration) |  |        | 98  |                    | 
|Leased under
  5 years                                                 |  |        | 45  |                    | 
|Leased
  between 6-10 years                                            |  |        | 27  |                    | 
|Leased over
  10 years                                                 |  |        | 3   |                    | 
|                                                                       |  |        |     |                    | 
|                                                                       |  |        | 173 |                    | 
|                                                                       |  |        |     |                    | 
|Stores in Development                                                  |  |        |     |                    | 
|Owned                                                                  |  |        | 5   |                    | 
|Leased
  between 5-25 years                                            |  |        | 11  |                    | 
|                                                                       |  |        |     |                    | 
|                                                                       |  |        |     |                    | 
|                                                                       |  |        |     |                    | 
|Owned Offices (Rosh Haayin, 
  Givataim)                              |  |        | 2   |                    | 
|Owned Warehouses (Rishon Letzion, Kiriat Gat)                          |  |        | 2   |                    | 
|Leased Warehouses (Barkan, Ramla, Rosh Haayin)                        |  |        | 2   |                    | 
|                                                                       |  |        |     |                    | 
|                                                                       |  |        |     |                    | 
|                                                                       |  |        |     |                    | 
|Undeveloped Land                                                       |  |        |     |                    | 
|                                                                       |  |        |     |                    | 
|Leased to Third Party                                                  |  |        |     |                    | 
|                                                                       |  |        |     |                    | 
|Unutilized Properties                                                  |  |        |     |                    | 
|                                                                       |  |        |     |                    | 
|                                                                       |  |        |     |                    | 
|TOTAL                                                                  |  |        |     |                    | 
|                                                                       |  |        |     |                    | 

By
the end of 2003, we plan to open approximately 7 additional supermarkets,
totaling approximately 25,000  28,000 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.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 190million,
or $40 million on the acquisition and development of new supermarkets and the
remodeling of our existing supermarkets through the end of 2003. In the year
2004, we  plan to open 8-10 new branches
with total store space of 20,000-22,000 square meters.

Blue Square is
also the direct owner of a 50% interest in a 17,000 square meter shopping mall
in Jerusalem. We operate a 5,000 square
meter store in the mall.

27

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In February 2003,
Accounting Standard No. 15, Impairment of Assets was published.  The Standard prescribes the accounting
treatment and disclosure for impairment of assets. According to the new
Standard, if there is any indication that an asset may be impaired, Blue Square
should determine if there has been an impairment of the asset by comparing the
carrying amount of the asset to its recoverable amount. To fully describe
regarding Standard No. 15, see Item 5. Operating and Financial Review and
Prospects  Critical Accounting Policies.

|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

We are a leading
food retailer in the State of Israel. 
Through our supermarkets, we offer a wide range of consumer products,
including food and beverages and also apparel, housewares and cosmetics.  As of December 31, 2002, we owned and
operated 173 supermarkets under the brand names Mega, Super Center, Super
Center City, Co-Op,  Shefa Mehadrin and
King Center.

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, | 
|--------------------------------------------- |  | ------------------------- | 
|                                              |  |                           | 
|                                              |  | 2000                      | 
|                                              |  |                           | 
|                                              |  | %                         | 
|Sales                                         |  | 100.00                    | 
|Gross
  profit                                |  | 27.82                     | 
|Selling,
  general and administrativeexpenses |  | 22.60                     | 
|Operating
  income                            |  | 5.22                      | 
|Taxes
  on income                             |  | 1.74                      | 
|Minority
  interest in subsidiaries, net      |  | 0.42                      | 
|Income
  from continuing operations           |  | 2.54                      | 
|Net
  income                                  |  | 2.49                      | 

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

Sales.Sales in 2002 were
approximately NIS 5,548 million, or $1,171 million, a decrease of 6.6% compared
with sales of approximately NIS 5,940 million, or $1,254 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.

28

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Gross profit.   Gross profit in 2002 was
approximately NIS 1,498 million, or $316 million, a decrease of 8.9% compared
with gross profit of approximately NIS 1,644 million, or $347 million in
2001.   This decrease in gross profit is
primarily attributable to the decrease in our sales.   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 1,275
million, or $269 million, a decrease of 3.5% compared with operating and
administrative expenses of approximately NIS 1,321 million, or $279 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 223 million, or $47.1 million, a decrease of 31% compared
with approximately NIS 323 million, or $68.2 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.

Financial income
(expense), net.   Financial
income, net in 2002 was approximately NIS 16.2 million, or $3.4 million,
compared with financial expense, net of approximately NIS 13.4 million, or $2.8
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 177 million, or $37.4 million,
compared with other expenses, net of approximately NIS 18.5 million, or $3.9
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 $2.3 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 2l, 7b and 18C to the financial statements.

29

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Taxes on income.   Taxes on income in 2002 were approximately NIS 42.9 million, or
$9.1 million, a decrease of 61% compared with approximately NIS 109.9 million,
or $23.2 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 assests 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 6.1 million, or $1.3 million, a decrease of 76.2%
compared with approximately NIS 25.6 million, or $5.4 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 7.4 million, or  $1.6 million, a decrease of 95.2% compared
with approximately NIS 153.7 million, or 
$32.4  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.

Year ended December 31, 2001 compared with
year ended December 31, 2000

Sales. 
Sales in 2001 were approximately NIS 5,940 million, or $1,254million, an
increase of 5.8% compared with sales of approximately NIS 5,615 million, or
$1,185 million in 2000. This growth in sales is primarily attributable to an
increase in the selling space of our supermarkets in 2001.   The selling area of our supermarkets
increased from 258,000 square meters as of December 31, 2000 to 279,000 square
meters as of December 31, 2001. In 2001, same store sales decreased by 3.2% 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 2001 was approximately NIS 1,644 million, or $347
million, an increase of 5.2% compared with gross profit of approximately NIS
1,562 million, or $330 million in 2000.  
This increase in gross profit is primarily attributable to the increase
in our sales.   As a percentage of
sales, gross profit decreased to 27.7% in 2001 from 27.8% in 2000.

Operating and
administrative expenses.   Operating and administrative expenses in
2001 were approximately NIS 1,321 million, or $279 million an increase of 4.1%
compared with operating and administrative expenses of approximately NIS 1,269
million, or $268 million in 2000. As a percentage of sales, operating and
administrative expenses amounted to 22.2% in 2001 compared with 22.6% in 2000.

30

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Operating income.  
Operating income in 2001 was approximately NIS 323 million, or $68.1
million, an increase of 10.2% compared with approximately NIS 293million, or
$1.9 million in 2000.   As a percentage
of sales, operating income in 2001 was 5.4% compared with 5.2% in 2000.   This increase in operating income is
primarily attributable to the successful implementation of our operational
efficiency strategy.

Financial expense, net.  
Financial expense, net in 2001 was approximately NIS 13.4 million, or
$2.8 million, a decrease of 70.2% compared with financial expense, net of
approximately NIS 45 million, or $9.5 million in 2000.   This decrease in financial expense, net is
primarily attributable to the following:

         In
2001, the CPI increased by 1.4%, resulting in a depreciation of our net
monetary unlinked liabilities and generating financial income.   However, in 2000, the CPI remained
unchanged and as a result, no financial income was generated.

         the
reduction of the prime rate of interest regarding short  and long-term loans as established by the
Bank of Israel.

Other income (expense), net.   Other expenses, net in 2001 was
approximately NIS 18.5 million, or $3.9 million, a change from other income,
net of approximately NIS 20.7 million, or $4.4 million in 2000.   This change is primarily attributable to
losses on sales and disposal of fixed assets, net, and a provision for
impairment of fixed assets and goodwill. Closing stores with low revenues is
part of our efficiency process. In 2001, we closed five stores. Other Income
for 2000 consisted mainly of a one-time capital gain related to the sale of the
Companys holdings in Home Centers, which resulted in a capital gain (before
tax) of NIS 34 million, or $7.2 million.

Taxes on income.   Taxes on income in 2001 were approximately NIS 109.9million, or
$23.2 million, an increase of 12.5% compared with approximately NIS 97.7
million, or $20.6 million.   As a percentage
of income before taxes on income, taxes on income increased to approximately
38.5% in 2001, compared with 37.2% in 2000.

Minority interest in subsidiaries, net.   Minority interest in subsidiaries, net in
2001 was approximately NIS 25.6 million, or $5.4 million, an increase of 7.8%
compared with approximately NIS 23.8 million, or $5 million in 2000.   This increase in minority interest in
subsidiaries, net is primarily attributable to the increase in the net income
of BSIP in 2001.

Net income.   Net income in 2001 was approximately NIS 153.7 million, or  $32.4 million, an increase of 10% compared
with approximately NIS 139.7 million, or 
$29.5 million in 2000.   This
increase in net income is primarily attributable to the increase in sales and
operating income.   As a percentage of
sales, net income increased to 2.6% in 2001 compared with 2.5% in 2000.

31

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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.

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   |  | Percentageof
  Full Year | 
| |  |                  |  |                |  |                          | 
| |  |                  |  | (In thousands) |  |                          | 
| |  | 2002             |  |                |  |                          | 
| |  | First
  quarter  |  | 1,434,900      |  | 25.9%                    | 
| |  | Second
  quarter |  | 1,387,146      |  | 25.0%                    | 
| |  | Third
  quarter  |  | 1,400,197      |  | 25.2%                    | 
| |  | Fourth
  quarter |  | 1,362,129      |  | 23.9%                    | 
| |  |                  |  |                |  |                          | 
| |  | 2001             |  |                |  |                          | 
| |  | First
  quarter  |  | 1,412,496      |  | 23.8%                    | 
| |  | Second
  quarter |  | 1,521,063      |  | 25.6%                    | 
| |  | Third
  quarter  |  | 1,564,847      |  | 26.3%                    | 
| |  | Fourth
  quarter |  | 1,441,393      |  | 24.3%                    | 
| |  |                  |  |                |  |                          | 
| |  |                  |  |                |  |                          | 
| |  | 2000             |  |                |  |                          | 
| |  | First
  quarter  |  | 1,302,110      |  | 23.2%                    | 
| |  | Second
  quarter |  | 1,445,431      |  | 25.7%                    | 
| |  | Third
  quarter  |  | 1,470,490      |  | 26.2%                    | 
| |  | Fourth
  quarter |  | 1,396,776      |  | 24.9%                    | 

Exchange
Rates

At
December 31, 2002, the representative rate of exchange of the NIS to the
dollar, as published by the Bank of Israel, was NIS 4.737 = $1.00.At June 16, 2003, the representative rate
of exchange of the NIS to the dollar, as published by the Bank of Israel, was
NIS 4.354 = $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, 1998 through 2002:

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|Year Ended
  December 31, |  | Period End |  | Average Rate(1) |  | High |  | Low  | 
|------------------------- |  | ---------- |  | --------------- |  | ---- |  | ---- | 
|                          |  |            |  |                 |  |      |  |      | 
|                          |  |            |  | (NIS per $1.00) |  |      |  |      | 
|                          |  |            |  |                 |  |      |  |      | 
|1998                      |  | 4.16       |  | 3.80            |  | 4.37 |  | 3.54 | 
|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 | 

---

The following table sets fourth certain
information concerning the representative exchange rate of the NIS to the
dollar, as published for the months January through May, 2003.

|Month    |  | Period End |  | Average Rate(1) |  | High |  | Low  | 
|-------- |  | ---------- |  | --------------- |  | ---- |  | ---- | 
|         |  |            |  |                 |  |      |  |      | 
|         |  |            |  | (NIS per $1.00) |  |      |  |      | 
|         |  |            |  |                 |  |      |  |      | 
|January  |  | 4.81       |  | 4.83            |  | 4.9  |  | 4.77 | 
|February |  | 4.81       |  | 4.87            |  | 4.92 |  | 4.81 | 
|March    |  | 4.69       |  | 4.78            |  | 4.86 |  | 4.69 | 
|April    |  | 4.52       |  | 4.61            |  | 4.67 |  | 4.52 | 
|May      |  | 4.37       |  | 4.48            |  | 4.58 |  | 4.37 | 

---

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.

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.

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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 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.   The future effect
of these hostilities on the Israeli economy and our operations is unclear.

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 51 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 7.4% while during the
years 2001 and 2002 it declined by 0.9% and 1%, respectively. This economic slowdown during 2002,
adversely affected our financial performance during 2002.  We cannot be sure if and for how long the
Israeli economy will continue in its slowdown and what effect this will have on
our financial performance.

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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.

Israel and the
EEC, known as the European Union, concluded a Free Trade Agreement in
July 1975 which confers certain advantages on Israeli exports to most
European countries and obligates Israel to lower its tariffs on imports from
these countries over a number of years. 
In 1985, Israel and the United States entered into an agreement to
establish a free-trade area.  The
free-trade area has eliminated all tariff and specified non-tariff barriers on
most trade between the two countries. 
On January 1, 1993, an agreement between Israel and the European
Free Trade Association, known as EFTA established a free-trade zone between
Israel and the EFTA nations.  In
November 1995, Israel entered into a new agreement with the European Union,
which includes redefinement of rules of origin and other improvements,
including providing for Israel to become a member of the research and
technology programs of the European Union. 
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 Policies

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 accounting policies:

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Impairment
of Assets

Effective
December 31, 2002 Blue Square applies 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, Blue Square
determines 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, Blue Square
determines the recoverable amount of the cash generating unit (i.e., the smallest identifiable group of
assets that generates independently 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 for 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.

Blue Square
evaluates impairment separately for each store or other cash-generating unit.
In evaluating impairment, the Company considers 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, the Company uses 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 discount rate used by the
Company is 10%. In determining the net selling price of an asset, management
relies on estimates of the companys experts.

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.

36

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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. Blue Square estimates
future cash flows based on its experience and knowledge of the market in which
the stores are located. 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.

Rebates
from suppliers

Current rebates
from suppliers are recorded in the financial statements upon receipt.

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

The Company is
entitled to certain rebates only 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
the Company has 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, the Companys relationship with the supplier, and the amount of the
anticipated purchases for the remaining period. At year-end upon achievement of
final targets, the Company adjusts its interim estimtes to the actual.

Goodwill

Under Israeli GAAP, goodwill is amortized over the
estimated period of benefit, but not longer than 20 years.  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 the Company
based on market capitalization of the reporting unit.

Recently
issued accounting pronouncents in Israel

In 2001, the
Israel 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, the Company will
continue to 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.

37

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The
adoption of Standard No. 12 could have an adverse effect on the results of
operations of the Company. The extent of the effect is dependent on the rate of
inflation and the composition of the assets and sources of financing of the
Company.

Liquidity and Capital Resources.

Our principal
source of liquidity is the cash generated by our operations.  Both Blue Square and its partially owned
subsidiaries have in the past 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.  In 2002,
approximately 35.5% of our sales were paid for with cash and cash equivalents
at the point-of-sale, approximately 62.5% of sales were paid for with credit
cards and approximately 2% of sales were paid for with other short-term credit
arrangements

The average time
period within which our accounts receivable are paid is 31 days.  By contrast, the average time period for
payment of our accounts payable is 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. 
Cash generated by operations was approximately NIS 297 million, or  $62.7 
million, in 2002, a decrease of 9.4% compared with approximately NIS 328
million, or $69.2 million, in 2001, which, in turn, represented an increase
of  6.1% compared with approximately NIS
309 million or $65.2 million, in 2000.

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 34.8 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 30 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
2002, we invested approximately NIS 248 million, or  $52.4 million in fixed and other assets, in the development of
new stores and in existing store renovation and remodeling, a decrease of 15.1%
compared with approximately NIS 292 million, or  $61.6 million during 2001 which, in turn, represents a decrease
of 7.4% compared with approximately NIS 316 million, or $66.7 million during
2000.  This decrease is primarily
attributable to our strategy of leasing store sites with option to renew the
leases other than to purchase store sites. We currently plan to spend in excess
of NIS 190 million, or $40 million for the development or acquisition of new
supermarkets and retail formats and the renovation and remodeling of our
existing supermarkets through the end of 2003. 
We intend to finance our store development and acquisitions mainly from
cash generated by our operations and from borrowing from bank and financial
institutions and intend to finance store renovations, remodeling and expansions
mainly from cash generated by our operations.

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, 2002                    | 
|--------------------------------- |  | ------------------------------------ | 
|                                  |  | Expected Maturity (NIS in thousands) | 
|                                  |  |                                      | 
|                                  |  | 2003                                 | 
|                                  |  |                                      | 
|                                  |  |                                      | 
|Long
  term loans from banks      |  | 188,549                              | 
|                                  |  |                                      | 
|Debentures                        |  | 8,153                                | 
|Non-cancelable
  Long term leases |  | 93,675                               | 
|                                  |  |                                      | 
|Total contractalcash obligations  |  | 290,377                              | 
|                                  |  |                                      | 

In addition, Blue Square leases 4 stores
from the Co-Op.  The minimum annual
payment is NIS 0.8 milion

As of December 31, 2002, Blue Square had
entered into agreements for the purchase of real estate and equipment in the
aggregate amount of approximately NIS 105 million, or $22.2 million.

Dividends

During 2002, Blue
Square distributed to its shareholders a dividend of $0.72 per share in an aggregate amount of NIS 130 million, or
$27.5 million.

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During
2001, Blue Square distributed to its shareholders a dividend of $0.31
per share in an aggregate amount of approximately NIS 52.9 million, or $11.2
million.

Short-Term Credit from Banks

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

|                                              |  | December 31      | 
|--------------------------------------------- |  | ---------------- | 
|                                              |  |                  | 
|                                              |  | 2001             | 
|                                              |  | NIS in thousands | 
|                                              |  |                  | 
|Short-
  term credit from banks-              |  |                  | 
|Unlinked
  (1)                                |  | 92,802           | 
|                                              |  |                  | 
|Current
  maturities of long-termliabilities: |  |                  | 
|Loans                                         |  | 121,613          | 
|Debentures                                    |  | 25,709           | 
|                                              |  |                  | 
|                                              |  | 240,124          | 
|                                              |  |                  | 

|(1) | The balance
  as of December 31, 2002 bears variable interest at a weighted average annual
  rate of 7.3%.
|--- | ----------------------------------------------------------------------------------------------------------

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
  % |        
|-------------------------- |  | ---------------- |  | ---------------------------- | -------
|                           |  |                  |  |                             
|                           |  | 2001             |  | 2002                         |        
|                           |  | NIS in thousands |  |                             
|                           |  |                  |  |                              |        
|Linked
  to the CPI        |  | 261,236          |  |                              | 276,907
|Unlinked                   |  | 255,591          |  |                              | 273,754
|                           |  |                  |  |                              |        
|                           |  | 516,827          |  |                              | 550,661
|                           |  |                  |  |                              |        
|Less-
  current maturities |  | 121,613          |  |                              | 188,549
|                           |  | 395,214          |  |                              | 362,112
|                           |  |                  |  |                              |        

|(1) | Average
  fixed rate as of December 31, 2002                                                                                                                                                                   
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | As of
  December 31, 2002, includes NIS  92
  million at variables interest (average annual rate as of December 31, 2002-
  7.0%). The balance of NIS 182 million is at a fixed annual interest rate of
  7.3%.

40

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For
additional information on charges pertaining to the collateralized long-term
loans, see note 20 to our consolidated financial statements included
elsewhere in this annual report.

Commitments for Capital Expenditures

As of
December 31, 2002, we had entered into agreements for the purchase of real
estate and equipment in the total amount of NIS 105 million, or $22.2
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.

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
significant growth opportunities for supermarkets in Israel remain as more
households begin to purchase supermarket goods at supermarkets rather than
smaller grocery stores and open-air markets. 
We estimate that approximately 51%-52% of the total sales of supermarket
goods in Israel in 2002 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 and in response to the success of the hard discount formats,
other major chains launched their own hard discount store formats to compete
with our stores. Also, recognizing the growing opportunity as the low-end of
the market as a result of the recession, a new class of very low-priced private
supermarkets have emerged in selected areas, increasing competition in an
already difficult market.  Some of them,
by operating on Saturdays and offering non-kosher food, have been able to
capture a significant part of the sale from the major chains in their areas.
Large supermarket chains in Israel, including us, are kosher and therefore do
not offer non-kosher food or operate on Saturdays.   The increased competition has led to increased downward pressure
on prices.

As a result of
these developments, and our policy to close underperforming stores, we closed 8
underperforming stores in 2002 and an additional 11 stores from January 1, 2003
until June 15, 2003.

41

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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, but at a somewhat slower pace than in the past due to
current unfavorable economic and environment and the increased
competition.  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 have begun to adjust our stores to meet the needs of a more
price-sensitive customer base likely to reduce total purchases and to focus on
necessities.  As a result, we have
narrowed our focus on providing value to our customers.    We have 
emphasized our Mega supermarket format, a chain of discount stores.  During 2002, we converted 3 supermarkets of
other formats to Megas and opened 2 new Mega stores.

In addition, 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.

|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,
2003.  It is expected that the
contemplated sale of 78.1% of the outstanding shares of Blue Square by the
Co-Op (described in Item 4. Information on the Company- Contemplated Change in
Control) will affect the composition of the Board of Directors of Blue Square.

42

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|Name                                 |  | Age |  | Position                                                                                  
|------------------------------------ |  | --- |  | ------------------------------------------------------------------------------------------
|                                     |  |     |  |                                                                                           
|David
  Brodet (1)(2)                |  | 58  |  | Chairman
  of the Board of Directors                                                      
|Arie
  Bar (3)(4)                    |  | 64  |  | Director                                                                                  
|Tamar Ben-David (1)                  |  | 52  |  | Director                                                                                  
|Doron
  Cohen (1)(2)                 |  | 38  |  | Director                                                                                  
|Avi
  Cohen                          |  | 53  |  | Director                                                                                  
|Yona
  Markovitz (3)                 |  | 51  |  | Director                                                                                  
|Tamar
  Hacker (2)(3)(4)(5)          |  | 54  |  | Director                                                                                  
|Yossi
  Kucik (1)                    |  | 48  |  | Director                                                                                  
|M.
  Gen (res.) Gideon Shefer (3)(4) |  | 54  |  | Director                                                                                  
|Zeev
  Vurembrand(1)(3)(4)(5)        |  | 52  |  | Director                                                                                  
|Dr.
  Haim Zaban (1) (4)             |  | 66  |  | Director                                                                                  
|Yoram
  Dar                          |  | 52  |  | President
  and Chief Executive Officer                                                   
|Zvi
  Bochman                        |  | 52  |  | Vice
  President and Chief Financial Officer                                              
|Haim
  Gershon                       |  | 58  |  | Vice
  President and Chief Operation Officer                                              
|Ilana
  Kaufman                      |  | 54  |  | Vice
  President and Chief Trading and Marketing Officer                                  
|Avi
  Belfer                         |  | 53  |  | Head
  of Planning and Maintenance Division                                               
|Dov
  Carmeli                        |  | 63  |  | Head
  of Property and Development Division
   and General Manager of BSIP and Hyper Hyper
|Michael
  (Miki) Lev                 |  | 52  |  | Head
  of Human Resources Division                                                        
|Odelia
  Levanon                     |  | 40  |  | Head
  of  Information Technology Division                                                
|Iris  Penso                          |  | 42  |  | General
  Counsel and Corporate Secretary                                                 

---

|(1) | Member of the Strategy and Investment Committee.                                                                                                                                                                                                                                                                       
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Member
  of the Compensation Committee.                                                                                                                                                                                                                                                                                
|(3) | Member
  of the Corporate Audit Committee. As described under -Audit Committee-
  Israeli Companies Law Requirements, Blue Square maintains a corporate audit
  committee for purposes of the Israeli Companies Law separate from the audit
  committee maintained for purposes of the New York Stock Exchange rules.
|(4) | Member
  of the Audit Committee                                                                                                                                                                                                                                                                                        
|(5) | External
  directors.                                                                                                                                                                                                                                                                                                  

David Brodet has served as the chairman of
the board of directors of Blue Square since October 2000.  From 1998
to 2000, Mr. Brodet served as the
chairman of the board of directors of WIS (Space).  From 1997 to 1998, Mr. Brodet served as chairman of the board of
directors of United Mizrachi Bank Ltd. and Tefahot Mortgage Bank Ltd.  From 1995 to 1997, Mr. Brodet served as
director general of the Israeli Ministry of Finance.  From 1991 to 1994, he served as budget director in the Ministry
of Finance. In the years1993 and
1994, Mr. Brodet was the chief Israeli negotiator of the Paris Economic
Agreement with the P.L.O.  From 1987 to
1991, Mr. Brodet served as vice president and chief financial officer of Israel
Aircraft Industries.  From 1984 to 1987,
Mr. Brodet was head of the economic stabilization program in the Israeli
Ministry of Industry and Trade.  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 currently serves as the chairman of the board of directors of numerous
leading organizations engaged in financial, economic, academic and civic
activities, including the Jerusalem Foundation and as chairman of the executive
committee of Ben-Gurion University, the Falk Institute, chairman of the
advisory board of Hadassah College of Technology and as a member of the
directorate of the Florsheim Institute of Policy.  Mr. Brodet is a member of the Management Committee of the Co-Op.

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Arie Bar has served as a director of Blue
Square since February 2001.  Mr.
Bar retired from the Israeli Ministry of Industry and Trade in
September 2000, last serving as the commissioner of trade levies since
1997.  Until 1997, Mr. Bar served as the
deputy commissioner of the Israeli Antitrust Authority.  Mr. Bar holds a B.A. degree in economics and
political science from the Hebrew University, Jerusalem. Mr. Bar currently
serves as a high school instructor for economics in Jerusalem.

Tamar Ben-Davidhas served as a director of
Blue Square since February 2001. 
Ms. Ben-David is an attorney and special counsel with the law firm of
Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co.  From 1995 to 1996, Ms. Ben-David served as
director general of the Israeli Government Companies Authority in the Israeli
Ministry of Finance.  From 1990 to 1994,
Ms. Ben-David served as the chief executive officer of Inbal Insurance Company
Ltd.  Ms. Ben-David is the chairman of the
board of directors of Investec Kalil Asset Management Company, and a director
in Cellcom (Israel) Ltd., Isracard Ltd., 
Hadassah Medical Organization and the Hebrew University Properties
Company.  Ms. Ben-David was admitted to
the Israeli Bar in 1974 and holds an LL.B. degree from the Hebrew University,
Jerusalem.

Doron Cohenhas served as a director of
Blue Square since November 2000. 
Mr. Cohen has served as the chief executive officer of the Co-Op since
November 2000.  Since 1999, Mr. Cohen
has served as general director of the Israeli Governmental Companies Authority
in the Prime Ministers Office.  From
1995 to 1999, Mr. Cohen served as Deputy Director and Manager of the
Privatization Division of the Governmental Companies Authority.  Mr. Cohen holds M.B.A. and B.A. degrees from
the Hebrew University, Jerusalem.

Avi Cohenhas served as a director of Blue
Square since January 2002. Mr. Cohen is the founder and a partner at the law
firm of Yossifoff, Cohen & Co. since 1988. From 1986 to 1988 Mr. Cohen has
been an associate lawyer at Kantor & Co. 
Mr. Cohen holds a B.A. in oriental studies from the Hebrew University
and an LL.B. degree from Tel Aviv University.

Yona Markovitzis an attorney specializing
in civil and real estate matters, and is a notary and partner in the law office
of Markovitz, Zadok and Co., having joined the firm in 1976. Since 1997, Ms.
Markovitz is counsel to the Tenants Protection Association. Ms. Markovitz
serves as a prosecutor in the disciplinary court of the Israeli Bar Association
(District of Tel Aviv) and as an arbitrator for civic disputes. From 1977 until
1998, Ms. Markovitz served as a secretary and board member of the Macabi
neighborhood Cooperative Society. Since 1998, Ms. Markovitz serves as a member
in the Women Council of the city of Herzlia and as chairperson of Herzlias
Women Association. Ms. Markovitz was a founder of the Equal Rights Party in
1999 and a founder of the Women Party in 1992. Between 1992 and 1998 Ms.
Markovitz served as a member of the public council of the Business Women
Chamber of Commerce. Ms. Markovitz was admitted to the Israeli Bar in 1976 and
holds an LL.B. degree from the Hebrew University, Jerusalem.

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Tamar Hacker has served as a director of
Blue Square since February 2001. 
Mrs. Hacker is a senior partner in the law firm of Ephraim Abramson
& Co., Jerusalem. From 1987 until 1996, Mrs. Hacker was the Legal Advisor
of the Ministry of Finance and served as a director in Inbal Insurance Company
Ltd. and M.I. Holdings Ltd., which are government corporations.  Mrs. Hacker was a member of the
investigating team of the Regulation of Bank Securities Investigation Committee
and was a member of the Israeli delegation to the economic relations
negotiations with the Palestinians. 
Mrs. Hacker holds a law degree from the Hebrew University, Jerusalem.

Yossi Kucik has served as a director of Blue Square
since June 2001.  Mr. Kucik served
for 25 years in senior positions in a variety of Israeli ministries and
agencies.  From 1999 to 2001, Mr. Kucik
served as a director-general of Israels Prime Ministers office under Prime
Minister Ehud Barak.  During a
three-month period in 1999, Mr. Kucik served as deputy director-general of the
Discount Bank.  From 1994 to 1999, Mr.
Kucik served in the Israel Ministry of Finance as director of wages in the
Israeli public sector.  From 1981 to
1994, Mr. Kucik held senior positions in the North America Delegation of the
Zionist Organization, the Jewish Agency, the Ministry of Health, and the
Ministry of Absorption.  Mr. Kucik holds
an M.A. in Public Administration from the Hebrew University, Jerusalem.

M. Gen. (res.) Gideon Sheferhas served as
a director of Blue Square since February 2001.  Mr. Shefer has served as the acting national security advisor to
the Government of Israel since January 2000.  Before 2000, Mr. Shefer served as deputy national security
advisor for planning and infrastructure. 
Mr. Shefer retired from the Israel Defense Forces, or the IDF in 1999,
where he had served, among other roles, as the Chief of the Personnel Branch of
the IDF and as Deputy Commander of the Israeli Air Force.

Zeev Vurembrandhas served as a director of
Blue Square 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.  From 1979 to 1992, Mr. Vurembrand held the
position of  Deputy Director General of
Automobile Industries Ltd.  Mr.
Vurembrand holds a degree in Industrial Engineering and Management from the
Technion-Israel Institute of Technology, in Haifa, Israel.

45

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Dr. Haim Zaban has served as a director of
Blue Square since February 2001. 
Since 1991, Dr. Zaban has been the owner and chairman of Zenovar
Consultants Ltd., a consulting firm he founded specializing in an integrated
approach to economic planning and development. 
Between 1989 and 1990, Mr. Zaban served as the manager of the Economics
and Projects Division of the Co-Op.  Dr.
Zaban holds B.Sc. and M.Sc. degrees in agricultural economics from the Hebrew
University, Jerusalem, and a Ph.D. in agricultural economics from the
University of Reading, England.  Dr.
Zaban was an adjunct professor of agricultural economics at the Hebrew
University, Jerusalem.

Yoram Dar has served as president and chief
executive officer of Blue Square since October 1999.  Until 2000, Mr. Dar served as a member of
the secretariat of the Co-Op.  From
January 1999 to September 1999, Mr. Dar served as the deputy
president, trading and marketing division of Blue Square, having served as head
of that division since May 1996, and head of the same division with the
Co-Op since 1987.  Mr. Dar
currently serves as the chairman of the board of directors of Radio 103FM, and
from 2000, to 2002 was chairman of the Marketing Chains Association in the
Federation of Israeli Chambers of Commerce. 
Mr. Dar serves as a director in, and since November 2000 as
chairman of the board of directors of Blue Square Chain Investment and
Properties Ltd. From February 2000-2002 Mr. Dar served as a director in Granit
Hacarmel Investments Ltd.  Mr. Dar also
serves as a director in various subsidiaries and affiliates of Blue Square.

Zvi Bochman has served as the chief
financial officer of Blue Square and vice president, finance, since 1999.  From July 1996 to 1999,
Mr. Bochman served as head of the corporate control division of Blue
Square.  Mr. Bochman served as the
head of the finance division of Blue Square. 
From May 1993 to 1996, He served in the same position with the
Co-Op.  From 1992 to 1993, He served as
financial controller of the Co-Op. 
Mr. Bochman serves as the Chairman of the National Tax
Committee of the C.F.O  Forum in Israel. Mr. Bochman is a certified
public accountant. Mr. Bochman is a member of the central committee of the
Institute of Certified Public Accountants in Israel, and he also serves as a
director in various subsidiaries and affiliates of Blue Square.

Haim Gershon has served as Vice President,
Operation Division of Blue Square since January 1999, having served as head of
that division since May 1996 and head of the same division in the Co-Op since
July 1994. Prior thereto, Mr. Gershon served as Head of the Planning and
Maintenance Division of the Co-Op since 1987. Mr. Gershon served as a member of
the Secretariat of the Co-Op Consumers Cooperative Society between the years
1997-2000. Mr. Gershon also serves as a director in various subsidiaries and
affiliates of Blue Square.

Ilana Kaufman has served as vice president, trade and marketing of Blue Square
since November 2002.  From 1993 to
November 2002, Mrs. Kaufman served as President of Golf Group Ltd., a fashion
and home textile retailer.  From 1988 to
1993, Mrs. Kaufman served as Vice President of Sales and Marketing for Tango
Ltd., Levis manufacturer and distributor in Israel.  Mrs. Kaufman holds a B.Sc degree in Food Engineering from
TechnionIsrael Institute of Technology, in Haifa, Israel. Mrs. Kaufman also
serves as a director in various subsidiaries and affiliates of Blue Square.

46

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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.

Dov Carmeli has been head of the property
and development division of Blue Square since 1996, having served in that same
position with the Co-Op since1988.  From 1998 to August 2000,
Mr. Carmeli served as a member of the secretariat of the Co-Op.  Mr. Carmeli is also the general manager
of BSIP and Hyper Hyper. 
Mr. Carmeli also serves as a director of Teco Ltd. and Elkanit
Holdings and Management Ltd. Mr. Carmeli also serves as a director in various
subsidiaries and affiliates of Blue Square.

Michael (Miki) Lev has served as head of
the human resources and quality division of Blue Square since January 1997
and was responsible for organizational planning and quality since 1996.  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 TelAviv University.  From 1992 to 1994, Mr. Lev served as a Management Consultant
in the private and public sectors.

Odelia Levanon has served as the chief
information officer of Blue Square 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 the general
counsel and corporate secretary of Blue Square 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 Industrial Ltd., a public company listed for
trading on the Tel Aviv Stock Exchange, and its subsidiaries.

Michal Reiss ended serving in her position
as Vice President of the Trade and Marketing Division as of November 2002.

47

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Arrangements for the Election of
Directors

The Co-Op owns
approximately 78.1% of Blue Squares ordinary shares.  So long as the Co-Op continues to own beneficially more than 50%
of Blue Squares 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s directors, other than Blue Squares two external
directors whose election 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. See Item 4.  Information on the CompanyContemplated
Change in Control for  information
regarding the contemplated sale of all of the shares of Blue Square held by the
Co-Op to Bronfman-Alon.

B.    Compensation.

The following
table sets forth the aggregate compensation we paid or accrued on behalf of all
persons who currently serve as directors or executive officers of Blue Square
for services they rendered us, for the year ended December 31, 2002:

|                                                               |  | Salaries,
  fees, expenses, directorsfees, commissions and bonuses |  | Pension, retirement
  and similar benefits | 
|-------------------------------------------------------------- |  | ------------------------------------------------------------------- |  | ------------------------------------------ | 
|                                                               |  |                                                                     |  |                                            | 
|All
  directors and executive officers as a group (21 persons) |  | $2,205,000                                                          |  | $504,000                                   | 

Blue
Squares board of directors maintains a compensation committee, which reviews
and approves the compensation of its executive officers.

Blue Square pays
its directors, except its chairman of the board of directors, the maximum
amount payable to external directors under Israeli law for a company with
equity comparable to Blue Squares equity. 
As of December 31, 2002, that amount consisted of NIS 45,621 or
$9,630 per year, plus, as compensation for attending meetings of the board of
directors, NIS 1,755, or $370 per meeting. 
Blue Square does not have any service contract with any of its directors
granting benefits to these directors upon termination of office.

The chairman of
the board of directors of Blue Square receives a monthly gross salary of NIS
40,000 linked to changes in the CPI, since September 1, 2000, the date on
which his term of office began. Blue Squares corporate audit committee, board
of directors and the shareholders meeting approved this arrangement

48

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All
of the 1,500,000 options to purchase ordinary shares of Blue Square, which were
authorized under Blue Squares share option plan, were issued and
subsequently exercised.  No further
options may be granted under the share option plan and no options to purchase
shares of Blue Square are currently outstanding.  In December 1999, the Registrar of Cooperative Societies
appointed an investigator to investigate certain activities of the Co-Op 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 the officers, directors and
employees of Blue Square 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

Board Practices

Appointment of Directors and Terms of
Officers

The directors of
Blue Square, other than its external directors, are elected by Blue Squares
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, 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.  Blue Squares 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 executive officers of Blue Square are determined by the board
of directors.  The terms of office of
the directors must be approved, under the Israeli Companies Law, by the
corporate audit committee, the board of directors and the shareholders meeting.

Independent and External Directors

Israeli Companies Law Requirements

Blue Square is
subject to the provisions of the Israeli Companies Law, which became effective
on February 1, 2000 (the Israeli Companies Law). 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.

49

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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 the
company, any entity controlling the company or any entity controlled by or
under common control with the company. 
The term affiliation includes:

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 the company.

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 the
company.  Each committee of Blue Squares board of directors is
required to include at least one external director and its corporate audit
committee is required to include all of the 
external directors.

Tamar Hacker and
Zeev Vurembrand currently serve as Blue Squares external directors.

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New York Stock Exchange Requirements

Blue Squares
ordinary shares and ADSs are listed on the New York Stock Exchange, and Blue
Square is subject to the rules of the New York Stock Exchange applicable to
listed companies.  Under the current New
York Stock Exchange rules, Blue Square is required to have three independent
directors. Blue Square complies with these requirements.  The independence standard under the New York
Stock Exchange 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 that employment, (2) any person who is
a partner, controlling shareholder or executive officer of an organization that
has a business relationship with the company or who has a direct business
relationship with the company, unless the board of directors of the company
determines that the business relationship does not interfere with the 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 the companys executives serves on that
companys compensation committee.  See
-Audit Committee- New York Stock Exchange Requirements below for a
description of proposed changes to the independence standard under the New York
Stock Exchange rules.

Audit Committees

Israeli Companies Law Requirements

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

The role of the
corporate audit committee is to examine flaws in the business management of the
company, in consultation with the internal auditor and the companys
independent accountants and suggest appropriate course of action.  In addition, the approval of the corporate
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 the company or any person who serves as a director or as a
general manager.

A corporate 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 corporate audit committee and at least one of whom was present
at the meeting in which an approval was granted.

Commencing from
February 18, 2003 Blue Square has maintained an audit committee maintained for purposes of the
New York Stock Exchange rules described below separate from the corporate audit committee for
purposes of the Israeli Companies Law. As of June 15, 2003, Arie Bar, Yona Markovitz,
Tamar Hacker, Zeev Vurembrand, and M. Gen. (res.) Gideon Shefer served as a members of our
corporate audit committee.

51

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New York Stock Exchange Requirements

Under the current
New York Stock Exchange rules, Blue Square is required to maintained an audit
committee consisting of at least three 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.

Pursuant to the
Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission (the SEC)
has issued new rules which would, 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 proposed rules that would comply
with the SECs requirements and which are expected to be applicable to us 18
months following publication of SEC approval of the proposed rules.

The proposed
requirements would 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.

Pursuant the
Sarbanes-Oxley Act of 2002, on February 18, 2003 the board of directors established
an audit committee for purposes of the New York Stock Exchange rules.  As stated above under -Israeli Companies
Law Requirements, the audit committee maintained by Blue Square for purposes
of the New York Stock Exchange rules is separate from the corporate audit
committee maintained for purposes of the Israeli Companies Law. As of June 15,
2003, Arie Bar, Tamar Hacker, Zeev Vurembrand, M.Gen (res) Gideon Shefer  and Haim Zaban served as a members of our
audit committee.

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Internal Auditor

Under the Israeli
Companies Law, the board of directors must also appoint an internal auditor
proposed by the corporate audit committee. 
The role of the internal auditor is to examine whether the companys
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 the companys independent accountant or its
representative. Blue Square complies with this requirement.

As of June 15,
2003, Shmuel Tal was our internal auditor.

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
corporate audit committee approval, board of directors approval and
shareholder approval.

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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;
  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 corporate audit committee
and the board of directors must approve the transaction.  Under specific circumstances, shareholder
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 corporate 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.

Disclosure of Personal Interests of a Controlling Shareholder

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 corporate 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
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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.

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 45% shareholder of the company, unless there is a 50%
shareholder of the company or would acquire 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.

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Office Holder Insurance

Blue Squares
Articles of Association provide that, subject to the provisions of the Israeli
Companies Law, Blue Square may enter into a contract for the insurance of the
liability of any of its 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.                                                                                                      

Exemption and Indemnification of
Office Holders

Blue Squares
Articles of Association provide that Blue Square 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s
  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, Blue Squares shareholders approved amendments to Blue
Squares Articles of Association enabling Blue Square to provide its 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 Blue
Squares shareholders equity as stated in Blue Squares consolidated financial
statements for the year ended December 31, 2000 for all persons and all
events to be indemnified.

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Limitations on Insurance and
Indemnification

The Israeli
Companies Law provides 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;                                                                                    
| |  | 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 Blue Squares 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, Blue Squares office holders must be approved by
Blue Squares corporate audit committee and board of directors and, in
specified circumstances, by Blue Squares shareholders.  Blue Squares corporate audit committee,
board of directors and general shareholders meeting approved in
February 2001 the grant of indemnification and exemption letters to Blue
Squares 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 Blue
Squares shareholders equity (in U.S. dollars) as stated in Blue Squares
consolidated financial statements for the year ended December 31, 2000,
for all persons and events.  Under the
indemnification and exemption letters, Blue Square 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;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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 the
  Companys shares or assets, by the Co-Op.                                                                                                                                                                          
| |  | 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 Blue Square, including any related decision, including
  without limiting the generality of the foregoing, splitting, dividing or
  modifying Blue Squares share capital, establishment of subsidiaries or their
  liquidation or sale and issuance of shares; or            
| |  | 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 the Company in relation with the following issues:
  building and planning, licensing of businesses, safety in work places,
  environment and recycling and protection of the consumer.                                                                                  
| |  | Each one of
  the circumstances stated above, all in connection with the officeholders
  service on behalf of the companys subsidiaries or affiliated companies.                                                                                                                                              

Blue
Square is 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.

Blue Square
agreed to indemnify its 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.

The Company will
indemnify its 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.

Blue Square
further agreed to exempt these directors and officers to the fullest extent
permitted by the Israeli Companies Law from any liability towards Blue Square
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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This
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 Blue Square in accordance with the options allotment
scheme of 1996.

This 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.                                                                                           
|   |  |                                                                                                                                                                       
|4. |  | A fine or monetary composition imposed on him.                                                                                                                        

Under
the resolution from February 2001, Blue Square obtained and will continue to
hold a directors and officers liability insurance policy.  Coverage under Blue Squares policy has been
set at $30 million (including its subsidiaries).

Blue
Square has purchased directors and officers liability insurance policy for
directors and officers of the Company and its subsidiaries, which includes BSIP and its subsidiaries (the Insurance
Policy). The Insurance Policy is for a period beginning on September 1, 2002
and ending on August 31, 2003 (the Policy Period), for the maximum coverage
of US$30 million per claim and in the aggregate during the Policy Period.   Our corporate 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
corporate audit committee, Board of Directors and shareholders have approved
the acquisition by Blue Square of a Run Off insurance policy for a maximum
period of six (6) years commencing from the date of change in control in the
Company (the Run Off Insurance Policy) which covers directors and officers of
the Company and its subsidiaries, which may include BSIP and its subsidiaries,
up to a total liability of US$30 million. The Run Off Insurance Policy will
cover the liability of persons who were directors and/or officers of the
Company, BSIP and their subsidiaries, through the date of the purchase of the
Run Off Insurance Policy, with respect to events that occurred prior
to such date. The total premium for the Run Off Insurance Policy for the period
of 6 (six) years, may not be more than 350% of the total amount of the annual premium paid for the
Insurance Policy. If the Run Off Insurance Policy will be for a period of less
than 6 (six) years, the total premium will be reduced. As of June 15, 2003,
Blue Square had not received a proposal with respect to Run Off Insurance
Policy, and there can be no guarantee that Blue Square will in fact acquire
such Run Off Insurance Policy.

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In the event that
the Insurance Policy covers directors and officers of both the Company and BSIP
and their respective subsidiaries, the payment of the Annual Premium will be
divided between each of the Company 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 equity of
the Company and BSIP and their respective subsidiaries, as presented in their
respective current annual audited consolidated Financial Statements.

Committees

Blue Squares
board of directors has established a compensation committee, audit committees
and a strategy and investment committee. 
Blue Squares compensation committee, which consists of David Brodet,
Doron Cohen and Tamar Hacker, administers issues relating to employee
compensation.  Blue Squares corporate
audit committee maintained for the Israeli Companies Law purposes, which
consists of Arie Bar, Yona Markovitz, Tamar Hacker, Zeev Vurembrand and Gideon
Shefer, examine flaws in the business management of the Company and its
approval is required to effect specified action and transaction with interested
parties. Blue Squares audit committee maintained for New York Stock Exchange
purposes, which consists of Arie Bar, Tamar Hacker, Zeev Vurembrand, Gideon
Shefer and Haim Zaban assists the Board of Directors in overseeing the quality
and integrity of Blue Squares accounting, auditing and reporting
practices.  Blue Squares strategy  and investment committee, which consists of
Zeev Vurembrand, Yossi Kucik, Doron Cohen, Tamar Ben-David, Haim Zaban and
David Brodet, reviews our business strategy, operational plans and financial
position, and provides its recommendations to Blue Squares board of directors.

|C. |  | Employees.
|-- |  | ----------

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.

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

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Under a Special
Collective Bargaining Agreement, referred to as the Special Agreement, dated
May 1, 1996, among the Co-Op, Blue Square, the Histadrut (General Federation of Labor in
Israel), 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.  Any benefits not recorded on the Co-Ops
records as of the date of transfer, remain obligations of the Co-Op.  The Special Agreement applies only to
employees who were covered by collective bargaining agreements while employed
by the Co-Op, and does not apply to the Co-Op employees who were employed
pursuant to personal employment contracts. See Item 7. Major Shareholders and
Related Party Transactions- Benefits for Employees. In 2001, we entered into a
new labor agreement 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. This agreement was in effect for a
period of two years, commencing in April 2000, and as of June 15, 2002 we
continued to operate under this agreement.

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.

Furthermore,
under certain provisions of these agreements, the wages of most of our
employees are automatically adjusted in accordance with cost-of-living
adjustments.

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.

|D. |  | Share
  Ownership.
|-- |  | ------------------

As
of June 15, 2003, none of Blue Squares directors or officers owned more than
1% of its outstanding equity securities.

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|ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|------- | -------------------------------------------------

|A. |  | Major
  Shareholders.
|-- |  | ---------------------

The
following table sets forth certain information regarding the beneficial
ownership of Blue Squares ordinary shares as of June 15, 2003, by
each person or entity known to own beneficially 5% or more of Blue Squares outstanding ordinary shares
based on information provided to Blue Square by the holders or disclosed in
public filings with the Securities and Exchange Commission.  Blue Squares major shareholders do not have
voting rights different from the voting rights of Blue Squares other
shareholders.

|Name                               |  | Number of OrdinaryShares Beneficially
  Owned |  | Percentage
  of
  Outstanding Ordinary
  Shares(1)
|---------------------------------- |  | --------------------------------------------- |  | --------------------------------------------------
|                                   |  |                                               |  |                                                   
|Co-Op Blue Square Services Society |  | 29,999,993                                    |  | 78.1%                                             

---

|(1) | The
  percentage of outstanding ordinary shares is based on 38,400,000 ordinary
  shares outstanding as of June
  15, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------

See
Item 4.  Information on the
CompanyContemplated Change in Control for information regarding the
contemplated sale of all of the shares of Blue Square held by the Co-Op.

As of April 30,
2003, Blue Square had approximately 18 shareholders of record with a United
States address.  As of April 30, 2003,
these United States record holders held approximately 1,451,672 ordinary shares
in the form of ADSs, representing approximately 3.78% of Blue Squares then
outstanding share capital.

The Co-Op
currently owns approximately 78.1% of Blue Squares outstanding ordinary shares
and voting power.  So long as the Co-Op
continues to own beneficially more than 50% of Blue Squares outstanding
ordinary shares and voting power, it will be able to control the outcome of
matters requiring shareholder approval, including the election of all of Blue
Squares directors, other than Blue Squares two external directors, whose
election 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 vote against their nomination.

To the best of
our knowledge, except for the Co-Op, Blue Square is not directly or indirectly
owned or controlled by another corporation or by any foreign government.

62

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On February 13,
2002, the Co-Op Management Committee submitted an application to the District
Court of Tel-Aviv to confirm a plan which provided for the sale of  the assets of the Co-Op, including
approximately 78.1% of Blue Square Ordinary Shares. Following the
instruction of the District Court of Tel Aviv to convene a meeting of the
members of the Co-Op in order to confirm the settlement implementing the plan,
and the confirmation of the proposed settlement by the members of the Co-Op,
the District Court approved the settlement and authorized the Co-Op Management
Committee to carry out the settlement plan and to commence the selling
procedure.

In April 2003,
following the submission of a number of bids for the holdings of the Co-Op in
Blue Square, the Company was informed that the highest bid, for the amount of
NIS 1,337,360,000, plus interest to the date of purchase, was submitted by
Bronfman-Alon .  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.  The sale agreement and its execution has been approved by  the Commissioner of Israelis Antitrust
Authority, and is expected to be completed shortly. See Item 4.  Information on the CompanyContemplated
Change in Control for more information regarding the contemplated sale of the
shares of Blue Square held by the Co-Op.

|B. |  | Related
  Party Transactions.
|-- |  | -----------------------------

Arrangements
between us and the Co-Op

See Item 4.  Information on the CompanyContemplated
Change in Control for information regarding the contemplated sale of the
shares of Blue Square held by the Co-Op to Bronfman-Alon.

Sale
of IKEA

Also as part of
our strategy to focus on supermarket goods retailing, in 2001, we sold all of
our interests in IKEA to the Co-Op for $1.3 million, plus interest at an
annual rate of 6.5% beginning on February 2, 2000 and ending on the date
of payment, and the repayment of a shareholders loan we granted IKEA of
approximately NIS 1 million, or $0.2 million. We did not record a
capital gain on the sale. The excess of the consideration received over the
carrying value of the investment in the approximate amount of NIS 6.6 million
(net of taxes) was credited to additional paid-in capital in accordance with
Israeli accounting standards because the transaction was with a controlling
shareholder.

Lease Agreements

Prior to January
1, 2003, we leased from the Co-Op and one of its subsidiaries (Hamashbir) five
facilities that operate as supermarkets. 
Commencing from January 1, 2003, we lease from the Co-Op four facilities
that operate as supermarkets. The expiration dates of these leases were
extended, and the term of the leases range from five (5) to ten (10)
years.  Lease payments are calculated
based on sales (with a minimum rent) and are paid monthly.

63

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Management Agreement

The Co-Op also
provides Blue Square with management and other services.  The service agreement became effective in
April 1996 and is scheduled to remain in effect so long as the Co-Op owns
at least 51% of the outstanding shares of Blue Square.  Under the agreement, the annual fee was
determined to be $1.25 million until 2000 and that the sum would be discussed
between Blue Square 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. The management fee for the first six
(6) months of 2003 is $250,000.  In
addition, Blue Square shall pay approximately $41,667 for each month
thereafter, until the sale of the holdings of the Co-Op in Blue Square to
Bronfman-Alon.

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.

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 Blue Square, different
interpretations have arisen between Blue Square 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 decides that
the above mentioned amounts is payable entirely by Blue Square.

Inter-Company Accounts

Blue Square,
BSIP, Hyper Hyper and the Co-Op maintain inter-company accounts for day-to-day
operations which bear 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 6.9%
in 2002, 7% in 2001and 9.5% in 2000.

Registration
Rights Agreement

In 1996, the
Co-Op and Blue Square entered into a registration rights agreement.  Under the agreement, the Co-Op has the right
to require Blue Square to register its ADSs or ordinary shares.  These rights may not be exercised more
frequently than once in any six-month period. 
Blue Square will not be required to complete more than three of these
registrations.  The Co-Op will bear the
expense of these registrations.  The
Co-Op also has the right, in some
circumstances, to register its ADSs or ordinary shares for sale if Blue Square
at any time proposes to register any of its securities for sale.  Under the agreement, the Co-Ops piggyback
registration rights may be exercised for an unlimited number of times but may
not be exercised if the exercise interferes with an offering of ADSs by Blue
Square.

64

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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
3,950 employees are working for Hyper Hyper under that arrangement.  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.

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 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 2002 was 1.95% of Hyper Hypers sales.

Blue Square
provides certain services to BSIP pursuant to a management agreement in
consideration for annual management fees of NIS 103,500, or $21,849 linked to
the July 1996 CPI.

Lease Arrangements

Pursuant to an
arrangement adopted in October 1996, Blue Square purchases real property
which BSIP identifies as appropriate for BSIPs use as a store location.  BSIP leases that property from Blue Square
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.       

BSIP is not obligated to lease the property, in which case the property
may be used by Blue Square.

65

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Blue
Square leases from BSIP four (4) facilities in which it operates supermarkets,
for an annual rent equal to 9% of the appraised value of the properties,
and part of the distribution center, for an annual rent equal to 9% of the
adjusted cost of that property.  The
other part of the distribution center is leased by Blue Square from BSIP for an
annual rent equal to 7% of the adjusted cost of the property.  Most of the leases are renewable for
additional periods on substantially the same terms and conditions.

Hyper Hyper
leases from Blue Square and certain of its subsidiaries 23 facilities in which
it operates  different formats of
supermarkets.  The leases are for
varying terms, generally for a period of 119 months.

Agreements to Identify Store Locations

The Co-Op, Blue
Square and Hyper Hyper have entered into an agreement according to which the
Co-Op identifies facilities suitable for the Co-Op stores.  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.

We believe that
the terms of these agreements are at arms-length and are no less favorable to
us than those available from unaffiliated third parties.

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.                  

66

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|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 a class action 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, Supersol 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 the Company amounts to
approximately NIS 108 million.

The plaintiff is
claiming compensation from the Company 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.

We believe, based
on the opinion of legal counsel, that, at this preliminary stage of the claim,
it is difficult to evaluate the outcome of the suit and of the application for
the suit to be recognized as a class action. However, we believe, based on the
opinion of legal counsel, that Blue Square has good defenses, both against the
application and against the suit itself. Accordingly, no provisions, with
respect to the above suit have 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.

67

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The Co-Op Investigations

In December 1999,
the Registrar of Cooperative Societies appointed an investigator to investigate
certain activities of the Co-Op 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 a committee be appointed to replace the governing
body of the Co-Op and that the committee would consider commencing legal
proceedings with respect to that grant, investigate possible conflicts of
interest, manage the Co-Op and direct the voting of the shares that the Co-Op
owns in its subsidiaries, including Blue Square, for the election of the
directors of these subsidiaries and other matters

In June, 2000,
the Registrar of Cooperative Societies decided to nullify the elections to the
governing body of the Co-Op.  In his
decision, the Registrar of Cooperative Societies adopted the recommendations of
Advocate Doron Dinaey, who was appointed to examine the election proceedings.

On August 15,
2000, all the members of the secretariat of the Co-Op resigned, after the
Israeli Supreme Court rejected a petition seeking to enjoin the Registrar of
Cooperative Societies from appointing a management committee to the Co-Op.  On August 15, 2000, the Registrar of
Cooperative Societies appointed a management committee for the Co-Op. The Co-Op
Management Committee was granted the power to manage the Co-Op pursuant to the
regulations of the Cooperative Societies Ordinance and the Co-Ops Articles of
Association.

The Co-Op
Management Committee has resolved not to commence legal proceedings against the
officers, directors and employees of Blue Square in receipt of options in 1996,
except for Mr. Benny Gaon who at the time in which the said options were
granted, served as the Chairman of the Co-Ops governing body, see Item 8.
Financial Information- Legal Proceedings below.

Blue Square
continues to operate in the ordinary course of business in accordance with its
Articles of Association and under the direction of its incumbent board of
directors.

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, the former acting chairman 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. 
The former acting chairman
of the board of directors
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.

68

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Restrictive
Trade Practices Inquiry

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

We are involved
in various 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.

Dividend Policy

The board of
directors of Blue Square adopted a dividend policy effective as of 1999,
according to which an annual dividend of up to 50% of our net profits will
generally be distributed, after considering our business plans, investment
plans, liquidity, the general economic situation in Israel as a whole and the
conditions of the retail section in particular.  The dividend policy may be amended at any time by Blue Squares
board of directors.

Despite the
abovementioned policy, during 2003, the board of directors of Blue Square
decided to distribute a dividend materially in excess of our net profits during
2002.

Change of Affiliation of Independent
Accountants

On
April 2002, Blue Squares general shareholders meeting resolved to engage
the accounting firm of Luboshitz Kasierer ,which was until May 2002 a member of
Arthur Andersen International, and since June 2002 is a member of Ernst &
Young International, as our independent accountants for the year 2002.

|B. |  | Significant
  Changes.
|-- |  | ----------------------

Except
as otherwise disclosed in this annual report, no significant change has
occurred since December 31, 2002.

69

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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
|---- |  | ---- | ---- | ---
|     |  |      |      |    
|1998 |  | $    | 16.3 |    
|1999 |  | $    | 16.9 |    
|2000 |  | $    | 13.9 |    
|2001 |  | $    | 17.3 |    
|2002 |  | $    | 15.0 |    

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
|---------------- |  | ---- | ---- | ---
|                 |  |      |      |    
|2001             |  |      |      |    
|First
  quarter  |  | $    | 13.8 |    
|Second
  quarter |  | $    | 14.8 |    
|Third
  quarter  |  | $    | 15.2 |    
|Fourth
  quarter |  | $    | 17.3 |    
|                 |  |      |      |    
|2002             |  |      |      |    
|First
  quarter  |  | $    | 14.8 |    
|Second
  quarter |  | $    | 15.0 |    
|Third
  quarter  |  | $    | 12.3 |    
|Fourth
  quarter |  | $    | 9.7  |    
|                 |  |      |      |    
|2003             |  |      |      |    
|First
  quarter  |  | $    | 8.2  |    

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.

70

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|2002     |  | High |      | Low
|-------- |  | ---- | ---- | ---
|         |  |      |      |    
|         |  |      |      |    
|December |  | $    | 9.4  |    
|         |  |      |      |    
|2003     |  |      |      |    
|January  |  | $    | 7.2  |    
|February |  | $    | 7.1  |    
|March    |  | $    | 8.2  |    
|April    |  | $    | 9.7  |    
|May      |  | $    | 10.1 |    

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, and 2002 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

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.

|2001             |  | High |  | Low 
|---------------- |  | ---- |  | ----
|                 |  |      |  |     
|                 |  | NIS  |  | $   
|First
  quarter  |  | 58.0 |  | 13.8
|Second
  quarter |  | 62.0 |  | 14.9
|Third
  quarter  |  | 64.7 |  | 14.9
|Fourth
  quarter |  | 78.5 |  | 17.8

|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

71

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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.

|2002     |  | High |  | Low |     
|-------- |  | ---- |  | --- | ----
|         |  |      |  |     |     
|         |  | NIS  |  | $   |     
|December |  | 42.2 |  |     | 8.9 
|         |  |      |  |     |     
|2003     |  |      |  |     |     
|January  |  | 34.8 |  |     | 7.2 
|February |  | 33.9 |  |     | 7.0 
|March    |  | 38.5 |  |     | 8.2 
|April    |  | 44.5 |  |     | 9.8 
|May      |  | 45.3 |  |     | 10.4

For
additional information on Blue Squares 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.               

On
November 2000, Blue Squares ordinary shares began trading also on the Tel
Aviv Stock Exchange.

Blue Squares
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.

|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

Blue Squares 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 Blue Squares Articles of Association the company shall engage in
any legal business.  Article 3 of Blue
Squares Articles of Association provides that Blue Square s 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 Blue
Squares Articles of Association, resolutions of the board of directors
regarding a private placement of Blue Squares shares constituting, or
securities convertible into, more than ten percent of Blue Squares outstanding
share capital require the approval of Blue Squares shareholders.

Board of Directors

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 corporate 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, corporate audit committee and shareholder
approval is also required.  The vote
required by the corporate 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.  Under the
Israeli Companies Law, the corporate 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.

73

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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.  If the transaction is with a third party in
which the member of the board of directors or senior management has a personal
interest, 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 corporate 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 corporate 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.

Blue
Squares 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. The corporate audit committee is responsible for reviewing, among other things,
potential conflicts of interest situations where appropriate.  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 corporate audit committee, the board of directors,
and the shareholders.

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According
to the Israeli Companies Law, an extraordinary transaction of a company with
its controlling member or with another person in whom the controlling member
has a personal interest, including a private offering and also a contract of a
company with a controlling member if he is also an officer or employee of the
company regarding his service and employment conditions, shall require the
following approvals in the following order: (i) corporate audit committee, (ii)
the board of directors and (iii) the general shareholders meeting so long as
the majority of the shareholders approving the transaction includes at least
one third of the votes of shareholders who do not have personal interest in the
approval of the transaction, or the total of opposing votes from shareholders
who do not have personal interest does not exceed  1% of all the voting rights in the company.

Description of Securities

Ordinary Shares

The
following is a description of Blue Squares ordinary shares.  Blue Square is
authorized to issue 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 Blue Squares Memorandum of
Association or 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 Blue
Squares Articles of Association unless
that transfer is restricted or prohibited by another instrument.

Notices. 
Under Blue Squares Articles of Association, each shareholder of record
is entitled to receive 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.  Blue Squares 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 Blue Squares ordinary shares and voting power
have the power to elect all of Blue Squares directors, other than Blue
Squares 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, the Co-Op has the power to elect all of Blue Squares
directors other than its two external directors.  See Item 3.  Key
InformationRisk FactorsThe Co-Op is able to control the outcome of matters
requiring shareholder approval. Please also see Item 4.  Information on the CompanyContemplated
Change in Control for information regarding the contemplated sale of all of
the shares of Blue Square held by the Co-Op to Bronfman-Alon.

Dividend and Liquidation Rights.  Blue Squares 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 Blue Squares 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
Blue Squares 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 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.

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.

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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.

Inspection of Transfer Books

The
Depositary is required to maintain at its transfer office in the Borough of
Manhattan, the City of New York, facilities for the execution and delivery,
registration, registration of transfer, and surrender of ADRs and books for the
registration of ADRs and transfers of ADRs that at reasonable times will be
open for inspection by the holders of ADRs and Blue Square.  The inspection shall not be for the purpose
of communicating with holders of ADRs in the interest of a business or object
other than the business of Blue Square or a matter related to the Deposit
Agreement or the ADRs.

Reports and Notices

Blue
Square is required to furnish to the Depositary English-language versions of
communications generally distributed to holders of ordinary shares, including
its annual reports to shareholders together with its audited consolidated
financial statements prepared in accordance with Israeli GAAP and reconciled
with U.S. GAAP, if necessary.  Blue
Square is required to also furnish its unaudited quarterly consolidated
financial information in English, which will also be prepared in accordance
with Israeli GAAP.  The Depositary is
required to make available for inspection by ADR holders at its principal
office any reports and communications received from Blue Square that are both
(a) received by the Depositary as the holder of ordinary shares and
(b) made generally available to the holders of ordinary shares by Blue Square. 
The Depositary also will send these reports to ADR holders as soon as
practicable after receipt of copies of these reports when furnished by Blue
Square as provided in the Deposit Agreement.

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On
or before the first date on which Blue Square gives notice, by publication or
otherwise, of any meeting of holders of ordinary shares or shareholders
generally, or of any adjourned meeting of these holders, or of the distribution
of cash dividends or the offering of any rights, Blue Square shall transmit to
the Depositary and the Custodian a copy of that notice in the form given or to
be given to holders of ordinary shares. 
Blue Square will arrange for the translation into English and the prompt
transmittal to the Depositary and the custodians of these notices and any other
reports and communications which are made generally available by Blue Square to
holders of the ordinary shares.  The
Depositary is requiring, at Blue Squares expense, to arrange for the mailing
of these notices to all ADR holders if requested in writing by Blue Square.

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.

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.

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Charges of Depositary

The
Depositary will charge any party depositing or withdrawing ordinary shares or
any party surrendering ADRs or to whom ADRs are issued, including issuance in
connection with a stock dividend or stock split declared by Blue Square or an
exchange of stock regarding the ADRs or deposited securities or a distribution
of ADRs pursuant to the Deposit Agreement, where applicable:  (a) taxes and other governmental charges;
(b) registration fees as may from time to time be in effect for the
registration of transfers of ordinary shares generally on the share register of
Blue Square or the appointed agent of Blue Square for transfer and registration
of ordinary shares and applicable to transfers of ordinary shares to the name
of the Depositary or its nominee or the Custodian or its nominee on the making
of deposits or withdrawals; (c) cable, telex and facsimile transmission
expenses as expressly provided in the Deposit Agreement to be at the expense of
persons depositing ordinary shares or owners; (d) expenses incurred by the
Depositary in the conversion of foreign currency pursuant to the Deposit
Agreement; (e) a fee not in excess of $5.00 per 100 ADSs, or portion of 100 ADSs,
for the issuance and surrender of ADRs under the Deposit Agreement; (f) a fee
not in excess of $.02 per ADS, or portion of an ADS, for any cash distribution
made under the Deposit Agreement; and (g) a fee for the distribution of
securities under the Deposit Agreement, in an amount equal to the fee for the
execution and delivery of ADSs referred to above, which would have been charged
as a result of the deposit of these securities, but which securities are
instead distributed by the Depositary to owners.

General

Neither
the Depositary nor Blue Square will incur any liability if prevented or delayed
from performing its obligations under the Deposit Agreement by reason of any
present or future law of any country, act of God, war, the threat of any civil
or criminal penalty, or any other circumstances beyond its control or, in the
case of the Depositary,any
provision of Blue Squares Articles of Association or of the ordinary shares
deposited under the Deposit Agreement. 
The obligations and liabilities of Blue Square and the Depositary and
its agents under the Deposit Agreement are expressly limited to performing
without negligence or bad faith their respective obligations specified therein.

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The
Depositary will act as ADR registrar or appoint a registrar or one or more co-registrars for registration of the
ADRs evidencing the ADSs in accordance with any requirements of the New York
Stock Exchange or of any other stock exchange on which the ADSs may be listed.

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.

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.

The
Depositary may, if so requested by Blue Square, appoint one or more co-transfer
agents for the purpose of effecting transfers, combinations and split-ups of
ADRs at designated transfer offices on behalf of the Depositary.  In carrying out its functions, a co-transfer
agent may require evidence of authority and compliance with applicable laws and
other requirements by holders of ADRs or persons entitled to ADRs and will be
entitled to protection and indemnity to the same extent as the Depositary.

Under
Israeli law, persons who hold a direct or indirect interest in 5% or more of
the ordinary shares, including persons who hold an interest through the holding
of ADRs, are required to promptly give written notice of their interest and any
subsequent change in their interest to Blue Square.

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|C. |  | Material
  Contracts.
|-- |  | ---------------------

Pursuant
to an Agreement, dated January 31, 2002, with HID International Distribution France
(HID), we were 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.  As part of the agreement, with certain
exceptions, we agreed not to import, manufacture or produce any other private
label products, other than products under the Leader Price name; however, we
are entitled to import any product other than products under the Leader Price
trademark as well as products to be purchased by us from HIDs manufacturers
and/or suppliers which at the time of execution of the agreement or prior
thereto worked with us. The parties agreed to discuss the terms on which HID
will pay us an annual bonus.  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.

For
a summary of other material contracts, see Item 4.  Information on the CompanyProperty, Plants and Equipment, Item
6.  Directors, Senior Management and
EmployeesBoard PracticesExculpation, Insurance and Indemnification of
Directors and OfficersLimitations on Insurance and Indemnification, 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 Blue Squares 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.

Dividends,
if any, paid to holders of Blue Squares ordinary shares, and any amounts
payable upon our dissolution, liquidation or winding up, as well as the
proceeds of any sale in Israel of Blue Squares 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.

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|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
(the 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 (the 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 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.

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.

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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.

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 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% applicable to individuals with respect to sale transactions
effected prior to January 1, 2003.

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Real
Gains derived from the disposal after January 1, 2003 of an asset 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% 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.

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%
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.

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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, 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
| | - | ------------------------------------------------------------------------------------------------------

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,
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
| | - | ------------------------------------------------------------------------------
| |   |                                                                               
| |   |                                                                              

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.

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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, 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).

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. As a temporary measure for 2003, the
stockbroker will withhold tax from
the consideration received upon the sale at the rate of 0.5% from January 1,
2003 until June 30, 2003 and at the rate of 1% from July 1, 2003 until December
31, 2003.

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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 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.

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 (the 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.

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. 
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 US
federal income tax imposed on the sale, exchange or other disposition, subject
to the limitations in US laws applicable to foreign tax credits. The US treaty
does not relate to US state or local taxes.

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.

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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 the Company 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.

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:

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| |  | 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.                                                                                                      

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
tradeable 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
received 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.

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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.

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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):

| |  | 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.

95

---

---

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.

Blue
Square believes that it was not a PFIC in 2002.  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.                                                                                                                                                                                                                                   

96

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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 28% 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 28% 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 (the 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.

97

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|I. |  | Subsidiary Information.
|-- |  | -----------------------
|   |  |                        
|   |  | Not
  applicable.      

|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,
  2002
  Expected Maturity (NIS in thousands)
|------------------------------------------------------ | -------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------
|                                                       |                                                                                                          |                                                           
|                                                       |                                                                                                          | 2003                                                      
|                                                       |                                                                                                          |                                                           
|                                                       | Long
  term loans from banks
  Linked to the CPI  4.6%
  (average fixed rate as of
  December 31, 2001) |                                                           
|                                                       |                                                                                                          |                                                           
|                                                       | Long
  term loans from Bank
   unlinked                                                                 |                                                           
|                                                       | Average
  Fixed Rate(7.3%)                                                                               |                                                           
|                                                       | Variable
  Rate                                                                                          |                                                           
|                                                       |                                                                                                          |                                                           
|                                                       |                                                                                                          |                                                           
|                                                       |                                                                                                          | 106,252                                                   
|                                                       |                                                                                                          |                                                           
|Debentures
  - Linked to the
  CPI - fixed Rate (6.8%) |                                                                                                          | 8,153                                                     

---

Inflation Risks and Exchange Rate Risks

Blue
Square has a net excess of unlinked monetary liabilities over unlinked monetary
assets.  Therefore, an increase in the
CPI results in financing income due to the erosion of the net unlinked monetary
liabilities, whereas a decrease in the CPI results in financing expenses due to
the appreciation of the net unlinked monetary liabilities.  In addition, according to Israeli GAAP, the
Companys non-monetary assets are adjusted to the CPI in respect of the month
of the balance sheet date, while the long-term bank loans and the debentures
are adjusted to the CPI for the month preceding the balance sheet date (the
known index).  Therefore, an increase
in the known index in excess of the increase in the index in respect of the
month, raises financial expenses.

98

---

---

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

|     |  | CPI  |   | The known
  index
|---- |  | ---- | - | -------------------
|     |  |      |   |                    
|2000 |  | 0    | % |                    
|2001 |  | 1.41 | % |                    
|2002 |  | 6.5  | % |                    

The table below provides an analysis of monetary assets and liabilities
by currency and linkage as of December 31, 2002:

|                                                          |  | Israeli Currency |  | OtherCurrenciesespecially theEuro
|--------------------------------------------------------- |  | ---------------- |  | ---------------------------------
|                                                          |  |                  | 
|                                                          |  | Unlinked         |  | Linked to the Israeli CPI        
|                                                          |  |                 
|                                                          |  | NIS in thousands
|                                                          |  |                 
|Cash
  and cash equivalents                               |  | 13,969           |  |                                  
|Trade
  receivables                                       |  | 525,329          |  |                                  
|Other
  accounts receivables                              |  | 42,812           |  |                                  
|Investments
  in affiliates                               |  | -                |  |                                  
|                                                          |  |                  |  |                                  
|                                                          |  | 582,110          |  |                                  
|                                                          |  |                  |  |                                  
|Short-term
  credit from banks                            |  | 127,809          |  |                                  
|                                                          |  |                  |  |                                  
|Trade
  payables                                          |  | 725,504          |  |                                  
|Other
  accounts payables                                 |  | 250,645          |  |                                  
|Long
  term lonas from banks including current maturities |  | 273,754          |  |                                  
|Debentures
  including current maturities                 |  | -                |  |                                  
|                                                          |  |                  |  |                                  
|                                                          |  | 1,377,712        |  |                                  
|                                                          |  |                  |  |                                  
|Monetary
  liabilities, net                               |  | 795,602          |  |                                  
|                                                          |  |                  |  |                                  



|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- | ------------------------------------------------------
|         |                                                       
|         | Not
  applicable.                                     

99

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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

Within
the 90 days prior to the date of this Annual Report on Form 20-F, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (Disclosure Controls) and internal controls and procedures for
financial reporting (Internal Controls). The controls evaluation was done
under the supervision and with the participation of management, including our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Limitations on the Effectiveness of Controls

Our
management, including the CEO and CFO, does not expect that our Disclosure
Controls or our Internal Controls will prevent all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control systems objectives will be met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Controls can also be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.

100

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---

Scope of the Controls Evaluation

The
evaluation of our Disclosure Controls and our Internal Controls included a
review of the controls objectives and design, the companys implementation of
the controls and the effect of the controls on the information generated for
use in this Annual Report. In the course of the controls evaluation, we sought
to identify data errors, controls problems or acts of fraud and confirm that
appropriate corrective action, including process improvements, were being
undertaken. This type of evaluation is performed on an annual basis so that the
conclusions of management, including the CEO and CFO, concerning controls
effectiveness can be reported in our Annual Report on Form 20-F. Our Internal
Controls are also evaluated on an ongoing basis by our personnel in our finance
department, as well as our independent auditors who evaluate them in connection
with determining their auditing procedures related to their report on our
annual financial statements and not to provide assurance on our Internal
Controls. The overall goals of these various evaluation activities are to
monitor our Disclosure Controls and our Internal Controls, and to modify them
as necessary; our intent is to maintain the Disclosure Controls and the
Internal Controls as dynamic systems that change as conditions warrant.

Among
other matters, we sought in our evaluation to determine whether there were any
significant deficiencies or material weaknesses in the companys Internal
Controls, and whether the company had identified any acts of fraud involving
personnel with a significant role in the companys Internal Controls.

Conclusions

Based
upon the controls evaluation, our CEO and CFO have concluded that, subject to
the limitations noted above, our Disclosure Controls are effective to ensure
that material information relating to Blue Square and its consolidated
subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being prepared.

From
the date of the controls evaluation to the date of this Annual Report, there
have been no significant changes in Internal Controls or in other factors that
could significantly affect Internal Controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.

|ITEM 16. | [RESERVED]
|-------- | ----------

101

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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         |  | Memorandum
  of Association of the Registrant (incorporated by reference to Exhibit 3.1 to
  the Registration Statement on Form F-1 (File No. 333-05024)).                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                  
|1.2         |  | Articles
  of Association of the Registrant adopted in August 2001. (incorporated by
  reference to Exhibit 1.2 to the Companys Annual Report on Form 20-F for the
  year ended December 31, 2001).                                                                             
|            |  |                                                                                                                                                                                                                                                                                  
|4.1         |  | Form
  of Deposit Agreement (incorporated by reference to Exhibit (a) to the
  Registration Statement on Form F-6 (File No. 333-05158)).                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                  
|4.2         |  | Service
  Agreement made and entered into on the 1st day of January 1990 between
  Blue Square Chain (Super Super) Ltd. and Blue Square Chain (Hyper Hyper) Ltd.
  (incorporated by reference to Exhibit 10.10 to the Registration Statement on
  Form F-1 (File No. 333-05024)).
|            |  |                                                                                                                                                                                                                                                                                  
|4.3         |  | Supply
  Agreement made and entered into on the 1st day of January 1990 between
  Blue Square Chain (Super Super) Ltd. and Blue Square Chain (Hyper Hyper) Ltd.
  (incorporated by reference to Exhibit 10.11 to the Registration Statement on
  Form F-1 (File No. 333-05024)). 
|            |  |                                                                                                                                                                                                                                                                                  
|4.4         |  | Management
  Agreement made and entered into on July 23, 1996 between Blue Square
  Chain Investments & Properties Ltd. and the Registrant (incorporated by
  reference to Exhibit 10.12 to the Registration Statement on Form F-1 (File
  No. 333-05024)).                      
|            |  |                                                                                                                                                                                                                                                                                  
|4.5         |  | An
  Agreement to Loan Employees made and entered into on July 23, 1996
  between Blue Square Chain Properties (Hyper Hyper) Ltd. and the Registrant
  (incorporated by reference to Exhibit 10.13 to the Registration Statement on
  Form F-1 (File No. 333-05024)).            
|            |  |                                                                                                                                                                                                                                                                                  
|4.6         |  | Agreement
  made and entered into on July 25, 1996 between the Registrant and Blue
  Square Chain (Hyper Hyper) Ltd. regarding property selection (incorporated by
  reference to Exhibit 10.14 to the Registration Statement on Form F-1 (File
  No. 333-05024)).               
|            |  |                                                                                                                                                                                                                                                                                  
|4.7         |  | Registration
  Rights Agreement, dated as of July 25, 1996, by and among the Registrant
  and Co-Op Blue Square Consumers Cooperative Society Ltd. (incorporated by
  reference to Exhibit 10.15 to the Registration Statement on Form F-1 (File
  No. 333-05024)).              

102

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|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.8         |  | Services
  Agreement made and entered into on July 1, 1996 between the Registrant
  and Co-Op Blue Square Consumers Cooperative Society Ltd. (incorporated by
  reference to Exhibit 10.16 to the Registration Statement on Form F-1 (File
  No. 333-05024)).                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.9         |  | Letter,
  dated July 1, 1996, by Co-Op Blue Square Consumers Cooperative Society
  Ltd. indemnifying the Registrant against certain real estate tax liabilities
  (incorporated by reference to Exhibit 10.17 to the Registration Statement on
  Form F-1 (File No. 333-05024)).                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.10        |  | Letter,
  dated May 21, 1993 and March 18, 1993, by Co-Op Blue Square
  Consumers Cooperative Society Ltd. indemnifying Blue Square Chain Investments
  & Properties Ltd. against certain real estate tax liabilities
  (incorporated by reference to Exhibit 10.18 to the Registration Statement on
  Form F-1 (File No. 333-05024)).                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.11        |  | Agreement,
  dated as of July 6, 2000, by and between the Registrant and Co-Op Blue
  Square Consumers Cooperative Society Ltd. (incorporated by reference to
  Exhibit 4.11 to the Companys Annual Report on Form 20-F for the year ended
  December 31, 2000).                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.13        |  | Form
  of Letter of Exemption and Indemnity adopted in February 2001 (incorporated
  by reference to Exhibit 4.13 to the Companys Annual Report on Form 20-F for
  the year ended December 31, 2000).                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.14        |  | Form
  of Letter of Exemption and Indemnity (English translation accompanied by the
  Hebrew original). (incorporated by reference to Exhibit 4.14 to the Company
  Annual Report on Form 20-F for the year ended December 31, 2001)                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.15        |  | Special
  Collective Agreement made on the 28th day of May 1996 between Co-Op Blue
  Square Consumers Cooperative Society Ltd., the Registrant and The New
  Federation of Labor in Israel/The Federation of Clerical, Administrative and
  Services Employees and Consumers Cooperative UnionCentral Cooperative
  Society Ltd. (incorporated by reference to Exhibit 10.4 to the Registration
  Statement on Form F-1 (File No. 333-05024)).

103

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|Exhibit No. |           | Description
|----------- | --------- | -----------
|            |           |            
|            | 4.16      |            
|            |           |            
|            | 4.17      |            
|            |           |            
|            | 4.18*(1)  |            
|            |           |            
|            | 4.19*(1)  |            
|            |           |            
|            | 4.20*(1)  |            
|            |           |            
|            | 4.21*     |            
|            |           |            
|            | 8         |            
|            |           |            
|            | 10.(a).1* |            

---

|*   | Filed
  herewith.                                                        
|--- | -------------------------------------------------------------------------
|    |                                                                          
|(1) | Confidential
  treatment has been requested for portions of this Exhibit.

104

---

---

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:                    
| |                        
| |                        
| |                        
|
| | By:                    
| |                        
| |                        
| |                        
| |                        
| |                        

Date: June 23, 2003

105

---

---

I, Yoram Dar,
certify that:

1.  I have
reviewed this annual report on Form 20-F of Blue Square-Israel Ltd.;

2.  Based on
my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;

3.  Based on
my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;

4.  The
registrants other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:

| | a. | designed
  such disclosure controls and procedures to ensure that material information
  relating to the registrant, including its consolidated subsidiaries, is made
  known to us by others within those entities, particularly during the period
  in which this annual report is being prepared;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                     
| | b. | evaluated
  the effectiveness of the registrants disclosure controls and procedures as
  of a date within 90 days prior to the filing date of this annual report (the
  Evaluation Date); and                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                     
| | c. | presented
  in this annual report our conclusions about the effectiveness of the
  disclosure controls and procedures based on our evaluation as of the
  Evaluation Date;                                                                                                                          

5.  The registrants other certifying officers
and I have disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors (or persons
performing the equivalent function):

| | a. | all
  significant deficiencies in the design or operation of internal controls
  which could adversely affect the registrants ability to record, process,
  summarize and report financial data and have identified for the registrants
  auditors any material weaknesses in internal controls; and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                       
| | b. | any
  fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrants internal controls; and                                                                                                                                            

6.  The registrants other certifying officers
and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: June
23, 2003

| | /s/ Yoram Dar                                    | 
| | ------------------------------------------------ | 
| |                                                  | 
| | Name:
  Yoram Dar                               
| | Title:
  President and Chief
  Executive Officer

106

---

---

I, Zvi Bochman,
certify that:

1.  I have
reviewed this annual report on Form 20-F of Blue Square-Israel Ltd.;

2.  Based on
my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;

3.  Based on
my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;

4.  The
registrants other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:

| | d. | designed
  such disclosure controls and procedures to ensure that material information
  relating to the registrant, including its consolidated subsidiaries, is made
  known to us by others within those entities, particularly during the period
  in which this annual report is being prepared;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                     
| | e. | evaluated
  the effectiveness of the registrants disclosure controls and procedures as
  of a date within 90 days prior to the filing date of this annual report (the
  Evaluation Date); and                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                     
| | f. | presented
  in this annual report our conclusions about the effectiveness of the
  disclosure controls and procedures based on our evaluation as of the
  Evaluation Date;                                                                                                                          

5.  The registrants other certifying officers
and I have disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors (or persons
performing the equivalent function):

| | c. | all
  significant deficiencies in the design or operation of internal controls
  which could adversely affect the registrants ability to record, process,
  summarize and report financial data and have identified for the registrants
  auditors any material weaknesses in internal controls; and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                       
| | d. | any
  fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrants internal controls; and                                                                                                                                            

6.  The registrants other certifying officers
and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: June
23, 2003

| | /s/ Zvi
  Bochman                                     | 
| | ----------------------------------------------------- | 
| |                                                       | 
| | Name:
  Zvi Bochman                                  
| | Title:
  Vice President and
  Chief Financial Officer

107

---

---

|BLUE SQUARE - ISRAEL LTD.
|-------------------------

CONSOLIDATED FINANCIAL STATEMENTSAs of December 31, 2002



---

---

|BLUE SQUARE - ISRAEL LTD.
  (An Israeli Corporation)
|----------------------------------------------------

CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 2002

INDEX

|                                                             | Page       
|------------------------------------------------------------ | -----------
|                                                             |            
|                                                             |            
|REPORT OF
  INDEPENDENT PUBLIC ACCOUNTANTS                   | F-2        
|                                                             |            
|CONSOLIDATED
  FINANCIAL STATEMENTS                          |            
|                                                             |            
|Consolidated
  Balance Sheets                                | F-3 - F-4  
|                                                             |            
|Consolidated
  Statements of Income                          | F-5        
|                                                             |            
|Consolidated
  Statements of Changes in Shareholders Equity | F-6 - F-7  
|                                                             |            
|Consolidated
  Statements of Cash Flows                      | F-8 - F-9  
|                                                             |            
|Notes
  to the Consolidated Financial Statements             | F-10 - F-47



#  #  #  #  # 
#  #  #

---

---

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 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. The consolidated financial statements of the Company as of December
31, 2001, and 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 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, 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 22 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.

| | /s/ Luboshitz Kasierer                              
| | ----------------------------------------------------
| | LUBOSHITZ KASIERER                                  
| | An affiliate member of Ernst & Young
  International

Tel-Aviv, Israel
March 24, 2003

F-2

---

---

This is a copy of the previously issued Independent 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 22 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.

| | /s/ Luboshitz Kasierer
| | ----------------------
| | LUBOSHITZ KASIERER    
| | Arthur Andersen       

Tel-Aviv,
Israel
March 12, 2002

F-2a

---

---

|ERNST
&YOUNG | § | Kost Forer & Gabbay3 Aminadav St.
  Tel-Aviv 67067, Israel | n | 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 statements of income, changes in
shareholders equity and cash flows of Blue Square - Israel Ltd. and its
subsidiaries for the year ended December 31, 2000. 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 audits in accordance with generally accepted auditing standards
in the United States and  in Israel ,
including those prescribed by 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 management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In
our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated results of operations and
cash flows of the Company and its subsidiaries for the year ended December 31,
2000, in conformity with accounting principles generally accepted in Israel,
which differ in certain respects from those followed in the United States (see
Note 22 to the consolidated financial statements).

In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2000, and the consolidated
results of their operations and cash flows for the year than ended, in
conformity with generally accepted accounting principles in Israel, which
differ in certain respects from those followed in the United States (see Note
22 to the consolidated financial statements).

As
explained in Note 2, the 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.

|Tel-Aviv,
  Israel | /s/
  Kost Forer & Gabbay                
|------------------ | -----------------------------------------
|                   | KOST FORER & GABBAY                      
|March 6, 2001      | A
  Member of Ernst & Young International

F-2b

---

---

|                                                |  |      |  | December 31  |  | Conveniencetranslation
  (Note 2N)
  December 31 |          
|----------------------------------------------- |  | ---- |  | ------------ |  | ------------------------------------------------ | ---------
|                                                |  |      |  |             
|                                                |  | Note |  | 2001
  NIS   |  | 2002NIS                                          |          
|                                                |  |      |  |              |  |                                                  |          
|                                                |  |      |  | In thousands | 
|                                                |  |      |  |              | 
|ASSETS                                          |  |      |  |              |  |                                                  |          
|                                                |  |      |  |              |  |                                                  |          
|CURRENT ASSETS                                  |  |      |  |              |  |                                                  |          
|Cash
  and cash equivalents                     |  |      |  | 1,388        |  |                                                  | 13,969   
|Trade
  receivables                             |  | (3)  |  | 595,587      |  |                                                  | 527,456  
|Other
  accounts receivable                     |  | (4)  |  | 81,327       |  |                                                  | 98,471   
|Inventories                                     |  | (5)  |  | 345,486      |  |                                                  | 336,621  
|                                                |  |      |  |              |  |                                                  |          
|                                                |  |      |  | 1,023,788    |  |                                                  | 976,517  
|                                                |  |      |  |              |  |                                                  |          
|                                                |  |      |  |              |  |                                                  |          
|INVESTMENTS IN INVESTEE  COMPANIES              |  | (6)  |  | 5,765        |  |                                                  | 2,957    
|                                                |  |      |  |              |  |                                                  |          
|                                                |  |      |  |              |  |                                                  |          
|FIXED ASSETS, NET                               |  | (7)  |  | 2,280,742    |  |                                                  | 2,208,925
|                                                |  |      |  |              |  |                                                  |          
|                                                |  |      |  |              |  |                                                  |          
|INTANGIBLE ASSETS AND DEFERRED
    CHARGES, NET |  | (8)  |  | 101,172      |  |                                                  | 106,127  
|                                                |  |      |  |              |  |                                                  |          
|                                                |  |      |  |              |  |                                                  |          
|                                                |  |      |  |              |  |                                                  |          
|                                                |  |      |  | 3,411,467    |  |                                                  | 3,294,526
|                                                |  |      |  |              |  |                                                  |          

F-3

---

---

|                                                                                     |  |       |  | December 31  |  | Conveniencetranslation
  (Note 2N)
  December 31 |          
|------------------------------------------------------------------------------------ |  | ----- |  | ------------ |  | ------------------------------------------------ | ---------
|                                                                                     |  |       |  |             
|                                                                                     |  | Note  |  | 2001
  NIS   |  | 2002NIS                                          |          
|                                                                                     |  |       |  |              |  |                                                  |          
|                                                                                     |  |       |  | In thousands | 
|                                                                                     |  |       |  |              | 
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                             |  |       |  |              |  |                                                  |          
|                                                                                     |  |       |  |              |  |                                                  |          
|CURRENT LIABILITIES                                                                  |  |       |  |              |  |                                                  |          
|Short-term
  credit from banks and others                                            |  | (9)   |  | 240,124      |  |                                                  | 324,511  
|Trade
  payables                                                                     |  |       |  | 780,124      |  |                                                  | 729,836  
|Other
  payables and accrued expenses                                                |  | (10)  |  | 271,840      |  |                                                  | 317,768  
|                                                                                     |  |       |  |              |  |                                                  |          
|                                                                                     |  |       |  | 1,292,088    |  |                                                  | 1,372,115
|                                                                                     |  |       |  |              |  |                                                  |          
|                                                                                     |  |       |  |              |  |                                                  |          
|LONG-TERM LIABILITIES                                                                |  |       |  |              |  |                                                  |          
|Long-term
  loans from banks                                                         |  | (11)  |  | 395,214      |  |                                                  | 362,112  
|Debentures                                                                           |  | (12)  |  | 8,137        |  |                                                  | -        
|Deferred
  taxes                                                                     |  | (13B) |  | 26,224       |  |                                                  | 16,161   
|Accrued
  severance pay, net                                                         |  | (14)  |  | 27,463       |  |                                                  | 24,118   
|                                                                                     |  |       |  |              |  |                                                  |          
|                                                                                     |  |       |  | 457,038      |  |                                                  | 402,391  
|                                                                                     |  |       |  |              |  |                                                  |          
|                                                                                     |  |       |  |              |  |                                                  |          
|MINORITY INTEREST                                                                    |  |       |  | 174,583      |  |                                                  | 155,002  
|                                                                                     |  |       |  |              |  |                                                  |          
|                                                                                     |  |       |  |              |  |                                                  |          
|CONTINGENT LIABILITIES AND  COMMITMENTS                                              |  | (15)  |  |              |  |                                                  |          
|                                                                                     |  |       |  |              |  |                                                  |          
|SHAREHOLDERS EQUITY                                                                 |  |       |  |              |  |                                                  |          
|Share
  capital -                                                                    |  |       |  |              |  |                                                  |          
|Ordinary
  Shares of NIS 1 par value -                                               |  |       |  |              |  |                                                  |          
|Authorized:
  100,000,000 shares
        as of December 31, 2002 and 2001;           |  |       |  |              |  |                                                  |          
|Issued
  and outstanding: 38,400,000 shares
        as of December 31, 2002 and 2001 |  | (16)  |  | 53,117       |  |                                                  | 53,117   
|Additional
  paid-in capital                                                         |  |       |  | 755,172      |  |                                                  | 755,172  
|Retained
  earnings:                                                                 |  |       |  |              |  |                                                  |          
|Dividend
  declared after balance sheet date                                         |  |       |  | 59,595       |  |                                                  | -        
|Unappropriated                                                                       |  |       |  | 619,874      |  |                                                  | 556,729  
|                                                                                     |  |       |  |              |  |                                                  |          
|                                                                                     |  |       |  | 1,487,758    |  |                                                  | 1,365,018
|                                                                                     |  |       |  |              |  |                                                  |          
|                                                                                     |  |       |  |              |  |                                                  |          
|                                                                                     |  |       |  | 3,411,467    |  |                                                  | 3,294,526
|                                                                                     |  |       |  |              |  |                                                  |          

The accompanying notes form an integral part of the financial statements.

F-4

---

---

BLUE SQUARE - ISRAEL LTD.

CONSOLIDATED STATEMENTS OF INCOMEIn adjusted NIS of December 2002

|                                                                      |  |       |  | For the year ended December 31                 |   | Convenience
  translation
  (Note 2N)
  For the year
  ended
  December 31 |           
|--------------------------------------------------------------------- |  | ----- |  | ---------------------------------------------- | - | -------------------------------------------------------------------------- | ----------
|                                                                      |  |       |  |                                               
|                                                                      |  | Note  |  | 2000NIS                                        |   | 2001NIS                                                                    |           
|                                                                      |  |       |  |                                                |   |                                                                            |           
|                                                                      |  |       |  | In thousands (except share and per share data) |  
|                                                                      |  |       |  |                                                |  
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Sales                                                                 |  |       |  | 5,614,807                                      |   |                                                                            | 5,939,799 
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Cost of sales                                                         |  |       |  | 4,053,004                                      |   |                                                                            | 4,296,016 
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Gross
  profit                                                        |  |       |  | 1,561,803                                      |   |                                                                            | 1,643,783 
|                                                                      |  |       |  |                                                |   |                                                                            |           
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Selling, general and administrativeexpenses                           |  | (18A) |  | 1,268,857                                      |   |                                                                            | 1,320,994 
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Operating
  income                                                    |  |       |  | 292,946                                        |   |                                                                            | 322,789   
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Financing income (expenses), net                                      |  | (18B) |  | (45,077                                        | ) |                                                                            | (13,359   
|                                                                      |  |       |  |                                                |   |                                                                            |           
|                                                                      |  |       |  | 247,869                                        |   |                                                                            | 309,430   
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Amortization of goodwill                                              |  |       |  | (6,067                                         | ) |                                                                            | (5,378    
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Other income (expenses), net                                          |  | (18C) |  | 20,670                                         |   |                                                                            | (18,499   
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Income
  before taxes on income                                       |  |       |  | 262,472                                        |   |                                                                            | 285,553   
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Taxes on income                                                       |  | (13)  |  | 97,714                                         |   |                                                                            | 109,884   
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Income
  after taxes on income                                        |  |       |  | 164,758                                        |   |                                                                            | 175,669   
|                                                                      |  |       |  |                                                |   |                                                                            |           
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Equity in net earnings (losses) ofaffiliates                          |  |       |  | 1,410                                          |   |                                                                            | 3,629     
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Minority interest                                                     |  |       |  | (23,753                                        | ) |                                                                            | (25,603   
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Income
  from continuing operations                                   |  |       |  | 142,415                                        |   |                                                                            | 153,695   
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Loss from discontinued operations                                     |  | (21)  |  | 2,700                                          |   |                                                                            | -         
|                                                                      |  |       |  |                                                |   |                                                                            |           
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Net
  income                                                          |  |       |  | 139,715                                        |   |                                                                            | 153,695   
|                                                                      |  |       |  |                                                |   |                                                                            |           
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Earnings
  (loss) per Ordinary share or ADS:                          |  |       |  |                                                |   |                                                                            |           
|From
  continuing operations                                          |  |       |  | 3.71                                           |   |                                                                            | 4.00      
|                                                                      |  |       |  |                                                |   |                                                                            |           
|From
  discontinued operations                                        |  |       |  | (0.07                                          | ) |                                                                            | -         
|                                                                      |  |       |  |                                                |   |                                                                            |           
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Net income                                                            |  |       |  | 3.64                                           |   |                                                                            | 4.00      
|                                                                      |  |       |  |                                                |   |                                                                            |           
|                                                                      |  |       |  |                                                |   |                                                                            |           
|Weighted average number of sharesor ADS outstanding during the period |  |       |  | 38,400,000                                     |   |                                                                            | 38,400,000
|                                                                      |  |       |  |                                                |   |                                                                            |           

The accompanying notes form an integral part of the financial statements.

F-5

---

---

BLUE SQUARE - ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITYIn adjusted NIS of December 2002

|                                                                                   |  |                  |  |                                |         | Retained earnings                                    |  |                |  
|---------------------------------------------------------------------------------- |  | ---------------- |  | ------------------------------ | ------- | ---------------------------------------------------- |  | -------------- | -
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|                                                                                   |  | Share
  capital  |  | Additional
  paid-in
  capital |         | Dividend
  declared
  after
  balance
  sheet
  date |  | Unappropriated |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|                                                                                   |  | NIS in thousands | 
|                                                                                   |  |                  | 
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Balance as
  of January 1, 2000                                                    |  | 53,117           |  |                                | 748,597 |                                                      |  | -              |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Dividend
  paid                                                                    |  | -                |  |                                | -       |                                                      |  | -              |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Net income                                                                         |  | -                |  |                                | -       |                                                      |  | -              |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Balance as
  of December 31, 2000                                                  |  | 53,117           |  |                                | 748,597 |                                                      |  | -              |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Additional
  paid-in capital in respect of
    transaction with parent cooperative |  | -                |  |                                | 6,575   |                                                      |  |                |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Dividend
  paid                                                                    |  | -                |  |                                | -       |                                                      |  | -              |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Dividend
  declared after balance sheet date                                       |  | -                |  |                                | -       |                                                      |  | 59,595         |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Net income                                                                         |  | -                |  |                                | -       |                                                      |  | -              |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Balance as
  of December 31, 2001                                                  |  | 53,117           |  |                                | 755,172 |                                                      |  | 59,595         |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Dividend
  paid                                                                    |  | -                |  |                                | -       |                                                      |  | (59,595        | )
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Net income                                                                         |  | -                |  |                                | -       |                                                      |  | -              |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|Balance as
  of December 31, 2002                                                  |  | 53,117           |  |                                | 755,172 |                                                      |  | -              |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  
|                                                                                   |  |                  |  |                                |         |                                                      |  |                |  

The accompanying notes form an integral part of the financial statements.

F-6

---

---

BLUE SQUARE - ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY (Cont.)

|                                  |  | Convenience translation (Note 2N)
  U.S.$ in thousands | 
|--------------------------------- |  | ------------------------------------------------------ | 
|                                  |  |                                                        | 
|                                  |  |                                                        | 
|                                  |  |                                                        | 
|                                  |  | Share
  capital                                        | 
|                                  |  |                                                        | 
|                                  |  |                                                        | 
|Balance as
  of January 1, 2002   |  | 11,213                                                 | 
|                                  |  |                                                        | 
|Dividend
  paid                   |  | -                                                      | 
|                                  |  |                                                        | 
|Net income                        |  | -                                                      | 
|                                  |  |                                                        | 
|Balance as
  of December 31, 2002 |  | 11,213                                                 | 
|                                  |  |                                                        | 

The accompanying notes form an integral part of the financial statements.

F-7

---

---

BLUE SQUARE - ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWSIn adjusted
NIS of December 2002

|                                                                                                                |  | For the year ended December 31 |   | Convenience
  translation
  (Note 2N)
  For the year
  ended |         
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | - | ------------------------------------------------------------ | --------
|                                                                                                                |  |                                |   | December 31                                                  |         
|                                                                                                                |  | 2000
  NIS                     |   | 2001
  NIS                                                   |         
|                                                                                                                |  |                                |   |                                                              |         
|                                                                                                                |  | In thousands                   |  
|                                                                                                                |  |                                |  
|CASH
  FLOWS FROM OPERATING ACTIVITIES                                                                          |  |                                |   |                                                              |         
|Net income                                                                                                      |  | 139,715                        |   |                                                              | 153,695 
|Adjustments to
  reconcile net income to net cash
      provided by operating activities (see A below)          |  | 169,030                        |   |                                                              | 174,003 
|                                                                                                                |  |                                |   |                                                              |         
|Net
  cash provided by operating activities                                                                     |  | 308,745                        |   |                                                              | 327,698 
|                                                                                                                |  |                                |   |                                                              |         
|                                                                                                                |  |                                |   |                                                              |         
|CASH
  FLOWS FROM INVESTING ACTIVITIES                                                                          |  |                                |   |                                                              |         
|Purchase of
  fixed assets                                                                                      |  | (316,036                       | ) |                                                              | (292,624
|Acquisition of
  partners interest in partnership                                                              |  | -                              |   |                                                              | -       
|Investment
  grants                                                                                             |  | -                              |   |                                                              | -       
|Proceeds from
  sale of fixed assets                                                                            |  | 6,603                          |   |                                                              | 9,294   
|Proceeds from
  sale of investment in affiliate                                                                 |  | 107,344                        |   |                                                              | 6,039   
|Increase
  (decrease) in cash from sale of investments in
      previously consolidated companies (see B below) |  | -                              |   |                                                              | (26     
|Proceeds from
  sale of marketable securities, net                                                              |  | 35,722                         |   |                                                              | 38,641  
|Investment in
  other assets                                                                                    |  | (522                           | ) |                                                              | (406    
|Long-term
  loans to affiliates and proportionately 
      consolidated entities, net                           |  | (14,008                        | ) |                                                              | -       
|                                                                                                                |  |                                |   |                                                              |         
|Net
  cash used in investing activities                                                                         |  | (180,897                       | ) |                                                              | (239,082
|                                                                                                                |  |                                |   |                                                              |         
|                                                                                                                |  |                                |   |                                                              |         
|CASH
  FLOWS FROM FINANCING ACTIVITIES                                                                          |  |                                |   |                                                              |         
|Dividend paid                                                                                                   |  | (42,165                        | ) |                                                              | (52,978 
|Dividend paid
  to minority shareholders of subsidiaries                                                        |  | (288                           | ) |                                                              | (108    
|Increase
  (decrease) in the balance with parent cooperative, net                                               |  | (135,283                       | ) |                                                              | (1,876  
|Receipt of
  long-term loans                                                                                    |  | 206,664                        |   |                                                              | 226,513 
|Repayments of
  long-term loans and debentures                                                                  |  | (197,595                       | ) |                                                              | (123,557
|Short-term
  credit from banks, net                                                                             |  | 32,059                         |   |                                                              | (136,748
|                                                                                                                |  |                                |   |                                                              |         
|Net
  cash used in financing activities                                                                         |  | (136,608                       | ) |                                                              | (88,754 
|                                                                                                                |  |                                |   |                                                              |         
|                                                                                                                |  |                                |   |                                                              |         
|INCREASE (DECREASE) IN
  CASH AND
    CASH EQUIVALENTS                                                          |  | (8,760                         | ) |                                                              | (138    
|                                                                                                                |  |                                |   |                                                              |         
|CASH AND CASH EQUIVALENTS
  AT THE
    BEGINNING OF THE YEAR                                                    |  | 10,286                         |   |                                                              | 1,526   
|                                                                                                                |  |                                |   |                                                              |         
|                                                                                                                |  |                                |   |                                                              |         
|CASH AND CASH EQUIVALENTS
  AT THE
    END OF THE YEAR                                                          |  | 1,526                          |   |                                                              | 1,388   
|                                                                                                                |  |                                |   |                                                              |         
|                                                                                                                |  |                                |   |                                                              |         
|SUPPLEMENTAL DISCLOSURE OF
  CASH
    FLOW ACTIVITIES:                                                          |  |                                |   |                                                              |         
|                                                                                                                |  |                                |   |                                                              |         
|Cash
  paid during the year for interest                                                                        |  | 42,368                         |   |                                                              | 40,876  
|                                                                                                                |  |                                |   |                                                              |         
|Cash
  paid during the year for taxes                                                                           |  | 101,053                        |   |                                                              | 109,115 
|                                                                                                                |  |                                |   |                                                              |         

The accompanying notes form an integral part of the financial statements.

F-8

---

---

BLUE SQUARE - ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)In adjusted
NIS of December 2002

|   |                                                                                                   | For the year ended December 31 |         | Convenience
  translation
  (Note 2N)
  For the year
  ended | 
|-- | ------------------------------------------------------------------------------------------------- | ------------------------------ | ------- | ------------------------------------------------------------ | 
|   |                                                                                                   |                                |         | December 31                                                  | 
|   |                                                                                                   | 2000
  NIS                     |         | 2001
  NIS                                                   | 
|   |                                                                                                   |                                |         |                                                              | 
|   |                                                                                                   | In thousands                   |        
|   |                                                                                                   |                                |        
|   |                                                                                                   |                                |         |                                                              | 
|A- | ADJUSTMENTS
  TO RECONCILE NET INCOME
    TO NET CASH PROVIDED BY OPERATING   ACTIVITIES          |                                |         |                                                              | 
|   | Minority
  interest                                                                               |                                | 23,753  |                                                              | 
|   | Equity
  in net losses (earnings) of affiliates (*)                                               |                                | (1,410  | )                                                            | 
|   | Depreciation
  and amortization                                                                   |                                | 151,598 |                                                              | 
|   | Increase
  (decrease) in severance pay obligations, net                                           |                                | 4,893   |                                                              | 
|   | Loss
  (gain) on sale, disposal and impairment of fixed
        assets                            |                                | (989    | )                                                            | 
|   | Gain
  on sale of investment in affiliate                                                         |                                | (34,830 | )                                                            | 
|   | Deferred
  taxes, net                                                                             |                                | 10,531  |                                                              | 
|   | Purchasing
  power loss (gain) on long-term loans
        and other liabilities, net              |                                | 333     |                                                              | 
|   | Decrease
  (increase) in value of marketable        securities and deposits                       |                                | 6,155   |                                                              | 
|   | Decrease
  (increase) in trade and other receivables                                              |                                | (15,891 | )                                                            | 
|   | Decrease
  (increase) in inventories                                                              |                                | 12,009  |                                                              | 
|   | Increase
  (decrease) in trade and other payables                                                 |                                | 12,878  |                                                              | 
|   |                                                                                                   |                                |         |                                                              | 
|   |                                                                                                   |                                | 169,030 |                                                              | 
|   |                                                                                                   |                                |         |                                                              | 
|   |                                                                                                   |                                |         |                                                              | 
|   | (*)    Including profit distributions by
  partnership                                            |                                | -       |                                                              | 
|   |                                                                                                   |                                |         |                                                              | 
|   |                                                                                                   |                                |         |                                                              | 
|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)                  |                                | -       |                                                              | 
|   | Fixed
  assets and investments                                                                    |                                | -       |                                                              | 
|   | Collection
  of receivable (receivable in respect of
            sale)                            |                                | -       |                                                              | 
|   | Gain
  on sale                                                                                    |                                | -       |                                                              | 
|   |                                                                                                   |                                |         |                                                              | 
|   |                                                                                                   |                                | -       |                                                              | 
|   |                                                                                                   |                                |         |                                                              | 
|   |                                                                                                   |                                |         |                                                              | 
|C- | NON-CASH TRANSACTIONS                                                                             |                                |         |                                                              | 
|   | Receivable
  from sale of investments in previously
      consolidated companies                  |                                | -       |                                                              | 
|   |                                                                                                   |                                |         |                                                              | 
|   |                                                                                                   |                                |         |                                                              | 
|   | Sale and
  cancellation of purchase of fixed assets                                               |                                | -       |                                                              | 
|   |                                                                                                   |                                |         |                                                              | 

The accompanying notes form an integral part of the financial statements.

F-9

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTSIn adjusted
NIS of December 2002

| | Note 1   - | GENERAL
| | ---------- | -------
| |            |        
| |            | A.     
| |            |        
| |            |        
| |            |        
| |            | B.     
| |            |        
| |            |        
| |            |        
| |            | C.     
| |            |        
| |            |        

F-10

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 2   - | ACCOUNTING POLICIES                                                                                                                 
| | ---------- | ------------------------------------------------------------------------------------------------------------------------------------
| |            |                                                                                                                                     
| |            | The
  significant accounting policies followed in the preparation of the financial
  statements, applied on a consistent basis, are:
| |            |                                                                                                                                     
| |            | A.                                                                                                                                  
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     
| |            |                                                                                                                                     

F-11

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 2   - | ACCOUNTING POLICIES (Cont.)
| | ---------- | ---------------------------
| |            |                            
| |            | A.                         
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            | B.                         
| |            |                            
| |            |                            
| |            |                            
| |            | C.                         
| |            |                            
| |            |                            
| |            |                            
| |            | D.                         
| |            |                            
| |            |                            

F-12

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 2   - | ACCOUNTING POLICIES (Cont.)
| | ---------- | ---------------------------
| |            |                            
| |            | E.                         
| |            |                            
| |            |                            
| |            |                            
| |            | F.                         
| |            |                            
| |            |                            
| |            |                            
| |            | G.                         
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            

F-13

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 2   - | ACCOUNTING POLICIES (Cont.)
| | ---------- | ---------------------------
| |            |                            
| |            | H.                         
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            | I.                         
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            

F-14

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 2   - | ACCOUNTING POLICIES (Cont.)
| | ---------- | ---------------------------
| |            |                            
| |            | I.                         
| |            |                            
| |            |                            
| |            |                            
| |            | J.                         
| |            |                            
| |            |                            
| |            |                            
| |            | K.                         
| |            |                            
| |            |                            

F-15

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 2   - | ACCOUNTING POLICIES (Cont.)
| | ---------- | ---------------------------
| |            |                            
| |            | L.                         
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            

F-16

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 2   - | ACCOUNTING POLICIES (Cont.)
| | ---------- | ---------------------------
| |            |                            
| |            | M.                         
| |            |                            
| |            |                            
| |            |                            
| |            | N.                         
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            | O.                         
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            

| |  |  |                      |  | Consumer
  Price
  Index
  % |  | Exchange
  rate of the
  U.S. dollar
  % |      | Exchange
  rate of the
  Euro
  %
| |  |  | -------------------- |  | ---------------------------- |  | ---------------------------------------- | ---- | ---------------------------------
| |  |  |                      |  |                              |  |                                          |      |                                  
| |  |  |                      |  |                              |  |                                          |      |                                  
| |  |  | For the year
  ended |  |                              |  |                                          |      |                                  
| |  |  | December
  31, 2002  |  | 6.5                          |  |                                          | 7.3  |                                  
| |  |  | December
  31, 2001  |  | 1.4                          |  |                                          | 9.3  |                                  
| |  |  | December
  31, 2000  |  | 0.0                          |  |                                          | (2.7 | )                                

| |  |  | The exchange
  rate of the U.S. dollar at December 31, 2002 - $1 = NIS 4.737 (2001 - NIS
  4.416; 2000 - NIS 4.041).
| |  |  | --------------------------------------------------------------------------------------------------------------------

F-17

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 2   - | ACCOUNTING POLICIES (Cont.)
| | ---------- | ---------------------------
| |            |                            
| |            | P.                         
| |            |                            
| |            |                            
| |            |                            
| |            | Q.                         
| |            |                            
| |            |                            
| |            |                            
| |            | R.                         
| |            |                            
| |            |                            
| |            |                            
| |            | S.                         
| |            |                            
| |            |                            
| |            |                            
| |            | T.                         
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            

F-18

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 2   - | ACCOUNTING POLICIES (Cont.)
| | ---------- | ---------------------------
| |            |                            
| |            | T.                         
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| |            |                            
| | Note 3   - | TRADE RECEIVABLES          

| |  |                                          |  | December
  31     
| |  | ---------------------------------------- |  | ------------------
| |  |                                          |  |                   
| |  |                                          |  | 2001              
| |  |                                          |  | NIS
  in thousands
| |  |                                          |  |                   
| |  |                                          |  |                   
| |  | Credit card
  receivables                |  | 552,676           
| |  | Open
  accounts and checks receivables   |  | 61,681            
| |  |                                          |  |                   
| |  |                                          |  | 614,357           
| |  | Less -
  allowance for doubtful accounts |  | 18,770            
| |  |                                          |  |                   
| |  |                                          |  | 595,587           
| |  |                                          |  |                   

F-19

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 4   - | OTHER ACCOUNTS RECEIVABLE
| | ---------- | -------------------------

| |  |                                                                                 |  | December
  31     
| |  | ------------------------------------------------------------------------------- |  | ------------------
| |  |                                                                                 |  |                   
| |  |                                                                                 |  | 2001              
| |  |                                                                                 |  | NIS
  in thousands
| |  |                                                                                 |  |                   
| |  |                                                                                 |  |                   
| |  | Deferred tax
  benefits (see Note 13)                                           |  | 12,710            
| |  | Prepaid
  expenses                                                              |  | 14,219            
| |  | Government
  agencies                                                           |  | -                 
| |  | Receivables
  from sale and cancellation of
    purchase of fixed assets        |  | -                 
| |  | Deposit (*)                                                                     |  | -                 
| |  | Receivables
  from sale of investments
    in previously consolidated companies |  | 30,008            
| |  | Parent
  cooperative (see Note 10 (1))                                          |  | 8,561             
| |  | Other                                                                           |  | 15,829            
| |  |                                                                                 |  |                   
| |  |                                                                                 |  | 81,327            
| |  |                                                                                 |  |                   

| | (*)        | In respect
  of acquisition of partners interest in partnership  see Note 6D.
| | ---------- | -------------------------------------------------------------------------------
| |            |                                                                                
| | Note 5   - | INVENTORIES                                                                    

| |  |                                     |  | December
  31     
| |  | ----------------------------------- |  | ------------------
| |  |                                     |  |                   
| |  |                                     |  | 2001              
| |  |                                     |  | NIS
  in thousands
| |  |                                     |  |                   
| |  |                                     |  |                   
| |  | Merchandise                         |  | 332,452           
| |  | Parts, raw
  materials and supplies |  | 13,034            
| |  |                                     |  |                   
| |  |                                     |  | 345,486           
| |  |                                     |  |                   

F-20

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 6   - | INVESTMENTS IN INVESTEE COMPANIES
| | ---------- | ---------------------------------
| |            |                                  
| |            | A.                               

| |  |  |                                         |  | December
  31     
| |  |  | --------------------------------------- |  | ------------------
| |  |  |                                         |  |                   
| |  |  |                                         |  | 2001              
| |  |  |                                         |  |                   
| |  |  |                                         |  | NIS
  in thousands
| |  |  |                                         |  |                   
| |  |  | Shares                                  |  |                   
| |  |  | Cost
  of shares                        |  | 275               
| |  |  | Post-acquisition
  earnings, net        |  | 2,910             
| |  |  |                                         |  |                   
| |  |  |                                         |  | 3,185             
| |  |  | Long-term
  loans and capital notes (*) |  | 2,580             
| |  |  |                                         |  |                   
| |  |  |                                         |  | 5,765             
| |  |  |                                         |  |                   

| |  |    | (*)                        | The loans
  and the capital notes are linked to the CPI and bear annual interest of 5%.
  The repayment date has not yet been determined.
| |  | -- | -------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                           
| |  | B. | MOVEMENT
  DURING THE YEAR

| |  |  |                                      |  | NIS
  in thousands
| |  |  | ------------------------------------ |  | ------------------
| |  |  |                                      |  |                   
| |  |  | Balance as
  of January 1, 2002      |  | 5,765             
| |  |  | Profit
  distributed by partnership  |  | (2,418            
| |  |  | Equity in
  net losses of affiliates |  | (370              
| |  |  | Changes in
  loans, net              |  | (20               
| |  |  |                                      |  |                   
| |  |  | Balance as
  of December 31, 2002    |  | 2,957             
| |  |  |                                      |  |                   

| |  |    |                                                                                                                                                         
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | C. | COMPANYS
  SHARE OF ASSETS, LIABILITIES, REVENUES AND EXPENSES OF JOINTLY-CONTROLLED
  COMPANIES CONSOLIDATED BY THE PROPORTIONATE CONSOLIDATION METHOD

| |  |  |                         |  | December
  31     
| |  |  | ----------------------- |  | ------------------
| |  |  |                         |  |                   
| |  |  |                         |  | 2001              
| |  |  |                         |  |                   
| |  |  |                         |  | NIS
  in thousands
| |  |  |                         |  |                   
| |  |  | Current
  assets        |  | 8,384             
| |  |  | Non-current
  assets    |  | 91,478            
| |  |  |                         |  |                   
| |  |  | Current
  liabilities   |  | 13,064            
| |  |  | Long-term
  liabilities |  | 10,964            
| |  |  |                         |  |                   

| |  |  |                      |  | For
  the year ended
  December 31
| |  |  | -------------------- |  | ----------------------------------
| |  |  |                      |  |                                   
| |  |  |                      |  | 2001                              
| |  |  |                      |  |                                   
| |  |  |                      |  | NIS
  in thousands                
| |  |  |                      |  |                                   
| |  |  |                      |  |                                   
| |  |  | Revenues,
  net      |  | 14,890                            
| |  |  | Costs and
  expenses |  | 14,388                            

F-21

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Cont.)In adjusted
NIS of December 2002

| | Note 6   - | INVESTMENTS IN INVESTEE COMPANIES
  (Cont.)
| | ---------- | -------------------------------------------
| |            |                                            
| |            | D.                                         
| |            |                                            
| |            |                                            
| |            |                                            
| |            |                                            

F-22

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
In adjusted NIS of December 2002

| | Note 7   - | FIXED ASSETS
| | ---------- | ------------
| |            |             
| |            | A.          

|                                             |  |  | Land and
  buildings
  including
  leasehold
  land (1) |   | Leasehold
  improvements |  | Furniture,
  equipment
  and
  installations |   | Motor
  vehicles |  | Total     |  
|-------------------------------------------- |  |  | ------------------------------------------------------- | - | ------------------------ |  | -------------------------------------------- | - | ---------------- |  | --------- | -
|                                             |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|                                             |  |  | NIS in
  thousands                                      |  
|                                             |  |  |                                                         |  
|                                             |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|COST                                         |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|As of January 1, 2002                        |  |  | 1,768,320                                               |   |                          |  | 400,018                                      |   |                  |  | 1,102,632 |  
|Additions                                    |  |  | 112,165                                                 |   |                          |  | 39,709                                       |   |                  |  | 98,349    |  
|Disposals                                    |  |  | (15,001                                                 | ) |                          |  | (4,486                                       | ) |                  |  | (16,184   | )
|                                             |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|As of December 31, 2002                      |  |  | 1,865,484                                               |   |                          |  | 435,241                                      |   |                  |  | 1,184,797 |  
|                                             |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|ACCUMULATED DEPRECIATION                     |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|As of January 1, 2002                        |  |  | 206,566                                                 |   |                          |  | 193,940                                      |   |                  |  | 598,992   |  
|Provision                                    |  |  | 24,679                                                  |   |                          |  | 33,310                                       |   |                  |  | 98,832    |  
|Eliminated on disposals                      |  |  | (1,033                                                  | ) |                          |  | (1,929                                       | ) |                  |  | (13,740   | )
|                                             |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|As of December 31, 2002                      |  |  | 230,212                                                 |   |                          |  | 225,321                                      |   |                  |  | 684,084   |  
|                                             |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|Impairment of fixed assets (see B
    below) |  |  | (66,234                                                 | ) |                          |  | (18,618                                      | ) |                  |  | (58,956   | )
|                                             |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|NET BOOK VALUE                               |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|As of December 31, 2002                      |  |  | 1,569,038                                               |   |                          |  | 191,302                                      |   |                  |  | 441,757   |  
|                                             |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|                                             |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  
|As of December 31, 2001                      |  |  | 1,561,754                                               |   |                          |  | 206,078                                      |   |                  |  | 503,640   |  
|                                             |  |  |                                                         |   |                          |  |                                              |   |                  |  |           |  

| |  | (1) | Certain real
  estate assets which had been transferred to the Company from the parent
  cooperative are in the process of being registered under the name of the
  Company.                                                                                                                                                                                                                                                                                                                                                                                
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | B.  | Due to the
  continuing slowdown and decline in the activities of the Companys business
  environment and due to the initial application of Accounting Standard No. 15
  (see Note 2L), the Company recorded a loss from impairment of assets in the
  amount of approximately NIS 144 million (loss of approximately NIS 101
  million after taxes and minority interest) which is included in other
  expenses, in the statement of income. In calculating the impairment based on
  expected future cash flows, the Company used a discount rate of 10%.
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | C.  | Liens  See
  Note 20.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-23

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 8   - | INTANGIBLE ASSETS AND DEFERRED CHARGES, NET
| | ---------- | -------------------------------------------

| |                                                 |  | December 31           |        
| | ----------------------------------------------- |  | --------------------- | -------
| |                                                 |  |                       |        
| |                                                 |  | 2001                  |        
| |                                                 |  |                       |        
| |                                                 |  | NIS in thousands      |        
| |                                                 |  |                       |        
| |                                                 |  | Unamortized
  balance |        
| |                                                 |  |                       |        
| | Goodwill                                        |  |                       | 86,595 
| | Debenture
  issuance expenses                   |  |                       | 79     
| | Prepaid
  rental expenses and
  acquisition tax |  |                       | 14,498 
| | Deferred
  taxes (see Note 13)                  |  |                       | -      
| |                                                 |  |                       |        
| |                                                 |  |                       | 101,172
| |                                                 |  |                       |        

| | Note 9   - | SHORT-TERM CREDIT FROM BANKS AND OTHERS
| | ---------- | ---------------------------------------
| |            |                                        
| |            | A.                                     

| |                                                  |  | December 31      |        
| | ------------------------------------------------ |  | ---------------- | -------
| |                                                  |  |                  |        
| |                                                  |  | 2001             |        
| |                                                  |  | NIS in thousands |        
| |                                                  |  |                  |        
| | Short-term
  credit from banks -
  Unlinked (*)  |  |                  | 92,802 
| | Current
  maturities of long-term
  liabilities: |  |                  |        
| | Loans                                            |  |                  | 121,613
| | Debentures                                       |  |                  | 25,709 
| |                                                  |  |                  |        
| |                                                  |  |                  | 240,124
| |                                                  |  |                  |        

| |  | (*) | The balance
  as of December 31, 2002 bears variable interest at a weighted average annual
  rate of 7.3%.
| |  | --- | ----------------------------------------------------------------------------------------------------------
| |  |     |                                                                                                           
| |  | B.  | Collateral  See Note 20.                                                                                 

F-24

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 10   - | OTHER PAYABLES AND ACCRUED EXPENSES
| | ----------- | -----------------------------------

| |                              |  | December 31      |        
| | ---------------------------- |  | ---------------- | -------
| |                              |  |                  |        
| |                              |  | 2001             |        
| |                              |  | NIS in thousands |        
| |                              |  |                  |        
| |                              |  |                  |        
| | Payroll and related expenses |  |                  | 115,089
| | Parent cooperative (*)       |  |                  | -      
| | Related parties              |  |                  | 14,087 
| | Government agencies          |  |                  | -      
| | Customer advances            |  |                  | 87,306 
| | Accrued expenses and other   |  |                  | 55,358 
| |                              |  |                  |        
| |                              |  |                  | 271,840
| |                              |  |                  |        

| | (*) | The balance is not linked and bears interest at a rate equal to the
  interest rate for short-term credit from banks less 0.4%.  The average annual interest rate in 2002
  was 6.9% (2001 - 7%).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| |    

| | Note 11   - | LONG-TERM LOANS FROM BANKS
| | ----------- | --------------------------
| |             |                           
| |             | A.                        

| |                             |  | December 31      |         | Annual
  interest
  rate% | 
| | --------------------------- |  | ---------------- | ------- | ------------------------- | 
| |                             |  |                  |         |                          
| |                             |  | 2001             |         | 2002                      | 
| |                             | 
| |                             |  | NIS in thousands |         |                          
| |                             |  |                  |         |                           | 
| | Linked to
  the CPI         |  |                  | 261,236 |                           | 
| | Unlinked                    |  |                  | 255,591 |                           | 
| |                             |  |                  |         |                           | 
| |                             |  |                  | 516,827 |                           | 
| |                             |  |                  |         |                           | 
| | Less 
  current maturities |  |                  | 121,613 |                           | 
| |                             |  |                  |         |                           | 
| |                             |  |                  | 395,214 |                           | 
| |                             |  |                  |         |                           | 

| | (1) | Average rate
  as of December 31, 2002.                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                               
| | (2) | As of
  December 31, 2002 includes NIS 92 million at variable interest (average
  annual rate as of December 31, 2002  7.0%). 
  The balance of NIS 182 million is at a fixed annual interest rate of
  7.3%.

F-25

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)
In adjusted NIS of December 2002

| | Note 11   - | LONG-TERM LOANS FROM BANKS (Cont.)
| | ----------- | ----------------------------------
| |             |                                   
| |             | B.                                

| |                                   |  | NIS
  in thousands |        
| | --------------------------------- |  | ------------------ | -------
| |                                   |  |                    |        
| | First year -
  current maturities |  |                    | 188,549
| | Second year                       |  |                    | 153,233
| | Third year                        |  |                    | 101,462
| | Fourth year                       |  |                    | 94,794 
| | Fifth year                        |  |                    | 11,637 
| | Sixth year
  and thereafter       |  |                    | 986    
| |                                   |  |                    |        
| |                                   |  |                    | 550,661
| |                                   |  |                    |        

| |          | C.         | Collateral 
  See Note 20.
| | -------- | ---------- | ---------------------------
| |          |            |                            
| | Note 12- | DEBENTURES
| |          |            |                            
| |          | A.         | COMPOSITION                

| |                           |  | December 31      |       
| | ------------------------- |  | ---------------- | ------
| |                           |  |                  |       
| |                           |  | 2001             |       
| |                           |  | NIS in thousands |       
| |                           |  |                  |       
| | Issued by subsidiary (*)  |  |                  | 16,275
| | Issued by the Company     |  |                  | 17,571
| |                           |  |                  |       
| |                           |  |                  | 33,846
| | Less  current maturities |  |                  | 25,709
| |                           |  |                  |       
| |                           |  |                  | 8,137 
| |                           |  |                  |       

| |  |    | (*)                         | BSIP
  (subsidiary) issued debentures requiring compliance with the following
  financial covenants:
| |  | -- | --------------------------- | ----------------------------------------------------------------------------------------------------
| |  |    |                             |                                                                                                     
| |  |    |                             | -                                                                                                   
| |  |    |                             |                                                                                                     
| |  |    |                             | -                                                                                                   
| |  |    |                             |                                                                                                     
| |  |    |                             | As of December 31, 2002, BSIP has complied with these covenants.                                    
| |  |    |                             |                                                                                                     
| |  |    |                             | The debentures are linked to the CPI and bear an annual interest rate
  of 6.8%.                    
| |  |    |                             |                                                                                                     
| |  | B. | Collateral 
  See Note 20.

F-26

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 13   - | TAXES ON INCOME
| | ----------- | ---------------
| |             |                
| |             | A.             
| |             |                
| |             |                
| |             |                
| |             |                
| |             |                
| |             | B.             
| |             |                
| |             |                
| |             |                

| |                                                  |  | December 31      |        
| | ------------------------------------------------ |  | ---------------- | -------
| |                                                  |  |                  |        
| |                                                  |  | 2001             |        
| |                                                  |  | NIS in thousands |        
| |                                                  |  |                  |        
| | Temporary differences in respect of:             |  |                  |        
| | Allowances and accruals                          |  |                  | 21,505 
| | Depreciable fixed assets and deferred 
  charges |  |                  | (35,019
| |                                                  |  |                  |        
| |                                                  |  |                  | (13,514
| |                                                  |  |                  |        
| | Presented in balance sheet as follows:           |  |                  |        
| | Other accounts receivable                        |  |                  | 12,710 
| | Intangible assets and deferred
  charges         |  |                  | -      
| | Long-term liabilities                            |  |                  | (26,224
| |                                                  |  |                  |        
| |                                                  |  |                  | (13,514
| |                                                  |  |                  |        

| |  |  | 2. | The Companys subsidiaries have operating tax loss carryforwards of
  approximately NIS 7
  million. The Company and its subsidiary have capital loss tax carryforwards
  of approximately NIS 31.5 million. The tax benefit in respect of these losses
  has not been recorded due to uncertainty of their realization.
| |  |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-27

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 13   - | TAXES ON INCOME (Cont.)
| | ----------- | -----------------------
| |             |                        
| |             | C.                     

| |                                                     |  | For the year ended December 31 |        
| | --------------------------------------------------- |  | ------------------------------ | -------
| |                                                     |  |                                |        
| |                                                     |  | 2000                           |        
| |                                                     |  | NIS in thousands               |        
| |                                                     |  |                                |        
| | In respect of the
  reported year                   |  |                                |        
| | Current                                             |  |                                | 89,825 
| | Deferred                                            |  |                                | 10,531 
| |                                                     |  |                                |        
| |                                                     |  |                                | 100,356
| | Tax expense (benefit)
  in respect of prior
  years |  |                                | (2,642 
| |                                                     |  |                                |        
| |                                                     |  |                                | 97,714 
| |                                                     |  |                                |        

| |  | D. | EFFECTIVE TAXThe
  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:
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                           |  | For the year ended December 31 |        
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                                                                           |  |                                |        
|                                                                                                                           |  | 2000                           |        
|                                                                                                                           |  | NIS in thousands               |        
|                                                                                                                           |  |                                |        
|Income before taxes on income, as
  reported in the statement of income                                                    |  |                                | 262,472
|                                                                                                                           |  |                                |        
|Theoretical tax expense                                                                                                    |  |                                | 94,490 
|Increase (decrease) in taxes resulting from:                                                                               |  |                                |        
|Nondeductible amortization and
  impairment
      losses in respect of goodwill and fixed assets                           |  |                                | 7,204  
|Tax exempt net capital
  gain on realization
      of investments and assets                                               |  |                                | (4,193 
|Losses for which no tax benefit has
  been
      recorded (utilization of tax benefits not
      previously recorded), net |  |                                | 2,388  
|Tax expense (benefit) in respect of
  prior years                                                                          |  |                                | (2,642 
|Nondeductible expenses and other, net                                                                                      |  |                                | 467    
|                                                                                                                           |  |                                |        
|                                                                                                                           |  |                                |        
|Income tax expense                                                                                                         |  |                                | 97,714 
|                                                                                                                           |  |                                |        

F-28

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 13   - | TAXES ON INCOME (Cont.)   
| | ----------- | --------------------------
| |             |                           
| |             | E.                        
| |             |                           
| |             |                           
| |             |                           
| |             |                           
| |             |                           
| | Note 14   - | ACCRUED SEVERANCE PAY, NET
| |             |                           
| |             | A.                        
| |             |                           
| |             |                           
| |             |                           
| |             |                           

F-29

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 14   - | ACCRUED SEVERANCE PAY, NET (Cont.)
| | ----------- | ----------------------------------
| |             |                                   
| |             | B.                                
| |             |                                   
| |             |                                   
| |             |                                   
| |             |                                   
| |             |                                   
| |             |                                   
| |             |                                   
| |             |                                   
| |             |                                   
| |             |                                   
| |             |                                   
| |             | C.                                

| |                                                 |  | December 31      |       
| | ----------------------------------------------- |  | ---------------- | ------
| |                                                 |  |                  |       
| |                                                 |  | 2001             |       
| |                                                 |  | NIS in thousands |       
| |                                                 |  |                  |       
| | Accrued severance pay                           |  |                  | 13,898
| | Less  deposits with severance pay
  funds      |  |                  | 5,327 
| |                                                 |  |                  |       
| |                                                 |  |                  | 8,571 
| | Provision in respect of unutilized sick
  leave |  |                  | 18,892
| |                                                 |  |                  |       
| |                                                 |  |                  | 27,463
| |                                                 |  |                  |       

| |  | D. | Severance
  pay expense in the years ended December 31, 2000, 2001 and 2002 amounted to
  NIS 44 million, NIS 54 million and NIS 48 million, respectively.
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

F-30

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 15   - | CONTINGENT LIABILITIES AND COMMITMENTS
| | ----------- | --------------------------------------
| |             |                                       
| |             | A.                                    
| |             |                                       
| |             |                                       
| |             |                                       
| |             |                                       
| |             |                                       
| |             |                                       
| |             |                                       
| |             |                                       
| |             |                                       
| |             |                                       

F-31

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 15   - | CONTINGENT LIABILITIES AND COMMITMENTS (Cont.)
| | ----------- | ----------------------------------------------
| |             |                                               
| |             | A.                                            
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               

F-32

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 15   - | CONTINGENT LIABILITIES AND COMMITMENTS (Cont.)
| | ----------- | ----------------------------------------------
| |             |                                               
| |             | A.                                            
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               

F-33

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 15   - | CONTINGENT LIABILITIES AND COMMITMENTS (Cont.)
| | ----------- | ----------------------------------------------
| |             |                                               
| |             | A.                                            
| |             |                                               
| |             |                                               
| |             |                                               
| |             | B.                                            
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               

| |                           |  | NIS
  in thousands |        
| | ------------------------- |  | ------------------ | -------
| |                           |  |                    |        
| | First year                |  |                    | 93,675 
| | Second year               |  |                    | 91,177 
| | Third year                |  |                    | 81,092 
| | Fourth year               |  |                    | 70,333 
| | Fifth year                |  |                    | 62,353 
| | Sixth year and thereafter |  |                    | 259,689
| |                           |  |                    |        
| |                           |  |                    | 658,319
| |                           |  |                    |        

| |  |  |  | In addition,
  the Company leases stores from the parent cooperative.  The minimum annual payment is NIS 850,000.
| |  |  |  | -----------------------------------------------------------------------------------------------------------------

F-34

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 15   - | CONTINGENT LIABILITIES AND COMMITMENTS (Cont.)
| | ----------- | ----------------------------------------------
| |             |                                               
| |             | B.                                            
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               
| |             | C.                                            
| |             |                                               
| |             |                                               
| |             |                                               
| |             |                                               

F-35

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 16   - | SHARE CAPITAL        
| | ----------- | ---------------------
| |             |                      
| |             | A.                   
| |             |                      
| |             |                      
| |             |                      
| |             |                      
| |             |                      
| |             | B.                   
| |             |                      
| |             |                      
| |             |                      
| | Note 17   - | FINANCIAL INSTRUMENTS
| |             |                      
| |             | A.                   
| |             |                      
| |             |                      
| |             |                      
| |             |                      

F-36

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 17   - | FINANCIAL INSTRUMENTS (Cont.)
| | ----------- | -----------------------------
| |             |                              
| |             | B.                           
| |             |                              
| |             |                              
| |             |                              
| |             | C.                           
| |             |                              
| |             |                              
| |             |                              
| |             | D.                           
| |             |                              
| |             |                              

F-37

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 18   - | SUPPLEMENTAL DATA TO STATEMENTS OF INCOME
| | ----------- | -----------------------------------------
| |             |                                          
| |             | A.                                       
| |             |                                          

| |                              |  | For the year ended December 31 |       
| | ---------------------------- |  | ------------------------------ | ------
| |                              |  |                                |       
| |                              |  | 2000                           |       
| |                              |  |                                |       
| |                              |  | NIS in thousands               |       
| |                              |  |                                |       
| | Includes advertising expense |  |                                | 42,573
| |                              |  |                                |       

| | B.        FINANCING INCOME (EXPENSES), NET
| | ------------------------------------------

| |                                                                                            |  | For the year ended December 31 |        
| | ------------------------------------------------------------------------------------------ |  | ------------------------------ | -------
| |                                                                                            |  |                                |        
| |                                                                                            |  | 2000                           |        
| |                                                                                            |  |                                |        
| |                                                                                            |  | NIS in thousands               |        
| |                                                                                            |  |                                |        
| | In respect of:                                                                             |  |                                |        
| | Long-term loans and debentures                                                             |  |                                | (24,982
| | Short-term loans, net                                                                      |  |                                | (14,929
| | Increase (decrease) in value of
    marketable securities and
    short-term deposits, net |  |                                | (6,155 
| | Purchasing power gain in respect
  of other monetary items, net                            |  |                                | 989    
| |                                                                                            |  |                                |        
| |                                                                                            |  |                                | (45,077
| |                                                                                            |  |                                |        

| | C.        OTHER INCOME (EXPENSES), NET
| | --------------------------------------

| |                                                                 |  | For the year ended December 31 |        
| | --------------------------------------------------------------- |  | ------------------------------ | -------
| |                                                                 |  |                                |        
| |                                                                 |  | 2000                           |        
| |                                                                 |  |                                |        
| |                                                                 |  | NIS in thousands               |        
| |                                                                 |  |                                |        
| | Capital gain on sale of investments
  in investee companies (1) |  |                                | 34,830 
| | Gain on sale and disposal of fixed
  assets, net                |  |                                | -      
| | Impairment of fixed assets and
  goodwill (2)                   |  |                                | -      
| | Costs in respect of closure of stores                           |  |                                | (12,632
| | Employee rights in respect of prior
  years (see Note 15A(6))   |  |                                | -      
| | Other, net                                                      |  |                                | (1,528 
| |                                                                 |  |                                |        
| |                                                                 |  |                                | 20,670 
| |                                                                 |  |                                |        

F-38

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 18   - | SUPPLEMENTAL DATA TO STATEMENTS OF INCOME
| | ----------- | -----------------------------------------
| |             |                                          
| |             | C.                                       
| |             |                                          
| |             |                                          
| |             |                                          
| |             |                                          
| |             |                                          
| |             |                                          
| |             |                                          
| |             |                                          
| |             |                                          
| | Note 19   - | TRANSACTIONS WITH RELATED PARTIES        
| |             |                                          
| |             | A.                                       

| |                    |  | For the year ended December 31 |      
| | ------------------ |  | ------------------------------ | -----
| |                    |  |                                |      
| |                    |  | 2000                           |      
| |                    |  |                                |      
| |                    |  | NIS in thousands               |      
| |                    |  |                                |      
| |                    |  |                                |      
| | Financing expenses |  |                                | 6,774
| |                    |  |                                |      
| |                    |  |                                |      
| | Rent expense       |  |                                | 1,304
| |                    |  |                                |      
| |                    |  |                                |      
| | Management fee     |  |                                | 5,508
| |                    |  |                                |      

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

F-39

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 20   - | LIENS AND RESTRICTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |             | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |             | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |             | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Note 21   - | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |             | On February
  6, 2001, the shareholders of the Company approved the resolution of the Board
  of Directors to sell all of the Companys holdings (45%) in an affiliate,
  which is engaged in retail sales of furniture, to the parent cooperative for
  approximately NIS 6.1 million. The excess of the consideration received over
  the carrying value of the investment in the approximate amount of NIS 6.6
  million, net of income taxes, was credited to additional paid-in capital. For
  the year ended December 31, 2000 the loss from discontinued operations which
  relates to the abovementioned entity was NIS 2.7 million.

F-40

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 22   - | EFFECT ON THE FINANCIAL STATEMENTS OF
  MATERIALDIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP
| | ----------- | ----------------------------------------------------------------------------------------------
| |             |                                                                                               
| |             | A.                                                                                            
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               

F-41

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 22   - | EFFECT ON THE FINANCIAL STATEMENTS OF
  MATERIALDIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP
| | ----------- | ----------------------------------------------------------------------------------------------
| |             |                                                                                               
| |             | A.                                                                                            
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               

F-42

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 22   - | EFFECT ON THE FINANCIAL STATEMENTS OF
  MATERIALDIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP
| | ----------- | ----------------------------------------------------------------------------------------------
| |             |                                                                                               
| |             | A.                                                                                            
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               

F-43

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 22   - | EFFECT ON THE FINANCIAL STATEMENTS OF
  MATERIALDIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP
| | ----------- | ----------------------------------------------------------------------------------------------
| |             |                                                                                               
| |             | A.                                                                                            
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               
| |             |                                                                                               

F-44

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 22   - | EFFECT ON THE FINANCIAL STATEMENTS OF
  MATERIALDIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP(Cont.)
| | ----------- | -----------------------------------------------------------------------------------------------------
| |             |                                                                                                      
| |             | B.                                                                                                   
| |             |                                                                                                      
| |             |                                                                                                      

| |                                                                                              |  | For the year ended December 31                       |           
| | -------------------------------------------------------------------------------------------- |  | ---------------------------------------------------- | ----------
| |                                                                                              |  |                                                      |           
| |                                                                                              |  | 2000                                                 |           
| |                                                                                              |  |                                                      |           
| |                                                                                              |  | NIS in thousands (except share and per
  share data) |           
| |                                                                                              |  |                                                      |           
| | Net income as reported, according to
  Israeli GAAP                                          |  |                                                      | 139,715   
| |                                                                                              |  |                                                      |           
| | Amortization of goodwill                                                                     |  |                                                      | -         
| | Impairment of long-lived assets (net of
  taxes of NIS 23.1 million)                         |  |                                                      | -         
| | Deferred taxes on income                                                                     |  |                                                      | 898       
| | Discontinued operations - start up costs                                                     |  |                                                      | (3,993    
| | Minority interest in respect of the above                                                    |  |                                                      | (262      
| |                                                                                              |  |                                                      |           
| | Net income according to U.S. GAAP                                                            |  |                                                      | 136,358   
| |                                                                                              |  |                                                      |           
| | Net income per share as reported,
  according to Israeli GAAP
  (primary and fully diluted): |  |                                                      |           
| |                                                                                              |  |                                                      |           
| | From continuing operations                                                                   |  |                                                      | 3.71      
| |                                                                                              |  |                                                      |           
| | From discontinued operations                                                                 |  |                                                      | (0.07     
| |                                                                                              |  |                                                      |           
| | Net income                                                                                   |  |                                                      | 3.64      
| |                                                                                              |  |                                                      |           
| | Per U.S. GAAP:                                                                               |  |                                                      |           
| | Basic and diluted earnings per share                                                         |  |                                                      |           
| | From continuing operations                                                                   |  |                                                      | 3.72      
| |                                                                                              |  |                                                      |           
| | From discontinued operations                                                                 |  |                                                      | (0.17     
| |                                                                                              |  |                                                      |           
| | Net income                                                                                   |  |                                                      | 3.55      
| |                                                                                              |  |                                                      |           
| | Weighted average number of shares or
  ADS outstanding (basic and diluted)                   |  |                                                      | 38,400,000
| |                                                                                              |  |                                                      |           

F-45

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 22   - | EFFECT ON THE FINANCIAL STATEMENTS OF
  MATERIALDIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP(Cont.)
| | ----------- | -----------------------------------------------------------------------------------------------------
| |             |                                                                                                      
| |             | B  -                                                                                                 
| |             |                                                                                                      
| |             |                                                                                                      

|                                               |  | December 31      |          
|---------------------------------------------- |  | ---------------- | ---------
|                                               |  |                  |          
|                                               |  | 2001             |          
|                                               |  |                  |          
|                                               |  | As
  reported    |          
|                                               |  |                  |          
|                                               |  | NIS in thousands |          
|                                               |  |                  |          
|                                               |  |                  |          
|Severance pay funds (6)                        |  |                  | -        
|Fixed assets, net (5)                          |  |                  | -        
|Intangible assets and
  deferred charges (4)   |  |                  | -        
|Deferred taxes, net (1)                        |  |                  | 13,514   
|Accrued severance pay (6)                      |  |                  | 27,463   
|Minority interest (3)                          |  |                  | 174,583  
|Additional paid-in capital (2)                 |  |                  | 755,172  
|Retained earnings                              |  |                  |          
|Dividend declared after
    balance sheet date |  |                  | 59,595   
|Unappropriated (3)                             |  |                  | 619,874  
|Total shareholders equity                     |  |                  | 1,487,758

| |  | (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), and difference in capital gain, net of
  tax, from transactions with the parent cooperative.
| |  |     |                                                                                                                                             
| |  | (3) | Net effect
  of reconciling items.                                                                                                          
| |  |     |                                                                                                                                             
| |  | (4) | Amortization
  of goodwill - see A(5) above.                                                                                                
| |  |     |                                                                                                                                             
| |  | (5) | Effect of
  adoption of Standard No. 15 - see A(6) above.                                                                                   
| |  |     |                                                                                                                                             
| |  | (6) | See A(10)
  above.                                                                                                                          

F-46

---

---

BLUE SQUARE - ISRAEL LTD.

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)In adjusted NIS of December 2002

| | Note 22   - | EFFECT ON THE FINANCIAL STATEMENTS OF
  MATERIALDIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP(Cont.)
| | ----------- | -----------------------------------------------------------------------------------------------------
| |             |                                                                                                      
| |             | B  -                                                                                                 
| |             |                                                                                                      
| |             |                                                                                                      

| |                                      |  | For the year ended December 31 |         
| | ------------------------------------ |  | ------------------------------ | --------
| |                                      |  |                                |         
| |                                      |  | 2000                           |         
| |                                      |  |                                |         
| |                                      |  | NIS in thousand                |         
| |                                      |  |                                |         
| | Cash flows from operating activities |  |                                |         
| | As per Israeli GAAP                  |  |                                | 308,745 
| | Adjustment (1)                       |  |                                | 35,722  
| |                                      |  |                                |         
| | As per U.S. GAAP                     |  |                                | 344,467 
| |                                      |  |                                |         
| |                                      |  |                                |         
| | Cash flows from investing activities |  |                                |         
| | As per Israeli GAAP                  |  |                                | (180,897
| | Adjustment (1)                       |  |                                | (35,722 
| |                                      |  |                                |         
| | As per U.S. GAAP                     |  |                                | (216,619
| |                                      |  |                                |         

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

#  #  #  #  #  #

F-47

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---