**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      20-F**

| o | REGISTRATION                STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE                ACT                OF 1934 |
|---|---------------------------------------------------------------------------------------------------------------------------------------------|

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

| o | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 |
|---|---------------------------------------------------------------------------------------------------------------------------------------|

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| 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.             |

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**INTRODUCTION**

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**NOTE      REGARDING TRANSITION TO NOMINAL-HISTORICAL **

**FINANCIAL      REPORTING **

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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                                                                     | 16       |
| ITEM4A.                    | UNRESOLVED                  STAFF COMMENTS                                                                      | 41       |
| ITEM                  5.   | OPERATING                  AND FINANCIAL REVIEW AND PROSPECTS                                                   | 41       |
| ITEM                  6.   | DIRECTORS,                  SENIOR MANAGEMENT AND EMPLOYEES                                                     | 68       |
| ITEM                  7.   | MAJOR                  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                              | 92       |
| ITEM                  8.   | FINANCIAL                  INFORMATION                                                                          | 103      |
| ITEM                  9.   | THE                  OFFER AND LISTING                                                                          | 107      |
| ITEM                  10.  | ADDITIONAL                  INFORMATION                                                                         | 110      |
| ITEM                  11.  | QUANTITATIVE                  AND QUALITATIVE DISCLOSURES ABOUT                  MARKET RISK                    | 126      |
| ITEM                  12.  | DESCRIPTION                  OF SECURITIES OTHER THAN EQUITY SECURITIES                                         | 129      |
| PART                  II   |                                                                                                            | 129      |
| ITEM                  13.  | DEFAULTS,                  DIVIDEND ARREARAGES AND DELINQUENCIES                                                | 129      |
| ITEM                  14.  | MATERIAL                  MODIFICATIONS TO THE RIGHTS OF SECURITY                  HOLDERS AND USE OF PROCEEDS  | 129      |
| ITEM                  15.  | CONTROLS                  AND PROCEDURES                                                                        | 129      |
| ITEM                  16.  | [RESERVED]                                                                                                      | 131      |
| ITEM                  16A. | AUDIT                  COMMITTEE FINANCIAL EXPERT                                                               | 131      |
| ITEM                  16B. | CODE                  OF ETHICS                                                                                 | 131      |
| ITEM                  16C. | PRINCIPAL                  ACCOUNTANT FEES AND SERVICES                                                         | 132      |
| ITEM                  16D. | EXEMPTIONS                  FROM THE LISTING STANDARDS FOR AUDIT                  COMMITTEES                    | 133      |
| ITEM                  16E. | PURCHASES                  OF EQUITY SECURITIES BY THE ISSUER AND                  AFFILIATED PURCHASERS... | 133      |
| PART                  III  |                                                                                                            | 134      |
| ITEM                  17.  | FINANCIAL                  STATEMENTS                                                                           | 134      |
| ITEM                  18.  | FINANCIAL                  STATEMENTS                                                                           | 134      |
| ITEM                  19.  | EXHIBITS                                                                                                        | 134      |

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**PART      I**

| **ITEM                1.** | **IDENTITY                OF DIRECTORS, SENIOR MANAGEMENT****AND                ADVISERS** |
|----------------------------|--------------------------------------------------------------------------------------------|

| **ITEM                2.** | **OFFER                STATISTICS AND EXPECTED                TIMETABLE** |
|----------------------------|---------------------------------------------------------------------------|

**ITEM      3.**
**KEY      INFORMATION**

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|                                                                         |   | **2003**                                                                                  |       | **2004** |   | **2005**   |   | **2006** |       | **2007** |   | **2007**   |   |
|------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|------------|----------|--------|------------|--------|----------|------------|----------|--------|------------|--------|
|                                                                         |   | **NIS                (In thousands, except per ordinary share or ADS data)**** **(1) |       | **$**(2) |   |
| **Income                Data**                                               |   |                                                                                      |       |
| Sales                                                                        |   |                                                                                      | 5,170,510  |     |   | 5,365,784  |   |     | 5,797,018  |     |   | 6,515,035  |   |   | 6,982,350 |   |   | 1,815,484 |   |
| Cost                of sales                                                 |   |                                                                                      | 3,777,411  |     |   | 3,962,303  |   |     | 4,298,211  |     |   | 4,812,952  |   |   | 5,129,520 |   |   | 1,333,729 |   |
| Gross                profit                                                  |   |                                                                                      | 1,393,099  |     |   | 1,403,481  |   |     | 1,498,807  |     |   | 1,702,083  |   |   | 1,852,830 |   |   | 481,755 |   |
| Net                gain from adjustment of investment property to fair value |   |                                                                                      | -          |     |   | -          |   |     | -          |     |   | -          |   |   | 10,456 |   |   | 2,719 |   |
| Selling,                general and administrative expenses                  |   |                                                                                      | 1,190,425  |     |   | 1,203,391  |   |     | 1,269,760  |     |   | 1,396,877  |   |   | 1,562,555 |   |   | 406,281 |   |
| Operating                income                                              |   |                                                                                      | 202,674    |     |   | 200,090    |   |     | 229,047    |     |   | 305,206    |   |   | 300,731 |   |   | 78,193 |   |
| Financial                expenses, net                                       |   |                                                                                      | (48,813    | )        |   | (58,090    | )      |     | (59,529    | )        |   | (42,368    | )      |   | (54,798 | ) |   | (14,248 | ) |
| Amortization                of goodwill                                      |   |                                                                                      | (5,740     | )        |   | (5,870     | )      |     | (6,508     | )        |   | -          |   |   | - |   |   | - |   |
| Other                income (expenses), net                                  |   |                                                                                      | (136,612   | )        |   | (19,593    | )      |     | 690        |     |   | 78,022     |   |   | 3,355 |   |   | 872 |   |
| Taxes                on income                                               |   |                                                                                      | 8,445      |     |   | 41,230     |   |     | 58,490     |     |   | 96,660     |   |   | 68,495 |   |   | 17,809 |   |
| Equity                in net earnings (loss) of affiliates                   |   |                                                                                      | 742        |     |   | (1,204     | )      |     | 498        |     |   | 1,284      |   |   | 186 |   |   | 48 |   |
| Minority                interest                                             |   |                                                                                      | 10,852     |     |   | 13,555     |   |     | 15,717     |     |   | 31,573     |   |   | 30,757 |   |   | 7,997 |   |
| Net                income (loss)                                             |   |                                                                                      | (7,046     | )        |   | 60,548     |   |     | 89,991     |     |   | 213,911    |   |   | 150,222 |   |   | 39,059 |   |
| Earnings                (loss) per ordinary share or ADS (basic)             |   |                                                                                      | (0.18      | )        |   | 1.57       |   |     | 2.32       |     |   | 5.46       |   |   | 3.55 |   |   | 0.92 |   |
| Earnings                (loss) per ordinary share or ADS (fully diluted)     |   |                                                                                      | (0.18      | )        |   | 1.54       |   |     | 2.26       |     |   | 4.92       |   |   | 3.42 |   |   | 0.89 |   |
| Cash                dividends declared per ordinary share or ADS             |   |                                                                                      | 7.68       |     |   | 6.38       |   |     | 2.35       |     |   | 2.81       |   |   | 6.52 |   |   | 1.70 |   |
| **U.S.                GAAP:**                                                |   |                                                                                      |       |     |   |       |   |     |       |     |   |       |   |   |   |   |   |   |   |
| Net                income (loss)                                             |   |                                                                                      | (952       | )        |   | 45,235     |   |     | 88,340     |     |   | 166,724    |   |   | 97,301 |   |   | 25,299 |   |
| Earnings                (loss) per ordinary share or ADS (basic)             |   |                                                                                      | (0.02      | )        |   | 1.17       |   |     | 2.27       |     |   | 4.25       |   |   | 2.30 |   |   | 0.60 |   |
| Earnings                (loss) per ordinary share or ADS (fully diluted)     |   |                                                                                      | (0.02      | )        |   | 1.17       |   |     | 2.27       |     |   | 4.23       |   |   | 2.30 |   |   | 0.60 |   |
| **Number                of Ordinary Shares Outstanding:**                    |   |                                                                                      | 38,400,400 |     |   | 38,782,336 |   |     | 38,950,091 |     |   | 39,692,983 |   |   | 43,372,819 |   |   | N/A |   |
|                                                                         |
| **Selected                Operating Data:**                                  |   |                                                                                      |       |     |   |       |   |     |       |     |   |       |   |   |   |   |   |   |   |
| Number                of supermarket stores (at year end)                    |   |                                                                                      | 161        |     |   | 164        |   |     | 168        |     |   | 175        |   |   | 185 |   |   | N/A |   |
| Increase                (decrease) in same store sales(3)                    |   |                                                                                      | (11.0      | )%       |   | (1.3       | )%     |     | 1.7        | %        |   | 5.3        | %      |   | 1.2 | % |   | N/A |   |
| Total                square meters (at year end)                             |   |                                                                                      | 290,800    |     |   | 300,000    |   |     | 312,000    |     |   | 323,304    |   |   | 342,705 |   |   | N/A |   |
| Supermarket                sales per square meter (in NIS)(4)                |   |                                                                                      | 17,906     |     |   | 18,074     |   |     | 18,621     |     |   | 19,739     |   |   | 19,905 |   |   | 1,291 |   |
| Supermarket                sales per employee (in thousands) (5)             |   |                                                                                      | 832        |     |   | 867        |   |     | 899        |     |   | 938        |   |   | 937 |   |   | 61 |   |

| (1)   | For                the year 2003, these amounts have been adjusted to                reflect changes in the Israeli consumer price index as of December                31,                2003. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | The                translation of the NIS amounts into dollars has been made for the                convenience of the reader at the representative exchange rate prevailing                at December 31, 2007 (NIS 3.846 =$1.00),                as published by the Bank of Israel. During 2007, the US dollar depreciated                in value vis-à-vis the NIS by approximately 9%. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| (3)   | The                percentage in same store sales is the percentage change in sales                of those                stores that operated continuously during the entire reporting period                of                both the current year and that preceding it. Stores are not deemed                to have                operated continuously (and therefore not included as “same stores”) if                such stores were permanently closed during the reporting period or                the                preceding period or were resized significantly during the period                (including for renovation or expansion purposes). Store resizing                is                considered significant if it exceeds 5% or more of the store’s original                size. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4)   | Based                on an average total square meters at month end during the relevant                year. |
|-----------------|--------------------------------------------------------------------------------------------------------------|

| (5)   | In                2005, the Company began outsourcing its cleaning activities to external                services providers, which reduced its total number of employees as                compared to 2004. To facilitate a meaningful comparison between the                Company’s Sales Per Employee for 2005 2006 and 2007 with the Sales Per                Employee for the previous periods, the number of employees used to                calculate Sales Per Employee for all previous periods has been adjusted                to                excluding cleaning personnel. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                       |   | **December                31,**       |      |
|------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|
|                                                                                                       |   | **2003**                              |      | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2007** |   |
|                                                                                                       |   | NIS                (in thousands) (1) |      |   |   | **$**(2) |   |
| ***Balance                Sheet Data:***                                                                   |   |                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Israeli                GAAP:**                                                                           |   |                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Working                capital (deficit)                                                                   |   |                                  | (288,831  | ) |   | (380,666 | ) |   | (450,044 | ) |   | 335,376 |   |   | 100,444 |   |   | 26,116 |   |
| Total                assets                                                                                |   |                                  | 3,199,680 |   |   | 3,079,011 |   |   | 3,683,035 |   |   | 4,071,733 |   |   | 4,232,371 |   |   | 1,100,461 |   |
| Short-term                credit from banks and others and current maturities of                debentures |   |                                  | 212,521   |   |   | 136,541 |   |   | 359,316 |   |   | 264,858 |   |   | 207,723 |   |   | 54,010 |   |
| Long-term                debt, net of current maturities                                                   |   |                                  | 686,084   |   |   | 776,568 |   |   | 1,102,810 |   |   | 1,161,926 |   |   | 1,209,265 |   |   | 314,422 |   |
| Shareholders’                equity                                                                  |   |                                  | 1,037,340 |   |   | 819,310 |   |   | 865,308 |   |   | 992,922 |   |   | 1,024,834 |   |   | 266,467 |   |
| **U.S.                GAAP:**                                                                              |   |                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                assets                                                                                |   |                                  | 3,262,934 |   |   | 3,147,284 |   |   | 3,757,640 |   |   | 4,247,394 |   |   | 4,310,173 |   |   | 1,120,690 |   |
| Shareholders’                equity                                                                  |   |                                  | 1,082,450 |   |   | 873,120 |   |   | 928,504 |   |   | 1,003,384 |   |   | 932,985 |   |   | 242,586 |   |

| (1)   | For                the year 2003, these amounts have been adjusted to                reflect changes in the Israeli consumer price index as of December                31,                2003. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | The                translation of the NIS amounts into dollars has been made for the                convenience of the reader at the representative exchange rate prevailing                at December 31, 2007 (NIS 3.846 =                $1.00), as published by the Bank of                Israel. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

**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.**

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**Alon      Retail Ltd. (formerly Bronfman-Alon) is able to control the outcome of matters      requiring shareholder approval.**
** **

**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**

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

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

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

| ·  | actual                  or anticipated variations in our quarterly operating results or                  those of                  our competitors; |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| · | changes                  in financial estimates by securities                  analysts; |
|--------|------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| · | conditions                  or trends in our business; |
|--------|--------------------------------------------------------|
|   |   |
|--------|--------|

| · | changes                  in the market valuations of our                  competitors; |
|--------|----------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| · | announcements                  by us or our competitors of significant                  acquisitions; |
|--------|-------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| · | entry                  into strategic partnerships or joint ventures by us or our                  competitors; |
|--------|-----------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| · | the                  political, economic, security and military conditions in                  Israel; |
|--------|--------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| · | additions                  or departures of key personnel; and |
|--------|----------------------------------------------------------------|
|   |   |
|--------|--------|

| · | sales                  of ordinary shares by Blue Square’s controlling shareholder. |
|--------|-------------------------------------------------------------------------------------------|

**To      maintain the credit rating on our 5.9% unsecured debentures issued in August      2003, we may be limited in our ability to pay cash dividends on our ordinary      shares. **

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

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

*inter      alia*

** **

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**Increases      in oil, raw material and product prices in recent years may affect our operating      results**

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**Impact      of inflation may adversely affect our financial expenses and operating      income.**

**Damage      to our reputation may have a material adverse effect on our operating      results.**

**The      potential declaration of a boycott by certain segments of Israel’s      ultra-orthodox population against our Shefa Shuk stores may affect our operating      income. **

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**Currency      fluctuations might affect our operating results and translation of operating      results**

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

**We      are exposed to risks of fraud and theft with regard to our gift certificates      which may cause a loss of revenue and non-recoverable expenses**

**We      may be limited in our ability to borrow from Israeli banks**

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**Use      of technological information systems**

**We      are party to legal proceedings **
**in      connection with tax assessments.**

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

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

**Economic      conditions in Israel affect our financial performance.**
** **

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

** **

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

** **

**The      Company is subject to risks regarding the ownership of real estate      assets**

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| **ITEM                4.** | **INFORMATION ON THE              COMPANY** |
|----------------------------|---------------------------------------------|

| ·      | The launch of “Mega In Town”, a discount                supermarket brand designed to combine discount prices and convenience                for                neighborhood shoppers. This initiative included the conversion of                over 100                existing SuperCenter and Mega stores to the new brand. |
|--------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| ·      | The                increase of the variety of “Non-Food” and “Near-Food” items, which                generate more revenues per square meter, with the goal of increasing                the                portion of our customers’ overall shopping needs that are addressed in our                stores; |
|--------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | As                part of our strategy of expanding our presence in “Non-Food” stand alone                retail outlets, in 2007, we acquired (through our subsidiary Bee                Group                Retail Ltd.) the controlling interest in Vardinon Textile Ltd (home                textile chain), and the controlling interest in Naaman Porcelain                Ltd                (houseware chain); |
|--------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | The                entering into the organic/health food market by acquiring the control                interest in Eden Teva Briut Market (Eden Nature), which operates                two                organic/health food supermarkets; |
|--------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | The                establishment of a new joint loyalty plan (the "You Plan") with Dor                Alon                Energy In Israel (1988) Ltd. in 2005, including the offering to our                costumers of a new Diners Club Israel credit card bearing the name“You”,                and the acquisition, together with Dor Alon, of 49% of the shares                of                Diners Club Israel Ltd., a subsidiary of Credit Cards for Israel                Ltd.                (allocated 36.75% to us and 12.25% to Dor Alon) (see “Item 4. Information                on The Company - B. Business Overview -Related Businesses”);                and |
|--------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | The                initial public offering of ordinary shares and convertible and                non-convertible unsecured debentures of our subsidiary, BSRE, on                the Tel                Aviv Stock Exchange in 2006, following the transfer of the Company's                real                estate assets (including unoccupied land and unused building rights,                but                excluding real estate owned by BSIP and its subsidiaries) and certain                liabilities (including lease agreements with third parties and with                BSIP)                to BSRE (see “Item 4. Information on The Company - B. Business Overview -                Real Estate.”). |
|--------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Capital      Expenditures**

* *

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**General**

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|                                   |   | **No.                of Stores** |   | **Store                Space****(square                meters)** |   |
|----------------------------------------|--------|----------------------------------|--------|------------------------------------------------------------------|--------|
|                                   |   |                             |   |                                                             |   |
| As                of December 31, 2003 |   |                             | 161    |                                                             |   | 290,800 |   |
| As                of December 31, 2004 |   |                             | 164    |                                                             |   | 300,000 |   |
| As                of December 31, 2005 |   |                             | 168    |                                                             |   | 312,000 |   |
| As                of December 31, 2006 |   |                             | 175    |                                                             |   | 323,300 |   |
| As                of December 31, 2007 |   |                             | 185    |                                                             |   | 342,705 |   |

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**Industry      Overview **

**Our      Supermarkets**
** **

**Seasonality**

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**Our      Strategy**

| · | accelerated                  opening of additional supermarket stores. As part of our strategy,                  we plan                  to open eight to ten additional supermarket stores in                  2008; |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | increasing                  the pace of our growth rate and market share by opening additional                  store                  locations, renovating, improving and enlarging existing stores                  and, if                  necessary, reducing and/or closing underperforming                  stores; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | expanding                  the geographic presence of our stores with the goal of bringing                  all four                  of our supermarket store formats within the shopping range of every                  Israeli consumer; |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | increasing                  our market share of “Non-Food” and “Near-Food” products and to offer a                  wider selection of these products to consumers in our supermarket                  stores,                  including small electrical appliances, computers and computer accessories,                  textile and leisure products (such as videos and magazines) infants                  products as well as toys, housewares and traveling packages; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | continue                  our significant expansion into “Non-Food” stand alone activities through                  an acquisition program and developing our “Non-Food” chains (Vardinon                  Textile Ltd (home textile chain), and Naaman Porcelain Ltd (houseware                  chain)) that we acquired in 2007 through our subsidiary Bee Group                  Retail                  Ltd; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | expanding                  into the organic/health food market with the goal of establishing                  Blue                  square as a leader of Israel emerging organic/health food market.                  To this                  end, we intend to accelerate the development of our subsidiary,                  Eden Teva                  Briut Market (Eden Nature), and we plan to open approximately eight                  to ten                  additional Eden Nature stores in the next three                  years. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | offering                  travel services through Nofesh Yashir and considering the possibility                  of                  offering and selling other products in our supermarket stores,                  such as                  financial instruments, personal finance and insurance products                  to our                  consumers; |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | exploring                  various alternatives to maximize the potential value of our real                  estate                  assets, including unused building rights, which are held by BSIP                  and its                  subsidiaries; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | differentiating                  our store brands and products from those of our competitors; |
|--------|-----------------------------------------------------------------------------------------------|

| · | increasing                  operational efficiency; |
|--------|-----------------------------------------------------|

| · | focusing                  on improving the availability of products in our stores and reducing                  the                  shortage of products “on the shelves”;                  and |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| · | expanding                  and improving our new loyalty plan for the benefit of our customers                  which                  offers a new credit card; including joining other businesses to                  the                  plan. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·  | developing and improving existing real estate; |
|--------------|------------------------------------------------|
| · | maximize                the leasing of existing properties to commercial users; |
|--------|---------------------------------------------------------------------------------|
| ·   | increase and develop unused building rights in our              existing properties; and |
|--------------------|------------------------------------------------------------------------------------------|

| · | acquire                additional commercial real estate and yield-generating assets in                Israel                and abroad. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------|

**Real      Estate**

*Transfer      of Real Estate Assets to BSRE *

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*Description      of Real Estate Properties*

|                                                                                        |   | **BSRE**         |    | **BSIP**                                          |   | **TOTAL**        |   |
|---------------------------------------------------------------------------------------------|--------|------------------|---------|---------------------------------------------------|--------|------------------|--------|
| **Properties**                                                                         |   | **Number**  |    | **Property                Space (square meters)** |   | **Number**  |   | **Property                Space (square meters)** |   | **Number**  |   | **Property                Space (square meters)** |   |
|                                                                                        |   |             |    |                                              |   |             |   |   |   |   |   |   |   |
| **Commercial****properties,                including****Supermarket                Stores** |   |             | 100     |                                              |   | 135,975          |   |   | 19 |   |   | 45,961 |   |   | 119 |   |   | 181,936 |   |
|                                                                                        |   |             |    |                                              |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Offices**                                                                                 |   |             | 2       |                                              |   | 5,190            |   |   | 1 |   |   | 9,300 |   |   | 3 |   |   | 14,490 |   |
|                                                                                        |   |             |    |                                              |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Warehouses**                                                                              |   |             | 1       |                                              |   | 11,950           |   |   | 4 |   |   | 34,991 |   |   | 5 |   |   | 46,941 |   |
|                                                                                        |   |             |    |                                              |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Undeveloped                Land**                                                         |   |             | 13      |                                              |   | 43,025           |   |   | 6 |   |   | 39,683 |   |   | 19 |   |   | 82,708 |   |
|                                                                                        |   |             |    |                                              |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total**                                                                                   |   |             | **116** |                                              |   | **196,140**      |   |   | **30** |   |   | **129,935** |   |   | **146** |   |   | **326,075** |   |

*Tax      Authority Approval*

----

|   | · | Until                  December 31, 2007, incurred losses (if any) up to the amount of                  finance                  expenses in                  connection with loans attributed to the transferred real estate                  and                  up to the amount of lease expenses of the Company and/or BSRE may                  not be                  deducted for tax purposes. Thereafter, no such restriction                  applies. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Until                  December 31, 2007, the Company and BSRE may not transfer one to                  the other                  assets, cash or any other activity except in the ordinary course                  of                  business. In addition, until December 31, 2010, the Company and                  BSRE may                  not grant and/or receive loans to each other except in the ordinary                  course                  of business. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                  lease payments charged by BSRE for leasing the transferred properties                  to                  the Company or to any related party of the Company, and the management                  fees charged by the Company to BSRE, will each be at market value                  as would                  have been obtained in arm's length transactions between non-related                  parties. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                  accordance with Section 104A                  of                  the Israeli Tax Ordinance and in connection with the Transfer Agreement,                  the Company is required to hold at least 90% of each kind of right                  in BSRE                  until at least December 31, 2007. Notwithstanding the foregoing,                  in the                  following circumstances prior to December 31, 2007, the Company                  may hold                  less than 90% of each kind of right in BSRE, but in any event not                  less                  than 51%: (i) public offer pursuant to a prospectus, (ii) private                  placement of no more than 25% of the share capital before the placement                  and (iii) sale of no more than 10% of the ownership rights in                  BSRE. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                  accordance with Section                  105A(2) of the                  Israeli Tax Ordinance and in connection with the Split Agreement,                  the                  Company is required to hold all of its rights in BSRE for two years.                  Notwithstanding the foregoing, the                  following circumstances will not be deemed a change in rights provided                  that until December 31, 2007, the Company may not hold less than                  50% of                  the rights in BSRE: (i) public offer pursuant to a prospectus,                  (ii)                  private placement of shares and (iii) sale of no more than 10%                  of the                  rights in BSRE. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                  accordance with the Israeli Tax Ordinance, BSRE is required to                  hold the                  transferred assets under the Transfer Agreement until December                  31,                  2007. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                  accordance with the Israeli Tax Ordinance, until December 31, 2007,                  the                  Company is prohibited from selling most of the remaining assets                  of the                  Company (*i.e.*,                  which were not transferred under the Split Agreement), and BSRE                  is                  prohibited from selling most of the assets transferred to BSRE                  under the                  Split Agreement, and in each case during such period such assets                  will be                  used for acceptable uses in light of the circumstances. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Recent      Activities in Our Real Estate Sector *

*.*

**Competition**

** **

----

** **
** **
**)**

** **
** **

----

**Our      Operations**
** **

|                                 |   | **Blue                Square Israel**     |    | **BSIP**                                       |   | **Total**                           |   |
|--------------------------------------|--------|-------------------------------------------|---------|------------------------------------------------|--------|-------------------------------------|--------|
| **Retail                Format**     |   |  **Number                of Stores** |    | **Store                Space (square meters)** |   | **Number                of Stores** |   | **Store                Space (square meters)** |   | **Number                of Stores** |   | **Store                Space (square meters)** |   |
|                                 |   |                                      |    |                                           |   |                                |   |   |   |   |   |   |   |
| Mega (1)                        |   |                                      | 1       |                                           |   | 7,187                               |   |   | 35 |   |   | 150,598 |   |   | 36 |   |   | 157,785 |   |
|                                 |   |                                      |    |                                           |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mega                in Town (2) |   |                                      | 88      |                                           |   | 80,705                              |   |   | 15 |   |   | 29,440 |   |   | 103 |   |   | 110,145 |   |
|                                 |   |                                      |    |                                           |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shefa                Shuk (3)   |   |                                      | 26      |                                           |   | 31,576                              |   |   | 18 |   |   | 40,121 |   |   | 44 |   |   | 71,696 |   |
|                                 |   |                                      |    |                                           |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Eden                Nature (4)  |   |                                      | 2       |                                           |   | 3,079                               |   |   | - |   |   | - |   |   | 2 |   |   | 3,079 |   |
| **Total**                            |   |                                      | **117** |                                           |   | **122,546**                         |   |   | **68** |   |   | **220,159** |   |   | **185** |   |   | **342,705** |   |

----

**Purchasing      and Distribution**

----

**Marketing**
** **

----

**Government      Regulation**

*Deposits      for Drink Containers*

----

*Limits      on Expansion*

*Arrangements      between Major Supermarkets Chains and Large Suppliers *

** **

----

|   | · | *Reduction                in the number of suppliers*.                Suppliers are prohibited from being a party to an arrangement by                which                they influence the setting of the number or identity of competing                suppliers’ presence at retail chains. Decisions regarding the number and                identity of suppliers and their products quantity, kind or location                on the                shelf space are to be made by the retail chain without interference                by                suppliers. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | *Acquisition                of shelf and off-shelf display space*.                A                dominant supplier is prohibited to be a part of: (i) an arrangement                granting an allocation exceeding half of the overall display area                designated for the product category in which he has dominance; (ii)                an                arrangement which its purpose or effect is granting exclusivity to                one or                more of the supplier’s products in an off-shelf display in which it has                dominance (nevertheless, exclusive arrangement for off-shelf display                for a                limited discount period will not constitute a basis for enforcement                measures under certain circumstances). In addition, arrangements                with                suppliers (as opposed to dominant suppliers) regarding allocation                of shelf                area or off-shelf display, if not prohibited according to the decree,                may                not exceed a period of one year (the retail chain and the supplier                may                enter a new arrangement at the end of the one year term, provided                the                period of such new arrangement does not exceed one year and is in                accordance with the provisions of the decree). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | *Category                management*:                Unless prior approval of the antitrust authorities is obtained, a                dominant                supplier is prohibited to be party to an arrangement whose purpose                or                effect is the supplier involvement (including as advisor) in the                process                of category management (nevertheless, a retail chain may consult                with a                supplier regarding innovations in this                area). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | *Shelve                arrangements*:                Whereas in his position document, the Commissioner determined that                the                use of suppliers’ representatives                to physically arrange the shelves in the chains’ stores constitutes a                restrictive arrangement, the suppliers disagree with this position,                and                the Commissioner agreed not to take enforcement measures with regard                to                such arrangements for 30 months, so long as such arrangements satisfy                certain conditions. As of the date of this Annual Report, the Company                is                examining its compliance in light of the Commission's position and                the                consent decree. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | *Discounts                and rebates in exchange for meeting sales targets*.                A                dominant supplier may not be party to an agreement whose objective                or                effect** **is                the grant benefits to the retail chain in connection to meeting sales                targets of the products in which the supplier has dominance, unless                the                benefit is given only as a discount to the purchase of units sold                in                excess of the supplier’s sales basis in the chain and is restricted to                these units alone. The prices of units sold in excess of the sales                goals                shall not be lower than the production costs of these units. In addition,                a dominant supplier is prohibited from sanctioning a retail chain                for                failure to meet monopolistic sales targets regarding products for                which                the supplier posseses monopolistic                power. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | *Setting                market share*.                A                supplier is prohibited from being a party to an arrangement whose                purpose                or effect is to determine the supplier’s market share (or restricting the                market share of competing suppliers) in the chain’s                sales. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | *Exclusivity                in sales*:                A                supplier is prohibited from entering into the following arrangements                with                retail chains without the prior approval of the antitrust authorities:                (i)                an arrangement whose purpose or effect is to restrict the ability                of                competing suppliers to respond to sales conducted by such supplier                by way                of lowering their prices and (ii) an arrangement whose purpose or                effect                is to restrict the ability of competing chains to respond to sales                conducted by another chain, including by way of commitment of the                supplier                not to offer a similar sale to competing                chains. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | *Price                dictation by supplier*.                A                supplier is prohibited from setting the consumer price of its products                sold in the chain and from intervening in chain decisions regarding                the                setting of the consumer price of its products or of its competitors’                products. Nevertheless, a supplier may recommend the resale consumer                price                of its products to the chain, provided that the supplier takes no                action                to enforce such recommendation. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Consumer      Protection Laws*

*Consumer      Protection Law*
*Commodities      and Services (Control) Law*
*Consumer      Protection Law,*

----

*Consumer      Protection Law *

*Consumer      Protection Law*

*Consumer      Protection Law,*

*Consumer      Protection Law*

*Class      Actions Law *
*Consumer      Protection Law)*

----

*Consumer      Protection Law*

*Drugstores*

*Pharmacists      Ordinance, 1981*

*the      Pharmacists Regulation (Sale of Preparation without Prescription not in Pharmacy      or by Pharmacist)*

----

*New      Proposed Business License Regulation*

*The      Businesses License Law, 1968, *
*Businesses      License Regulation (Proper Sanitation Conditions to Grocery)*
*Business      License Regulation*

*Gasoline      Stations*

**Related      Businesses**

*Non-Food      Retail Businesses *

----

*Diners      Israel *

----

*Mega      Nofesh Yashir (Mega Direct Vacation)*

----

|  **Company**(1)                                                   |   | **Operations**                                                                                       | **%                Ownership Held by Blue Square** |
|------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|----------------------------------------------------|
|                                                                   |   |                                                                                                 |                                               |
| The                Blue Square Chain Investments & Properties Ltd. |   | Real                estate and supermarkets                                                          | 80%(2)                                             |
| The                Blue Square Chain (Hyper Hyper) Ltd.                |   | Supermarkets                                                                                         | 80%(3)                                             |
| Blue                Square Real Estate Ltd. **                    |   | Real                estate                                                                           | 80%(4)                                             |
| Bee                Group Retail Ltd.                                   |   | toy                and infants products, home textile products and houseware                products | 60%(5)                                             |
| Diners                Club Israel Ltd.*                                |   | Credit                cards                                                                          | 36.75%(6)                                          |
| Eden                Teva Briut Market Ltd. (Eden Nature Market)        |   |  Organic/Health                Food Products                                                    | 51%                                                |
| Mega                Nofesh Yashir Ltd.                                 |   | Travel                services                                                                       | 50%                                                |
| Radio                Non-Stop Ltd.*                                    |   | Local                radio station                                                                   | 26.4%                (7)                           |

|  | (1) | All                companies are incorporated under Israeli                law. |
|--|-----|---------------------------------------------------------------------------------|

|   | (2) | The                remaining shares of BSIP are held by the public and institutional                investors and are traded on the Tel Aviv Stock                Exchange. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | BSIP’s                wholly owned subsidiary. |
|--------|-----|------------------------------------------------------|

|   | (4) | The                remaining shares of BSRE are held by the public and institutional                investors and traded on the Tel Aviv Stock                Exchange. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (5) | Bee                Group Retail Ltd., holds approximately 85% interest in Vardinon Textile                Ltd., and approximately 53.4% (diluted 51.5%) interest in Naaman                Porcelain                Ltd., both of which are companies traded on the Tel Aviv Stock                Exchange. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (6) | The                remaining shares of Diners Club Israel Ltd are held by Credit Cards                for                Israel Ltd. (51%), a subsidiary of Israel Discount Bank Ltd., and                by Dor Alon Energy In Israel (1988) Ltd. (12.25%) (through a                subsidiary).                As                of the date of this Annual Report, the right of the Company to participate                in the income of Diners Club Israel in connection with credit card                activities outside the Loyalty Plan is subject to the satisfaction                of                various conditions. See “Item 7. Major Shareholders and Related Party                Transactions - B. Related Party Transactions” for information with respect                to our rights as a shareholder of Diners Israel. |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (7) | Hyper                Hyper holds its interest in this company through a wholly owned                subsidiary, which holds a 33% equity interest in Radio Non-Stop Ltd.                The                remaining interests are held by unaffiliated entities. In                2007, Radio Non-Stop Ltd., won the tender for a renewal of the franchise                for regional radio broadcasting for four years (which may be extended                without a tender for additional three four-year periods). |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|  | ** | Including                also a 50% interest in a 17,000 square meter shopping mall in Jerusalem                owned by BSRE and a 50% interest in warehouses owned by BSRE covering                approximately 22,000 square meters. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  **Properties**                                                                                                 |   | **Number** |    | **Space**(sq.                  meters)**(1)** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|------------|---------|-----------------------------------------------|--------|
| **Total                  Existing Supermarket Stores**                                                               |   |       |    |                                          |   |
| Owned                  (including                  long term lease from Israel                  Land Administration) |   |       | 93      |                                          |   | 163,868 |   |
| Leased                  under 5 years                                                                                |   |       | 34      |                                          |   | 23,370 |   |
| Leased                  between 6-10 years                                                                           |   |       | 52      |                                          |   | 54,858 |   |
| Leased                  over 10 years                                                                                |   |       | 62      |                                          |   | 111,433 |   |
|                                                                                                                 |   |       | **241** |                                          |   | **353,529** |   |
| **Stores****in Development**                                                                                         |   |       |    |                                          |   |   |   |
| Owned                                                                                                                |   |       | -       |                                          |   | - |   |
| Leased                  between 5-25 years                                                                           |   |       | 24      |                                          |   | 31,620 |   |
|                                                                                                                 |   |       | **24**  |                                          |   | **31,620** |   |
|                                                                                                                 |   |       |    |                                          |   |   |   |
| **Owned                  Office**                                                                                    |   |       | 1       |                                          |   | 9,245 |   |
| **Leased                  Offices**                                                                                  |   |       | 4       |                                          |   | 2,038 |   |
| **Owned                  Warehouses**                                                                                |   |       | 3       |                                          |   | 25,991 |   |
| **Leased                  Warehouses**                                                                               |   |       | 9       |                                          |   | 31,419 |   |
|                                                                                                                 |   |       | **17**  |                                          |   | **68,873** |   |
|                                                                                                                 |   |       |    |                                          |   |   |   |
| **Undeveloped                  Land**** ****(1)**                                                               |   |       | 19      |                                          |   | 82,708 |   |
| **Leased                  to Third Party**** ****(2)**** ****(3)**                                         |   |       | 18      |                                          |   | 32,214 |   |
| **Unutilized                  Properties**** **                                                                 |   |       | 12      |                                          |   | 19,179 |   |
|                                                                                                                 |   |       | **49**  |                                          |   | **134,101** |   |
|                                                                                                                 |   |       |    |                                          |   |   |   |
| **TOTAL**                                                                                                            |   |       | **331** |                                          |   | **588,123** |   |

----

|  | (1) | The                figures in this table do not include building                rights. |
|--|-----|-----------------------------------------------------------------------------------------|

|  | (2) | Including                a 50% interest owned by BSRE in a 17,000 square meter shopping mall                in                Jerusalem, in which we operate a 5,000 square meter                store. |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (3) | Including                a 50% interest owned indirectly by BSIP in a 7,100 square meter shopping                mall in Be’er Sheva. |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------|

** **
** **

**ITEM      4A. **
**UNRESOLVED      STAFF COMMENTS**

**ITEM      5.**
**      OPERATING AND FINANCIAL REVIEW AND PROSPECTS **

*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 - D. Risk      Factors.”*

----

**General**

*i.e.,*
** **

** **
** **
** **
** **

----

| · | In                2005 we acquired 50% of the holdings of Bee Group Retail Ltd (formerly                known as “Hamachsan Hamerkazi Kfar Hasha’ashuim Ltd. (Central                Warehouse/Toy Village)”) ("Bee Group"), a large retail franchiser in                Israel of home textile, houseware, baby, and toys stores, and in                April                2007 we increased to 60% our holdings of Bee                Group. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                April 2007, we acquired, through Bee Group, approximately 85.79%                of the                holdings of Vardinon Textile Ltd., a company which imports, designs                and                distributes home textile products and accompanying accessories. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                October 2007, we acquired, through Bee Group, approximately 57.8%                of the                holdings of Naaman Porcelain Ltd. (51.5% on a fully diluted basis),                one of                Israel’s major branded houseware retailer and wholeseller, which imports                and markets various houseware products, such as kitchen utensils,                cutlery                and dinner sets. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| · | In                January, 2008, we acquired from Issta Israel Ltd, ("Issta") a subsidiary                of Issta Lines Ltd, Israel’s largest travel agency, 50% of "Nofesh Yashir"                (direct vacation) enterprise, operating travel services through an                internet portal and a travel services call                center. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                addition, we sell over the counter pharmaceutical medical products                to                further expand the mix of goods sold in our                stores. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Operating      Results**

|                                                            |   | **Year                Ended December 31,** |   |
|-----------------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                            |   | **2005**                                        |   | **2006** |   | **2007** |   |
|                                                                 |   | **%**                                           |   | **%** |   | **%** |   |
| Sales                                                           |   |                                            | 100.00 |   |   | 100.00 |   |   | 100.00 |   |
| Gross                profit                                     |   |                                            | 25.9   |   |   | 26.1 |   |   | 26.5 |   |
| Selling,                general and administrative expenses     |   |                                            | 21.9   |   |   | 21.4 |   |   | 22.4 |   |
| Operating                income                                 |   |                                            | 4.0    |   |   | 4.7 |   |   | 4.3 |   |
| Taxes                on income                                  |   |                                            | 1.0    |   |   | 1.5 |   |   | 1.0 |   |
| Minority                interest in profit of subsidiaries, net |   |                                            | 0.3    |   |   | 0.5 |   |   | 0.4 |   |
| Net                income                                       |   |                                            | 1.6    |   |   | 3.3 |   |   | 2.2 |   |

**Year      Ended December 31, 2007 compared with year ended December 31,      2006**

*Sales*

|   | · | an                increase of approximately NIS 376 million in connection with the                addition                of 17 supermarket stores in 2006 and 2007 and newly consolidated                operations; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | an                increase of approximately NIS 70 million in connection with the increase                in Same Store Sales1 . |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------|

----

| 1 | The                    percentage in same store sales is the percentage change in sales                    of those                    stores that operated continuously during the entire reporting                    period of                    both the current year and that preceding it. Stores are not deemed                    to have                    operated continuously (and therefore not included as “same stores”) if                    such stores were permanently closed during the reporting period                    or the                    preceding period or were resized significantly during the period                    (including for renovation or expansion purposes). Store resizing                    is                    considered significant if it exceeds 5% or more of the store’s original                    size. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Gross      profit*

*Revaluation      of Investment Property*
**.      **

*Selling,      general and administrative expenses*
* *
* *

*Operating      income.*

*Financial      expenses, net*

*Other      income, net*

----

*Taxes      on income*

*Minority      interest in profit of subsidiaries, net.*
** **

*Net      income.*
** **

**Year      Ended December 31, 2006 compared with year ended December 31,      2005**

*Sales.*

|   | · | an                increase of approximately NIS 292 million in Same Store Sales2                 related to success of the Company’s brand management strategies, including                the restructuring of operations into three brands, the identification                of                the “return to the neighborhood” trend and the strengthening of discount                brands, successful marketing, including pricing policies and attractive                special offers, and the strengthening of Israel’s economy and the                reduction in unemployment; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 2 | The                  percentage in same store sales is the percentage change in sales                  of those                  stores that operated continuously during the entire reporting period                  of                  both the current year and that preceding it. Stores are not deemed                  to have                  operated continuously (and therefore not included as “same stores”) if                  such stores were permanently closed during the reporting period                  or the                  preceding period or were resized significantly during the period                  (including for renovation or expansion purposes. Store                  resizing is considered significant if it exceeds 5% or more of                  the store’s                  original size. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | an                increase of approximately NIS 289 million related to ongoing expansion,                including the opening of seven stores during the year, increasing                the                Company’s sales area by approximately 11,304 square meters, and                renovations carried out throughout the chain;                and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | an                increase of approximately NIS 137 million in respect of the consolidation                of the financial results of Bee Group into the Company’s consolidated                financial results for the entire 2006, as compared to consolidation                of Bee                Group financial results into the Company’s consolidated financial results                for only the second half of 2005. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Gross      profit*

*Selling,      general and administrative expenses*
* *
* *

|   | · | An                increase of approximately NIS 85 million in connection with new activities                such as new stores operation, launching the new “You” loyalty plan, and                consolidation of the financial results of Bee Group into the Company’s                consolidated financial results for the entire 2006, as compared to                consolidation of Bee Group’s financial results into the Company’s                consolidated financial results for only the second half of 2005;                and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | An                increase of approximately NIS 42 million related to expenses generated                from the increase in the Company’s ongoing operations, mainly in respect                of an increase in wage expenses due to new positions and to the increase                in the minimum wage. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Operating      income.*

*Financial      expenses, net*

|   | · | The                effect of the year’s negative inflation of 0.29% on the CPI index known at                the end of the year (hereinafter: "Known" CPI index), which decreased                the                financial expenses associated with its index-linked loans and debentures,                compared with a 2.69% increase in the “Known” CPI index in 2005;                and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Reduction                in average level of debt due to the initial public offering of the                BSRE in                August 2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

*Other      income, net*

|   | · | A                capital gain of approximately NIS 49 million recorded in the third                quarter                as a result of the IPO of BSRE in August 2006; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Non-cash                income of approximately NIS 23 million recorded following the Company’s                review of the carrying value of its assets in compliance with Israeli                Accounting Standard No.15 - Impairment of Assets. The Company recorded                a                reversal of the impairment provisions due to the increase in the                value of                the Company’s properties and stores in light of the strengthening of the                local real estate market, together with the Company’s increased sales and                profitability. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | A                capital gain of approximately NIS 6 million recorded in the fourth                quarter, reflecting the sale to the public of 0.73% of the shares                of BSIP,                a transaction undertaken to assure that the shares of BSIP would                continue                to be included in the Tel Aviv 100 (TA100)                Index; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Taxes      on income*

----

*Minority      interest in profit of subsidiaries, net.*
** **

*Net      income.*

**Quarterly      Fluctuations**

|                          | **Net                sales**      | **Operating                income**              |
|-------------------------------|-----------------------------------|--------------------------------------------------|
|                          | **NIS**                           | **Percentage****of****Full                Year** | **NIS** | **Percentage****of****Full                Year** |
|                          | **(In                thousands)** |                                             | **(In                thousands)** |   |
| **2007**                      |                              |                                             |   |   |
| First                quarter  | 1,693,456                         | 24.2%                                            | 80,502 | 26.8% |
| Second                quarter | 1,680,859                         | 24.1%                                            | 74,232 | 24.7% |
| Third                quarter  | 1,823,522                         | 26.1%                                            | 68,591 | 22.8% |
| Fourth                quarter | 1,784,513                         | 25.6%                                            | 77,406 | 25.7% |
|                          |                              |                                             |   |   |
| **2006**                      |                              |                                             |   |   |
| First                quarter  | 1,536,669                         | 23.6%                                            | 65,962 | 21.6% |
| Second                quarter | 1,677,719                         | 25.7%                                            | 84,839 | 27.8% |
| Third                quarter  | 1,710,242                         | 26.3%                                            | 83,222 | 27.3% |
| Fourth                quarter | 1,590,405                         | 24.4%                                            | 71,183 | 23.3% |
|                          |                              |                                             |   |   |
| **2005**                      |                              |                                             |   |   |
| First                quarter  | 1,313,883                         | 22.7%                                            | 52,757 | 23.0% |
| Second                quarter | 1,422,032                         | 24.5%                                            | 58,709 | 25.6% |
| Third                quarter  | 1,585,581                         | 27.4%                                            | 59,177 | 25.8% |
| Fourth                quarter | 1,475,522                         | 25.4%                                            | 58,404 | 25.5% |

----

**Exchange      Rates**

** **

| **Year                Ended****December 31,** |   |  **Period                End** |    | ** ****Average                Rate****(1)** |   |  **High** |   |  **Low** |   |
|----------------------------------------------------|--------|-------------------------------------|---------|--------------------------------------------------|--------|----------------|--------|---------------|--------|
|                                               |   |                                |    | **(NIS                per $1.00)**               |   |           |   |          |   |
|                                               |   |                                |    |                                             |   |           |   |          |   |
| 2003                                               |   |                                | 4.38    |                                             |   | 4.55           |   |          | 4.92   |   |   | 4.28 |   |
| 2004                                               |   |                                | 4.31    |                                             |   | 4.48           |   |          | 4.63   |   |   | 4.31 |   |
| 2005                                               |   |                                | 4.60    |                                             |   | 4.49           |   |          | 4.74   |   |   | 4.30 |   |
| 2006                                               |   |                                | 4.30(2) |                                             |   | 4.46           |   |          | 4.73   |   |   | 4.18 |   |
| 2007                                               |   |                                | 3.85(2) |                                             |   | 4.11           |   |          | 4.34   |   |   | 3.81 |   |

|  **Month** |   | **Period                End** |   | **Average                Rate****(1)** |   | **High** |   | **Low** |   |
|-----------------|--------|-------------------------------|--------|----------------------------------------|--------|----------|--------|---------|--------|
|            |   |                          |   | **(NIS                per $1.00)**     |   |     |   |    |   |
| December        |   |                          | 3.85   |                                   |   | 3.90     |   |    | 4.01   |   |   | 3.84 |   |
| January         |   |                          | 3.63   |                                   |   | 3.75     |   |    | 3.86   |   |   | 3.63 |   |
| February        |   |                          | 3.64   |                                   |   | 3.61     |   |    | 3.66   |   |   | 3.58 |   |
| March           |   |                          | 3.55   |                                   |   | 3.51     |   |    | 3.66   |   |   | 3.38 |   |
| April           |   |                          | 3.43   |                                   |   | 3.52     |   |    | 3.64   |   |   | 3.43 |   |
| May             |   |                          | 3.23   |                                   |   | 3.38     |   |    | 3.46   |   |   | 3.23 |   |

| (1)                The average of the daily exchange                rates. |
|----------------------------------------------------------------------------|

**Impact      of Inflation and Currency Fluctuations **

----

**Political      Conditions**

**Economic      Conditions**

**Trade      Agreements **

----

**Corporate      Tax Rate**

**Critical      Accounting Estimates**

----

***Impairment      of Assets***

----

*** ***

***Revaluation      of Investment Property***

----

***Rebates      from suppliers***

***Inventory***

----

***Compensation      for Unutilized Sick Leaves***

***Tax      Uncertainties***

**Critical      Accounting Policies**

**Recently      issued accounting pronouncements in Israel and in the United      States**

**Liquidity      and Capital Resources**

*Sources      and Uses of Cash*

----

*Sources*

----

*Uses*

* *

----

*Dividends*

| **Date                of payment** | **Amount                per share** | **Total                amount***                                           |
|------------------------------------|-------------------------------------|----------------------------------------------------------------------------|
| October                8, 2007     | NIS                5.07 ($1.27)     | NIS                220 million (approximately $55 million)                 |
| April                19, 2007      | NIS                1.45 ($0.35)     | NIS                60 million (approximately $14.7 million)                |
| September                13, 2006  | NIS                0.76 ($0.18)     | NIS                30 million (approximately $6.8 million)                 |
| June                22, 2006       | NIS                0.77 ($0.17)     | NIS                30 million (approximately $6.7 million)                 |
| April                20, 2006      | NIS                1.28 ($0.27)     | NIS                50 million (approximately $10.9                million) |

|  **Year                of payment** | **Amount                per share**  | **Total                amount***                                             |
|------------------------------------------|--------------------------------------|------------------------------------------------------------------------------|
| 2005                                     | NIS                2.29 ($0.51)      | NIS                89 million (approximately $20 million)                    |
| 2004                                     | NIS                6.6 ($1.48)  | NIS                253 million (approximately $56.7 million)                 |
| 2003                                     | NIS                7.71 ($1.72)      | NIS                295 million (approximately $66.1 million)                 |
| 2002                                     | NIS                3.35 ($0.72)      | NIS                128 million (approximately $27.3 million)                 |
| 2001                                     | NIS                1.29 ($0.31)      | NIS                51.9 million (approximately $11.9                million) |

----

*Dividends      paid by BSIP from 2004 until the date of this Annual Report:*

| **Date                of payment** | **Amount                per share** | **Total                amount***                                            |
|------------------------------------|-------------------------------------|-----------------------------------------------------------------------------|
| October                8, 2007     | NIS                6.1 ($1.52)      | NIS                200 million (approximately $50 million)                  |
| April                12, 2007      | NIS                0.76 ($0.19)     | NIS                25 million (approximately $5.9 million)                  |
| April                11, 2005      | NIS                2.44 ($0.56)     | NIS                80 million (approximately $18.6 million) **              |
| May                30, 2004        | NIS                12.21 ($2.68)    | NIS                400 million (approximately $87.8                million) |

*Dividends      paid by BSRE until the date of this Annual Report:*

| **Date                of payment** | **Amount                per share** | **Total                amount***                                           |
|------------------------------------|-------------------------------------|----------------------------------------------------------------------------|
| April                28, 2008      | NIS                1.58 ($0.46)     | NIS                19.7 million (approximately $5.7 million)               |
| April                12, 2007      | NIS                0.78 ($0.19)     | NIS                9.7 million (approximately $2.3                million) |

*Short-Term      Credit from Banks *

|                                                 |   | **December                31**      |        |
|------------------------------------------------------|--------|-------------------------------------|-------------|
|                                                 |   | **2006**                            |        | **2007** |   |
|                                                 |   | **NIS                in thousands** |        |
|                                                 |   |                                |        |   |   |
| Short-                term credit from banks         |   |                                | 39,067      |   |   | 53,493 |   |
|                                                 |   |                                |        |   |   |   |   |
| Current                maturities of Long-term loans |   |                                | 172,085     |   |   | 84,371 |   |
|                                                 |   |                                |        |   |   |   |   |
|                                                 |   |                                | **211,152** |   |   | **137,864** |   |

----

*Long-Term      Loans from Banks and other Financial Institutions*

|                                     |   | **December                31**         |    | **Annual**     |   |
|------------------------------------------|--------|----------------------------------------|---------|----------------|--------|
|                                     |   | **2006**                               |    |  **2007** |   | **Interest                Rate** |   |
| In                Israeli currency -     |   | **NIS****in                thousands** |    | **%**          |   |
| Linked                to the Israeli CPI |   |                                   | 169,407 |           |   | 190,683 |   |   | 5.45(1) |   |
| Unlinked (2)                   |   |                                   | 115,252 |           |   | 175,321 |   |   |   |   |
|                                     |   |                                   | 284,659 |           |   | 366,004 |   |   |   |   |
|                                     |   |                                   |    |           |   |   |   |   |   |   |
| Less                - current maturities |   |                                   | 172,085 |           |   | 84,371 |   |   |   |   |
|                                     |   |                                   | 112,574 |           |   | 281,633 |   |   |   |   |

*Debentures*

|                                       |   | **December                31**      |        |
|--------------------------------------------|--------|-------------------------------------|-------------|
|                                       |   | **2006**                            |        | **2007** |   |
|                                       |   | **NIS                in thousands** |        |
| **Convertible                debentures:** |   |                                |        |   |   |
| Issued                by the Company       |   |                                | 160,544     |   |   | 34,984 |   |
| Issued                by BSRE              |   |                                | 107,956     |   |   | 108,174 |   |
|                                       |   |                                | 268,500     |   |   | 143,158 |   |
|                                       |   |                                |        |   |   |   |   |
| Less                - current maturities   |   |                                | 53,706      |   |   | - |   |
|                                       |   |                                | 214,794     |   |   | 143,158 |   |
|                                       |   |                                |        |   |   |   |   |
| **Other                debentures:**       |   |                                |        |   |   |   |   |
| Issued                by the Company       |   |                                | 203,679     |   |   | 209,578 |   |
| Issued                by BSRE              |   |                                | 623,879     |   |   | 633,108 |   |
|                                       |   |                                | 827,558     |   |   | 842,686 |   |
|                                       |   |                                |        |   |   |   |   |
| Less                - current maturities   |   |                                | -           |   |   | 69,859 |   |
|                                       |   |                                | **827,558** |   |   | **772,827** |   |

*Blue      Square Debentures*

----

*Blue      Square Series A Debentures*

*Blue      Square Series B Debentures*

*Other      terms of the Blue Square Series A and Series B Debentures*

*BSRE      Debentures *

----

*BSRE      Series A Debentures*

*BSRE      Series B Debentures*

**Commitments      for Capital Expenditures**

----

** **

*i.e.,*

----

** **
** **
** **

----

|                                                                                                                       |   | **Expected                Maturity (NIS in thousands)** |         |
|----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------------|
|                                                                                                                            |        | **2008**                                                |         | **2009**  |   | **2010**  |   | **2011** |   | **2012** |   | **From                2013 and thereafter** |   | **Total** |   |
|                                                                                                                       |   |                                                    |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Long                term loans from banks                (1)                                                               |   |                                                    | 84,371       |   |   | 90,083 |   |   | 55,863 |   |   | 39,583 |   |   | 96,104 |   |   | - |   |   | 366,004 |   |
| Non-Convertible                Debentures                issued by the                Company (2)                (3)  |   |                                                    |  69,859 |   |   | - |   |   | 46,573 |   |   | - |   |   | 31,049 |   |   | 62,097 |   |   | 209,578 |   |
| Convertible                Debentures                issued by the                Company (2)                (4)           |   |                                                    | -            |   |   | 17,492 |   |   | - |   |   | 17,492 |   |   | - |   |   | - |   |   | 34,984 |   |
| Non-Convertible                Debentures                issued by BSRE                (5)                (6)              |   |                                                    | -            |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 633,108 |   |   | 633,108 |   |
| Convertible                Debentures                issued by BSRE                (5)                (6)                  |   |                                                    | -            |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 108,174 |   |   | 108,174 |   |
| Non-cancelable                Long term                leases                                                              |   |                                                    | 148,637      |   |   | 147,036 |   |   | 160,988 |   |   | 115,646 |   |   | 106,962 |   |   | 313,941 |   |   | 993,210 |   |
| **Total                contractual cash obligations**                                                                      |   |                                                    | 302,867      |   |   | 254,611 |   |   | 263,424 |   |   | 172,721 |   |   | 234,114 |   |   | 1,117,320 |   |   | 2,345,058 |   |

|   | (1) | The                table above does not include payments of interest on our long-term                loans                because the actual interest payments on most of the loans are dependent                on                variable parameters, such as changes in the Israeli CPI, variable                interest                rates or foreign currency rates which cannot be predicted at the                date of                this report. Without taking into account any changes in the Israeli                CPI or                changes in foreign currency rates and assuming the relevant variable                interest rate will remain at its level as it was as of December 31,                2007                (5.18% per annum), interest payments on the long-term loans (in thousands)                would be NIS 20,124 in 2008, NIS 15,555 in 2009, NIS 10,997 in 2010,                NIS                8,174 in 2011, NIS 5,848 in 2012 and NIS 12,560 in 2013 and thereafter. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | These                debentures bear interest at an annual rate of 5.9% and are linked                (principal and interest) to the Israeli CPI, but in the event the                Israeli                CPI is less than the base index (index known at date of issuance),                the                amount of debentures will not be adjusted below the base index. Without                taking into account any changes to the Israeli CPI, interest payments                on                the Non-Convertible Debentures (in thousands) would be NIS 12,365                in each                of the years 2008 to 2012, and NIS 18,548 in 2013 and thereafter.                Without                taking into account any changes to the Israeli CPI, based on the                principal                amount of the Convertible Debentures as of December 31, 2007 and                assuming                no additional conversion of debentures, interest payments on the                Convertible Debentures (in thousands) would be NIS 2,064 in 2008                and in                2009, and NIS 1,032 in 2010 and in 2011. The table above does not                include                payments of interest on our debentures because the actual interest                payments on these debentures will depend on changes in the Israeli                CPI,                which cannot be predicted at the time of this                report. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | (3) | The                principal is repayable in three equal annual installments on August                5 of                each of the years 2012 to 2014. Notwithstanding the above, under                the terms                of the debentures, on August 5 of each of the years 2006, 2008 and                2010,                the holders of the debentures are entitled to early redemption of                the                principal provided that on each of the said dates, we will not repay                more                than one third of the par value of the debentures outstanding as                of that                date. The table above assumes early redemption of these debentures. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | (4) | Under                the terms of these debentures, the principal is repayable in three                equal                installments on August 5 of each of the years 2007, 2009, and                2011. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | (5) | The                Non-Convertible Debentures and the Convertible Debentures bear interest                at                an annual rate of 4.7% and 6.25%, respectively, and are linked (principal                and interest) to the Israeli CPI, but in the event the Israeli CPI                is less                than the base index (index known at date of issuance), the amount                of                debentures will not be adjusted below the base index. Without taking                into                account any changes to the Israeli CPI, interest payments on the                Non-Convertible Debentures (in thousands) would be NIS 29,756 in                each of                the years 2008 to 2013, NIS 22,317 in 2014, NIS 14,878 in 2015, and                NIS                7,439 in 2016. Without taking into account any changes to the Israeli                CPI,                based on the principal amount of the Convertible Debentures as of                December                31, 2007 and assuming no additional conversion of debentures, interest                payments on the Convertible Debentures (in thousands) would be NIS                6,761                in each of the years 2008 to 2013, NIS 5,071in 2014, NIS 3,380 in                2015,                and NIS 1,690 in 2016. The table above does not include payments                of                interest on our debentures because the actual interest payments on                these                debentures will depend on changes in the Israeli CPI, which cannot                be                predicted at the time of this                report. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (6) | The                principal is repayable in four equal annual installments on August                31 of                each of the years 2013 to 2016. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | * | The                table above does not include severance payment obligations because                the                actual severance payments will depend on the dates of payment, which                cannot be predicted at the time of this                report. |
|--------|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**ITEM      6.**
**      DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**

| **Name**                                               | **Age** | **Position**                                                           |
|--------------------------------------------------------|---------|------------------------------------------------------------------------|
| David                Wiessman (1)                      | 53      | Chairman                of the Board of Directors                      |
| Yitzhak                Bader                           | 62      | Director                                                               |
| Shlomo                Even                             | 51      | Director                                                               |
| Diana                Bogoslavsky                       | 49      | Director                                                               |
| David                Alphandary (2)                (3) | 73      | Director                                                               |
| Uzi                Baram (1)                (2) (3)    | 71      | Director                                                               |
| Avinadav                Grinshpon                      | 36      | Director                                                               |
| Ron                Fainaro                             | 41      | Director                                                               |
| Avraham                Meiron (2)                      | 69      | Director                                                               |
| Zeev                Vurembrand                         | 57      | President                and Chief Executive Officer                   |
| Uri                Falach                              | 51      | Chief                Operating Officer; Vice President for Trade       |
| Zeév                Stein                         | 55      | Chief                Executive Officer of Blue Square Real Estate Ltd. |
| Dror                Moran                              | 40      | Vice                President and Chief Financial Officer              |
| Ilan                Buchris                            | 56      | Vice                President for Planning and Maintenance Division    |
| Elli                Levinson Sela                      | 41      | General                Counsel and Corporate Secretary                 |
| Moshe                Shatz                             | 60      | Head                of Human Resources Division                        |
| Oren                Lahat                              | 60      | Head                of Real Estate Development Division                |
| Odelia                Levanon                          | 45      | Head                of Information Technology Division                 |
| Shay                Lifshitz                           | 54      | Head                of Trade Headquarters                              |
| Shai                Almog                              | 42      | Head                of Marketing Division                              |
| Eliezer                Gayer                           | 51      | “Mega                In Town” Manager                      |
| Rafi                Masiach                            | 49      | “Mega”                and “Shefa Shuk” Manager |
| Dany                Magen                              | 64      | Head                of Supply Chain Division                           |

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

**David      Wiessman**

----

**Yitzhak      Bader**

**Shlomo      Even**

**Diana      Bogoslavsky**

**David      Alphandary**

**Uzi      Baram **
** **
** **
** **
** **

----

**Avinadav      Grinshpon**

**Ron      Fainaro**

**Avraham      Meiron**

**Zeev      Vurembrand **

**Uri      Falach**

----

**Zeév      Stein **

**Dror      Moran**

**Ilan      Buchris **

**Elli      Levinson-Sela, Adv**
*with      honors*

**Moshe      Shatz**

**Oren      Lahat **

**Odelia      Levanon**

----

**Shay      Lifshitz**

**Shai      Almog**

**Eliezer      Gayer**

**Rafi      Masiach**

**Dany      Magen**

**Termination      of Office**

**Shaul      Gliksberg **
**Erez      Meltzer **
**Yaakov      Shalom Fisher**
**Ron      Hadassi**
**Elisha      Eitani**
**Gil      Unger**
**      Zeev Kalimi **
**Yehuda      Porat **
** **
**      Uri Kaminsky **

**Arrangements      for the Election of Directors**
** **

----

|                                                                                                              | **Salaries,                fees, expenses, directors’****fees,                commissions and bonuses****(In                thousands)** | **Pension,                retirement****and                similar benefits****(In                thousands)** |
|-------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|
| All                directors, senior management and                Acting Chairman                as a group |  **$                4,334**                                                                                                               |  **$                556**                                                                                 |

----

**Appointment      of Directors and Terms of Officers**

**Substitute      Directors**

----

**Independent      and External Directors**

***Israeli      Companies Law Requirements***
*** ***

| ·      | an                employment relationship; |
|--------------------------------------|--------------------------------------------|

| ·      | a                business or professional relationship maintained on a regular                basis; |
|--------------------------------------|------------------------------------------------------------------------------------------------------|

| ·      | control;                and |
|--------------------------------------|-----------------------------|

| ·      | service                as an office holder, other than service as a director who was appointed                in                order to serve as an external director of a company when such company                was                about to make an initial public                offering. |
|--------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

***New      York Stock Exchange Requirements***

**Audit      Committee**
**s**

***Israeli      Companies Law Requirements***
*** ***

| ·      | chairman                of the board of directors; |
|--------------------------------------|----------------------------------------------------|

| ·      | controlling                shareholder or his relative; and |
|--------------------------------------|-------------------------------------------------------------|

| ·      | any                director employed by or who provides services to the company on a                regular                basis. |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|

***New      York Stock Exchange Requirements***

----

**Corporate      Governance Practices**

**Internal      Auditor**

----

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

***Fiduciary      Duties of Office Holders***

| ·      | 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. |
|--------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Controlling      Shareholder***
***Transactions and Actions***

----

**Exemption,      Insurance and Indemnification of Directors and Officers**

***Office      Holder Exemption***

----

***Office      Holder Insurance***

| ·      | 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; |
|--------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | a                  financial liability imposed upon him in favor of another person                  concerning                  an act performed by him in his capacity as an office holder;                  or |
|--------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Indemnification      of Office Holders***

| · | a                provision authorizing the company to indemnify an Office Holder for                future                events with respect to 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), so long as                such indemnification is limited to types of events which, in the                board of                directors' opinion, are foreseeable at the time of granting the indemnity                undertaking in view of the Company’s actual business, and in such amount                or standard as the board of directors deems reasonable under the                circumstances. Such undertaking must specify the events that, in                the Board                of directors’ opinion, are foreseeable in view of the company’s actual                business at the time of the undertaking and the amount or the standards                that the board of directors deemed reasonable at the time; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| · | a                provision authorizing the company to indemnify an Office Holder for                future                events with respect to reasonable litigation expenses, including                counsel                fees, incurred by an office holder or which he is ordered to pay                by a                court, in proceedings that the company institutes against him or                instituted on behalf of the company 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 criminal                intent; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| · | a                provision authorizing the company to indemnify an Office Holder for                future                events with respect to reasonable litigation fees, including attorney’s                fees, incurred by an office holder in consequence of an investigation                or                proceeding filed against him by an authority that is authorized to                conduct                such investigation or proceeding, and that resulted without filing                an                indictment against him and without imposing on him financial obligation                in                lieu of a criminal proceeding, or that resulted without filing an                indictment against him but with imposing on him a financial obligation                as                an alternative to a criminal proceeding in respect of an offense                that does                not require the proof of criminal intent; and |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| · | a                provision authorizing the company to retroactively indemnify an Office                Holder. |
|--------|----------------------------------------------------------------------------------------------------------------|

**Limitations      on Insurance, Exemption and Indemnification**

| ·      | a                breach by the office holder of his duty of loyalty 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 (a recent change to the Israeli Companies                  Law                  clarifies that this provision does not apply if the breach was                  solely as a                  result of negligence); |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

| · | The                  issuance of securities, including the offering of securities to                  the public                  according to a prospectus, a circular, a private offering or any                  other                  manner of security offering; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Any                  transaction, as defined in section 1 of the Israeli Companies Law,                  including a transfer, sale or purchase of assets or liabilities,                  including                  securities or the receipt of any right in any of the above, and                  any action                  related, directly or indirectly, to such                  transaction; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | An                  action, including handing over information and papers, in connection                  with                  sale of our shares or assets, by the                  Co-Op; |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The                  filing of a report or announcement required by the Israeli Companies                  Law                  or the Israeli Securities Law, 1968, the rules and regulations                  of a stock                  exchange in or outside Israel, or any law of any other country                  pertaining                  to these issues, and/or omission to file such a report or                  announcement; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Any                  change of reorganization of us, including any related decision,                  including                  without limiting the generality of the foregoing, splitting, dividing                  or                  modifying our share capital, establishment of subsidiaries or their                  liquidation or sale and issuance of shares; |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| · | Oral                  or written statements, including the expression of an opinion or                  a                  position conveyed in good faith by an office holder, in his capacity                  as                  such, during his term of office, including statements made in meetings                  of                  the board of directors or any                  committee; |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | An                  action in the line of business of us in relation with the following                  issues: building and planning, licensing of businesses, safety                  in work                  places, environment and recycling and protection of the consumer;                  or |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Each                  one of the circumstances stated above, all in connection with the                  office                  holder’s service on behalf of our subsidiaries or affiliated                  companies. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 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                  breach of the duty of care, which was committed intentionally or                  recklessly; |
|----|------------------------------------------------------------------------------------------------------------------|

----

| 3. | An                  act committed with the intention to realize a personal illegal                  profit;                  or |
|----|---------------------------------------------------------------------------------------------------------------------------------|

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

----

| · | Issue                  of securities, including, an offering of securities to the public                  pursuant                  to a prospectus, private placement, tender offer or offering of                  securities                  in any other manner; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | An                  event connected with the making of an investment by the Company                  before,                  during and after the effecting of the investment, in the course                  of                  negotiations, contractual arrangement, signature, development and                  monitoring the investment, including actions performed on behalf                  of the                  Company as an officer, employee or observer in the corporation                  in which                  the investment is made; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | A                  transaction or arrangement, including a transfer, sale or purchase                  of                  assets or liabilities, and including, goods, real estate, securities,                  or                  rights, or the giving or receiving of a right in any one of them                  and any                  action connected, directly or indirectly with such transaction,                  and                  including a tender offer of any sort and another transaction in                  securities                  which the Company has issued, whether or not the Company is a party                  thereto; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | A                  report or notice filed or submitted according to any law, including,                  an                  event arising from the fact of the Company being a public company                  or                  arising from the fact of its securities having been offered to                  the public,                  or arising from the fact of its securities being traded on a stock                  exchange, and including, a report or notice in accordance with                  the                  Companies Law - 1999 or the Securities Law - 1968, or the tax laws                  including regulations or directives made pursuant thereto, or in                  accordance with laws or provisions that apply outside of Israel                  or a                  report or notice lodged or submitted in accordance with rules,                  directives                  or instructions customarily practiced on the stock exchange in                  Israel or                  abroad and/or failure to submit such report or                  notice; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | An                  act in connection with voting rights in investee                  companies; |
|--------|--------------------------------------------------------------------------------------------------|

| · | An                  act in connection with the management of market                  risks. |
|--------|---------------------------------------------------------------------------------------------|

| · | A                  change in the structure of the Company or its reorganization or                  any                  resolution relating thereto, including, a merger, split, alteration                  of the                  capital of the Company, setting up of subsidiaries, winding-up                  or sale                  thereof. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Action                  connected directly or indirectly with employer-employee relationships                  in                  the Company and/or the commercial relations of the Company, including                  employees, external contractors, customers, suppliers and service                  providers, including negotiations, entering into and implementation                  of                  personal employment agreements or collective bargaining agreements,                  benefits to employees, including the issue of securities to                  employees. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | An                  act in connection, directly or indirectly, with the sale of products,                  purchase of products, import of products, operation of branches                  and sites                  of the Company, safeguarding of public health and safety instructions                  and                  provisions. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| · | An                  act in connection with the issue or non-issue of licenses and permits                  for                  the Company’s activities. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The                  preparation and approval of financial statements, including the                  approval                  of resolutions regarding the application of accounting standards                  and                  restatement in the financial                  statements. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | An                  act in connection with a distribution, including, for a repurchase                  by the                  Company of its own securities. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The                  transfer of information that is required or permissible for transfer                  according to law between the Company and/or the other companies                  and                  interested parties in any of them. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Remarks,                  statements including the expression of a position or opinion made                  in good                  faith by the officer in the course of performing his function and                  by                  virtue of his function, and including in the framework of meetings                  of the                  board of directors or any of its                  committees. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | An                  act or deed on matters of planning and building, work safety, the                  environment and recycling, public health, consumer                  protection. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Committees**
** **

----

** **

----

** **

** **

** **

** **
** **
*i.e.*

----

** **

*Employment      of Employees by Manpower Contractors Act, 1996*
* *

----

**ITEM      7.**
**MAJOR      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

|  **Name**                                          | **Number                of Ordinary****Shares                Beneficially****Owned** | **Percentage                of****Outstanding                Ordinary****Shares**(1) |
|---------------------------------------------------------|--------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|
| Alon                Retail                              | 30,640,803                                                                           | 70.65%                                                                               |
| Clal                Insurance Enterprises Holdings Ltd. | 3,880,802                (2)                                                         | 8.95%                                                                           |

| (1)   | The                percentage of outstanding ordinary shares is based on 43,372,819                ordinary                shares outstanding as of June 12,                2008. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Includes                shares held by Clal Finance Ltd., through its wholly owned                subsidiaries. Based on Schedule 13G/A filed with the SEC on February                14, 2008, Clal Finance Ltd. is a majority owned subsidiary of Clal                Insurance Enterprises Holdings Ltd. ("Clal").  Clal is a                majority owned subsidiary of IDB Development Corporation Ltd., an                Israeli public company, which is a majority owned subsidiary of                IDB Holding Corporation Ltd. ("IDB Holdings"),  an Israeli                public company.  Mr. Nochi Dankner, Mrs. Shelly                Bergman,  Mrs. Ruth Manor and  Mr. Avraham Livnat,                by reason of their interests in, and relationships among them with                respect to, IDB Holdings, may each be deemed beneficial owner of                and share                the power to vote and dispose of, the Clal shares owned                beneficially by Clal. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Procurement      Agreement with Dor Alon Stations***

----

***Transactions      with Dor Alon in Connection with Establishment of a New Joint Loyalty      Plan***

----

*i.e*

----

**Arrangements      between Blue Square and various subsidiaries**

***Arrangements      among Blue Square, BSIP and Hyper Hyper***

*Advertisement      and Marketing.*

*Customer      Clubs*

*Gift      Certificates; Electronic cards*

----

*Other      services*

*Officer      Costs*

*Elementary      Insurance. *

*Leasing      of Property by the Company*

*Leasing      of Property to the Company.*

|   | · | The                  term will be up to ten (10) years from September 1,                  2005; |
|--------|--------|-------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | · | The                  annual rent for property used for stores will be equal to the higher                  of 2%                  of the annual turnover of that store or 9% of the amount invested                  in that                  store by BSIP and Hyper Hyper, linked and adjusted to changes in                  Israel’s                  consumer price index as known at the day of the investment; however,                  with                  regard to four specific properties, the annual rent will not be                  lower then                  the specific agreed amounts; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | · | The                  annual rent for property not used for stores will be 9% of the                  amount                  invested in that property by BSIP and Hyper Hyper, linked and adjusted                  to                  changes in Israel’s consumer price index as known at the day of the                  investment; and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | · | Rent                  payments will be charged on an annual                  basis. |
|--------|--------|-------------------------------------------------------------------------------------|

----

*Expenses      and Payments for Proceedings: *

*Employee      Lending Agreement*

*Service      and Management Agreements*

----

*Agreements      to Identify Store Locations*

*Blue      Center Agreement*

*Inter-Company      Accounts*

*Other      Existing Arrangements*

***Arrangements      between Blue Square and BSRE***

*Arrangement      with respect to Legal Proceeding and/or Third Party Claims relating to Certain      Transferred Assets*

----

*Agreements      with Respect to Properties Operated by the Company.*

|   | · | Upon                  12 months' notice, at the time of the extension of the agreement                  the                  Company may reduce the number of the leased properties, provided                  that the                  rental payments for such properties (according to the average rental                  payments for the two years preceding the extension date) does not                  exceed                  15% of the total rent payments for all leased properties on average                  for                  the two years preceding the extension date. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | · | Additional                  properties may be leased by the Company under the same terms and                  conditions under the lease agreement provided that (i) the term                  of any                  such new lease agreement entered into during the initial ten-year                  period                  commencing on January 1, 2006 will be for up to 10 years from the                  date                  such new leased property is open for business to the public, and                  (ii) the                  aggregate properties that BSRE leases to the Company may not exceed                  60,000                  square meters. Additional properties added may not be included                  in the                  leased properties reduced in the manner described in the preceding                  paragraph. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | · | The                  Company may terminate the lease of some of the leased properties                  prior to                  the end of the lease term by giving 12 months' prior notice; however,                  such                  termination is limited to a number of leased properties which have                  an                  aggregate area of no more than 5% of the total area of the properties                  that                  were leased as of January 1, 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | BSRE                  may shorten or temporarily stop (suspend) the lease of three properties                  identified in the agreement to the extent required to develop or                  build on                  the land where such properties are located by giving 12 months'                  prior                  notice and subject to obtaining a building permit for such development                  or                  building at the time the Company must vacate the premises. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | · | BSRE                  may shorten or temporarily stop (suspend) the lease of any seven                  additional properties (five during the lease term and two during                  the                  extension term) to the extent required to develop or build on the                  land                  where such properties are located by giving 12 months' prior notice                  and                  subject to obtaining a building permit for such development or                  building at                  the time the Company must vacate the premises and on the condition                  that                  BSRE must bear the costs of vacating the premises and provide a                  substitute                  store at the location with similar characteristics at its own expense                  within 24 months of the Company vacating the premises. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Agreements      with Respect to Properties Operated by BSIP and Hyper Hyper.*

----

*Service      Agreement*

*Agreement      with respect to the Allocation of Various Insurance Expenses*

*Deposit      of Cash Balances Agreement*

----

*Ordinary      Course Transactions*

**ITEM      8.**
**FINANCIAL      INFORMATION**

----

**Board      Resolution on Dividend Distributions**

**Legal      Proceedings**

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

*We      are subject to legal proceedings in connection with recognition of finance      expenses.*

*We      are subject to legal proceedings in connection with tax      assessments.*

----

*Dispute      with Former Chairman of the Board of *
*Directors*

*Restrictive      Trade Practices Inquiry *

*.      *

*The      Israeli Antitrust Authority may take actions against us in connection with      our      gift certificates *

*We      are subject to inquiries in connection with alleged reduction by suppliers      of      the weight and/or contents of packaged products*
** **

----

*We      are subject to legal proceedings in connection with*
*business      licenses*

*We      may be subject to a class action in connection with the Consumer Protection      Law,      1981*

*We      may be subject to a class action in connection with the Restrictive Trade      Practices Law, 1988*

----

*Other      proceedings *

*.*

**Independent      Accountants**
** **

**ITEM      9.**
**THE      OFFER AND LISTING**
** **

----

**ADSs**

| **Year** |   | **High** |   | **Low** |    |
|----------|--------|----------|--------|---------|---------|
| 2003     |   | $        | 11.5   |    |  $ | 6.1 |   |
| 2004     |   | $        | 13.1   |    |  $ | 9.3 |   |
| 2005     |   | $        | 11.3   |    |  $ | 8.5 |   |
| 2006     |   | $        | 14.8   |    |  $ | 9.8 |   |
| 2007     |   | $        | 20.0   |    | $       | 11.6 |   |

|  **Year**                |   | **High** |   | **Low** |   |
|-------------------------------|--------|----------|--------|---------|--------|
| **2006**                      |   |     |   |    |   |
| First                quarter  |   | $        | 11.8   |    | $      | 9.8 |   |
| Second                quarter |   | $        | 12.6   |    | $      | 10.3 |   |
| Third                quarter  |   | $        | 12.6   |    | $      | 11.0 |   |
| Fourth                quarter |   | $        | 14.8   |    | $      | 11.6 |   |
|                          |   |     |   |    |   |   |   |
| **2007**                      |   |     |   |    |   |   |   |
| First                quarter  |   | $        | 16.4   |    | $      | 14.2 |   |
| Second                quarter |   | $        | 20.0   |    | $      | 15.7 |   |
| Third                quarter  |   | $        | 17.5   |    | $      | 12.3 |   |
| Fourth                quarter |   | $        | 14.4   |    | $      | 11.6 |   |
|                          |   |     |   |    |   |   |   |
| **2008**                      |   |     |   |    |   |   |   |
| First                quarter  |   | $        | 13.9   |    | $      | 9.8 |   |

|  **2007** |   | ** ****High** |     | ** ****Low** |   |
|----------------|--------|--------------------|----------|-------------------|--------|
| December       |   | $                  | 13.4     |              | $      | 11.6 |   |
| **2008**       |   |               | **High** |              |   | **Low** |   |
| January        |   | $                  | 13.9     |              | $      | 12.6 |   |
| February       |   | $                  | 12.7     |              | $      | 10.5 |   |
| March          |   | $                  | 11.9     |              | $      | 9.8 |   |
| April          |   | $                  | 10.8     |              | $      | 9.5 |   |
| May            |   | $                  | 14.4     |              | $      | 9.6 |   |

----

**Ordinary      Shares**
** **

| **Year** |   | **High** |   | **Low** |   |
|----------|--------|----------|--------|---------|--------|
|     |   | **NIS**  |   | **$**   |   | **NIS** |   | **$** |   |
| 2003     |   |     | 50.2   |    |   | 11.5 |   |   | 29.4 |   |   | 6.7 |   |
| 2004     |   |     | 57.8   |    |   | 13.4 |   |   | 40.6 |   |   | 9.4 |   |
| 2005     |   |     | 53.8   |    |   | 11.7 |   |   | 38.6 |   |   | 8.4 |   |
| 2006     |   |     | 62.6   |    |   | 13.6 |   |   | 46.8 |   |   | 10.2 |   |
| 2007     |   |     | 78.8   |    |   | 20.5 |   |   | 45.9 |   |   | 11.9 |   |

| **2006**                      |   | **High** |   | **Low** |   |
|-------------------------------|--------|----------|--------|---------|--------|
|                          |   | **NIS**  |   | **$**   |   | **NIS** |   | **$** |   |
| First                Quarter  |   |     | 54.6   |    |   | 11.7 |   |   | 46.8 |   |   | 10.0 |   |
| Second                quarter |   |     | 55.3   |    |   | 12.5 |   |   | 49.4 |   |   | 11.1 |   |
| Third                quarter  |   |     | 54.3   |    |   | 12.6 |   |   | 48.5 |   |   | 11.3 |   |
| Fourth                quarter |   |     | 62.6   |    |   | 13.6 |   |   | 50.8 |   |   | 11.0 |   |

| **2007**                      |   |   | **High** |   | **Low** |
|-------------------------------|--------|--------|----------|--------|---------|
|                          |   |   | **NIS**  |   |    | **$** |   |   | **NIS** |   |   | **$** |   |
| First                Quarter  |   |   | 68.6     |   |    | 16.5 |   |   | 60.3 |   |   | 14.5 |   |
| Second                Quarter |   |   | 78.8     |   |    | 18.5 |   |   | 67.3 |   |   | 15.8 |   |
| Third                Quarter  |   |   | 73.0     |   |    | 18.2 |   |   | 52.1 |   |   | 13.0 |   |
| Fourth                Quarter |   |   | 58.3     |   |    | 15.2 |   |   | 45.9 |   |   | 11.9 |   |

| **2008**                     |   | **High** |   | **Low** |   |
|------------------------------|--------|----------|--------|---------|--------|
|                         |   | **NIS**  |   | **$**   |   | **NIS** |   | **$** |   |
| First                Quarter |   |     | 52.4   |    |   | 14.8 |   |   | 33.8 |   |   | 9.5 |   |

| **2007** |   | **High** |   | **Low** |   |
|----------|--------|----------|--------|---------|--------|
|     |   | **NIS**  |   | **$**   |   | **NIS** |   | **$** |   |
| December |   |     | 51.9   |    |   | 13.5 |   |   | 45.9 |   |   | 11.9 |   |

----

| **2008** |   | **High** |   | **Low** |   |
|----------|--------|----------|--------|---------|--------|
| January  |   |     | 52.4   |    |   | 14.5 |   |   | 44.7 |   |   | 12.3 |   |
| February |   |     | 46.4   |    |   | 12.8 |   |   | 38.3 |   |   | 10.5 |   |
| March    |   |     | 39.6   |    |   | 11.1 |   |   | 33.8 |   |   | 9.5 |   |
| April    |   |     | 37.4   |    |   | 10.9 |   |   | 33.2 |   |   | 9.7 |   |
| May      |   |     | 46.0   |    |   | 14.2 |   |   | 32.5 |   |   | 10.1 |   |

**ITEM      10.**
**ADDITIONAL      INFORMATION**

**Securities      Registers**

----

**Objects      **
**and      Purposes**

**Private      Placements**

**Board      of Directors**

----

* *

----

** **

**Description      of Securities**
** **

**Ordinary      Shares**

*Transfer      of Shares*

*Notices*

----

*Election      of Directors*

*Dividend      and Liquidation Rights*

*Voting,      Shareholders’ Meetings and Resolutions*
* *

----

*Modification      of Class Rights. *

*Allotment      of Shares.*

**Private      Placements**

----

**Israeli      Tax Considerations**

***General***

***Israeli      Tax Reform***

**2003      Tax Reform**
*e.g.,*

----

** **

**2006      Tax Reform**
*inter      alia*

**It      should be noted that various issues related to the 2003 Tax Reform and 2006      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.**

**Corporate      Tax Structure**

***General***

***Corporate      Taxation Under Inflationary Conditions***

----

| · | 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, and                  linked to the Israeli consumer price index. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| · | 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. Note that the cost                  of fixed assets is also calculated under the Inflationary Adjustments                  Law. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| · | Subject                  to specified limitations, depreciation deductions on fixed assets                  and                  losses carried forward are adjusted for inflation based on the                  increase in                  the CPI. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Taxation      of the Company Shareholders***

***Dividends***

|   | · | **Israeli                resident**                -                The distribution of dividend income to Israeli residents who purchased                our                Shares will generally be subject to income tax at a rate of 20% (in                2006                and thereafter) for individuals (25% if the dividends recipient is                a                “**significant                shareholder**”                (*inter                alia*,                more than 10% of our outstanding voting rights during the 12 months                prior                to a dividend distribution)) and will be exempt from income tax for                corporations. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | **Non                Israeli resident**                -                non Israeli residents (both individual and corporation) are generally                subject to Israeli income tax on the receipt of dividends paid on                the                ordinary shares at the rate of 20% (25% if the dividends recipient                is a                “**significant                shareholder**”                (see aforementioned)), which tax will be withheld at source. Under                the                U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder                of                the ordinary shares who is a U.S. resident is                25%. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Capital      Gains Tax**

***General***

***Capital      Gains Taxes Applicable to Israeli Shareholders***

**significant      shareholder**

***The      Real Gain accrued at the sale of an asset purchased on or after January 1,      2003      will be tax as follows:***

|   | · | 20%                rate for individuals (25% if the shareholder is a “**significant                shareholder**”                (see aforementioned), or if the shareholder claims a deduction of                financing expenses); and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 25%                for corporations (which are not subject to the Inflationary Adjustments                Law). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|

**C**
***apital      Gains Taxes Applicable to Non-Israeli Shareholders***

----

***Taxation      of investors engaged in a business of trading      securities***

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

**United      States Federal Income Tax Considerations**

| · | 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. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| · | 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. |
|--------|--------------------------------------------------------------------------------------|

**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*

----

*Taxation      of the Disposition of Ordinary Shares*

----

*Tax      Consequences if Blue Square is a Passive Foreign Investment      Company*

| · | 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. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

| · | 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. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Information      Reporting and Back-up Withholding*

----

**ITEM      11.**
**QUANTITATIVE      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

----

|                                                                                                              |   | **December                  31, 2007****Expected                Maturity (NIS in thousands)** |    |
|-------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|---------|
|                                                                                                              |   |  **2008**                                                                                |    | **2009** |   | **2010** |   | **2011** |   | **2012** |   | **from                2013 and thereafter** |   | **Total** |   |
| Long                term loan from banks - linked:                                                                |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Linked                to the Israeli CPI - 5.45% (weighted                average rate as of December 31, 2007)   |   |                                                                                          | 43,793  |   |   | 50,044 |   |   | 23,890 |   |   | 14,080 |   |   | 58,876 |   |   | - |   |   | 190,683 |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long                term loans from Bank - unlinked:                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed                annual interest rate of 6.7%                                                                 |   |                                                                                          | 22,196  |   |   | 21,706 |   |   | 17,806 |   |   | 15,503 |   |   | 31,487 |   |   | - |   |   | 108,698 |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable                interest (average annual rate as of December 31, 2007 - Prime minus                0.32%) |   |                                                                                          | 18,382  |   |   | 18,333 |   |   | 14,167 |   |   | 10,000 |   |   | 5,741 |   |   | - |   |   | 66,623 |   |
|                                                                                                              |   |                                                                                          | 84,371  |   |   | 90,083 |   |   | 55,863 |   |   | 39,583 |   |   | 96,104 |   |   | - |   |   | 366,004 |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debentures                - Linked to the Israeli CPI:                                                            |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issued                by the Company - fixed rate 5.9% (1)                                                        |   |                                                                                          | 69,859  |   |   | - |   |   | 46,573 |   |   | - |   |   | 31,049 |   |   | 62,097 |   |   | 209,573 |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issued                by BSRE - fixed rate 4.7%                                                                   |   |                                                                                          | -       |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 633,108 |   |   | 633,108 |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible                Debentures Linked to the Israeli CPI:                                                  |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issued                by the Company - fixed rate 5.9% (1)                                                        |   |                                                                                          | -       |   |   | 17,492 |   |   | - |   |   | 17,492 |   |   | - |   |   | - |   |   | 34,984 |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issued                by BSRE - fixed rate 6.25%                                                                  |   |                                                                                          | -       |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 108,174 |   |   | 108,174 |   |
|                                                                                                              |   |                                                                                          | 69,859  |   |   | 17,492 |   |   | 46,573 |   |   | 17,492 |   |   | 31,049 |   |   | 803,379 |   |   | 985,844 |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term                Deposit in Banks - Fixed annual interest rate of 4.41%                                  |   |                                                                                          | 103,498 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 103,498 |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marketable                Securities - Linked to the Israeli CPI                                                  |   |                                                                                          | 138,563 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 138,563 |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marketable                Securities - unlinked                                                                   |   |                                                                                          | 60,831  |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 60,831 |   |
|                                                                                                              |   |                                                                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

|     |   | **CPI** |   | **The                “known" CPI index** |   |
|----------|--------|---------|--------|------------------------------------------------|--------|
| **2005** |   |    | 2.4    | %                                              |   | 2.7 | % |
| **2006** |   |    | (0.1   | )%                                             |   | (0.3 | )% |
| **2007** |   |    | 3.4    | %                                              |   | 2.8 | % |

|                                                                   |   | **Israeli                Currency** |      |
|------------------------------------------------------------------------|--------|-------------------------------------|-----------|
|                                                                   |   | **Unlinked**                        |      | **Linked                to the Israeli CPI** |   |
|                                                                   |   | **NIS                in thousands** |      |
| Cash                and cash equivalents                               |   |                                | 56,410    |   |   | - |   |
| Marketable                securities                                   |   |                                | 60,831    |   |   | 138,563 |   |
| Trade                receivables                                       |   |                                | 775,311   |   |   | 940 |   |
| Short-term                deposit                                      |   |                                | 103,498   |   |   | - |   |
| Other                accounts receivables                              |   |                                | 97,062    |   |   | 23,128 |   |
| Investments                in an associated company                    |   |                                | -         |   |   | 2,094 |   |
| Other                Long-term receivables                             |   |                                | 1,238     |   |   | 1,226 |   |
|                                                                   |   |                                | 1,094,350 |   |   | 165,951 |   |
| Short-term                credit from banks                            |   |                                | 46,781    |   |   | 6,712 |   |
| Trade                payables                                          |   |                                | 978,711   |   |   | - |   |
| Other                accounts payables and accrued expenses            |   |                                | 285,525   |   |   | 12,851 |   |
| Long                term loans from banks including current maturities |   |                                | 175,321   |   |   | 190,683 |   |
| Debentures                                                             |   |                                | -         |   |   | 842,686 |   |
| Convertible                debentures                                  |   |                                | -         |   |   | 143,158 |   |
|                                                                   |   |                                | 1,486,338 |   |   | 1,196,090 |   |
| Monetary                liabilities, net                               |   |                                | (391,988  | ) |   | (1,030,139 | ) |

----

**ITEM      12.**
**DESCRIPTION      OF SECURITIES OTHER THAN EQUITY SECURITIES**

**PART      II**

**ITEM      13.**
**DEFAULTS,      DIVIDEND ARREARAGES AND DELINQUENCIES**

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

**A.      to E. **

**ITEM      15.**
**CONTROLS      AND PROCEDURES**
** **

----

|   | · | pertain                  to the maintenance of records that in reasonable detail accurately                  and                  fairly reflect our transactions and asset                  dispositions; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | provide                  reasonable assurance that transactions are recorded as necessary                  to permit                  the preparation of our financial statements in accordance with                  generally                  accepted accounting principles; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | provide                  reasonable assurance that receipts and expenditures are made only                  in                  accordance with authorizations of our management and board of directors                  (as appropriate); and |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | provide                  reasonable assurance regarding the prevention or timely detection                  of                  unauthorized acquisition, use or disposition of assets that could                  have a                  material effect on our financial                  statements. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**ITEM      16.**
**[RESERVED]**

**ITEM      16A.**
**AUDIT      COMMITTEE FINANCIAL EXPERT**

**ITEM      16B.**
**CODE      OF ETHICS**

----

**ITEM      16C.**
**PRINCIPAL      ACCOUNTANT FEES AND SERVICES**

|                                  |   | 2006                              |   | 2007                              |   |
|---------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                                  |   | (NIS                in thousands) |   | (NIS                in thousands) |   |
| Audit                Fees (1)    |   |                              | 1,996  |                              |   | 2,837 |   |
| Audit-Related                fees (2) |   |                              | 355    |                              |   | 6,57 |   |
| Tax                Fees (3)           |   |                              | 464    |                              |   | 64 |   |
| All                Other Fees (4)     |   |                              | -      |                              |   | 775 |   |
| TOTAL                            |   |                              | 2,815  |                              |   | 4,333 |   |

|   | (1) | Audit                Fees consist of fees billed for the annual audit services engagement                and                other audit services, which are those services that only the external                auditor can reasonably provide, and include the group audit; statutory                audits; comfort letters and consents; attest services; assistance                with and                review of documents filed with the SEC and Sarbanes-Oxley Act                compliance. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Audit-related                services in connection with BSRE's initial public offering and in                connection with reports delivered to the Company's controlling                shareholder. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Tax                Fees include fees billed for tax compliance services, including the                preparation of original and amended tax returns and claims for refund;                tax                consultations, such as assistance and representation in connection                with                tax audits and appeals, tax advice related to mergers and acquisitions,                restructuring, transfer pricing, and requests for rulings or technical                advice from taxing authority; tax planning services; and expatriate                tax                planning and services. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | Other                Fees mainly relate to consulting services in connection with the                transfer                by the Company of real estate assets to BSRE and due diligence services                in                connection with several potential acquisitions by the                Company. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Audit      Committee Pre-Approval Policies and Procedures**

----

**ITEM      16D**
**EXEMPTIONS      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.**

**ITEM      16E.**
**PURCHASES      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED      PURCHASERS**

| **Period**                                                                                                                 | **Total                Number of Shares Purchased****(1)** | **Average                Price Paid Per Share****(in                NIS)** | **Total                Number of Shares Purchased as Part of Publicly Announced Plans or                Programs** | **Maximum                Number of Shares that May Yet Be Purchased Under Plans or                Programs** |
|----------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------|----------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
| August                21, 2007                                                                                             | 89,912                                                     | 52.32                                                                      | N/A                                                                                                                | N/A                                                                                                          |
| August                22, 2007                                                                                             | 7,898                                                      | 52.85                                                                      | N/A                                                                                                                | N/A                                                                                                          |
| August                23, 2007                                                                                             | 17,122                                                     | 54.76                                                                      | N/A                                                                                                                | N/A                                                                                                          |
| August                28, 2007                                                                                             | 33,330                                                     | 56.56                                                                      | N/A                                                                                                                | N/A                                                                                                          |
| August                29, 2007                                                                                             | 17,656                                                     | 56.73                                                                      | N/A                                                                                                                | N/A                                                                                                          |
| August                30, 2007                                                                                             | 24,218                                                     | 56.1                                                                       | N/A                                                                                                                | N/A                                                                                                          |
| September                2, 2007                                                                                           | 20,244                                                     | 56.76                                                                      | N/A                                                                                                                | N/A                                                                                                          |
| September                3, 2007                                                                                           | 105,446                                                    | 57.02                                                                      | N/A                                                                                                                | N/A                                                                                                          |
| September                4, 2007                                                                                           | 192,800                                                    | 57.38                                                                      | N/A                                                                                                                | N/A                                                                                                          |
| September                10, 2007                                                                                          | 70,090                                                     | 57.99                                                                      | N/A                                                                                                                | N/A                                                                                                          |
| September                11, 2007                                                                                          | 25,245                                                     | 57.91                                                                      | N/A                                                                                                                | N/A                                                                                                          |
| November                6, 2007                                                                                            | 87,000                                                     | 53.1                                                                       | N/A                                                                                                                | N/A                                                                                                          |
| (1)                All shares purchased in open-market transactions and off the market                private transactions |

----

**PART      III**

**ITEM      17.**
**FINANCIAL      STATEMENTS**

**ITEM      18.**
**FINANCIAL      STATEMENTS**

**ITEM      19.**
**EXHIBITS**

| **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 Blue Square’s Annual Report on Form 20-F for                the year ended December 31, 2001).                                                                                                                                                                                                  |
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 1.3                            | Amendments                to Articles of Association of the Registrant adopted in January 2004                (incorporated by reference to Exhibit 1.3 to Blue Square’s Annual Report                on Form 20-F for the year ended December 31, 2003).                                                                                                                                                                                                  |
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 1.4                            | Amendment                to Articles of Association of the Registrant adopted in February                2006                (incorporated by reference to Exhibit 1.4 to Blue Square’s Annual Report                on Form 20-F for the year ended December 31, 2005).                                                                                                                                                                                   |
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 1.5                            | Amendments                to Articles of Association of the Registrant adopted in June                2008.                                                                                                                                                                                                                                                                                                                                                      |
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.1                            | Form                of Amended and Restated Deposit Agreement among Blue Square-Israel                Ltd.,                The Bank of New York as Depositary, and all Owners and Holders from                time                to time of American Depositary Shares issued thereunder (incorporated                by                reference to Exhibit (a) to the Registration Statement on Form F-6                (File                No. 333-05158)). |
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1                            | 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)).                                                                                         |
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2                            | 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)).                                                                                          |
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.3                            | 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)).                                                                                                                          |
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.4                            | 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)).                                                                                                                                   |

----

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

| 4.5    | 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)).                                                                                                                                                                                                                                                                                                            |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.6    | 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)).                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.7    | 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)).                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.8    | 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)).                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.9    | Form                of Letter of Exemption and Indemnity adopted in February 2001                (incorporated by reference to Exhibit 4.13 to Blue Square’s Annual Report                on Form 20-F for the year ended December 31, 2000).                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.10   | Form                of Letter of Exemption and Indemnity (English translation accompanied                by                the Hebrew original) (incorporated by reference to Exhibit 4.14 to                Blue                Square’s Annual Report on Form 20-F for the year ended December 31,                2001).                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.11   | Form                of Letter of Indemnity adopted in June 2008 (English                translation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.12   | 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)).                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.13   | Special                Collective Agreement made on the 3rd day of September 2000 between                Blue Square and The New Federation of Labor in Israel. The Federation                of                Clerical, Administrative and Services Employees / the Commercial                Section                Employees and the committee of Blue Square employees. (English summary                accompanied by the Hebrew original) (incorporated by reference to                Exhibit                4.16 to Blue Square’s Annual Report on Form 20-F for the year ended                December 31, 2001). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.14   | Collective                Agreement, made on August 13, 2003, by and among Blue Square - Israel                Ltd.                and The New Federation of Labor in Israel/The Federation of Clerical,                Administrative and Services Employees and the National Committee                of the                Blue Square Co-Op Employees (English translation) (incorporated by                reference to Exhibit 4.15 to Blue Square’s Annual Report on Form 20-F for                the year ended December 31, 2003).                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.15   | Collective                Agreement, made on October 15, 2003, by and among Blue Square - Israel                Ltd. and The New Federation of Labor in Israel/The Federation of                Clerical,                Administrative and Services Employees and the National Workers Committee                of Blue Square-Israel Ltd (English translation) (incorporated by                reference                to Exhibit 4.16 to Blue Square’s Annual Report on Form 20-F for the year                ended December 31, 2003).                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.16   | Special                Collective Bargaining Agreement made on the 21st                day of January 2005 among Blue Square, the Histadrut and the National                Committee of Blue Square-Israel. (English translation) (incorporated                by                reference to Exhibit 4.15 to Blue Square’s Annual Report on Form 20-F for                the year ended December 31, 2004).                                                                                                                                                                                                                    |

----

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

| 4.17   | Special                Collective Bargaining Agreement made on April 26, 2006 among Blue                Square,                the MAOF Histadrut and Blue Square-Israel Employees' Union (English                translation) (incorporated by reference to Exhibit 4.16 to Blue Square’s                Annual Report on Form 20-F for the year ended December 31,                2006).                                                                         |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.18   | Special                Collective Bargaining Agreement made on May 29, 2006 among Blue Square,                the MAOF Histadrut and Blue Square-Israel Employees' Union (English                translation) (incorporated by reference to Exhibit 4.17 to Blue Square’s                Annual Report on Form 20-F for the year ended December 31,                2006).                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.19   | Special                Collective Bargaining Agreement made on July 16, 2007 among Blue                Square,                the MAOF Histadrut and Blue Square-Israel Employees' Union (English                translation).                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.20   | Deed                of Trust made on August 5, 2003, by and between Blue Square - Israel                Ltd.                and Israel Discount Bank Trust Company Ltd., together with second                schedule                (English translation) (incorporated by reference to Exhibit 4.18                to Blue                Square’s Annual Report on Form 20-F for the year ended December 31,                2003).                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.21   | First                Schedule to Deed of Trust - Debenture Certificate for Registered                Debenture                (Series A) of NIS 1 par value each (out of series of NIS 200,000,000                par                value Debentures (Series A)) (English translation) (incorporated                by                reference to Exhibit 4.19 to Blue Square’s Annual Report on Form 20-F for                the year ended December 31, 2003). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.22   | First                Schedule to Deed of Trust - Debenture Certificate for Registered                Debenture                (Series B) of NIS 1 par value each (out of series of NIS 200,000,000                par                value Debentures (Series B)) (English translation) (incorporated                by                reference to Exhibit 4.20 to Blue Square’s Annual Report on Form 20-F for                the year ended December 31, 2003). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.23   | Agreement                between the Registrant and Blue Square Chain (Hyper Hyper) Ltd.                (incorporated by reference to Exhibit 4.21 to Blue Square’s Annual Report                on Form 20-F for the year ended December 31, 2002).                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.24   | General                services framework and expenses allotment agreement, dated October                11,                2005, among Blue Square, Blue Square Chain Investments & Properties                Ltd. and Blue Square Chain (Hyper Hyper) Ltd., as amended (incorporated                by                reference to Exhibit 4.21 to Blue Square’s Annual Report on Form 20-F for                the year ended December 31, 2005).            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.25   | Transfer                Agreement, dated June 21, 2006, between Blue Square and Blue Square                Real                Estate Ltd. (English translation) (incorporated by reference to Exhibit                4.23 to Blue Square’s Annual Report on Form 20-F for the year ended                December 31, 2006).                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.26   | Split                Agreement, dated April 2, 2006, between Blue Square and Blue Square                Real                Estate Ltd. (English translation) (incorporated by reference to Exhibit                4.24 to Blue Square’s Annual Report on Form 20-F for the year ended                December 31, 2006).                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.27   | Lease                Agreement, dated August 13, 2006, between Blue Square and Blue Square                Real                Estate Ltd. (English translation) (incorporated by reference to Exhibit                4.25 to Blue Square’s Annual Report on Form 20-F for the year ended                December 31, 2006).                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.28   | Lease                Agreement, dated June 23, 2006, between Blue Square and Blue Square                Chain                Investments & Properties Ltd Blue Square Real Estate Ltd (assigned to                BSRE) (English translation) (incorporated by reference to Exhibit                4.26 to                Blue Square’s Annual Report on Form 20-F for the year ended December 31,                2006).                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.29   | Service                Agreement, dated August 13, 2006, between Blue Square and Blue Square                Real                Estate Ltd. (English translation) (incorporated by reference to Exhibit                4.27 to Blue Square’s Annual Report on Form 20-F for the year ended                December 31, 2006).                                                                                                                                      |

----

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

| 4.30     | Underwriting                Agreement, dated August 15, 2006, among Blue Square Real Estate Ltd.,                and                Poalim I.B.I Underwriting and Issues Ltd., Africa-Israel Issues Ltd.,                Discount Underwriting and Issues Ltd. and various other underwriters                (English translation) (incorporated by reference to Exhibit 4.28                to Blue                Square’s Annual Report on Form 20-F for the year ended December 31,                2006). |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.31     | Deed                of Trust (for Series A Debenture) made on August 14, 2006, by and                between                Blue Square Real Estate Ltd. and Hermetic Trust (1975) Ltd., together                with                second schedule (English translation) (incorporated by reference                to                Exhibit 4.29 to Blue Square’s Annual Report on Form 20-F for the year                ended December 31, 2006).                                                         |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.32     | First                Schedule to Deed of Trust - Debenture Certificate for Registered                Debentures (Series A) of NIS 1 par value each (out of series of NIS                100,000,000 par value Debentures (Series A)) (English translation)                (incorporated by reference to Exhibit 4.30 to Blue Square’s Annual Report                on Form 20-F for the year ended December 31, 2006).                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.33     | Deed                of Trust (for Series B Debenture) made on August 14, 2006, by and                between                Blue Square Real Estate Ltd. and Hermetic Trust (1975) Ltd., together                with                second schedule (English translation) (incorporated by reference                to                Exhibit 4.31 to Blue Square’s Annual Report on Form 20-F for the year                ended December 31, 2006).                                                         |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.34     | First                Schedule to Deed of Trust - Debenture Certificate for Registered                Debentures (Series B) of NIS 1 par value each (out of series of NIS                650,000,000 par value Debentures (Series B)) (English translation)                (incorporated by reference to Exhibit 4.32 to Blue Square’s Annual Report                on Form 20-F for the year ended December 31, 2006).                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.35     | Document                of Principles of Transaction, dated July 26, 2007, among Blue Square                and                Orin Provizor Holdings Ltd., M.A.Sh.- M.I.S. Ltd., Mr. Guy Provizor,                and                Eden Natural Health Market Ltd., as amended (English                translation).                                                                                                                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.36     | Sale                Agreement, made on August 2, 2007, between Kfar Hasha'ashuim Central                Warehouse Ltd. and Eldar Gil & Mahoney Assets Ltd., as amended                 (English translation).                                                                                                                                                                                                                                                                                              |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 8        | List                of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.(a).1 | Certification                by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities                Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes                Oxley Act of 2002.                                                                                                                                                                                                                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.(a).2 | Certification                by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities                Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes                Oxley Act of 2002.                                                                                                                                                                                                                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 13.(a).1 | Certification                of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant                to                Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 14.(a).1 | Consent                of Independent Registered Public Accounting Firm from Kesselman &                Kesselman, certified public accountants (Isr.)                                                                                                                                                                                                                                                                                                                                                          |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 14.(a).2 | Consent                of Independent Registered Public Accounting Firm from Kost, Forer,                Gabbay                & Kasierer, certified public accountants (Isr.) relating to Radio                Non-Stop Ltd.                                                                                                                                                                                                                                                                                   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 14.(a).3 | Consent                of Independent Registered Public Accounting Firm from Kost, Forer,                Gabbay                & Kasierer, certified public accountants (Isr.) relating to Bee Group                Retail Ltd. (formerly known as Hamachsan Hamerkazi Kfar Hasha’ashuim                Ltd).                                                                                                                                                                                             |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 14.(a).4 | Consent                of an Expert dated June 25, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

----

**BLUE      SQUARE - ISRAEL LTD.**

**2007      ANNUAL REPORT**

|                                                                                                                                             |   | **Page**        |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|
|                                                                                                                                             |   |            |
| **REPORT                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**                                                                       |   | F1-F2           |
|                                                                                                                                             |   |            |
| **CONSOLIDATED                FINANCIAL STATEMENTS IN THOUSANDS OF NEW ISRAELI SHEKEL (NIS):**                                                   |   |            |
|                                                                                                                                             |   |            |
| Balance                sheets                                                                                                                    |   | F3-F4           |
|                                                                                                                                             |   |            |
| Statements                of operations                                                                                                          |   | F5              |
|                                                                                                                                             |   |            |
| Statements                of changes in shareholders' equity                                                                                     |   | F6              |
|                                                                                                                                             |   |            |
| Statements                of cash flows                                                                                                          |   | F7-F8           |
|                                                                                                                                             |   |            |
| Notes                to financial statements                                                                                                     |   | F9-F93          |
|                                                                                                                                             |   |            |
| **APPENDIX                - DETAILS OF PRINCIPAL SUBSIDIARIES, PROPORTIONATELY CONSOLIDATED                COMPANIES AND AN ASSOCIATED COMPANY** |   | F94             |
|                                                                                                                                             |   |            |
| REPORTS              OF INDEPENDANT REGISTERED PUBLIC ACCOUNTING FIRM RELATING TO COMPANY'S              SUBSIDIARIES                            |   |  F-95-F-96 |

**-      - - - - - - - - - - - - - - - - - -**

----

|    |
|--------------|
|              | **Kesselman                & Kesselman**Certified                Public Accountants1                Nathanson StreetTelephone                +972-4-8605000Facsimile                +972-4-8605001 |

**REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**BLUE      SQUARE - ISRAEL LTD.**

**Consolidated        financial statements**

----

**Internal        control over financial reporting**

*Internal        Control-Integrated Framework *

|                           |   |   |   |                                                                                      |
|--------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------|
| Haifa,                  Israel |   |   |   | /s/                  Kesselman & Kesselman                                            |
| June                  23, 2008 |   |   |   | Certified                  Public Accountants (Isr.)                                      |
|                           |   |   |   | A                  member of PricewaterhouseCoopersInternational                  Limited |

----

**BLUE      SQUARE – ISRAEL LTD.**

|                                                                                                             |   |           |   |                                 |   |                       |   | **Convenience****translation****(note 2y)** |      |
|------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------------------------------------|--------|----------------------------|--------|--------------------------------------------------|-----------|
|                                                                                                             |   |           |   | **December 31,**                |   | **December 31,**      |   |
|                                                                                                             |   |           |   | **2006**                             |   | **2007**                   |   | **2007**                                         |      |
|                                                                                                             |   | **Note ** |   | **NIS (see note 2a)** |   | **U.S. dollars**      |   |
|                                                                                                             |   |           |   | **In thousands**                |   |
| **A                s s e t s**                                                                                   |   | 12             |   |                                 |   |                       |   |                                             |      |
|                                                                                                             |   |           |   |                                 |   |                       |   |                                             |      |
| **CURRENT                ASSETS:**                                                                               |   | 15             |   |                                 |   |                       |   |                                             |      |
| Cash                and cash equivalents                                                                         |   |           | 2c     |                                 |   | 186,454                    |   |                                             | 56,410    |   |   | 14,667 |   |
| Marketable                securities                                                                             |   |           | 16a    |                                 |   | 65,287                     |   |                                             | 199,394   |   |   | 51,845 |   |
| Short-term                bank deposit                                                                           |   |           | 16b    |                                 |   | 526,459                    |   |                                             | 103,498   |   |   | 26,911 |   |
| Trade                receivables                                                                                 |   |           | 16c    |                                 |   | 672,605                    |   |                                             | 776,251   |   |   | 201,833 |   |
| Other                accounts receivable                                                                         |   |           | 16d    |                                 |   | 119,028                    |   |                                             | 139,650   |   |   | 36,310 |   |
| Inventories                                                                                                      |   |           |   |                                 |   | *                377,561   |   |                                             | 453,655   |   |   | 117,955 |   |
|                                                                                                             |   |           |   |                                 |   |                       |   |                                             |      |   |   |   |   |
| Total                current assets                                                                              |   |           |   |                                 |   | 1,947,394                  |   |                                             | 1,728,858 |   |   | 449,521 |   |
|                                                                                                             |   |           |   |                                 |   |                       |   |                                             |      |   |   |   |   |
| **INVESTMENTS                AND LONG-TERM RECEIVABLES:**                                                        |   |           |   |                                 |   |                       |   |                                             |      |   |   |   |   |
|                                                                                                             |   |           |   |                                 |   |                       |   |                                             |      |   |   |   |   |
| Associated                companies                                                                              |   |           | 3b     |                                 |   | 4,762                      |   |                                             | 4,948     |   |   | 1,287 |   |
| Other                long-term receivables                                                                       |   |           | 16e    |                                 |   | 2,618                      |   |                                             | 48,289    |   |   | 12,556 |   |
|                                                                                                             |   |           |   |                                 |   | 7,380                      |   |                                             | 53,237    |   |   | 13,843 |   |
|                                                                                                             |   |           |   |                                 |   |                       |   |                                             |      |   |   |   |   |
| **PROPERTY,                PLANT AND EQUIPMENT,**net of accumulated depreciation and                amortization |   |           | 4      |                                 |   | *                1,778,755 |   |                                             | 1,860,203 |   |   | 483,672 |   |
|                                                                                                             |   |           |   |                                 |   |                       |   |                                             |      |   |   |   |   |
| **INVESTMENT                PROPERTY**                                                                           |   |           | 5      |                                 |   | *                222,057   |   |                                             | 315,778   |   |   | 82,106 |   |
|                                                                                                             |   |           |   |                                 |   |                       |   |                                             |      |   |   |   |   |
| **DEFERRED                TAXES**                                                                                |   |           | 13b    |                                 |   | 16,789                     |   |                                             | 22,301    |   |   | 5,798 |   |
|                                                                                                             |   |           |   |                                 |   |                       |   |                                             |      |   |   |   |   |
| **INTANGIBLE                ASSETS AND DEFERRED CHARGES,**net of accumulated                amortization         |   |           | 6      |                                 |   | *                99,358    |   |                                             | 251,994   |   |   | 65,521 |   |
|                                                                                                             |   |           |   |                                 |   |                       |   |                                             |      |   |   |   |   |
|                                                                                                             |   |           |   |                                 |   |                       |   |                                             |      |   |   |   |   |
|                                                                                                             |   |           |   |                                 |   | 4,071,733                  |   |                                             | 4,232,371 |   |   | 1,100,461 |   |

| June                23, 2008               |     |                                                          |     |                                                        |     |                                                                  |
|-------------------------------------------------|--------------------|---------------------------------------------------------------|--------------------|-------------------------------------------------------------|--------------------|-----------------------------------------------------------------------|
| **Date of approval of the** |               | **David Wiessman**                                       |               | **Zeev Vurembrand**                                    |               | **Dror Moran**                                                   |
| **financial statements**                   |               | **Chairman of the Board****of Directors** |               | **President and Chief****Executive Officer** |               | **Vice President and****Chief Financial Officer** |

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

----

**BLUE      SQUARE – ISRAEL LTD**

|                                                                                                                                                                                                                                |   |        |   |                                 |   |                     |   | **Convenience****translation****(note 2y)** |      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|--------------------------------------|--------|--------------------------|--------|--------------------------------------------------|-----------|
|                                                                                                                                                                                                                                |   |        |   | **December 31,**                |   | **December 31,**    |   |
|                                                                                                                                                                                                                                |   |        |   | **2006**                             |   | **2007**                 |   | **2007**                                         |      |
|                                                                                                                                                                                                                                |   | **Note**    |   | **NIS (see note 2a)** |   | **U.S. dollars**    |   |
|                                                                                                                                                                                                                                |   |        |   | **In thousands**                |   |
| **Liabilities                and shareholders’ equity**                                                                                                                                                                       |   |        |   |                                 |   |                     |   |                                             |      |
|                                                                                                                                                                                                                                |   |        |   |                                 |   |                     |   |                                             |      |
| **CURRENT                LIABILITIES:**                                                                                                                                                                                             |   | 12, 15 |   |                                 |   |                     |   |                                             |      |
| Credit                and loans from banks                                                                                                                                                                                          |   |        | 16f    |                                 |   | 211,152                  |   |                                             | 137,864   |   |   | 35,846 |   |
| Current                maturities of debentures and convertible debentures                                                                                                                                                          |   |        | 8      |                                 |   | 53,706                   |   |                                             | 69,859    |   |   | 18,164 |   |
| Trade                payables                                                                                                                                                                                                       |   |        |   |                                 |   | *                938,007 |   |                                             | 973,461   |   |   | 253,111 |   |
| Other                accounts payable and accrued expenses                                                                                                                                                                          |   |        | 16g    |                                 |   | 409,153                  |   |                                             | 447,230   |   |   | 116,284 |   |
|                                                                                                                                                                                                                                |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| Total                current liabilities                                                                                                                                                                                            |   |        |   |                                 |   | 1,612,018                |   |                                             | 1,628,414 |   |   | 423,405 |   |
|                                                                                                                                                                                                                                |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| **LONG-TERM                LIABILITIES:**                                                                                                                                                                                           |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| Long-term                loans from banks, net of current maturities                                                                                                                                                                |   |        | 7      |                                 |   | 112,574                  |   |                                             | 281,633   |   |   | 73,228 |   |
| Debentures,                net of current maturities                                                                                                                                                                                |   |        | 8      |                                 |   | 827,558                  |   |                                             | 772,827   |   |   | 200,943 |   |
| Convertible                debentures, net of current maturities                                                                                                                                                                    |   |        | 8      |                                 |   | 214,794                  |   |                                             | 143,158   |   |   | 37,223 |   |
| Other                liabilities                                                                                                                                                                                                    |   |        | 16h    |                                 |   | *                7,000   |   |                                             | 11,647    |   |   | 3,028 |   |
| Deferred                income taxes                                                                                                                                                                                                |   |        | 13b    |                                 |   | 30,198                   |   |                                             | 51,638    |   |   | 13,426 |   |
| Liability                for employee rights, net of amount funded                                                                                                                                                                  |   |        | 9      |                                 |   | 35,527                   |   |                                             | 43,909    |   |   | 11,417 |   |
|                                                                                                                                                                                                                                |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| Total                long-term liabilities                                                                                                                                                                                          |   |        |   |                                 |   | 1,227,651                |   |                                             | 1,304,812 |   |   | 339,265 |   |
|                                                                                                                                                                                                                                |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| **CONTINGENT                LIABILITIES AND COMMITMENTS**                                                                                                                                                                           |   |        | 10     |                                 |   |                     |   |                                             |      |   |   |   |   |
|                                                                                                                                                                                                                                |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| Total                liabilities                                                                                                                                                                                                    |   |        |   |                                 |   | 2,839,669                |   |                                             | 2,933,226 |   |   | 762,670 |   |
|                                                                                                                                                                                                                                |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| **MINORITY                INTEREST**                                                                                                                                                                                                |   |        | 16i    |                                 |   | 239,142                  |   |                                             | 274,311   |   |   | 71,324 |   |
|                                                                                                                                                                                                                                |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| **SHAREHOLDERS’                EQUITY:**                                                                                                                                                                                      |   |        | 11     |                                 |   |                     |   |                                             |      |   |   |   |   |
| Share                capital -                                                                                                                                                                                                      |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| Ordinary                shares of NIS 1 par value -                                                                                                                                                                                 |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| Authorized:                100,000,000 shares as of December 31, 2007 and 2006; Issued and                outstanding 43,372,819 and 39,692,983 shares as of December 31, 2007                and                2006, respectively |   |        |   |                                 |   | 53,414                   |   |                                             | 57,094    |   |   | 14,845 |   |
| Additional                paid-in capital                                                                                                                                                                                           |   |        |   |                                 |   | 737,756                  |   |                                             | 845,168   |   |   | 219,752 |   |
| Retained                earnings:                                                                                                                                                                                                   |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| Dividend                declared subsequent to balance sheet date                                                                                                                                                                   |   |        |   |                                 |   | 60,000                   |   |                                             | —   |   |   | — |   |
| Unappropriated                                                                                                                                                                                                                      |   |        |   |                                 |   | 141,752                  |   |                                             | 122,572   |   |   | 31,870 |   |
|                                                                                                                                                                                                                                |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
| Total                shareholders’ equity                                                                                                                                                                                     |   |        |   |                                 |   | 992,922                  |   |                                             | 1,024,834 |   |   | 266,467 |   |
|                                                                                                                                                                                                                                |   |        |   |                                 |   |                     |   |                                             |      |   |   |   |   |
|                                                                                                                                                                                                                                |   |        |   |                                 |   | 4,071,733                |   |                                             | 4,232,371 |   |   | 1,100,461 |   |

**The      accompanying notes are an integral part of the consolidated financial      statements**

----

**BLUE      SQUARE – ISRAEL LTD.**

|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       | **Convenience****translation****(note 2y)** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|---------------------------------------------------------------------------------------|--------|-----------------------|--------|----------|------------|--------------------------------------------------|--------|
|                                                                                                                                  |   |     |   | **2005**                                                                              |   | **2006**              |   | **2007** |       | **2007**                                         |   |
|                                                                                                                                  |   | **Note** |   | **NIS (see note 2a)**                                                  |   | **U.S. dollars** |   |
|                                                                                                                                  |   |     |   | **In thousands (except share and per share data)** |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |
| Sales                                                                                                                                 |   |     | 2n     |                                                                                  |   | 5,797,018             |   |     | 6,515,035  |                                             |   | 6,982,350 |   |   | 1,815,484 |   |
| Cost                  of sales                                                                                                        |   |     |   |                                                                                  |   | 4,298,211             |   |     | 4,812,952  |                                             |   | 5,129,520 |   |   | 1,333,729 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Gross                  profit                                                                                                         |   |     |   |                                                                                  |   | 1,498,807             |   |     | 1,702,083  |                                             |   | 1,852,830 |   |   | 481,755 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Net                  gain from adjustment of investment property to fair value                                                        |   |     |   |                                                                                  |   | —               |   |     | —    |                                             |   | 10,456 |   |   | 2,719 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Selling,                  general and administrative expenses                                                                         |   |     | 16j    |                                                                                  |   | 1,269,760             |   |     | 1,396,877  |                                             |   | 1,562,555 |   |   | 406,281 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Operating                  income                                                                                                     |   |     |   |                                                                                  |   | 229,047               |   |     | 305,206    |                                             |   | 300,731 |   |   | 78,193 |   |
| Financial                  expenses, net                                                                                              |   |     | 16k    |                                                                                  |   | (59,529               | )      |     | (42,368    | )                                                |   | (54,798 | ) |   | (14,248 | ) |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
|                                                                                                                                  |   |     |   |                                                                                  |   | 169,518               |   |     | 262,838    |                                             |   | 245,933 |   |   | 63,945 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Amortization                  of goodwill                                                                                             |   |     |   |                                                                                  |   | (6,508                | )      |     | —    |                                             |   | — |   |   | — |   |
| Other                  income, net                                                                                                    |   |     | 16l    |                                                                                  |   | 690                   |   |     | 78,022     |                                             |   | 3,355 |   |   | 872 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Income                  before taxes on income                                                                                        |   |     |   |                                                                                  |   | 163,700               |   |     | 340,860    |                                             |   | 249,288 |   |   | 64,817 |   |
| Taxes                  on income                                                                                                      |   |     | 13d    |                                                                                  |   | 58,490                |   |     | 96,660     |                                             |   | 68,495 |   |   | 17,809 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Income                  after taxes on income                                                                                         |   |     |   |                                                                                  |   | 105,210               |   |     | 244,200    |                                             |   | 180,793 |   |   | 47,008 |   |
| Share                  in profits of associated companies, net                                                                        |   |     |   |                                                                                  |   | 498                   |   |     | 1,284      |                                             |   | 186 |   |   | 48 |   |
| Minority                  interest in profits of subsidiaries, net                                                                    |   |     |   |                                                                                  |   | 15,717                |   |     | 31,573     |                                             |   | 30,757 |   |   | 7,997 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Net                  income for the year                                                                                              |   |     |   |                                                                                  |   | 89,991                |   |     | 213,911    |                                             |   | 150,222 |   |   | 39,059 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Net                  income per Ordinary share or ADS:                                                                                |   |     | 17     |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Basic                                                                                                                                 |   |     |   |                                                                                  |   | 2.32                  |   |     | 5.46       |                                             |   | 3.55 |   |   | 0.92 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Fully                  diluted                                                                                                        |   |     |   |                                                                                  |   | 2.26                  |   |     | 4.92       |                                             |   | 3.42 |   |   | 0.89 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Weighted                  average number of shares or ADS used for computation of income                  per                  share: |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Basic                                                                                                                                 |   |     |   |                                                                                  |   | 38,832,663            |   |     | 39,207,214 |                                             |   | 42,355,339 |   |   | 42,355,339 |   |
|                                                                                                                                  |   |     |   |                                                                                  |   |                  |   |     |       |                                             |   |   |   |   |   |   |
| Fully                  diluted                                                                                                        |   |     |   |                                                                                  |   | 44,443,433            |   |     | 44,939,831 |                                             |   | 45,134,184 |   |   | 45,134,184 |   |

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

----

**BLUE      SQUARE – ISRAEL LTD.**

|                                                                                                                                                                                                                                                                                            |   |                                                    |    |                                 |   | **Retained earnings**                                                   |   |               |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|---------|--------------------------------------|--------|------------------------------------------------------------------------------|--------|--------------------|---------|
|                                                                                                                                                                                                                                                                                            |   | **Share****capital**                                    |    | **Additional****paid-in****capital** |   | **Dividend****declared****subsequent to****balance sheet****date** |   | **Unappropriated** |    | **Total** |   |
|                                                                                                                                                                                                                                                                                            |   | **NIS****in thousands****(see note                2a)** |    |
|                                                                                                                                                                                                                                                                                            |   |                                                    |    |                                 |   |                                                                         |   |               |    |   |   |
| **BALANCE                AT JANUARY 1, 2005**                                                                                                                                                                                                                                                   |   |                                                    | 52,503  |                                 |   | 754,264                                                                      |   |               | — |   |   | 12,543 |   |   | 819,310 |   |
|                                                                                                                                                                                                                                                                                            |   |                                                    |    |                                 |   |                                                                         |   |               |    |   |   |   |   |   |   |   |
| **CHANGES                DURING 2005:**                                                                                                                                                                                                                                                         |   |                                                    |    |                                 |   |                                                                         |   |               |    |   |   |   |   |   |   |   |
| Issuance                of shares upon conversion of convertible debentures                                                                                                                                                                                                                     |   |                                                    | 168     |                                 |   | 5,432                                                                        |   |               | — |   |   | — |   |   | 5,600 |   |
| Reclassification                of capital reserve related to capital gain from transaction with                previous                parent cooperative (see note 11d)                                                                                                                       |   |                                                    | — |                                 |   | (44,900                                                                      | )      |               | — |   |   | 44,900 |   |   | — |   |
| Gain                on derivatives hedging dividend payable, net of taxes                                                                                                                                                                                                                       |   |                                                    | — |                                 |   | —                                                                      |   |               | — |   |   | 407 |   |   | 407 |   |
| Dividend                paid                                                                                                                                                                                                                                                                    |   |                                                    | — |                                 |   | —                                                                      |   |               | — |   |   | (50,000 | ) |   | (50,000 | ) |
| Dividend                declared subsequent to balance sheet date                                                                                                                                                                                                                               |   |                                                    | — |                                 |   | —                                                                      |   |               | 50,000  |   |   | (50,000 | ) |   | — |   |
| Net                income                                                                                                                                                                                                                                                                       |   |                                                    | — |                                 |   | —                                                                      |   |               | — |   |   | 89,991 |   |   | 89,991 |   |
| **BALANCE                AT DECEMBER 31, 2005**                                                                                                                                                                                                                                                 |   |                                                    | 52,671  |                                 |   | 714,796                                                                      |   |               | 50,000  |   |   | 47,841 |   |   | 865,308 |   |
|                                                                                                                                                                                                                                                                                            |   |                                                    |    |                                 |   |                                                                         |   |               |    |   |   |   |   |   |   |   |
| **CHANGES                DURING 2006:**                                                                                                                                                                                                                                                         |   |                                                    |    |                                 |   |                                                                         |   |               |    |   |   |   |   |   |   |   |
| Issuance                of shares upon conversion of convertible debentures                                                                                                                                                                                                                |   |                                                    | 743     |                                 |   | 22,960                                                                       |   |               | — |   |   | — |   |   | 23,703 |   |
| Dividend                paid                                                                                                                                                                                                                                                                    |   |                                                    | — |                                 |   | —                                                                      |   |               | (50,000 | ) |   | (60,000 | ) |   | (110,000 | ) |
| Dividend                declared subsequent to balance sheet date                                                                                                                                                                                                                          |   |                                                    | — |                                 |   | —                                                                      |   |               | 60,000  |   |   | (60,000 | ) |   | — |   |
| Net                income                                                                                                                                                                                                                                                                       |   |                                                    | — |                                 |   | —                                                                      |   |               | — |   |   | 213,911 |   |   | 213,911 |   |
| **BALANCE                AT DECEMBER 31, 2006**                                                                                                                                                                                                                                                 |   |                                                    | 53,414  |                                 |   | 737,756                                                                      |   |               | 60,000  |   |   | 141,752 |   |   | 992,922 |   |
|                                                                                                                                                                                                                                                                                            |   |                                                    |    |                                 |   |                                                                         |   |               |    |   |   |   |   |   |   |   |
| Adjustment,                as of January 1, 2007, resulting from first-time adoption of a new                accounting standard - amount carried to retained earnings in respect                of                adjusting investment property to its fair value (see note                2i) |   |                                                    | — |                                 |   | —                                                                      |   |               | — |   |   | 50,598 |   |   | 50,598 |   |
|                                                                                                                                                                                                                                                                                            |   |                                                    |    |                                 |   |                                                                         |   |               |    |   |   |   |   |   |   |   |
| **BALANCE                AT JANUARY 1, 2007** after first-time application of a new                accounting standard                                                                                                                                                                          |   |                                                    | 53,414  |                                 |   | 737,756                                                                      |   |               | 60,000  |   |   | 192,350 |   |   | 1,043,520 |   |
|                                                                                                                                                                                                                                                                                            |   |                                                    |    |                                 |   |                                                                         |   |               |    |   |   |   |   |   |   |   |
| **CHANGES                DURING 2007:**                                                                                                                                                                                                                                                         |   |                                                    |    |                                 |   |                                                                         |   |               |    |   |   |   |   |   |   |   |
| Issuance                of shares upon conversion of  convertible debentures                                                                                                                                                                                                               |   |                                                    | 3,680   |                                 |   | 107,412                                                                      |   |               | — |   |   | — |   |   | 111,092 |   |
| Dividend                paid                                                                                                                                                                                                                                                                    |   |                                                    | — |                                 |   | —                                                                      |   |               | (60,000 | ) |   | (220,000 | ) |   | (280,000 | ) |
| Net                income                                                                                                                                                                                                                                                                       |   |                                                    | — |                                 |   | —                                                                      |   |               | — |   |   | 150,222 |   |   | 150,222 |   |
|                                                                                                                                                                                                                                                                                            |   |                                                    |    |                                 |   |                                                                         |   |               |    |   |   |   |   |   |   |   |
| **BALANCE                AT DECEMBER 31, 2007**                                                                                                                                                                                                                                                 |   |                                                    | 57,094  |                                 |   | 845,168                                                                      |   |               | — |   |   | 122,572 |   |   | 1,024,834 |   |

|                                                                                                                                                                                                                                                                             |   | **Convenience translation into U.S. dollars in thousands (note 2y)** |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|---------|
|                                                                                                                                                                                                                                                                             |   |                                                                                                         |    |   |   |   |   |   |   |   |   |
| **BALANCE                AT DECEMBER 31, 2006**                                                                                                                                                                                                                                  |   |                                                                                                         | 13,888  |   |   | 191,824 |   |   | 15,601 |   |   | 36,857 |   |   | 258,170 |   |
|                                                                                                                                                                                                                                                                             |   |                                                                                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjustment,                as of January 1, 2007, resulting from first-time adoption of a new                accounting standard - amount carried to retained earnings in respect                of                adjusting investment property to its fair value (see note 2i) |   |                                                                                                         | — |   |   | — |   |   | — |   |   | 13,156 |   |   | 13,156 |   |
|                                                                                                                                                                                                                                                                             |   |                                                                                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **BALANCE                AT JANUARY 1, 2007** after first-time application of a new                accounting standard                                                                                                                                                           |   |                                                                                                         | 13,888  |   |   | 191,824 |   |   | 15,601 |   |   | 50,013 |   |   | 271,326 |   |
|                                                                                                                                                                                                                                                                             |   |                                                                                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **CHANGES                DURING 2007:**                                                                                                                                                                                                                                          |   |                                                                                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                of shares upon conversion of  convertible debentures                                                                                                                                                                                                |   |                                                                                                         | 957     |   |   | 27,928 |   |   | — |   |   | — |   |   | 28,885 |   |
| Dividend                paid                                                                                                                                                                                                                                                     |   |                                                                                                         | — |   |   | — |   |   | (15,601 | ) |   | (57,202 | ) |   | (72,803 | ) |
| Net                income                                                                                                                                                                                                                                                        |   |                                                                                                         | — |   |   | — |   |   | — |   |   | 39,059 |   |   | 39,059 |   |
|                                                                                                                                                                                                                                                                             |   |                                                                                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **BALANCE                AT DECEMBER 31, 2007**                                                                                                                                                                                                                                  |   |                                                                                                         | 14,845  |   |   | 219,752 |   |   | — |   |   | 31,870 |   |   | 266,467 |   |

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

----

**BLUE      SQUARE – ISRAEL LTD.**

|                                                                                                                                                            |   |                                     |     |                  |   |      |   | **Convenience****translation****(note 2y)** |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|----------|-----------------------|--------|-----------|--------|--------------------------------------------------|----------|
|                                                                                                                                                            |   | **2005**                                 |     | **2006**              |   | **2007**  |   | **2007**                                         |     |
|                                                                                                                                                            |   | **NIS ****(see note 2a)** |     | **U.S. dollars** |   |
|                                                                                                                                                            |   | **In thousands**                    |     |
| **CASH                      FLOWS FROM OPERATING ACTIVITIES:**                                                                                                  |   |                                     |     |                  |   |      |   |                                             |     |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |
| Net                      income                                                                                                                                 |   |                                     | 89,991   |                  |   | 213,911   |   |                                             | 150,222  |   |   | 39,059 |   |
| Adjustments                      required to reflect the cash flows from operating activities                      (a)                                          |   |                                     | 119,769  |                  |   | 56,060    |   |                                             | 141,994  |   |   | 36,920 |   |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| Net                      cash provided by operating activities                                                                                                  |   |                                     | 209,760  |                  |   | 269,971   |   |                                             | 292,216  |   |   | 75,979 |   |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| **CASH                      FLOWS FROM INVESTING ACTIVITIES:**                                                                                                  |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| Purchase                      of property, plant and equipment, investment property and                      software                                           |   |                                     | (89,050  | )                     |   | (113,791) |   |                                             | (205,934 | ) |   | (53,544 | ) |
| Investment                      in short-term deposit                                                                                                           |   |                                     | (500,028 | )                     |   | —   |   |                                             | (101,487 | ) |   | (26,388 | ) |
| Collection                      of short-term bank deposit                                                                                                      |   |                                     | —  |                  |   | —   |   |                                             | 500,000  |   |   | 130,005 |   |
| Acquisition                      of minority interest                                                                                                           |   |                                     | —  |                  |   | —   |   |                                             | (5,000   | ) |   | (1,300 | ) |
| Payments                      on account of real estate                                                                                                         |   |                                     | —  |                  |   | —   |   |                                             | (45,825  | ) |   | (11,915 | ) |
| Collection                      of other long-term receivables                                                                                                  |   |                                     | —  |                  |   | 319       |   |                                             | 409      |   |   | 106 |   |
| Grant                      of long-term loan                                                                                                                    |   |                                     | (205     | )                     |   | (245      | )      |                                             | —  |   |   | — |   |
| Proceeds                      from sale of property, plant and equipment and investment                      property                                           |   |                                     | 9,213    |                  |   | 9,447     |   |                                             | 16,456   |   |   | 4,279 |   |
| Purchase                      of marketable securities, net                                                                                                     |   |                                     | —  |                  |   | (64,972   | )      |                                             | (127,714 | ) |   | (33,207 | ) |
| Proceeds                      from realization of investment in a subsidiary                                                                                    |   |                                     | —  |                  |   | 11,315    |   |                                             | 394      |   |   | 102 |   |
| Proceeds                      from realization of investment in former investee company:                                                                        |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| Consideration                      for shares sold                                                                                                              |   |                                     | 2,731    |                  |   | —   |   |                                             | —  |   |   | — |   |
| Amount                      received for assumed liabilities to banks and others                                                                                |   |                                     | 11,039   |                  |   | —   |   |                                             | —  |   |   | — |   |
| Acquisition                      of operation and subsidiaries consolidated for the first time                      (b)                                         |   |                                     | (3,152   | )                     |   | 482       |   |                                             | (161,876 | ) |   | (42,090 | ) |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| Net                      cash used in investing activities                                                                                                      |   |                                     | (569,452 | )                     |   | (157,445) |   |                                             | (130,577 | ) |   | (33,952 | ) |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| **CASH                      FLOWS FROM FINANCING ACTIVITIES:**                                                                                                  |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| Issuance                      of shares to minority shareholders in consolidated subsidiary,                      net of                      issuance expenses |   |                                     | —  |                  |   | 147,559   |   |                                             | —  |   |   | — |   |
| Issuance                      of debentures and convertible debentures, net of issuance                      expenses                                           |   |                                     | —  |                  |   | 731,225   |   |                                             | —  |   |   | — |   |
| Dividends                      paid to shareholders                                                                                                             |   |                                     | (88,998  | )                     |   | (110,000  | )      |                                             | (280,000 | ) |   | (72,803 | ) |
| Dividend                      paid to minority shareholders of subsidiaries                                                                                     |   |                                     | (22,614  | )                     |   | (2,500    | )      |                                             | (50,706  | ) |   | (13,184 | ) |
| Receipt                      of long-term loans                                                                                                                 |   |                                     | 633,169  |                  |   | 54,670    |   |                                             | 269,364  |   |   | 70,037 |   |
| Repayments                      of long-term loans                                                                                                              |   |                                     | (139,167 | )                     |   | (809,158  | )      |                                             | (215,143 | ) |   | (55,939 | ) |
| Convertible                      debentures repaid                                                                                                              |   |                                     | —  |                  |   | —   |   |                                             | (16,726  | ) |   | (4,349 | ) |
| Repayment                      of credit from long-term payables                                                                                                |   |                                     | —  |                  |   | —   |   |                                             | (1,740   | ) |   | (452 | ) |
| Repayment                      of capital note to previous shareholders of subsidiary,                      net                                                 |   |                                     | (8,200   | )                     |   | —   |   |                                             | —  |   |   | — |   |
| Short-term                      loans from minority in subsidiaries                                                                                             |   |                                     | —  |                  |   | 549       |   |                                             | —  |   |   | — |   |
| Short-term                      credit from banks, net                                                                                                          |   |                                     | 4,916    |                  |   | (5,190    | )      |                                             | 3,268    |   |   | 850 |   |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| Net                      cash provided by (used in) financing activities                                                                                        |   |                                     | 379,106  |                  |   | 7,155     |   |                                             | (291,683 | ) |   | (75,840 | ) |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| **INCREASE                      (DECREASE) IN CASH AND CASH EQUIVALENTS**                                                                                       |   |                                     | 19,414   |                  |   | 119,681   |   |                                             | (130,044 | ) |   | (33,813 | ) |
| **BALANCE                      OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR**                                                                              |   |                                     | 47,359   |                  |   | 66,773    |   |                                             | 186,454  |   |   | 48,480 |   |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| **BALANCE                      OF CASH AND CASH EQUIVALENTS AT END OF YEAR**                                                                                    |   |                                     | 66,773   |                  |   | 186,454   |   |                                             | 56,410   |   |   | 14,667 |   |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| **SUPPLEMENTAL                      DISCLOSURE OF CASH FLOW ACTIVITIES:**                                                                                       |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
|                                                                                                                                                            |   |                                     |     |                  |   |      |   |                                             |     |   |   |   |   |
| Cash                      paid during the year for interest                                                                                                     |   |                                     | 49,510   |                  |   | 57,397    |   |                                             | 72,622   |   |   | 18,822 |   |
| Cash                      paid during the year for income taxes                                                                                                 |   |                                     | 40,747   |                  |   | 65,004    |   |                                             | 72,508   |   |   | 18,853 |   |

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

----

**BLUE      SQUARE – ISRAEL LTD.**

|                                                                                                                                                 |   | **2005**                             |    | **2006**              |   | **2007** |   | **Convenience****translation****(note 2y)****2007** |     |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|-----------------------|--------|----------|--------|----------------------------------------------------------|----------|
|                                                                                                                                                 |   | **NIS (see note 2a)** |    | **U.S. dollars** |   |
|                                                                                                                                                 |   | **In thousands**                |    |
| **(a)                  Adjustments required to reflect the cash flows from operating                  activities:**                             |   |                                 |    |                  |   |     |   |                                                     |     |
|                                                                                                                                                 |   |                                 |    |                  |   |     |   |                                                     |     |
| Income                  and expenses not involving cash flows:                                                                                       |   |                                 |    |                  |   |     |   |                                                     |     |
| Depreciation                  and amortization                                                                                                       |   |                                 | 139,199 |                  |   | 131,154  |   |                                                     | 132,726  |   |   | 34,510 |   |
| Minority                  interest in profits of subsidiaries - net                                                                                  |   |                                 | 15,717  |                  |   | 31,573   |   |                                                     | 30,757   |   |   | 7,997 |   |
| Share                  in profits of associated companies                                                                                            |   |                                 | (498    | )                     |   | (1,284   | )      |                                                     | (186     | ) |   | (48 | ) |
| Capital                  loss (gain) from realization of investments in subsidiaries (see                  notes 3                  (d)(e)           |   |                                 | (2,345  | )                     |   | (54,745  | )      |                                                     | 1,520    |   |   | 395 |   |
| Gain                  from sale, disposal of impairment of property, plant and equipment,                  net                                       |   |                                 | (807    | )                     |   | (24,572  | )      |                                                     | (4,927   | ) |   | (1,281 | ) |
| Net                  gain from adjustment of investment property to fair value                                                                       |   |                                 | — |                  |   | —  |   |                                                     | (10,456  | ) |   | (2,719 | ) |
| Deferred                  income taxes, net                                                                                                          |   |                                 | 18,079  |                  |   | 8,716    |   |                                                     | (2,065   | ) |   | (537 | ) |
| Interest                  and linkage differences on long-term loans and other liabilities,                  net                                     |   |                                 | 13,736  |                  |   | (820     | )      |                                                     | 20,013   |   |   | 5,204 |   |
| Increase                  in liability for employee rights, net                                                                                      |   |                                 | 1,125   |                  |   | 7,249    |   |                                                     | 6,022    |   |   | 1,566 |   |
| Decrease                  (increase) in value of marketable securities, deposit and long                  term                  receivables, net     |   |                                 | (122    | )                     |   | (26,648  | )      |                                                     | 18,055   |   |   | 4,695 |   |
| Changes                  in operating assets and liabilities:                                                                                        |   |                                 |    |                  |   |     |   |                                                     |     |   |   |   |   |
| Decrease                  (increase) in trade receivables and other accounts                  receivable                                             |   |                                 | 18,645  |                  |   | (89,573  | )      |                                                     | (64,858  | ) |   | (16,864 | ) |
| Increase                  in inventories                                                                                                             |   |                                 | (42,841 | )                     |   | (25,914  | )      |                                                     | (15,856  | ) |   | (4,123 | ) |
| Increase                  (decrease) in trade payables and other accounts payable                                                                    |   |                                 | (40,119 | )                     |   | 100,924  |   |                                                     | 31,249   |   |   | 8,125 |   |
|                                                                                                                                                 |   |                                 |    |                  |   |     |   |                                                     |     |   |   |   |   |
|                                                                                                                                       |   |                                 | 119,769 |                  |   | 56,060   |   |                                                     | 141,994  |   |   | 36,920 |   |
|                                                                                                                                                 |   |                                 |    |                  |   |     |   |                                                     |     |   |   |   |   |
| **(b)                  Acquisition of operation and subsidiaries consolidated for the first                  time:**                            |   |                                 |    |                  |   |     |   |                                                     |     |   |   |   |   |
|                                                                                                                                                 |   |                                 |    |                  |   |     |   |                                                     |     |   |   |   |   |
| Assets                  and liabilities assumed at date of acquisition:                                                                              |   |                                 |    |                  |   |     |   |                                                     |     |   |   |   |   |
| Working                  capital (excluding cash and cash equivalents)                                                                               |   |                                 | (15,122 | )                     |   | 1,908    |   |                                                     | (63,517  | ) |   | (16,515 | ) |
| Property,                  plant and equipment                                                                                                       |   |                                 | (3,897  | )                     |   | (1,235   | )      |                                                     | (31,053  | ) |   | (8,074 | ) |
| Deferred                  taxes, net                                                                                                                 |   |                                 | (1,652  | )                     |   | (1,071   | )      |                                                     | 8,103    |   |   | 2,107 |   |
| Liability                  for employee rights upon retirement - net                                                                                 |   |                                 | 147     |                  |   | 113      |   |                                                     | 2,359    |   |   | 613 |   |
| Long-term                  loans                                                                                                                     |   |                                 | 8,376   |                  |   | 4,373    |   |                                                     | 22,946   |   |   | 5,966 |   |
| Goodwill                  and intangible assets arising on acquisitions                                                                              |   |                                 | (12,354 | )                     |   | (1,936   | )      |                                                     | (143,344 | ) |   | (37,271 | ) |
| Minority                  interest in subsidiaries at date of acquisition                                                                            |   |                                 | 21,350  |                  |   | (1,539   | )      |                                                     | 42,630   |   |   | 11,084 |   |
| Investments                  in affiliates                                                                                                           |   |                                 | — |                  |   | (131     | )      |                                                     | —  |   |   | — |   |
|                                                                                                                                            |   |                                 | (3,152  | )                     |   | 482      |   |                                                     | (161,876 | ) |   | (42,090 | ) |
|                                                                                                                                                 |   |                                 |    |                  |   |     |   |                                                     |     |   |   |   |   |
| **(c)                  Supplementary information on investing and financing activities                  not                  involving cash flows:** |   |                                 |    |                  |   |     |   |                                                     |     |   |   |   |   |
|                                                                                                                                                 |   |                                 |    |                  |   |     |   |                                                     |     |   |   |   |   |
| Purchasing                  property, plant and equipment on credit                                                                                  |   |                                 | — |                  |   | 13,811   |   |                                                     | 5,690    |   |   | 1,479 |   |
| Issuance                  of shares upon conversion of convertible debentures                                                                        |   |                                 | 5,600   |                  |   | 23,703   |   |                                                     | 111,092  |   |   | 28,885 |   |
| Sale                  of property, plant and equipment on credit                                                                                     |   |                                 | — |                  |   | 1,537    |   |                                                     | —  |   |   | — |   |
| Dividend                  to pay to minority in a subsidiary                                                                                         |   |                                 | — |                  |   | 3,000    |   |                                                     | —  |   |   | — |   |

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

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE 1 -**
**GENERAL:        **

|   | a. | Nature                of operations |
|--------|----|-------------------------------------|

|  | b. | Use                of estimates in the preparation of financial                statements |
|--|----|-------------------------------------------------------------------------------------------|

|  | c. | Definitions: |
|--|----|--------------|

| Subsidiary                                                         | -      | a                company over which the Company has control, the financial statements                of                which have been consolidated with the financial statements of the                Company,                which is not a proportionately consolidated company.                                                                                                                                                                                                                                            |
|--------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Proportionately                consolidated                company | -      | a                jointly controlled company, none of the shareholders of which holds                exclusive control, the financial statements of which are consolidated                with                those of the Company by the proportionate consolidation method.                                                                                                                                                                                                                                                    |
|                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Associated                company                                  | -      | a** **company** **(which                is not a subsidiary or a proportionately consolidated company), over                whose                financial and operational policy the Company exerts material influence,                the investment in which is presented by the equity method. Material                influence is deemed to exist when the percentage holding in the said                company is 20% or more, unless there are circumstances that contradict                this assumption. |

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE 1 -        **
**GENERAL        **

| Investeecompany | - | a                subsidiary, proportionately consolidated company or associated                company. |
|-----------------|---|---------------------------------------------------------------------------------------------------------|

| Related                parties | -      | as                defined in Opinion No.29 of the Israeli Institute of Certified Public                Accountant.                                                                                                                                                                                                                                      |
|--------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                           |   |                                                                                                                                                                                                                                                                                                                                                    |
| Goodwill                       | -      | the                difference between the cost of the investment in the investee company                and                the Company’s share in the fair value of its underlying assets, net of the                fair value of its underlying liabilities, at time of acquisition,                net of                the applicable taxes. |

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES:**

|  | **a.** | **Financial                statements presentation                basis:** |
|--|--------|----------------------------------------------------------------------------|

|   | 1) | Transition                to nominal financial reporting in 2004 |
|--------|----|------------------------------------------------------------------|

** **

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|  | 2) | The                  amounts of non-monetary assets do not necessarily represent realization                  value or current economic value, but only the reported amounts                  of such                  assets, as described in (1) above. In these financial statements,                  the term                  “cost” signifies cost in reported                  amounts. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | **b.** | **Principles                of consolidation:** |
|--|--------|-------------------------------------------------|

|  | 1) | The                consolidated financial statements include the accounts of the Company                and                its subsidiaries; as to companies consolidated for the first time-                see                note 3a. The companies included in consolidation are listed in the                appendix to the financial                statements. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2) | In                addition to the fully consolidated companies as above, the consolidated                financial statements include jointly controlled companies that have                been                consolidated by the proportionate consolidation method, as prescribed                by                Opinion 57 of the Israeli Institute. As to data relating to such                companies included in these consolidated financial statements - see                note                3c. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3) | Goodwill                is presented in the consolidated balance sheets, and represents the                excess                of the cost of acquisition of an investment in a subsidiary over                the                Company’s share in the fair value of the subsidiary’s identifiable assets                (including intangible assets), net of the fair value of its identifiable                liabilities, net of related taxes, at the date of acquisition. Through                December 31, 2005, goodwill was amortized in equal annual installments                over 10-20 years, commencing in the year of acquisition. Pursuant                to                Standard No. 20 (As Amended), which is applied by the Company since                January 1, 2006, amortization of goodwill was discontinued from the                said                date - see j. below.    |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 4) | Intercompany                balances and transactions have been eliminated. Profits from intercompany                sales, not yet realized outside the group, have also been eliminated. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|  | **c.** | **Cash                equivalents** |
|--|--------|-------------------------------------|

|  | **d.** | **Marketable                securities** |
|--|--------|------------------------------------------|

|  | **e.** | **Concentrations                of credit risks - allowance for doubtful                accounts** |
|--|--------|----------------------------------------------------------------------------------------------------|

|  | **f.** | **Inventories** |
|--|--------|-----------------|

|  | **g.** | **Investment                in associated companies** |
|--|--------|-------------------------------------------------------|

|  | 1) | Investment                in associated companies is accounted for by the equity                method. |
|--|----|---------------------------------------------------------------------------------------------------------|

|  | 2) | The                Company reviews at each balance sheet date whether any events have                occurred or changes in circumstances have taken place, which might                indicate that there has been an impairment of its investments, in                the                associated companies. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|  | **h.** | **Property,                Plant and Equipment** |
|--|--------|--------------------------------------------------|

|   | 1) | An                item of property, plant and equipment is measured at cost upon its                initial                recognition. The standard indicates that the cost of an item of property,                plant and equipment includes its purchase price (including import                duties                and non-refundable purchase taxes, after deducting trade discounts                and                rebates), costs directly attributable to bringing the asset to the                location and condition necessary for it to be capable of operating                in the                manner intended by management, as well as the initial estimate of                the                present value of the costs of dismantling and removing the item and                restoring the site on which it is located (if the Company is obligated                to                do so). The property, plant and equipment of subsidiaries that existed                on                the date of purchase by the Company, is included at fair value on                date of                purchasing these subsidiaries. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2) | When                the payment in respect of an item of property, plant and equipment                is                deferred beyond normal credit terms, the difference between the cash                price                equivalent and the total payment is recognized as interest over the                period                of credit. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3) | The                Company elected the cost method as its accounting policy for the                measurement of its property, plant and equipment subsequent to initial                recognition. Under the cost model, an item of property, plant and                equipment shall be carried at its cost, less any accumulated depreciation                and any accumulated impairment losses. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4) | The                depreciable amount of each asset shall be allocated on a systematic                basis                over its useful life using the straight-line method. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|                                                  |   | **%**                                                                                                                                   |
|-------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|                                                  |   |                                                                                                                                    |
| Buildings                                             |   | 2                                                                                                                                       |
| Furniture, equipment and installations |   | 6 - 33 (mainly 10%)                                                                                                 |
| Motor vehicles                                   |   | 15 - 20                                                                                                                       |
| Leasehold improvements                           |   | The lower of the term of thelease or the estimated usefullives (mainly 10%) |

|  | 5) | At each financial year-end, the Company reviews                the residual value, the useful life and depreciation method it uses.                If                there have been a significant changes in the expected residual value,                the                useful life or significant change in the expected pattern of consummation                of the future economic benefits embodied in the asset that may indicate                that a change in the depreciation method is required, such changes                are                treated as changes in accounting estimates. In the reporting periods,                no                material changes, as above, have taken place with any material effect                on                the financial statements of the Company. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | **i.** | **Investment                property** |
|--|--------|----------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|                                                                                                                                     |   | **NIS                in****thousands** |    |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|---------|
|                                                                                                                                     |   |                                   |    |
| Increase                in investment property                                                                                           |   |                                   | 75,969  |   |
| Increase                in long-term liabilities in respect of future payments                to the Israel Land Administrator Authority |   |                                   | (2,746  | ) |
| Increase                in deferred taxes                                                                                                |   |                                   | (9,975  | ) |
| Increase                in minority interest                                                                                             |   |                                   | (12,650 | ) |
| Increase                in retained earnings                                                                                             |   |                                   | 50,598  |   |

|  | **j.** | **Intangible                assets and deferred                charges:** |
|--|--------|---------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|  | 1. | Deferred                charges in respect of operating lease agreements are amortized over                the                remaining leasehold period. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2. | Software                rights are presented at cost net of accumulated amortization, and                amortized in four equal annual installments, reflecting their useful                lives. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3. | Brand                name and Customer base are presented based on their attributed fair                value                at the date of acquisition of the said subsidiaries, and amortized                in                eight and fifteen equal annual installments, respectively, reflecting                their useful lives. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 4. | Goodwill                - see b (4) above. |
|--|----|--------------------------------------------|

|  | **k.** | **Impairment                    of assets** |
|--|--------|---------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|  | **l.** | **Convertible                debentures** |
|--|--------|-------------------------------------------|

|   |   | Commencing                January 1, 2006, the Company applies Israel Accounting Standard No.                22 -                "Financial Instruments: Disclosure and Presentation" (hereafter -                standard                22), pursuant to which, the liability component and the equity component                imputed in the convertible debentures should be recognized separately                in                the balance sheet. The fair value of the liability component is determined                based on the customary interest rate applicable to debentures with                similar                features that do not include a conversion option. The remaining balance                of                the proceeds should be attributed to the conversion option incorporated                in                the debentures, and presented under shareholders’ equity. According to                this standard transaction costs should be proportionately allocated                to the                components of the debentures. The portion of the transaction costs                attributed to the liability component should be deducted from the                liability and taken into account in computing the effective interest                rate,                and the portion of transaction costs attributed to the equity component                should be deducted from shareholders’ equity. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|  | **m.** | **Deferred                taxes** |
|--|--------|-----------------------------------|

|  | 1) | The                Company applies Israel Accounting Standard No. 19 - “Taxes on Income”                (hereafter - Standard 19) that prescribes the accounting treatment                (recognition criteria, measurement, presentation and disclosure)                required                for taxes on income. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2) | In                accordance with the provisions of Standard 19, the Company recognizes                deferred taxes in respect of temporary differences between the amounts                of                assets and liabilities as reported in the financial statements and                those                taken into account for tax purposes; the standard requires that full                recognition be given to deferred taxes in respect of all taxable                temporary                differences, except for the temporary difference resulting from the                initial recognition of goodwill. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3) | Deferred                tax balances are computed at the tax rates expected to be in effect                at the                time the deferred tax asset is utilized or the deferred tax liability                is                settled, based on the tax rates and the tax laws enacted, or substantively                enacted, by the balance sheet date. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 4) | The                current taxes, as well as the changes in the deferred tax balances                are                included in the tax expenses or income in the reporting period, except                for                taxes derived from the initial recognition of business combinations                and                except for the tax in respect of transactions that are recognized                directly                in shareholders’ equity (in such instances, the applicable tax is taken                directly to shareholders’ equity). |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 5) | Taxes                that would apply in the event of disposal of investments in investee                companies have not been taken into account in computing the deferred                taxes, as it is the Company's policy to hold these investments, not                to                realize them. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **n.** | **Revenue                recognition** |
|--------|--------|----------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|  | **o.** | **Club                member awards** |
|--|--------|---------------------------------------|

|  | **p.** | **Rebates                from suppliers** |
|--|--------|-------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|  | **q.** | **Advertising                costs** |
|--|--------|--------------------------------------|

|  | **r.** | **Store                closure costs** |
|--|--------|----------------------------------------|

|  | **s.** | **Dividend                declared subsequent to balance sheet                date** |
|--|--------|--------------------------------------------------------------------------------------|

|  | **t.** | **Earnings                per share (“EPS”)** |
|--|--------|-----------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|  | **u.** | **Linked                balances and balances in foreign                currency** |
|--|--------|------------------------------------------------------------------------------------|

|  | **v.** | **Derivatives** |
|--|--------|-----------------|

|  | **w.** | **Financial                instruments** |
|--|--------|------------------------------------------|

|  | 1) | Issuance                of multiple classes of securities in a single                transaction |
|--|----|--------------------------------------------------------------------------------------------------|

|  | 2) | Offset                of financial instruments |
|--|----|------------------------------------------------|

|  | 3) | As                to the accounting treatment of debentures convertible into shares,                see l.                above. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|  | 4) | In                accordance with the transitional provisions of Israeli Accounting                Standard                No. 22, commencing January 1, 2006, in addition to the aforesaid, the                financial statements include the following                changes: |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | **x.** | **Transactions                    with controlling                    shareholders** |
|--|--------|--------------------------------------------------------------------------------------|

|  | **y.** | **Convenience                translation into U.S.                dollars** |
|--|--------|-----------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

|  | **z.** | **Recently                issued accounting pronouncement in                Israel** |
|--|--------|--------------------------------------------------------------------------------------|

**Israeli      Accounting Standard No. 29 of the IsASB - “Adoption of International Reporting      Financial Standards (IFRS)”**

|  | 1) | International                Financial Reporting Standards                (IFRS); |
|--|----|-----------------------------------------------------------------------------------|

|  | 2) | International                Accounting Standards (IAS); |
|--|----|----------------------------------------------------------|

|  | 3) | Clarifications                by the International Financial Reporting Interpretations Committee                (IFRIC)                or by its predecessor, the Standing Interpretations Committee                (SIC). |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      2 - SIGNIFICANT ACCOUNTING POLICIES **

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      3 - INVESTEE COMPANIES **

|  | a. | Acquisitions: |
|--|----|---------------|

|  | 1) | Bee                    Group Retail Ltd. (formerly- Hamachsan Hamerkazi Kfar Hasha’ashuim                    Ltd.): |
|--|----|---------------------------------------------------------------------------------------------------------------------------|

|  | a) | In                May, 2005, the Company completed the purchase of 50% of the holding                of Bee                Group Ltd. (hereafter - "Bee Group"), an Israeli company that operates                non-food chain stores through franchises. The acquisition cost of                Bee                Group was allocated to its assets and liabilities based on their                fair                value on the date of acquisition. The balance, in the amount of NIS                12.3                million, was allocated to goodwill which until December 31, 2005                was                amortized at the rate of 10% per annum (see note                2b(4)). |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b) | In                April 2007, the Company purchased an additional 10% of the issued                and                paid-up share capital of Bee Group in consideration of approximately                NIS 5                million, out of which NIS 1.8 million was allocated to                Goodwill.  |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      3 - INVESTEE COMPANIES**

|  | 2) | Vardinon                Textiles Ltd.( hereafter –“Vardinon”) |
|--|----|---------------------------------------------------------------------------------|

|  | 3) | Eden                Briut Teva Market Ltd. (hereafter -                "Eden") |
|--|----|--------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      3 - INVESTEE COMPANIES**
**:**

|  | 4) | Naaman                Porcelain Ltd.(hereafter -“Naaman”) |
|--|----|-----------------------------------------------------------------------|

|                                                                                                                   |   | **December 31, ****2007** |    |
|------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                                                                   |   | **NIS in thousands**      |    |
| **Balance                sheet:**                                                                                      |   |                                |    |
| Assets:                                                                                                                |   |                                |    |
| Current                assets                                                                                          |   |                                | 148,236 |   |
| Property,                plant and equipment                                                                           |   |                                | 32,617  |   |
| Goodwill                and Intangible assets arising from acquisition, net of accumulated                amortization |   |                                | 140,386 |   |
| Liabilities:                                                                                                           |   |                                |    |   |
| Current                liabilities                                                                                     |   |                                | 54,889  |   |
| Long-term                liabilities                                                                                   |   |                                | 56,167  |   |
| Minority                interests                                                                                      |   |                                | 40,177  |   |

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      3 - INVESTEE COMPANIES**
**:**

|                                         |   | **For the period****from date of****acquisition of each****of the subsidiaries to****December 31, 2007** |   |
|----------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                         |   | **NIS in thousands**                                                                                                                                  |   |
| **Statements                of operations:** |   |                                                                                                                                                            |   |
|                                    |   |                                                                                                                                                            |   |
| Sales                                        |   |                                                                                                                                                            | 88,606 |   |
| Cost                of sales                 |   |                                                                                                                                                            | 43,307 |   |
| Income                before taxes on income |   |                                                                                                                                                            | 4,507  |   |
| Net                income                    |   |                                                                                                                                                            | 3,384  |   |

|  | b. | Investment                in an associated companies: |
|--|----|-------------------------------------------------------|

|                                                                        |   | **December 31,**          |   |
|-----------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                        |   | **2006**                       |   | **2007** |   |
|                                                                        |   | **NIS in thousands** |   |
| Shares:                                                                     |   |                           |   |   |   |
|                                                                        |   |                           |   |   |   |
| Cost                of shares                                               |   |                           | 402    |   |   | 402 |   |
| Share                in undistributed profits accumulated since acquisition |   |                           | 2,266  |   |   | 2,452 |   |
|                                                                        |   |                           | 2,668  |   |   | 2,854 |   |
| Perpetual                capital notes (a)                                  |   |                           | 1,378  |   |   | 1,378 |   |
| Long-term                loans (b)                                          |   |                           | 716    |   |   | 716 |   |
|                                                                        |   |                           | 4,762  |   |   | 4,948 |   |

|   | (a) | Perpetual                capital notes are linked to the Israeli CPI and bear interest at                an annual                rate of 5%. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | The                loans are linked to the Israeli CPI and bear interest at an annual                rate of                4.5%. The repayment date has not yet been                determined. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | c. | Proportionately                consolidated companies: |
|--|----|--------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      3 - INVESTEE COMPANIES **

|  | 1) | Balance                sheet data: |
|--|----|------------------------------------|

|                                                           |   | **December 31,**          |   |
|----------------------------------------------------------------|--------|--------------------------------|--------|
|                                                           |   | **2006**                       |   | **2007** |   |
|                                                           |   | **NIS in thousands** |   |
|                                                           |   |                           |   |   |   |
| Current                assets                                  |   |                           | 11,120 |   |   | 4,592 |   |
| Non-current                assets, without investment property |   |                           | 13,982 |   |   | 12,759 |   |
| Investment                property                             |   |                           | 50,323 |   |   | 88,928 |   |
| Current                liabilities                             |   |                           | 8,395  |   |   | 2,962 |   |
| Long-term                liabilities                           |   |                           | 1,039  |   |   | 3,560 |   |

|  | 2) | Operating                results data: |
|--|----|----------------------------------------|

|                                                                         |   | **2005**                            |    | **2006** |   | **2007** |   |
|------------------------------------------------------------------------------|--------|-------------------------------------|---------|----------|--------|----------|--------|
|                                                                         |   | **NIS                in thousands** |    |
|                                                                         |   |                                |    |     |   |     |   |
| Revenues                                                                     |   |                                | 8,769   |     |   | 7,706    |   |   | 9,535 |   |
| Costs                and expenses                                            |   |                                | 5,888   |     |   | 2,923    |   |   | 1,952 |   |
| Net                gain from adjustment of investment property to fair value |   |                                | — |     |   | —  |   |   | 2,570 |   |
| Net                income                                                    |   |                                | 2,142   |     |   | 4,323    |   |   | 8,852 |   |

|  | 3) | Cash                flows data: |
|--|----|---------------------------------|

|                                                     |   | **2005**                            |   | **2006** |   | **2007**     |   |
|----------------------------------------------------------|--------|-------------------------------------|--------|----------|--------|--------------|--------|
|                                                     |   | **NIS                in thousands** |   |
|                                                     |   |                                |   |     |   |    |   |
| Net                cash provided by operating activities |   |                                | 9,259  |     |   | 12,136       |   |   | 10,912 |   |
| Net                cash used in investing activities     |   |                                | (112   | )        |   | (144         | )      |   | (21,379 | ) |
| Net                cash used in financing activities     |   |                                | (410   | )        |   | (830         | )      |   | (299 | ) |

|  | d. | Transfer                of real estate assets to a new                subsidiary |
|--|----|----------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      3 - INVESTEE COMPANIES **

|  | e. | On                December 7, 2006, the Company completed the sale of approximately                0.7% of                BSIP’s share capital for a consideration of approximately NIS 11.3                million. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | f. | As                to a commitment of the Company in connection with acquisition of                Diners                Israel, see note 10(b). |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------|

|  | g. | The                list of principal investee companies is presented in the appendix                to the                financial statements. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      4 - PROPERTY, PLANT AND EQUIPMENT **

|   | a. | Composition                of assets and the accumulated depreciation and amortization thereon,                grouped by major classifications, and changes therein in 2007, are                as                follows: |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                       |   | **Land and****buildings****including****Leasehold****rights (1)** |      | **Leasehold****improvements** |   | **Furniture,****equipment****and****installations** |   | **Motor****vehicles** |      | **Total** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|-----------|-------------------------------|--------|-----------------------------------------------------|--------|-----------------------|-----------|-----------|--------|
|                                                                                       |   | **NIS in thousands**                                              |      |
| Cost:                                                                                      |   |                                                                        |      |                          |   |                                                |   |                  |      |      |   |
|                                                                                       |   |                                                                        |      |                          |   |                                                |   |                  |      |      |   |
| Balance                at January 1, 2007 (2)                                              |   |                                                                        | 1,515,641 |                          |   | 494,573                                             |   |                  | 1,335,967 |      |   | 19,344 |   |   | 3,365,525 |   |
| Additions                                                                                  |   |                                                                        | 19,286    |                          |   | 38,710                                              |   |                  | 116,471   |      |   | 238 |   |   | 174,705 |   |
| Disposals                                                                                  |   |                                                                        | —   |                          |   | (1,682                                              | )      |                  | (18,353   | )         |   | (3,822 | ) |   | (23,857 | ) |
| Changes                due to acquisitions of subsidiaries consolidated for the first time |   |                                                                        | —   |                          |   | 18,297                                              |   |                  | 29,594    |      |   | 8,891 |   |   | 56,782 |   |
|                                                                                       |   |                                                                        |      |                          |   |                                                |   |                  |      |      |   |   |   |   |   |   |
| Balance                at December 31, 2007                                           |   |                                                                        | 1,534,927 |                          |   | 549,898                                             |   |                  | 1,463,679 |      |   | 24,651 |   |   | 3,573,155 |   |
|                                                                                       |   |                                                                        |      |                          |   |                                                |   |                  |      |      |   |   |   |   |   |   |
| Accumulated                depreciation and amortization:                                  |   |                                                                        |      |                          |   |                                                |   |                  |      |      |   |   |   |   |   |   |
|                                                                                       |   |                                                                        |      |                          |   |                                                |   |                  |      |      |   |   |   |   |   |   |
| Balance                at January 1, 2007 (2)                                              |   |                                                                        | 258,957   |                          |   | 321,104                                             |   |                  | 946,651   |      |   | 11,814 |   |   | 1,538,526 |   |
| Additions                                                                                  |   |                                                                        | 19,999    |                          |   | 32,001                                              |   |                  | 82,879    |      |   | 2,031 |   |   | 136,910 |   |
| Eliminated                on disposals                                                     |   |                                                                        | —   |                          |   | (1,500                                              | )      |                  | (12,962   | )         |   | (3,114 | ) |   | (17,576 | ) |
| Changes                due to acquisitions of subsidiaries consolidated for the first time |   |                                                                        | —   |                          |   | 7,662                                               |   |                  | 14,896    |      |   | 3,171 |   |   | 25,729 |   |
|                                                                                       |   |                                                                        |      |                          |   |                                                |   |                  |      |      |   |   |   |   |   |   |
| Balance                at December 31, 2007                                           |   |                                                                        | 278,956   |                          |   | 359,267                                             |   |                  | 1,031,464 |      |   | 13,902 |   |   | 1,683,589 |   |
| Impairment                of property, plant and equipment (see b below)                   |   |                                                                        | 12,989    |                          |   | 5,614                                               |   |                  | 10,760    |      |   | — |   |   | 29,363 |   |
|                                                                                       |   |                                                                        |      |                          |   |                                                |   |                  |      |      |   |   |   |   |   |   |
| Net                book value at December 31, 2007                                    |   |                                                                        | 1,242,982 |                          |   | 185,017                                             |   |                  | 421,455   |      |   | 10,749 |   |   | 1,860,203 |   |
|                                                                                       |   |                                                                        |      |                          |   |                                                |   |                  |      |      |   |   |   |   |   |   |
| Net                book value at December 31, 2006                                    |   |                                                                        | 1,229,794 |                          |   | 169,432                                             |   |                  | 371,999   |      |   | 7,530 |   |   | 1,778,755 |   |

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

|  | (2) | Reclassified                  - see notes 2i and 2j. |
|--|-----|------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      4 - PROPERTY, PLANT AND EQUIPMENT **

|   | b. | During                2005 the Company recorded a reversal of impairment provisions resulting                in                the net amount of NIS 0.1 million. This was the result of recording                an                impairment provision of NIS 15.5 million in respect of certain stores,                against which was offset the reversal in the impairment provision                in                respect of other stores that had been recorded in previous years                in the                amount of NIS 15.6 million. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | c. | Additional                details: |
|--|----|------------------------------------|

|  | 1) | Composition                    of net book value of land and buildings as of December 31,                    2007: |
|--|----|--------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                     |   | **NIS**               |      |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|-----------|
|                                                                                                                                                                                                                                     |   | **In thousands** |      |
| Ownership                                                                                                                                                                                                                                |   |                  | 564,496   |   |
| Capitalized                leaseholding for a period of 999 years                                                                                                                                                                        |   |                  | 35,654    |   |
| Capitalized                leaseholding from the Israel Land Administration                for periods ending 2010-2053  (including                the option period which is relevant for  some                of the lands). |   |                  | 642,832   |   |
|                                                                                                                                                                                                                                     |   |                  | 1,242,982 |   |

|  | 2) | Part                    of the ownership rights and leasehold rights have not been technically                    recorded in the name of the                    companies. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | d. | As                to liens placed on assets, see note                12. |
|--|----|--------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      5 - INVESTMENT PROPERTY: **

|                                                                                                                               |   | **NIS in thousands** |    |
|------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|---------|
| Balance                as of December 31, 2006 (1)                                                                                 |   |                           | 222,057 |   |
| Fair                value adjustment, resulting from first-time adoption of a new accounting                standard (see note 2i) |   |                           | 75,969  |   |
| Balance                of investment property as of January 1, 2007                                                                |   |                           | 298,026 |   |
| Acquisition                (2)                                                                                                     |   |                           | 21,339  |   |
| Disposals                                                                                                                          |   |                           | (14,978 | ) |
| Net                gain from adjustments of investment property to fair value                (3)                                   |   |                           | 11,391  |   |
| Balance                of investment property as of December 31, 2007                                                              |   |                           | 315,778 |   |

|  | (1) | Reclassified-see                note 2i. |
|--|-----|------------------------------------------|

|  | (2) | On                March 20, 2007, BSRE, Kibbutz Einat Agricultural Cooperative Society                Ltd.                (hereafter - "the Kibbutz"), Einat Bar Agricultural Cooperative Society                Ltd. (hereafter - "Einat Bar") and Einat Yielding Real Estate Agricultural                Cooperative Society Ltd. (hereafter - "the Society" or "Einat Real                Estate") signed an agreement (hereafter - "the Agreement") whereunder                BSRE                would be allocated 50% of the cooperative society Einat Real Estate,                the                purpose of which is to hold and develop real estate rights transferred                thereto by the Kibbutz. On August 26, 2007, BSRE's joining to Einat                Real                Estate was approved and according to the agreement BSRE has been                allocated                at this date 50% of the rights in Einat Real                Estate. |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Update                of land appraisals - |
|--------|-----|--------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      6 - INTANGIBLE ASSETS AND DEFERRED CHARGES: **

|   | a. | Composition                of intangible assets and the accumulated amortization thereon, grouped                by                major classifications, and changes therein in 2007, are as                follows: |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                          |   | **Goodwill** |    | **Deferred****charges** |   | **Software** |   | **Brand****name** |                      | **Customer****base** |   | **Total** |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------------|---------|-------------------------|--------|--------------|--------|-------------------|---------------------------|----------------------|--------|-----------|--------|
|                                                                                                          |   |         |    |                    |   |         |   |              |                      |                 |   |      |   |
| Cost:                                                                                                         |   |         |    |                    |   |         |   |              |                      |                 |   |      |   |
|                                                                                                          |   |         |    |                    |   |         |   |              |                      |                 |   |      |   |
| Balance                  at January 1, 2007                                                                   |   |         | 120,363 |                    |   | 1,230        |   |              | *                  60,375 |                 |   | 2,623     |   |   | 215 |   |   | 184,806 |   |
| Additions                                                                                                     |   |         | — |                    |   | 5,734        |   |              | 10,727                    |                 |   | —   |   |   | — |   |   | 16,461 |   |
| Changes                  due to acquisitions of subsidiaries consolidated for the first                  time |   |         | 106,241 |                    |   | 2,045        |   |              | —                   |                 |   | 10,983    |   |   | 25,869 |   |   | 145,138 |   |
|                                                                                                          |   |         |    |                    |   |         |   |              |                      |                 |   |      |   |   |   |   |   |   |   |
| Balance                  at December 31, 2007                                                            |   |         | 226,604 |                    |   | 9,009        |   |              | 71,102                    |                 |   | 13,606    |   |   | 26,084 |   |   | 346,405 |   |
|                                                                                                          |   |         |    |                    |   |         |   |              |                      |                 |   |      |   |   |   |   |   |   |   |
| Accumulated                  amortization:                                                                    |   |         |    |                    |   |         |   |              |                      |                 |   |      |   |   |   |   |   |   |   |
|                                                                                                          |   |         |    |                    |   |         |   |              |                      |                 |   |      |   |   |   |   |   |   |   |
| Balance                  at January 1, 2007                                                                   |   |         | 39,252  |                    |   | —      |   |              | *                  45,222 |                 |   | 954       |   |   | 20 |   |   | 85,448 |   |
| Additions                                                                                                     |   |         | — |                    |   | 1,224        |   |              | 6,742                     |                 |   | 612       |   |   | 385 |   |   | 8,963 |   |
|                                                                                                          |   |         |    |                    |   |         |   |              |                      |                 |   |      |   |   |   |   |   |   |   |
| Balance                  at December 31, 2007                                                            |   |         | 39,252  |                    |   | 1,224        |   |              | 51,964                    |                 |   | 1,566     |   |   | 405 |   |   | 94,411 |   |
|                                                                                                          |   |         |    |                    |   |         |   |              |                      |                 |   |      |   |   |   |   |   |   |   |
| Net                  book value at December 31, 2007                                                     |   |         | 187,352 |                    |   | 7,785        |   |              | 19,138                    |                 |   | 12,040    |   |   | 25,679 |   |   | 251,994 |   |
|                                                                                                          |   |         |    |                    |   |         |   |              |                      |                 |   |      |   |   |   |   |   |   |   |
| Net                  book value at December 31, 2006                                                     |   |         | 81,111  |                    |   | 1,230        |   |              | *                  15,153 |                 |   | 1,669     |   |   | 195 |   |   | 99,358 |   |

|  | * | Reclassified-                see note 2j. |
|--|---|-------------------------------------------|

|   | b. | The                amortization of intangible assets in 2007, in the amount of NIS 9                million                was carried to selling, general and administrative                expenses. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      7 - LONG -TERM LOANS FROM BANKS: **

|   | a. | Composition: |
|--------|----|--------------|

|                                             |   | **Weighted** |                      |                           |   |
|--------------------------------------------------|--------|--------------|---------------------------|--------------------------------|--------|
|                                             |   | **interest** |                      | **December 31,**          |   |
|                                             |   | **rate**     |                      | **2006**                       |   | **2007** |   |
|                                             |   | %            |                      | **NIS in thousands** |   |
|                                             |   |         |                      |                           |   |   |   |
| NIS                  - Linked to the Israeli CPI |   |         | (1)                  5.45 |                           |   | 169,407 |   |   | 190,683 |   |
| NIS                  - Unlinked (2)              |   |         |                      |                           |   | 115,252 |   |   | 175,321 |   |
|                                             |   |         |                      |                           |   | 284,659 |   |   | 366,004 |   |
|                                             |   |         |                      |                           |   |   |   |   |   |   |
| Less                  - current maturities       |   |         |                      |                           |   | (172,085 | ) |   | (84,371 | ) |
|                                             |   |         |                      |                           |   | 112,574 |   |   | 281,633 |   |

|  | (1) | Weighted                average interest rate as of December 31,                2007. |
|--|-----|---------------------------------------------------------------------------------------|

|  | (2) | As                of December 31, 2007 includes approximately NIS 66 million at variable                interest (average annual rate as of December 31, 2007 - 5.18%, for                the                major part of these loans, based on PRIME minus 0.32%). The balance                of                approximately NIS 109 million is at a fixed annual interest rate                of                6.92%. |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | The                long-term loans are repayable in the years subsequent to the balance                sheet                date as follows: |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------|

|                                                 |   | **December 31,**          |    |
|------------------------------------------------------|--------|--------------------------------|---------|
|                                                 |   | **2006**                       |    | **2007** |   |
|                                                 |   | **NIS in thousands** |    |
| First                year – current maturities |   |                           | 172,085 |   |   | 84,371 |   |
| Second                year                           |   |                           | 53,856  |   |   | 90,083 |   |
| Third                year                            |   |                           | 46,227  |   |   | 55,863 |   |
| Fourth                year                           |   |                           | 12,491  |   |   | 39,583 |   |
| Fifth                year and afterwards             |   |                           | — |   |   | 96,104 |   |
|                                                 |   |                           | 284,659 |   |   | 366,004 |   |

|  | c. | Other                terms: |
|--|----|-----------------------------|

|   |   | As                of December 31, 2007, Bee Group and its investee companies have loans                in a                total amount of approximately NIS 141 million, whereby the companies                have undertaken to meet certain financial                covenants. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   |   | As                of December 31, 2007, Bee Group did not comply with one of the financial                covenants regarding a loan of approximately NIS 36 million. On April                15, 2008 the lender has agreed on changing the unfulfilled covenant                (effective until January 5, 2009). As a result, Bee Group has complied                with the new financial covenants. As for the remaining loans, Bee                Group is                in compliance with the financial                covenants. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      8 - DEBENTURES AND CONVERTIBLE DEBENTURES:**

|  | a. | Composition |
|--|----|-------------|

|                                       |   | **December 31,**          |    |
|--------------------------------------------|--------|--------------------------------|---------|
|                                       |   | **2006**                       |    | **2007** |   |
|                                       |   | **NIS in thousands** |    |
| **Convertible                debentures:** |   |                           |    |   |   |
| Issued                by the Company       |   |                           | 160,544 |   |   | 34,984 |   |
| Issued                by BSRE (1)          |   |                           | 107,956 |   |   | 108,174 |   |
|                                       |   |                           | 268,500 |   |   | 143,158 |   |
|                                       |   |                           |    |   |   |   |   |
| Less                - current maturities   |   |                           | 53,706  |   |   | — |   |
|                                       |   |                           | 214,794 |   |   | 143,158 |   |
|                                       |   |                           |    |   |   |   |   |
| **Other                debentures:**       |   |                           |    |   |   |   |   |
| Issued                by the Company       |   |                           | 203,679 |   |   | 209,578 |   |
| Issued                by BSRE (1)          |   |                           | 623,879 |   |   | 633,108 |   |
|                                       |   |                           | 827,558 |   |   | 842,686 |   |
|                                       |   |                           |    |   |   |   |   |
| Less                - current maturities   |   |                           | — |   |   | 69,859 |   |
|                                       |   |                           | 827,558 |   |   | 772,827 |   |
| (1)                see note 3d.            |   |                           |    |   |   |   |   |

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

|  | (1) | 200                million registered debentures (Series A) of NIS 1 par value                each. |
|--|-----|-----------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      8 - DEBENTURES AND CONVERTIBLE DEBENTURES**

|  | (2) | 200                million registered convertible debentures (Series B) of NIS 1 par                value                each |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------|

|  | c. | Other                  terms: |
|--|----|-------------------------------|

|  | (1) | The                    terms of the debentures (Series A and Series B) provide that                    in the event                    that the shares of the Company are delisted from trading on the                    TASE,                    and/or in the event that the shares of the Company are no longer                    held by                    the public and/or in the event that Maalot The Israeli Securities                    Rating                    Company Ltd. ("Maalot") reduces the Company’s rating to BBB or lower, then                    within three months from one of the abovementioned events the                    Company,                    subject to the then prevailing law, will offer to acquire the                    debentures                    at a price equivalent to the price of debentures of the same                    type                    reflecting a return of 2.5% in excess of the return on Government                    debentures with an average life similar to the remaining average                    life of                    the debentures of that series as of the date of the offer, but                    in no event                    will the price exceed the carrying value of the debentures of                    that                    series. |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (2) | In                connection with the rating for the said debentures by Maalot, in                July 2003                the Board of Directors of the Company resolved that the Company will                not                distribute dividends in quarters in which the Company does not meet                the                following financial covenants: |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      8 - DEBENTURES AND CONVERTIBLE DEBENTURES **

|  | a) | For                the period from date of issuance of the debentures until June 30,                2006,                the ratio between the Company’s monetary liabilities (as defined by                Maalot) and the cumulative EBITDA in the preceding four quarters                was less                than 3.5, and for the period from the aforementioned date, the ratio                is                less than 3. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b) | The                ratio between the carrying amount of property, plant and equipment                on                which a lien is not recorded and the Company’s monetary liabilities (as                defined by Maalot) will exceed 1.2. |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | d. | As                to the changes in the presentation of debentures, commencing January                1,                2006 see also note 2l. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------|

**NOTE      9 - LIABILITY FOR EMPLOYEE RIGHTS NET OF AMOUNT FUNDED:**

|   | a. | Severance                pay |
|--------|----|------------------------------|

|   | b. | Compensation                for unutilized sick leave |
|--------|----|-------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      9 - LIABILITY FOR EMPLOYEE RIGHTS NET OF AMOUNT FUNDED**

|  | c. | The                balance sheet liability for employee rights upon retirement, and                the                amount funded with severance pay funds, are composed as                follows: |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                         |   | **December 31,**          |   |
|--------------------------------------------------------------|--------|--------------------------------|--------|
|                                                         |   | **2006**                       |   | **2007** |   |
|                                                         |   | **NIS in thousands** |   |
|                                                         |   |                           |   |   |   |
| Accrued                severance pay                         |   |                           | 33,385 |   |   | 40,506 |   |
| Less                - amounts funded                         |   |                           | 17,593 |   |   | 19,999 |   |
|                                                         |   |                           |   |   |   |   |   |
|                                                         |   |                           | 15,792 |   |   | 20,507 |   |
| Provision                in respect of unutilized sick leave |   |                           | 19,735 |   |   | 23,402 |   |
|                                                         |   |                           |   |   |   |   |   |
|                                                         |   |                           | 35,527 |   |   | 43,909 |   |

**NOTE      10 - CONTINGENT LIABILITES AND COMMITMENTS:**

|   | a) | Contingent                liabilities: |
|--------|----|----------------------------------------|

|  | 1. | 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 the Company's offices                and a                former CEO and other senior officers were                questioned. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      10 - CONTINGENT LIABILITES AND COMMITMENTS **

|  | 2. | In                2002, the Commissioner of the Antitrust Authority announced that                the                arrangements relating to the gift certificates issued by the Company                and                other supermarket chains apparently constitute a restrictive arrangement                pursuant to the Israeli antitrust law. At this stage, the Company                cannot                assess the impact of the aforementioned announcement on its business.                Following the announcement, the Company decided to cease issuing                the gift                certificates jointly with other supermarket chains and are presently                issuing its own gift certificates. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      10 - CONTINGENT LIABILITES AND COMMITMENTS **

|  | 3. | The                operation of the Company’s 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 are currently                in the                name of the Co-Op Blue Square Services Society, or the Co-Op, our                former                controlling shareholder, and entities other than the Company, and                have not                yet been transferred or re-issued to the Company. Furthermore, as                a result                of the hostilities between Israel and the Palestinians, the relevant                authorities, including the police, have required the Company to adopt                various security measures. These safety requirements prescribe extensive                investment in safety equipment, the retaining of security personnel                and                may lengthen the time dedicated for obtaining permits from the municipal                authorities. In the event that the Company is unable to obtain or                maintain                the required permits, it may be required to close the affected stores                or                take other action. However, the Company does not anticipate that                not                obtaining the necessary permits will have a material adverse effect                on its                business. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 4. | In                November 2001 a claim was filed against the Company, 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 to certify the claim                as a                class action in the amount of approximately NIS 250 million. In January,                2003, the Tel Aviv District Court dismissed the motion to certify                the said                claim as a class action. In November 2007, the Supreme Court dismissed                the                appeal filed by the plaintiffs. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 5. | In                February 2008, a claim was filed against the Company and other defendants,                including companies involved in the marketing of eggs and other food                marketing chains. The plaintiffs have requested to certify the claim                as a                class action. The claim alleges that the defendants market and/or                display                for purchase eggs that are classified as "Super Fresh Eggs"                which are not subject to Israeli regulatory price                controls, and are thus minimizing the shelf space and/or display                of eggs that are subject to regulatory price controls.                 According to the claim, the defendants allegedly derive a higher                profit                margin from the sale of such "Super Fresh Eggs" instead of the                regulated eggs.  The claim alleges that the defendants coordinated                their actions among each other, and that the defendants and the companies                involved in the marketing of eggs are misleading consumers in                violation of applicable consumer protection laws. The                plaintiff's personal claim is estimated at NIS 240 and if the claim                is                certified as a class action, the approximate claim against all the                defendants is estimated at NIS 1.1 billion.  The claim requests                relief in the form of monetary compensation and a                mandatory injunction to stop the current actions that are                allegedly misleading the consumers. At this preliminary stage of                the proceedings, the Company is unable to evaluate its likelihood of                success in the proceedings, including the likelihood that the claim                will                be certified as a class action. |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      10 - CONTINGENT LIABILITES AND COMMITMENTS **

|  | 6. | In                June 2008, a claim was filed against our subsidiary, Blue Square                Chain                (Hyper Hyper) Ltd. (hereafter - Hyper Hyper) and other defendants,                in                connection with the marketing of ink cartridges. The plaintiffs have                requested to certify the claim as a class action. The claim alleges                that                the defendants coordinated the prices of certain Hewlett-Packard                ("HP")                ink cartridges sold by them in a manner that allegedly constitutes                an                agreement in restraint of trade. According to the claim, the defendants                allegedly sell HP ink cartridges for a higher price than the price                charged                for such ink cartridges by smaller retailers. The plaintiff's personal                claim is estimated at NIS 496, and if the claim is certified as a                class                action, the approximate claim against all the defendants is estimated                by                the plaintiff at NIS 81 million. The claim requests a declaratory                relief                of an agreement in restraint of trade, monetary compensation and                an                injunction to stop the alleged price                coordination. |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 7. | The                Company is involved in various other legal or other proceedings incidental                to the ordinary course of its business. Management of the Company                believes, based upon the opinions of the legal advisers handling                the                claims, that the amounts provided in the financial statements are                sufficient under the circumstances, and that none of these proceedings,                individually or in the aggregate, will have a material adverse effect                on                its business, financial position or operating                results. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 8. | In                2005, the Income Tax Authority issued to the Company tax assessment                orders                for the years 1999-2001 alleging that certain finance expenses in                the                amount of approximately NIS 17 million are not to be recognized for                tax                purposes on the basis that such expenses were associated with loans                incurred for the purpose of distributing a dividend. In 2005, the                Company                filed an appeal with the District Court contesting these assessments.                In                the opinion of the Company and its advisors, the provisions included                in                the Company financial statements are sufficient to cover the potential                liabilities. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 9. | In                July 2005, the Income Tax Authority issued a notice of a deduction                assessment for the years 2001- 2004 to the Company. The amount claimed                under these assessments totaled NIS 34 million, and primarily relates                to certain benefits granted to employees in the Company’s branches. In                November 2005, several senior employees were questioned under warning,                with respect to these benefits. Following these assessments and after                the                rejection of the Company's position on the matter, Income Tax Authority                issued to the Company deduction assessment orders for the years 2001-                2004                in the amount of approximately NIS 44 million. The Company filed                appeals                with the District Court contesting these assessment orders which                as of the                filing of this Annual Report are still pending. In the opinion of                the                Company and its advisors, the provisions included in the Company                financial                statements are sufficient to cover the potential                liabilities. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE          10 -**
**CONTINGENT          LIABILITES AND COMMITMENTS **

|  | 10. | In                July 2007, the Israeli Tax Authority issued to the Company Value                Added Tax                assessment for the years 2001- 2006 in the amounts of approximately                NIS 22                million in connection with the subject matter of the foregoing deduction                assessments as specified in clause 9. The Israeli Tax Authority did                not                accept most of the Company's position, although it agreed to deduct                the                total amount to NIS 16.3 million. The Company has not yet decided                whether                to file an appeal with the District Court. In the opinion of the                Company                and its advisors, the provisions included in the Company financial                statements are sufficient to cover the potential                liabilities. |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | Commitments: |
|--------|----|--------------|

|  | 1. | On                    December 26, 2006, all conditions precedent for the completion                    of the                    agreement between the Company and Dor Alon Energy (1988) Ltd.,                    a related                    party, (hereafter - Dor Alon), the first party, and Cal - Israel                    Credit                    Cards Ltd. (hereafter - CAL) and Diners Club Israel Ltd (hereafter                    -                    Diners Israel), a subsidiary of CAL, the second party, were satisfied. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | According                to the said agreement, the Company and Dor Alon jointly purchased                from CAL                49% of the issued share capital of Diners in consideration for a                total                amount of approximately NIS 21.3 million (hereafter - the Consideration).                The holdings of the Company and Dor Alon in the issued share capital                of                Diners are as follows: The Company - 36.75% and Dor Alon - 12.25%.                The                consideration was financed through a non recourse loan provided by                CAL to                the Company and Dor Alon. The loan is for a period of 8 years, and                it is                linked to the CPI and bears interest in an annual rate of 6%. The                loan                will be repaid in a single payment at the end of the period. The                loan and                interest are secured only by the shares of Diners. Both parties can                cancel                the agreement if, at the end of a period of 4 years and/or 6 years,                the                number of credit cards will not exceed a pre-agreed quantity, as                set in                the agreement, or if the loyalty plan ceases to function or the customer                club agreement (referred to in a below) is                terminated. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      10 - CONTINGENT LIABILITES AND COMMITMENTS **

|  | a. | An                agreement between the Company and Dor Alon for the establishment                of a                joint loyalty club for the benefit of the customers of the Company                and Dor                Alon under the brand name “YOU” (hereafter - the Loyalty Program) that has                been incorporated as a partnership of the Company (75%) and Dor Alon                (25%)                (hereafter - the Customers’ Club). |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b. | The                agreement of the Company and Dor Alon with Diners Israel prescribes                that                the members of the Customers’ Club will receive a Diners credit card, and                defines the cooperation between the customers’ club and Diners, and                includes accompanying agreements to the said                agreement. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2. | Some                    of the stores that are operated by the Company are leased under                    non-cancelable long-term operating leases, mostly with renewal                    options.                    Future minimum payments under non-cancelable operating leases                    for the                    years subsequent to December 31, 2007, are as                    follows: |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                     |   | **NIS****in thousands** |    |
|------------------------------------------|--------|------------------------------|---------|
|                                     |   |                         |    |
| First                year                |   |                         | 148,637 |   |
| Second                year               |   |                         | 147,036 |   |
| Third                year                |   |                         | 160,988 |   |
| Fourth                year               |   |                         | 115,646 |   |
| Fifth                year                |   |                         | 106,962 |   |
| Sixth                year and thereafter |   |                         | 313,941 |   |
|                                     |   |                         | 993,210 |   |

|  | 3. | As                    of December 31, 2007, the Company has entered into agreements                    for the                    purchase of equipment and lease hold improvements, in the aggregate                    amount                    of approximately NIS 71                    million. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      10 - CONTINGENT LIABILITES AND COMMITMENTS **

|  | c) | Guarantees: |
|--|----|-------------|

|  | 1. | As                of balance sheet date, a subsidiary granted to an associated company                guarantees in respect of liabilities of the associated company to                a third                party in the amount of NIS 1.3-1.5 million, and to a third party                in the                amount of NIS 0.8 million. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2. | The                Company and BSIP has provided bank guarantees for a third party such                as                service suppliers and customers in an aggregate amount of approximately                NIS 2.1 million. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3. | A                subsidiary (Bee Group) and its investee companies granted guarantees                to                third parties in the amount of NIS 633                thousands. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**NOTE      11 - SHARE CAPITAL:**

|  | a. | In                July 1996, the Company completed a global offering of 6,900,000 American                Depositary Shares (“ADS”), each ADS representing one Ordinary share, at a                price per share of $11. In addition, in June 1999, 1,500,000 ADS                were                issued upon the exercise of stock                options. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b. | Dividends: |
|--|----|------------|

|  | c. | During                2007, Company debentures with a par value of approximately NIS 107,636                thousands were converted into 3,679,836 ordinary                shares. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

**NOTE      11 - SHARE CAPITAL **
**:**

|  | d. | In                2004, BSIP received court approval to reclassify to retained earnings                and                to distribute a dividend totaling NIS 80 million, from capital gains                that                were originally classified as a capital reserve, due to the accounting                principles related to transactions between BSIP and former controlling                shareholders. The dividend was distributed on April 11, 2005. Due                to this                transaction the Company reclassified its share in this capital gain                in the                amount of NIS 44.9 million from a capital reserve (within Additional                paid                in capital) to Retained earnings. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | e. | As                to a share option plan for the Company's managers and employees adopted                by                the Company's Board subsequent to December 31, 2007, see note                19b. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**NOTE      12 - LIENS:**

|  | a. | As                    collateral for liabilities to banks, a proportionately consolidated                    company has registered fixed charges on its land, goodwill, rights                    to                    insurance and share capital and floating charge on rent income.                    As of                    December 31, 2007, the proportionately consolidated company has                    no                    liabilities to banks. |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b. | The                    Bee Group and part of its investee companies (excluding N'aaman                    and                    Vardinon) placed unlimited, fixed and floating charges and a                    first ranking                    lien on the warehouse and                    all its assets, property, book debts, rent, goodwill, profits,                    revenues,                    rights of ownership and other benefits in favor of their liabilities                    to                    banks amounting as of December 31 2007, to NIS 211                    million. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | c. | Further                    to note 3d above, as of December 31, 2007 charges have been registered                    in                    favor of BSRE. on five of the transferred properties for the                    purpose of                    securing the liabilities of the vendors of the above properties                    acquired                    by the Company vis-à-vis third parties (mainly banks). In addition, such                    charges have been registered on twelve further properties from                    amongst the                    properties transferred. In the latter case, however, the Company                    has                    received ‘exclusion letters’ (hereinafter - the conditional ‘exclusion                    letters’) from the holders of the above charges. The Company has advised                    BSRE, that it has abided by, or will abide by, the terms of the                    conditional ‘exclusion letters,’ and that there is no significant                    impediment to the completion of their transfer to BSRE. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

**NOTE        13 -**
**TAXES        ON INCOME:**

|  | **a.** | **Corporate                taxation in Israel** |
|--|--------|-------------------------------------------------|

|  | 1. | Measurement                of results for tax purposes under the Income Tax (Inflationary                Adjustments)                Law, 1985 (hereafter - “the inflationary adjustments                law”) |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2. | Tax                rates |
|--|----|--------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      13 - TAXES ON INCOME **

|  | **b.** | **Deferred                taxes** |
|--|--------|-----------------------------------|

|  | 1) | The                composition of the deferred taxes at balance sheet dates and the                changes                therein during the years then ended, are as                follows: |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                              |   | **In respect of balance sheet items**                                       |    |                                         |   |                                                        |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|---------|----------------------------------------------|--------|-------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                              |   | **Depreciable****property, plantand equipmentand investment                property** |    | **Intangibleassets anddeferredcharges** |   | **Provisions for                employee rights** |   | **In respect of                carryforward tax losses** |   | **Total** |   |
|                                                                                                                                                                                                                                                              |   | **NIS                in thousands**                                                                  |    |
|                                                                                                                                                                                                                                                              |   |                                                                                                 |    |                                         |   |                                                        |   |   |   |   |   |
| Balance                at January 1, 2006                                                                                                                                                                                                                         |   |                                                                                                 | (12,451 | )                                            |   | 228                                                         |   |   | 21,646 |   |   | 1,819 |   |   | 11,242 |   |
|                                                                                                                                                                                                                                                              |   |                                                                                                 |    |                                         |   |                                                        |   |   |   |   |   |   |   |   |   |   |
| Changes                in 2006:                                                                                                                                                                                                                                   |   |                                                                                                 |    |                                         |   |                                                        |   |   |   |   |   |   |   |   |   |   |
| Amounts                carried to income                                                                                                                                                                                                                          |   |                                                                                                 | (12,931 | )                                            |   | 220                                                         |   |   | 2,053 |   |   | 1,942 |   |   | (8,716 | ) |
| Additions                of deferred taxes in respect of companies consolidated for the first                time                                                                                                                                                 |   |                                                                                                 | — |                                         |   | 203                                                         |   |   | 64 |   |   | 804 |   |   | 1,071 |   |
|                                                                                                                                                                                                                                                              |   |                                                                                                 |    |                                         |   |                                                        |   |   |   |   |   |   |   |   |   |   |
| Balance                at December 31, 2006                                                                                                                                                                                                                       |   |                                                                                                 | (25,382 | )                                            |   | 651                                                         |   |   | 23,763 |   |   | 4,565 |   |   | 3,597 |   |
| Adjustments                as of January 1, 2007 relating to first time adoption of a new accounting                standard- amount carried to retained earnings in respect of adjustment                of                investment property to its fair value |   |                                                                                                 | (9,975  | )                                            |   | —                                                     |   |   | — |   |   | — |   |   | (9,975 | ) |
| Changes                in 2007:                                                                                                                                                                                                                                   |   |                                                                                                 |    |                                         |   |                                                        |   |   |   |   |   |   |   |   |   |   |
| Amounts                carried to income                                                                                                                                                                                                                          |   |                                                                                                 | (543    | )                                            |   | 1,142                                                       |   |   | 1,342 |   |   | 124 |   |   | 2,065 |   |
| Additions                of deferred taxes in respect of companies consolidated for the first                time                                                                                                                                                 |   |                                                                                                 | (771    | )                                            |   | (7,970                                                      | )      |   | 638 |   |   | — |   |   | (8,103 | ) |
|                                                                                                                                                                                                                                                              |   |                                                                                                 |    |                                         |   |                                                        |   |   |   |   |   |   |   |   |   |   |
| Balance                at December 31, 2007                                                                                                                                                                                                                       |   |                                                                                                 | (36,671 | )                                            |   | (6,177                                                      | )      |   | 25,743 |   |   | 4,689 |   |   | (12,416 | ) |

|  | 2) | **Balance                of the depreciated cost of Property, Plant and Equipment and investment                property - the portion in respect of which deferred taxes have not                been                created** |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                        |   | **December 31,**          |   |
|---------------------------------------------|--------|--------------------------------|--------|
|                                        |   | **2006**                       |   | **2007** |   |
|                                        |   | **NIS in thousands** |   |
| Balance                as of January 1      |   |                           | 48,305 |   |   | 45,478 |   |
| Depreciation                during the year |   |                           | 2,827  |   |   | 2,790 |   |
| Balance                as of December 31    |   |                           | 45,478 |   |   | 42,688 |   |

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      13 - TAXES ON INCOME **

|                                         |   | **December 31,**          |    |
|----------------------------------------------|--------|--------------------------------|---------|
|                                         |   | **2006**                       |    | **2007** |   |
|                                         |   | **NIS in thousands** |    |
| Other accounts receivable          |   |                           | 17,006  |   |   | 16,921 |   |
| Long                term deferred tax assets |   |                           | 16,789  |   |   | 22,301 |   |
| Long-term                liabilities         |   |                           | (30,198 | ) |   | (51,638 | ) |
|                                         |   |                           | 3,597   |   |   | (12,416 | ) |

|  | **c.** | **Losses                for tax purposes, carried forward to future                years** |
|--|--------|--------------------------------------------------------------------------------------------|

|  | **d.** | **Taxes                on income included in the statements of                operations** |
|--|--------|--------------------------------------------------------------------------------------------|

|  | 1. | As                follows: |
|--|----|----------------------------|

|                                                                                     |   | **2005**                       |   | **2006** |   | **2007** |   |
|------------------------------------------------------------------------------------------|--------|--------------------------------|--------|----------|--------|----------|--------|
|                                                                                     |   | **NIS in thousands** |   |
| In respect of                the reported year:                                |   |                           |   |     |   |     |   |
| Current                                                                                  |   |                           | 40,291 |     |   | 77,741   |   |   | 76,064 |   |
| Deferred,                see b above:                                                    |   |                           |   |     |   |     |   |   |   |   |
| In                    respect of changes to tax rates, see a(2)                    above |   |                           | (409   | )        |   | —  |   |   | — |   |
| In                respect of the reporting period                                        |   |                           | 16,988 |     |   | 8,716    |   |   | (2,065 | ) |
| Tax                  expense (benefit) in respect of prior years:                        |   |                           |   |     |   |     |   |   |   |   |
| Current                                                                                  |   |                           | 120    |     |   | 10,203   |   |   | (5,504 | ) |
| Deferred                                                                                 |   |                           | 1,500  |     |   | —  |   |   | — |   |
|                                                                                     |   |                           | 58,490 |     |   | 96,660   |   |   | 68,495 |   |

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      13 - TAXES ON INCOME **

|  | 2. | Following                is a reconciliation of the theoretical tax expense, assuming all                income is                taxed at the regular tax rates applicable to companies in Israel                (see a(2)                above), and the actual tax expense: |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                          |   | **2005**                       |    | **2006** |   | **2007** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|---------|----------|--------|----------|--------|
|                                                                                                                                                                          |   |                           |    |     |   |     |   |
|                                                                                                                                                                          |   | **NIS in thousands** |    |
| Income before taxes on income, as                reported in the consolidated statements of operations                                               |   |                           | 163,700 |     |   | 340,860  |   |   | 249,288 |   |
|                                                                                                                                                                          |   |                           |    |     |   |     |   |   |   |   |
| Theoretical                tax expense                                                                                                                                        |   |                           | 55,658  |     |   | 105,667  |   |   | 72,293 |   |
| Decrease                in taxes resulting from:                                                                                                                              |   |                           |    |     |   |     |   |   |   |   |
| Nondeductible                amortization and impairment losses in respect of goodwill and property,                plant and equipment                                       |   |                           | (377    | )        |   | (2,846   | )      |   | — |   |
| Losses                for which no tax benefit has been recorded (utilization of tax benefits                not previously recorded), net                                    |   |                           | (1,025  | )        |   | (1,864   | )      |   | 436 |   |
| Tax                benefit recorded for the first time on carryforward capital                loss                                                                            |   |                           | — |     |   | (1,900   | )      |   | — |   |
| Increase                (decrease) in taxes resulting from computation of deferred taxes                at a rate                which is different from the theoretical rate |   |                           | — |     |   | (250     | )      |   | 591 |   |
| Tax                expense (benefit) in respect of prior years                                                                                                                |   |                           | 1,620   |     |   | 10,203   |   |   | (5,504 | ) |
| Decrease                in taxes resulting from adjustment to deferred tax balances due to                changes                in tax rates, see a(3) above.                |   |                           | (409    | )        |   | —  |   |   | — |   |
| Nondeductible                expenses and other, net*                                                                                                                         |   |                           | 3,023   |     |   | 2,870    |   |   | 679 |   |
| Capital                gain from the offering of BSRE which in respect, tax benefit has                not been                recorded                                       |   |                           | — |     |   | (15,220  | )      |   | — |   |
| Income                tax expense                                                                                                                                             |   |                           | 58,490  |     |   | 96,660   |   |   | 68,495 |   |

|   | * | Including                decrease in taxes in the amount of NIS 172 thousands, increase of                NIS 104                thousands and decrease of NIS 6.2 million in 2005, 2006 and 2007,                respectively, regarding difference between the measurement of income                reported for tax purposes (which is calculated in real terms on the                basis                of changes in the CPI) and the basis of measurement of income for                financial reporting purposes (in nominal values, commencing from                January                1, 2004). |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | **e.** | **Tax                assessments** |
|--|--------|------------------------------------|

|  | 1. | The                Company has received final tax assessments, or assessments deemed                to be                final, for tax years through 1998 and for 2002. Regarding tax assessments                for the years 1999 - 2001, see also note                10a(8). |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2. | As                to deduction assessment for the years 2001-2004, see note                10a(9). |
|--|----|----------------------------------------------------------------------------------------------------|

|  | **f.** | **The                effect of adopting IFRS on tax                liability** |
|--|--------|--------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      13 - TAXES ON INCOME **

**NOTE      14 - TERMS OF FINANCIAL INSTRUMENTS:**

|  | **a.** | **Currency                risks** |
|--|--------|-----------------------------------|

|   |   | The                group draws up and presents its financial statements in New Israel                shekel,                which is the currency of the primary economic environment in which                the                operations of the Company and its subsidiaries are conducted. . The                Company and its subsidiaries are parties to a number of rental contracts                linked to foreign currencies, the principle of which is the U.S.                dollar.                The Company does not undertake hedging operations involving derivative                instruments with respect to the exposure that may                arise. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **b.** | **Index                risks** |
|--------|--------|--------------------------------|

|   |   | The                Company and a subsidiary have issued debentures and have received                loans                linked to the Consumer Price Index. Each change in the index affects                the                level of the Company’s financing                expenses. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **c.** | **Credit                risks** |
|--------|--------|---------------------------------|

|   |   | The                Company’s sales are derived from a large number of customers in Israel and                the trade receivables consist mainly of receivables from credit card                companies. Accordingly, the Company’s trade balances do not represent a                substantial concentration of credit risks at December 31, 2007. Management                regularly monitors the balance of trade receivables, and the financial                statements include a specific allowance computed for accounts, the                collectibility of which, in the view of management, is doubtful. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | **d.** | **Interest                risks** |
|--|--------|-----------------------------------|

|   |   | The                interest rate risk of the Company and its subsidiaries stems from                long-term loans which bear fixed rates of interest and are exposed                to fair                value risk arising from interest rate changes, and from long-term                loans                that are unlinked and bear interest at variable rates and which are                exposed to cash flow risk arising from interest rate changes (see                note 7                above). The Company invests its surplus cash in unlinked shekel deposits,                and accordingly, any decrease in the interest rate has a corresponding                effect on the increase in the Company’s net financing                expenses. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      14 - TERMS OF FINANCIAL INSTRUMENTS **

|   | **e.** | **Price                risk** |
|--------|--------|-------------------------------|

|   |   | The                Company invests in marketable securities (government and corporate                debentures) and is accordingly exposed to risks arising from the                expected                market fluctuations (interest and index) associated with this type                of                investment. The investments in question are classified as current                investments and are presented at their market                value. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **f.** | **Fair                value of financial                instruments** |
|--------|--------|-----------------------------------------------------------------------|

|  | 1. | The                following table sets out the value of financial instruments in the                accounting records, and the fair value of groups of financial instruments                (these financial instruments are not reflected in the financial statements                at fair value): |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                             |   | **December 31, 2007** |   | **December 31, 2006** |   |
|------------------------------------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
|                                                             |   | **Value in**               |   |                            |   | **Value in** |   |   |   |
|                                                             |   | **accounting**                  |   |                            |   | **accounting** |   |   |   |
|                                                             |   | **records**                     |   | **Fair value**             |   | **records** |   | **Fair value** |   |
|                                                             |   | **NIS in millions**   |   |
| **Financial                liabilities:**                        |   |                            |   |                            |   |   |   |   |   |
| Long-term                loans, including current maturities (1) |   |                            | 366    |                            |   | 362 |   |   | 285 |   |   | 276 |   |
| Debentures                (2)                                    |   |                            | 986    |                            |   | 1,013 |   |   | 1,096 |   |   | 1,170 |   |

|  | (1) | The                fair value of the above loans is based on the calculation of the                present                value of the cash flows, as discounted at that market rate of interest                applicable to similar loans bearing similar characteristics (2007                -                4.15;7.65%, 2006 - 4.5%). |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (2) | The                fair value is based on quoted prices in an active market on the date                of                the balance sheet, for marketable debentures and on the calculation                of the                present value of the cash flows, as discounted at that market rate                of                interest applicable to similar debentures bearing similar characteristics                (2007 - 4.7%, 2006 - 4.5%), for non-marketable                debentures. |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2. | The                fair value of the financial instruments included in working capital                of the                Company is usually identical or close to their carrying value. As                to                long-term loan granted to investee company see note                3b. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      15 - LINKAGE OF MONETARY BALANCES:**

|  | a. | As                follows:  |
|--|----|----------------------------------|

|                                                                   |   | **December 31, 2007** |      |
|------------------------------------------------------------------------|--------|---------------------------------|-----------|
|                                                                   |   | **Linked to**              |      |   |   |
|                                                                   |   | **The CPI**                |      | **Unlinked** |   |
|                                                                   |   | **NIS in thousands**  |      |
| Current assets:                                                   |   |                            |      |   |   |
| Cash                  and cash equivalents                             |   |                            | —   |   |   | 56,410 |   |
| Marketable                  securities                                 |   |                            | 138,563   |   |   | 60,831 |   |
| Trade                  receivables                                     |   |                            | 940       |   |   | 775,311 |   |
| Short                  term deposit                                    |   |                            | —   |   |   | 103,498 |   |
| Other                  accounts receivable                             |   |                            | 23,128    |   |   | 97,062 |   |
| Investments                  and long-term receivables:                |   |                            |      |   |   |   |   |
| Investment                  in an associated company                   |   |                            | 2,094     |   |   | — |   |
| Other                  long term receivables                           |   |                            | 1,226     |   |   | 1,238 |   |
|                                                                   |   |                            | 165,951   |   |   | 1,094,350 |   |
|                                                                   |   |                            |      |   |   |   |   |
| Current                  liabilities:                                  |   |                            |      |   |   |   |   |
| Short-term                  credit from banks                          |   |                            | 6,712     |   |   | 46,781 |   |
| Trade                  payables (including long-term payables)         |   |                            | —   |   |   | 978,711 |   |
| Other                  accounts payable and accrued expenses           |   |                            | 12,851    |   |   | 285,525 |   |
| Long-term                  liabilities (including current maturities): |   |                            |      |   |   |   |   |
| Long-term                  loans from banks                            |   |                            | 190,683   |   |   | 175,321 |   |
| Debentures                                                             |   |                            | 842,686   |   |   | — |   |
| Convertible                  debentures                                |   |                            | 143,158   |   |   | — |   |
|                                                                   |   |                            | 1,196,090 |   |   | 1,486,338 |   |

|  | b. | Data                regarding the exchange rate and the                CPI: |
|--|----|-----------------------------------------------------------------------------|

|                                                  |   | **Exchangerate of one ****U.S. dollar** |                       |  **CPI*** |   |
|-------------------------------------------------------|--------|-------------------------------------------------------------|----------------------------|----------------|--------|
| At end of year:                        |   |                                                        |                       |           |   |
| 2007                                                  |   |                                                        | NIS                  3.846 |           |   | 113.6                  points |   |
| 2006                                                  |   |                                                        | NIS                  4.225 |           |   | 109.9                  points |   |
| Increase                  (decrease) during the year: |   |                                                        |                       |           |   |   |   |
| 2007                                                  |   |                                                        | (9.0                       | )%             |   | 3.4 | % |
| 2006                                                  |   |                                                        | (8.2                       | )%             |   | (0.1 | )% |
| 2005                                                  |   |                                                        | 6.8                        | %              |   | 2.4 | % |

|  | * | Based                on the index for the month ending on each balance sheet date, on                the                basis                of 2000 average = 100. |
|--|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      16 - SUPPLEMENTARY FINANCIAL STATEMENTS INFORMATION **

**Balance      sheets:**

|  | a. | Marketable                securities: |
|--|----|---------------------------------------|

|                                 |   | **December                31,**     |   |
|--------------------------------------|--------|-------------------------------------|--------|
|                                 |   | **2006**                            |   | **2007** |   |
|                                 |   | **NIS                in thousands** |   |
|                                 |   |                                |   |   |   |
| Government                debentures |   |                                | 26,111 |   |   | 87,447 |   |
| Corporate                bonds       |   |                                | 39,176 |   |   | 111,947 |   |
|                                 |   |                                |   |   |   |   |   |
|                                 |   |                                | 65,287 |   |   | 199,394 |   |

|  | b. | Short-term                bank deposit- |
|--|----|-----------------------------------------|

|                                     |   | **Weighted** |   |                                  |   |
|------------------------------------------|--------|--------------|--------|---------------------------------------|--------|
|                                     |   | **interest** |   | **December                  31,**     |   |
|                                     |   | **rate**     |   | **2006**                              |   | **2007** |   |
|                                     |   | **%**        |   | **NIS                  in thousands** |   |
|                                     |   |         |   |                                  |   |   |   |
| Short-term                  bank deposit |   |         | 4.41   |                                  |   | 526,459 |   |   | 103,498 |   |

|  | c. | Trade                receivables: |
|--|----|-----------------------------------|

|                                                      |   | **December 31,**          |    |
|-----------------------------------------------------------|--------|--------------------------------|---------|
|                                                      |   | **2006**                       |    | **2007** |   |
|                                                      |   | **NIS in thousands** |    |
|                                                      |   |                           |    |   |   |
| Credit                card receivables                    |   |                           | 504,827 |   |   | 548,385 |   |
| Open                accounts and checks receivables       |   |                           | 197,723 |   |   | 262,401 |   |
|                                                      |   |                           |    |   |   |   |   |
|                                                      |   |                           | 702,550 |   |   | 810,786 |   |
| Less                - allowance for doubtful accounts (1) |   |                           | 29,945  |   |   | 34,535 |   |
|                                                      |   |                           |    |   |   |   |   |
|                                                      |   |                           | 672,605 |   |   | 776,251 |   |

|  | (1) | The                changes in the allowance for doubtful accounts during the                year: |
|--|-----|---------------------------------------------------------------------------------------------------|

|                                                                             |   | **December 31,**          |    |
|----------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                             |   | **2006**                       |    | **2007** |   |
|                                                                             |   | **NIS in thousands** |    |
|                                                                             |   |                           |    |   |   |
| Balance                as of beginning of the year                               |   |                           | 26,273  |   |   | 29,945 |   |
| Changes                during the year:                                          |   |                           |    |   |   |   |   |
| Changes,                net                                                      |   |                           | 3,672   |   |   | 2,633 |   |
| Additions                in respect of companies consolidated for the first time |   |                           | — |   |   | 1,957 |   |
| Balance                as of end of the year                                     |   |                           | 29,945  |   |   | 34,535 |   |

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      16 - SUPPLEMENTARY FINANCIAL STATEMENTS INFORMATION**

|  | d. | Other                accounts receivable: |
|--|----|-------------------------------------------|

|                                                |   | **December 31,**          |    |
|-----------------------------------------------------|--------|--------------------------------|---------|
|                                                |   | **2006**                       |    | **2007** |   |
|                                                |   | **NIS in thousands** |    |
|                                                |   |                      |    |   |   |
| Deferred                income taxes (see note 13b) |   |                           | 17,006  |   |   | 16,921 |   |
| Prepaid                expenses                     |   |                           | 15,227  |   |   | 17,931 |   |
| Government                authorities               |   |                           | 27,102  |   |   | 22,490 |   |
| Related                parties                      |   |                           | 17,236  |   |   | 30,299 |   |
| Other                                               |   |                           | 42,457  |   |   | 52,009 |   |
|                                                |   |                           | 119,028 |   |   | 139,650 |   |

|  | e. | Other                long-term receivables: |
|--|----|---------------------------------------------|

|                                                    |   | **December                  31,**     |    |
|---------------------------------------------------------|--------|---------------------------------------|---------|
|                                                    |   | **2006**                              |    | **2007** |   |
|                                                    |   | **NIS                  in thousands** |    |
| Payments                  on account of real estate (1) |   |                                  | — |   |   | 45,825 |   |
| Others                                                  |   |                                  | 2,618   |   |   | 2,464 |   |
|                                                    |   |                                  | 2,618   |   |   | 48,289 |   |

|  | (a) | In                November 2007, BSRE's audit committee and Board of Directors approved                the                founders agreement (hereafter - "the founders agreement"), which                BSRE                signed with Bee Group. Under the said agreement, BSRE and Bee Group                would                establish a joint company (hereafter - "the joint company") in equal                parts                for the purpose of acquiring land in the Beer Tovia industrial zone;                this                land would be used for the erection of a logistic centre, of 20,000                square                meters, to be used mainly by Bee Group (hereafter - "the project").                On the                above date, the audit committee and the Board of Directors also approved                the agreement BSRE signed, in the name of the joint company, with                a third                party, for the acquisition of the land as above, at the area of 74                dunam                and in consideration for NIS 18 million. |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (b) | In                  November                  2007, BSRE has entered into agreements with third parties in connection                  with acquisition of an industrial asset in Kiriat Arieh in Petah                  Tikvah                  (hereafter - "the asset"), in consideration for NIS 31 million                  (hereafter                  - "the consideration"). |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              16 -** | **SUPPLEMENTARY                FINANCIAL STATEMENTS INFORMATION**                (continued): |
|----------------------------|-----------------------------------------------------------------------------------------------|

|  | (c) | On                December 31, 2007 BSRE entered into an agreement with a third party                for                the acquisition of land of 11 dunam, located in Weitzman St. in Raana'na                North industrial zone (hereafter - the land) in consideration for                NIS 33.5                million (hereafter - the consideration).BSRE                paid an advance of NIS 21.5 million at the date of the agreement.                On                January 14, 2008, BSRE paid the remaining consideration for the land                - NIS                12 million and was given possession in the land. |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | f. | Credit                and loans from banks: |
|--|----|---------------------------------------------|

|                                                              |   | **December                31,**     |    |
|-------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                              |   | **2006**                            |    | **2007** |   |
|                                                              |   | **NIS                in thousands** |    |
| Short-term                credit from banks                       |   |                                | 39,067  |   |   | 53,493 |   |
| Current                maturities of long-term Loans (see note 7) |   |                                | 172,085 |   |   | 84,371 |   |
|                                                              |   |                                | 211,152 |   |   | 137,864 |   |

|  | g. | Other                accounts payable and accrued                expenses: |
|--|----|----------------------------------------------------------------------------|

|                                                                    |   | **December                31,**     |    |
|-------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                    |   | **2006**                            |    | **2007** |   |
|                                                                    |   | **NIS                in thousands** |    |
|                                                                    |   |                                |    |   |   |
| Payroll                and related expenses and other employee benefits |   |                                | 132,056 |   |   | 148,764 |   |
| Government                authorities                                   |   |                                | 3,864   |   |   | 42,679 |   |
| Liability                in respect of gift certificates                |   |                                | 141,411 |   |   | 148,754 |   |
| Accrued                expenses and other                               |   |                                | 131,822 |   |   | 107,033 |   |
|                                                                    |   |                                | 409,153 |   |   | 447,230 |   |

|  | h. | Other                liabilities: |
|--|----|-----------------------------------|

|                                                         |   | **December                31,**     |    |
|--------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                         |   | **2006**                            |    | **2007** |   |
|                                                         |   | **NIS                in thousands** |    |
|                                                         |   |                                |    |   |   |
| Long-                term payable, net of current maturities |   |                                | 4,254   |   |   | 5,250 |   |
| Liability                to the Israel Land Administration   |   |                                | 2,746   |   |   | 4,785 |   |
| Other                                                        |   |                                | — |   |   | 1,612 |   |
|                                                         |   |                                | 7,000   |   |   | 11,647 |   |

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE                  16 -** | **SUPPLEMENTARY                    FINANCIAL STATEMENTS INFORMATION**                    (continued): |
|--------------------------------|-------------------------------------------------------------------------------------------------------|

|  | i. | Minority                interest: |
|--|----|-----------------------------------|

|                                                                                                                                                                                                                        |   | **December                31,**     |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                                                                                                                                                                        |   | **2006**                            |    | **2007** |   |
|                                                                                                                                                                                                                        |   | **NIS                in thousands** |    |
| Balance                at beginning of the year                                                                                                                                                                             |   |                                | 111,233 |   |   | 239,142 |   |
|                                                                                                                                                                                                                        |   |                                |    |   |   |   |   |
| Minority                interest in profits of subsidiaries, net                                                                                                                                                            |   |                                | 31,573  |   |   | 30,757 |   |
| Dividend                paid and to be paid to minority shareholders of                subsidiaries                                                                                                                         |   |                                | (5,500  | ) |   | (47,706 | ) |
| Additional                minority interest related to acquisition of subsidiaries consolidated                for                the first time                                                                            |   |                                | (1,539  | ) |   | 42,630 |   |
| Additional                minority interest related to realization and public offering of                subsidiaries                                                                                                       |   |                                | 103,375 |   |   | — |   |
| Acquisition                of minority interest                                                                                                                                                                             |   |                                | — |   |   | (3,062 | ) |
| Adjustments                as of January 1, 2007 relating to first time application of a new                accounting standard in respect of adjustment of investment property                to                fair value |   |                                | — |   |   | 12,650 |   |
| Balance                at end of the year                                                                                                                                                                                   |   |                                | 239,142 |   |   | 274,311 |   |

**Statements      of operations:**

|  | j. | Selling,                general and administrative                expenses: |
|--|----|-----------------------------------------------------------------------------|

|                                     |   | **2005**                            |   | **2006** |   | **2007** |   |
|------------------------------------------|--------|-------------------------------------|--------|----------|--------|----------|--------|
|                                     |   | **NIS                in thousands** |   |
|                                     |   |                                |   |     |   |     |   |
| Includes                advertising, net |   |                                | 39,421 |     |   | 43,146   |   |   | 65,939 |   |

|  | k. | Financial                expenses, net: |
|--|----|-----------------------------------------|

|                                                                                                |   | **2005**                            |    | **2006** |   | **2007** |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|----------|--------|----------|--------|
|                                                                                                |   | **NIS                in thousands** |    |
|                                                                                                |   |                                |    |     |   |     |   |
| In                respect of:                                                                       |   |                                |    |     |   |     |   |
| Long-term                loans and debentures                                                       |   |                                | (66,543 | )        |   | (75,626  | )      |   | (90,430 | ) |
| Increase                in value of marketable securities                                           |   |                                | — |     |   | 315      |   |   | 6,392 |   |
| Interest                income net of short-term credit, bank commissions and                others |   |                                | 7,014   |     |   | 32,943   |   |   | 29,242 |   |
|                                                                                                |   |                                |    |     |   |     |   |   |   |   |
|                                                                                                |   |                                | (59,529 | )        |   | (42,368  | )      |   | (54,798 | ) |

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              16 -** | **SUPPLEMENTARY                FINANCIAL STATEMENTS INFORMATION**                (continued): |
|----------------------------|-----------------------------------------------------------------------------------------------|

|  | l. | Other                    income, net: |
|--|----|---------------------------------------|

|                                                                                                                                           |   | **2005**                            |   | **2006** |   | **2007** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|----------|--------|----------|--------|
|                                                                                                                                           |   | **NIS                in thousands** |   |
|                                                                                                                                           |   |                                |   |     |   |     |   |
| Gain                (loss) from realization of investments in investee companies (see                note 3                (d)(e))             |   |                                | 2,345  |     |   | 54,745   |   |   | (1,520 | ) |
| Gain                (loss) from sale of property, plant and equipment, net                                                                     |   |                                | 736    |     |   | 1,305    |   |   | (8,591 | ) |
| Reversal                of impairment provision (impairment provision) in respect of property,                plant and equipment, see note 4b |   |                                | 71     |     |   | 22,761   |   |   | 13,518 |   |
| Costs                in respect of closure of stores (lease termination costs and                other)                                        |   |                                | (2,737 | )        |   | (288     | )      |   | — |   |
| Other,                net                                                                                                                      |   |                                | 275    |     |   | (501     | )      |   | (52 | ) |
|                                                                                                                                           |   |                                | 690    |     |   | 78,022   |   |   | 3,355 |   |

| **NOTE                  17 -** | **NET                    INCOME PER SHARE OR                    ADS:** |
|--------------------------------|------------------------------------------------------------------------|

|                                                                                                                                                                   |   | **Net                income****Year                ended December 31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|---------|
|                                                                                                                                                                   |   | **2005**                                                                |    | **2006** |   | **2007** |   |
|                                                                                                                                                                   |   | **NIS                in thousands**                                     |    |
| Net                income for the period, as reported in the statements of operations,                used                in computation of basic net income per share |   |                                                                    | 89,991  |   |   | 213,911 |   |   | 150,222 |   |
| Less                - the amount included in the said income, relating to Company's share                in                profits of an investee company              |   |                                                                    | — |   |   | (49,083 | ) |   | (44,379 | ) |
| Add                - Company's share in the diluted profit of this investee                company                                                                     |   |                                                                    | — |   |   | 48,905 |   |   | 44,379 |   |
| Adjustment                in respect of financial expenses relating to debentures convertible                into                shares (net of tax)                   |   |                                                                    | 10,333  |   |   | 7,260 |   |   | 3,966 |   |
| Total                net income for the purpose of computing diluted income per                share                                                                   |   |                                                                    | 100,324 |   |   | 220,993 |   |   | 154,188 |   |

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              17 -** | **NET                INCOME PER SHARE OR ADS**                (continued): |
|----------------------------|----------------------------------------------------------------------------|

|                                                                                                                                                               |   | **Number                of shares****Year                ended December 31,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|------------|
|                                                                                                                                                               |   | **2005**                                                                      |       | **2006** |   | **2007** |   |
|                                                                                                                                                               |   | **NIS                in thousands**                                           |       |
| Weighted                average number of shares used for computing the basic income per                share                                                      |   |                                                                          | 38,832,663 |   |   | 39,207,214 |   |   | 42,355,339 |   |
| Adjustment                in respect of incremental shares arising from the assumed conversion                of                debentures convertible into shares |   |                                                                          | 5,610,770  |   |   | 5,732,617 |   |   | 2,778,845 |   |
| Weighted                average number of shares used for computing the diluted income per                share                                                    |   |                                                                          | 44,443,433 |   |   | 44,939,831 |   |   | 45,134,184 |   |

| **NOTE              18 -** | **TRANSACTIONS                WITH RELATED PARTIES:** |
|----------------------------|-------------------------------------------------------|

|                            |   | **2005**                            |   | **2006** |   | **2007** |   |
|---------------------------------|--------|-------------------------------------|--------|----------|--------|----------|--------|
|                            |   | **NIS                in thousands** |   |
|                            |   |                                |   |     |   |     |   |
| Directors'                fees  |   |                                | 1,239  |     |   | 1,050    |   |   | 1,032 |   |
| Legal                consulting |   |                                | 514    |     |   | 1,473    |   |   | 1,282 |   |
| Consulting                (1)   |   |                                | 1,100  |     |   | —  |   |   | — |   |
| Commissions                (2)  |   |                                | (1,673 | )        |   | (2,013   | )      |   | (3,597 | ) |
| Discounts                (3)    |   |                                | 466    |     |   | 678      |   |   | 863 |   |

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              18 -** | **TRANSACTIONS                WITH RELATED PARTIES**(continued): |
|----------------------------|------------------------------------------------------------------|

|  | 1) | Represent                payments to S. Zohar in respect of consulting agreement signed on                June                2003 until November, 2005 when he ceased supplying consulting services.                In                March 2004, S. Zohar became a director of the Company and so the                amount                recorded above represents the fee payment as explained. On September                15,                2005, S. Zohar resigned from his position as a director in the                Company |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2) | In                January 2004 the shareholders of the Company approved an agreement                according to which the Company will provide to related parties purchasing                and supply services for stores operated by the related parties. In                consideration for these services, the Company is entitled to payment                equivalent to the cost of the services provided with the addition                of a                margin as stated in the agreement. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3) | On                September 13, 2005, the Company’s general shareholders meeting approved a                discount arrangement for some of the employees of the companies holding                directly or indirectly in the Company’s shares (some of the employees of                Alon Group, Palace Candles Group, Africa-Israel Group and Ikea Group)                (hereafter - “the entitled employees”).The                discounts to be given to the entitled employees will be identical                to those                given to the Company’s employees, which as of the date of approval of the                financial statements, are: 9% at the Mega In Town stores, 9% at the                Mega                stores and 4% at the Shefa Shuk stores.The                discounts are limited to purchases in a total amount of NIS 7,000                a                month. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **NOTE              19 -** | **SUBSEQUENT                EVENTS** |
|----------------------------|--------------------------------------|

|  | a. | On                January 21, 2008, the Board of Directors has appointed Mr. Zeev Vurembrand                as the Company's new Chief Executive Officer and President, effective                as                of March 2, 2008. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b. | On                January 21, 2008, the Company's Board of Directors had resolved to                adopt a                share option plan for managers and employees of the Company and/or                its                subsidiaries and/or affiliated companies. The total number of shares                reserved for issuance under the plan will be 5 million shares, (including                options issuable to the Company's newly appointed President and Chief                Executive Officer, Mr. Zeev Vurembrand). All exercises of options                under                the plan are to be on a cashless basis. Each option can be exercised                to                purchase one ordinary share of NIS 1 par value of the company. Immediately                upon allotment, the ordinary shares issued upon exercise of the options                will have the same rights as other ordinary shares of the company. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              19-** | **SUBSEQUENT                EVENTS**(continued): |
|---------------------------|--------------------------------------------------|

** **

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              19 -** | **SUBSEQUENT                EVENTS**(continued): |
|----------------------------|--------------------------------------------------|

|  | c. | On                    January 24, 2008, Na'aman filed to the Securities Authority a                    preliminary                    report regarding the commitments specified                    below: |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 1) | Agreement                for merger of Sheshet with Na'aman (hereafter - "the merger                agreement"). |
|--|----|------------------------------------------------------------------------------------------------------------------|

|  | 2) | Agreement                for Na'aman's acquisition of shares of Vardinon (hereafter - "the                acquisition agreement"). |
|--|----|------------------------------------------------------------------------------------------------------------------------------------|

|  | 3) | On                April 10, 2008, the General Assembly of Na'aman approved the merger                and                acquisition agreements. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              20 -** | **DISCLOSURE                REGARDING THE ADOPTION OF                IFRS** |
|----------------------------|-----------------------------------------------------------------------------|

|  | 1) | Recognize                all assets and liabilities whose recognition is required by                IFRSs; |
|--|----|------------------------------------------------------------------------------------------------------------|

|  | 2) | Not                recognizing items as assets or liabilities if IFRSs do not permit                such                recognition; |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------|

|  | 3) | Reclassify                items that were recognized under previous GAAP as one type of asset,                liability or component of equity, but are a different type of asset,                liability or component of equity under IFRSs;                and |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 4) | Apply                IFRSs in measuring all recognized assets and                liabilities. |
|--|----|-----------------------------------------------------------------------------------------------|

|  | 1) | Exemptions                from mandatory retrospective application with regard to certain topics,                while providing the option to utilize all or part of those                exemptions; |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2) | Prohibitions                concerning mandatory retrospective application with regard to defined                topics. |
|--|----|--------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              20 -** | **DISCLOSURE                REGARDING THE ADOPTION OF IFRS**(continued): |
|----------------------------|--------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              20 -** | **DISCLOSURE                REGARDING THE ADOPTION OF IFRS**(continued)**:** |
|----------------------------|------------------------------------------------------------------------------|

|                                                                                                          |   |     |                 | **January                1, 2007**        |   | **December                31, 2007**                                 |   |
|---------------------------------------------------------------------------------------------------------------|--------|----------|----------------------|-------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                                                                          |   |     |                 | **Reporting****under****Israeli****GAAP** |   | **Effect                of****transition****to                IFRS** |   | **Reporting****under****IFRS** |   | **Reporting****under****Israeli****GAAP** |   | **Effect                of****transition****to                IFRS** |   | **Reporting****under****IFRS** |   |
|                                                                                                          |   | **Note** |                 | **NIS                in thousands**       |   |
| ASSETS                                                                                                        |   |     |                 |                                      |   |                                                                 |   |    |   |   |   |   |   |   |   |
|                                                                                                          |   |     |                 |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| CURRENT                ASSETS:                                                                                |   |     |                 |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                and cash equivalents                                                                      |   |     |                 |                                      |   | 186,454                                                              |   |   | — |   |   | 186,454 |   |   | 56,410 |   |   | — |   |   | 56,410 |   |
| Marketable                securities                                                                          |   |     |                 |                                      |   | 65,287                                                               |   |   | — |   |   | 65,287 |   |   | 199,394 |   |   | — |   |   | 199,394 |   |
| Short-term                bank deposit                                                                        |   |     |                 |                                      |   | 526,459                                                              |   |   | — |   |   | 526,459 |   |   | 103,498 |   |   | — |   |   | 103,498 |   |
| Trade                receivables                                                                              |   |     |                 |                                      |   | 672,605                                                              |   |   | — |   |   | 672,605 |   |   | 776,251 |   |   | — |   |   | 776,251 |   |
| Other                accounts receivable                                                                      |   |     | 3,                12 |                                      |   | 119,028                                                              |   |   | (43,181 | ) |   | 75,847 |   |   | 139,650 |   |   | (39,809 | ) |   | 99,841 |   |
| Income                taxes receivable                                                                        |   |     | 12                   |                                      |   | —                                                              |   |   | 26,175 |   |   | 26,175 |   |   | — |   |   | 23,062 |   |   | 23,062 |   |
| Inventories                                                                                                   |   |     | 5                    |                                      |   | 377,561                                                              |   |   | — |   |   | 377,561 |   |   | 453,655 |   |   | 289 |   |   | 453,944 |   |
|                                                                                                          |   |     |                 |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |     |                 |                                      |   | 1,947,394                                                            |   |   | (17,006 | ) |   | 1,930,388 |   |   | 1,728,858 |   |   | (16,458 | ) |   | 1,712,400 |   |
|                                                                                                          |   |     |                 |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NON-CURRENT                ASSETS:                                                                            |   |     |                 |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Associated                companies                                                                           |   |     |                 |                                      |   | 4,762                                                                |   |   | — |   |   | 4,762 |   |   | 4,948 |   |   | — |   |   | 4,948 |   |
| Embedded                derivative                                                                            |   |     | 8                    |                                      |   | —                                                              |   |   | — |   |   | — |   |   | — |   |   | 10,500 |   |   | 10,500 |   |
| Prepaid                expenses for operating lease                                                           |   |     | 2                    |                                      |   | —                                                              |   |   | 205,670 |   |   | 205,670 |   |   | — |   |   | 199,679 |   |   | 199,679 |   |
| Other                long-term receivables                                                                    |   |     |                 |                                      |   | 2,618                                                                |   |   | — |   |   | 2,618 |   |   | 48,289 |   |   | — |   |   | 48,289 |   |
| Property,                plant and equipment, net of accumulated depreciation and                amortization |   |     | 2                    |                                      |   | 1,795,632                                                            |   |   | (246,688 | ) |   | 1,548,944 |   |   | 1,860,203 |   |   | (246,688 | ) |   | 1,613,515 |   |
| Investment                property                                                                            |   |     |                 |                                      |   | 281,149                                                              |   |   | — |   |   | 281,149 |   |   | 315,778 |   |   | — |   |   | 315,778 |   |
| Intangible                assets and deferred charges, net of accumulated                amortization         |   |     | 5,14                 |                                      |   | 99,358                                                               |   |   | — |   |   | 99,358 |   |   | 251,994 |   |   | 28,426 |   |   | 280,420 |   |
|   Deferred                taxes                                                                     |   |     | 2,3,5,6,9            |                                      |   | 16,789                                                               |   |   | 15,733 |   |   | 32,522 |   |   | 22,301 |   |   | 11,241 |   |   | 33,542 |   |
|                                                                                                          |   |     |                 |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |     |                 |                                      |   | 2,200,308                                                            |   |   | (25,285 | ) |   | 2,175,023 |   |   | 2,503,513 |   |   | 3,158 |   |   | 2,506,671 |   |
|                                                                                                          |   |     |                 |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                assets                                                                                   |   |     |                 |                                      |   | 4,147,702                                                            |   |   | (42,291 | ) |   | 4,105,411 |   |   | 4,232,371 |   |   | (13,300 | ) |   | 4,219,071 |   |

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              20 -** | **DISCLOSURE                REGARDING THE ADOPTION OF IFRS**(continued)**:** |
|----------------------------|------------------------------------------------------------------------------|

|                                                                       |   |     |   | **January                1, 2007**        |   | **December                31, 2007**                                 |   |
|----------------------------------------------------------------------------|--------|----------|--------|-------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                                       |   |     |   | **Reporting****under****Israeli****GAAP** |   | **Effect                of****transition****to                IFRS** |   | **Reporting****under****IFRS** |   | **Reporting****under****Israeli****GAAP** |   | **Effect                of****transition****to                IFRS** |   | **Reporting****under****IFRS** |   |
|                                                                       |   | **Note** |   | **NIS                in thousands**       |   |
| LIABILITIES                AND EQUITY                                      |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |
|                                                                       |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |
| CURRENT                LIABILITIES:                                        |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Credit                and loans from banks                                 |   |     | 13     |                                      |   | 211,152                                                              |   |   | — |   |   | 211,152 |   |   | 137,864 |   |   | 33,146 |   |   | 171,010 |   |
| Current                maturities of debentures and convertible debentures |   |     | 4      |                                      |   | 53,706                                                               |   |   | 55,307 |   |   | 109,013 |   |   | 69,859 |   |   | — |   |   | 69,859 |   |
| Trade                payables                                              |   |     |   |                                      |   | 938,007                                                              |   |   | — |   |   | 938,007 |   |   | 973,461 |   |   | — |   |   | 973,461 |   |
| Other                accounts payable and accrued expenses                 |   |     | 1,12   |                                      |   | 409,153                                                              |   |   | 2,549 |   |   | 411,702 |   |   | 447,230 |   |   | 499 |   |   | 447,729 |   |
| Income                taxes payable                                        |   |     | 12     |                                      |   | —                                                              |   |   | — |   |   | — |   |   | — |   |   | 2,905 |   |   | 2,905 |   |
|                                                                       |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |   |     |   |                                      |   | 1,612,018                                                            |   |   | 57,856 |   |   | 1,669,874 |   |   | 1,628,414 |   |   | 36,550 |   |   | 1,664,964 |   |
|                                                                       |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NON-CURRENT                LIABILITIES:                                    |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term                loans from banks, net of current maturity         |   |     | 13     |                                      |   | 112,574                                                              |   |   | — |   |   | 112,574 |   |   | 281,633 |   |   | (33,146 | ) |   | 248,487 |   |
| Convertible                debentures, net of current maturities           |   |     | 4      |                                      |   | 214,794                                                              |   |   | 95,908 |   |   | 310,702 |   |   | 143,158 |   |   | 26,739 |   |   | 169,897 |   |
| Debentures,                net of current maturities                       |   |     |   |                                      |   | 827,558                                                              |   |   | — |   |   | 827,558 |   |   | 772,827 |   |   | — |   |   | 772,827 |   |
| Other                liabilities                                           |   |     |   |                                      |   | 9,746                                                                |   |   | — |   |   | 9,746 |   |   | 11,647 |   |   | — |   |   | 11,647 |   |
| Derivative                instruments                                      |   |     | 9,14   |                                      |   | —                                                              |   |   | 9,558 |   |   | 9,558 |   |   | — |   |   | 9,968 |   |   | 9,968 |   |
| Liabilities                for employee rights, net of amount funded       |   |     | 6      |                                      |   | 35,527                                                               |   |   | (2,819 | ) |   | 32,708 |   |   | 43,909 |   |   | (7,923 | ) |   | 35,986 |   |
| Deferred                tax liability                                      |   |     | 2,3,6  |                                      |   | 40,173                                                               |   |   | 2,034 |   |   | 42,207 |   |   | 51,638 |   |   | 5,977 |   |   | 57,615 |   |
|                                                                       |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Total                long-term liabilities                     |   |     |   |                                      |   | 1,240,372                                                            |   |   | 104,681 |   |   | 1,345,053 |   |   | 1,304,812 |   |   | 1,615 |   |   | 1,306,427 |   |
|                                                                       |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Total                liabilities                               |   |     |   |                                      |   | 2,852,390                                                            |   |   | 162,537 |   |   | 3,014,927 |   |   | 2,933,226 |   |   | 38,165 |   |   | 2,971,391 |   |

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              20 -** | **DISCLOSURE                REGARDING THE ADOPTION OF IFRS**(continued)**:** |
|----------------------------|------------------------------------------------------------------------------|

|                                                                 |   |     |   | **January                1, 2007**        |   | **December                31, 2007**                                 |   |
|----------------------------------------------------------------------|--------|----------|--------|-------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                                 |   |     |   | **Reporting****under****Israeli****GAAP** |   | **Effect                of****transition****to                IFRS** |   | **Reporting****under****IFRS** |   | **Reporting****under****Israeli****GAAP** |   | **Effect                of****transition****to                IFRS** |   | **Reporting****under****IFRS** |   |
|                                                                 |   | **Note** |   | **NIS                in thousands**       |   |
|                                                                 |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |
| MINORITY                INTEREST                                     |   |     | 5      |                                      |   | 251,792                                                              |   |   | (251,792 | ) |   | — |   |   | 274,311 |   |   | (274,311 | ) |   | — |   |
|                                                                 |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| SHAREHOLDERS'                EQUITY:                                 |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity                attributable to equity holders of the Company: |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ordinary                shares                                       |   |     |   |                                      |   | 53,414                                                               |   |   | — |   |   | 53,414 |   |   | 57,094 |   |   | — |   |   | 57,094 |   |
| Additional                paid-in capital                            |   |     | 4      |                                      |   | 737,756                                                              |   |   | 28,653 |   |   | 766,409 |   |   | 845,168 |   |   | 173,237 |   |   | 1,018,405 |   |
| Other                reserve                                         |   |     | 6,8    |                                      |   | -                                                                    |   |   | — |   |   | — |   |   | — |   |   | 1,415 |   |   | 1,415 |   |
| Retained                earnings                                     |   |     |   |                                      |   | 192,350                                                              |   |   | (162,811 | ) |   | 29,539 |   |   | 122,572 |   |   | (229,834 | ) |   | (107,262 | ) |
| Dividend                declared subsequent to balance sheet date    |   |     | 10     |                                      |   | 60,000                                                               |   |   | (60,000 | ) |   | — |   |   | — |   |   | — |   |   | — |   |
|                                                                 |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                 |   |     |   |                                      |   | 1,043,520                                                            |   |   | (194,158 | ) |   | 849,362 |   |   | 1,024,834 |   |   | (55,182 | ) |   | 969,652 |   |
|                                                                 |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MINORITY                INTEREST IN EQUITY                           |   |     |   |                                      |   | —                                                              |   |   | 241,122 |   |   | 241,122 |   |   | — |   |   | 278,028 |   |   | 278,028 |   |
|                                                                 |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                equity                                          |   |     |   |                                      |   | 1,043,520                                                            |   |   | 46,964 |   |   | 1,090,484 |   |   | 1,024,834 |   |   | 222,846 |   |   | 1,247,680 |   |
|                                                                 |   |     |   |                                      |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                liabilities and shareholders' equity            |   |     |   |                                      |   | 4,147,702                                                            |   |   | (42,291 | ) |   | 4,105,411 |   |   | 4,232,371 |   |   | (13,300 | ) |   | 4,219,071 |   |

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      20**
**      - DISCLOSURE REGARDING THE ADOPTION OF IFRS **
**:**

|  | b. | Reconciliation                of statement of operations reported under Israeli GAAP to reporting                under                IFRS: |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                 |   |     |        | **Year                  ended December 31, 2007** |   |
|------------------------------------------------------------------------------------------------------|--------|----------|-------------|---------------------------------------------------|--------|
|                                                                                                 |   |     |        | **Reporting****under****Israeli****GAAP**         |   | **Effect                  of****transition****to                  IFRS** |   | **Reporting                  under****IFRS** |   |
|                                                                                                 |   | **Note** |        | **NIS                  in thousands**             |   |
| Sales                                                                                                |   |     | 9           |                                              |   | 6,982,350 |   |   | 122 |   |   | 6,982,472 |   |
| Cost                  of sales                                                                       |   |     | 6           |                                              |   | 5,129,520 |   |   | 58 |   |   | 5,129,578 |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
| Gross                  profit                                                                        |   |     |        |                                              |   | 1,852,830 |   |   | 64 |   |   | 1,852,894 |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
| Net                  gain from adjustment of investment property to fair value                       |   |     |        |                                              |   | 10,456 |   |   | — |   |   | 10,456 |   |
| Selling,                  general and administrative expenses                                        |   |     | 2,5,6,9,11  |                                              |   | 1,562,555 |   |   | (3,947 | ) |   | 1,558,608 |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
| Operating                  income                                                                    |   |     |        |                                              |   | 300,731 |   |   | 4,011 |   |   | 304,742 |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
| Other                  income (expenses)                                                             |   |     | 11          |                                              |   | 3,355 |   |   | (4,875 | ) |   | (1,520 | ) |
| Financial                  income                                                                    |   |     | 4,7,8,9     |                                              |   | — |   |   | 50,279 |   |   | 50,279 |   |
| Financial                  expenses                                                                  |   |     | 4,7,8,9     |                                              |   | (54,798 | ) |   | (53,288 | ) |   | (108,086 | ) |
| Share                  in profit of associated companies, net                                        |   |     |        |                                              |   | — |   |   | 186 |   |   | 186 |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
| Income                  before taxes on income                                                       |   |     |        |                                              |   | 249,288 |   |   | (3,687 | ) |   | 245,601 |   |
| Taxes                  on income                                                                     |   |     | 1-3,5,6,8,9 |                                              |   | 68,495 |   |   | 1,284 |   |   | 69,779 |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
| Income                  after taxes on income                                                        |   |     |        |                                              |   | 180,793 |   |   | (4,971 | ) |   | 175,822 |   |
| Share                  in profit of associated companies, net                                        |   |     |        |                                              |   | 186 |   |   | (186 | ) |   | — |   |
| Minority                  interest in profit of subsidiaries, net                                    |   |     |        |                                              |   | 30,757 |   |   | (30,757 | ) |   | — |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                          |   |     |        |                                              |   | 150,222 |   |   | (25,600 | ) |   | 175,822 |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
| **Attributable                  to:**                                                                |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
| Equity                  holders of the parent                                                        |   |     |        |                                              |   |   |   |   |   |   |   | 143,628 |   |
| Minority                  interest                                                                   |   |     | 5b          |                                              |   |   |   |   |   |   |   | 32,194 |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   | 175,822 |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
| **Net                  income per share attributed to Company shareholders                  (NIS):** |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
|                                                                                                 |   |     |        |                                              |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                |   |     |        |                                              |   |   |   |   |   |   |   | 3.39 |   |
| Fully                  diluted                                                                       |   |     |        |                                              |   |   |   |   |   |   |   | 3.39 |   |

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      20**
**      - DISCLOSURE REGARDING THE ADOPTION OF IFRS **
**:**

|  | c. | Notes                to the reconciliations of the balance sheets as of January 1, 2007                and December 31, 2007 and to the statement of operations for the                year                ended December 31, 2007 from Israeli GAAP to                IFRS: |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 1. | Provisions                for liabilities: |
|--|----|--------------------------------------------|

|  | 2. | Leasehold                rights mainly from the Israel Land Administration Authority                (ILAA): |
|--|----|-------------------------------------------------------------------------------------------------------------|

|  | 3. | Deferred                taxes: |
|--|----|--------------------------------|

|  | a) | According                to Israeli GAAP, there is no requirement to record deferred taxes                in                respect of temporary differences (as of January 1, 2007) in respect                of                land and buildings that are depreciated over a period in excess of                20                years. In addition, there is no requirement to create deferred taxes                in                respect of land and land originating in business combination transactions                accrued prior to January 1, 2005. Upon the transition to IFRS and                according to IAS 12, “Income Taxes”, the Company recorded deferred tax                liability in respect of these temporary                differences. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b) | According                to Israeli GAAP, deferred taxes were presented among current assets                under                other accounts receivable. Upon the transition to IFRS and according                to                IAS 12, “Income Taxes”, these deferred taxes are presented among                non-current assets. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      20**
**      - DISCLOSURE REGARDING THE ADOPTION OF IFRS **
**:**

|  | 4. | Convertible                debentures and attribution of proceeds from unit                issuance: |
|--|----|------------------------------------------------------------------------------------------------------|

|  | a) | Unit                issuance: |
|--|----|-------------------------------|

|  | b) | Convertible                debentures: |
|--|----|----------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      20**
**      - DISCLOSURE REGARDING THE ADOPTION OF IFRS **
**:**

|  | (1) | The                fair value of the conversion component as of January 1,                2007. |
|--|-----|-------------------------------------------------------------------------------------------------|

|  | (2) | The                balance of the liability component (the debt instrument) as it would                have                been presented on January 1, 2007, had the issuance proceeds in August                2006 been allocated first to the fair value of the conversion component,                and the residual amount had been allocated to the liability component,                and                subsequently, the liability component had been accounted for using                amortized cost (based on the recalculated effective interest rate). |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 5. | Business                combinations: |
|--|----|---------------------------------------|

|  | a) | According                to Israeli GAAP, minority interest arising in the acquisition of                a                subsidiary is calculated based on the carrying amount of the subsidiary's                assets and liabilities. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b) | According                to Israeli GAAP, minority interest is presented in the balance sheet                as a                line item between liabilities and shareholders' equity and in the                consolidated statement of operation as an expense in determining                the                Group's consolidated net income. Pursuant to IAS 1, “Presentation of                Financial Statements”, the Company presents minority interest in the                consolidated balance sheet within equity and minority interest is                not                deducted from the Group's net                income. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      20**
**      - DISCLOSURE REGARDING THE ADOPTION OF IFRS **
**:**

|  | 6. | Employee                  benefits: |
|--|----|-------------------------------------|

|  | 7. | Financial                  income and expenses: |
|--|----|-------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      20**
**      - DISCLOSURE REGARDING THE ADOPTION OF IFRS **
**:**

|  | 8. | Financial                instruments: |
|--|----|---------------------------------------|

|  | a) | Investments                in marketable securities: |
|--|----|------------------------------------------------------|

|  | b) | Acquisition                of Diners shares |
|--|----|---------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

|  | 9. | Embedded                derivatives: |
|--|----|--------------------------------------|

|  | 10. | Dividend                declared subsequent to balance sheet                date: |
|--|-----|-----------------------------------------------------------------------------------|

|  | 11. | Other                  expenses and income: |
|--|-----|---------------------------------------------|

|  | 12. | Classification                of income taxes receivables and income tax                payable: |
|--|-----|--------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

**NOTE      20**
**      - DISCLOSURE REGARDING THE ADOPTION OF IFRS **
**:**

|  | 13. | Classification                of loans in the balance sheet |
|--|-----|-------------------------------------------------------------|

|  | 14. | Warrants                issued to investors in subsidiary: |
|--|-----|------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A** |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | a. | The                consolidated financial statements of the Company are prepared in                accordance with accounting principles generally accepted in Israel                (Israel                GAAP), which vary in certain respects from accounting principles                generally                accepted in the United States of America (U.S. GAAP), and as allowed                by                item 17 to Form 20-F, as described in the paragraphs                hereafter: |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | Proportionate                consolidation |
|--------|----|--------------------------------------------|

|   | 2. | Deferred                income taxes |
|--------|----|--------------------------------------|

|  | a. | Under                Israeli GAAP, no deferred taxes have been provided, in respect of                certain                long-lived (more than 20 years) assets, such as buildings and land                purchased prior to 1982. Commencing January 1, 2005, under the new                Israeli                standard, deferred taxes are provided for land and land originating                in                newly combination transactions business. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Under                Israeli GAAP, the Company concluded as of December 31 ,2006, that                the                recognition of a deferred tax liability relating to a dilution gain                arising from the offering of shares of one of the Company’s subsidiaries                was not required because the Company does not intend to sell its                shares in                the subsidiary. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Liability                for employee rights, net of amount                funded |
|--------|----|-----------------------------------------------------------------------------------|

|  | 4. | Derivatives                  Instruments |
|--|----|------------------------------------------|

|  | a. | Under                    Israeli GAAP, as noted in note 2v, the Company accounts for its                    derivative                    instruments as hedging instruments. Under U.S. GAAP, in accordance                    with                    the provisions of FAS 133 (as amended by FAS 137, FAS 138 and                    FAS 149),                    the Company’s derivative instruments do not qualify for hedge accounting.                    Therefore under U.S GAAP the derivatives are stated at fair value,                    changes                    in the fair value of the derivative instruments are carried to“financial                    income or expenses as                    incurred”. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b. | Under                Israeli GAAP, gains and losses on derivatives that are hedging declared                dividend are deducted or added to the dividend amount whereas under                U.S.                GAAP changes in the fair value of those derivatives are carried to                the                statements of operations. |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | c. | Under                Israeli GAAP, lease agreements denominated in currencies other than                the                functional currency are not considered arrangements with embedded                derivatives. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | Goodwill |
|--------|----|----------|

|   | 6. | Impairment                of long-lived assets |
|--------|----|------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 7. | Share                based payments and warrants |
|--------|----|--------------------------------------------------|

|  | a) | Prior                to January 1, 2006, under Israeli GAAP, the 1996 Stock Option Plan                and                previous options plans (which do not exist any more) do not require                the                recognition of compensation                expense. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | Commencing                January 1, 2006, under the provisions of Israeli GAAP, warrants and                share                based payments, the exercise price of which is linked to the CPI,                are                being treated as equity instrument and are classified as part of                shareholder's euqity or a mezzanine line item depends to which it                relates                (the parent company or the subisidiary). |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 8. | Cash                flow classification |
|--------|----|-----------------------------------------|

|  | a. | According                to Israeli GAAP, proceeds from sale or purchase of marketable securities                are presented in cash flows from investing activities in the statement                of                cash flows. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b. | According                to Israeli GAAP, the change in accrued severance pay liability is                included                in cash flows from operating activities net of the change in related                funded amounts. |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 9. | Convertible                debentures |
|--------|----|---------------------------------------|

|  | a. | Under                U.S. GAAP, in accordance with EITF No. 98-5, “Accounting for Convertible                Securities with Beneficial Conversion Features or Contingently Adjustable                Conversion Ratios” and EITF No. 00-27, “Application of Issue No. 98-5 to                Certain Convertible Instruments”, embedded beneficial conversion features                included in convertible securities should be valued separately at                issuance. The embedded beneficial conversion feature should be recognized                and measured by allocating a portion of the proceeds equal to the                intrinsic value of that feature to additional paid-in capital. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Under                U.S. GAAP, the conversion feature embedded in the convertible debentures                of one of the Company's subsidiaries is accounted for in accordance                with                the provisions of Emerging Issues Task Force (“EITF”) Issue No. 00-19,                “Accounting for Derivative Financial Instruments Indexed to, and                Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). The Company                has also considered EITF No. 05-2, “The Meaning of Conventional                Convertible Debt Instrument” in the adoption of EITF 00-19. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | c. | Under                Israeli GAAP, the balance of the debt issuance costs are presented                as a                deduction from the liability (note2w(4)) and amortized as part of                the                financing expenses. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 10. | Reporting                comprehensive income |
|--|-----|-----------------------------------------------|

|  | 11. | Leasehold                rights from the Israel Land Administration Authority                (ILAA) |
|--|-----|-----------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 12. | Effect                of inflation |
|--------|-----|------------------------------------|

| 13.   | Classification                of certain expenses |
|-----------------|---------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 14. | Investment                property |
|--|-----|------------------------------------|

|  | 15. | Uncertainty                in income taxes |
|--|-----|--------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 16. | Marketable                securities |
|--|-----|--------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | The                effects on the financial statements of the abovementioned material                differences between Israeli GAAP and U.S. GAAP are as                follows: |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 1. | Consolidated                statements of operations: |
|--|----|-------------------------------------------------------|

|                                                                                                                                                            |   |   | **2005**                                                                                     |   |   | **2006**   |   |   | **2007**   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|------------|--------|
|                                                                                                                                                            |   |   | **NIS in thousands****(except share and per share data)** |   |
| Net                income as reported, according to Israeli GAAP                                                                                                |   |   | 89,991                                                                                       |   |   | 213,911    |   |   | 150,222    |   |
| Amortization                of goodwill ,see a(5)                                                                                                               |   |   | 6,508                                                                                        |   |   | —    |   |   | —    |   |
| Accretion                of discount resulting from beneficial conversion feature in respect                of                convertible debentures ,see a (9) |   |   | (11,690                                                                                      | )      |   | (23,216    | )      |   | (34,014    | )      |
| Gains                (loss) on derivatives ,see a (4)                                                                                                           |   |   | 882                                                                                          |   |   | 9,911      |   |   | (6,194     | )      |
| Impairment                of long-lived assets ,see a(6)*)                                                                                                      |   |   | (10,211                                                                                      | )      |   | (25,560    | )      |   | (26,563    | )      |
| Other                income see a (14)                                                                                                                          |   |   | —                                                                                      |   |   | —    |   |   | 2,333      |   |
| Amortization                of leasehold rights from the ILAA see a(11)                                                                                         |   |   | —                                                                                      |   |   | (3,752     | )      |   | (10,060    | )      |
| Depreciation                of property, plant and equipment, see a(14)                                                                                         |   |   | —                                                                                      |   |   | —    |   |   | (4,094     | )      |
| Reversal                of revaluation of investment property, see a(14)                                                                                        |   |   | —                                                                                      |   |   | —    |   |   | (10,456    | )      |
| Financial                income ( expenses), net, see a (9),a(16)                                                                                               |   |   | —                                                                                      |   |   | (986       | )      |   | 3,370      |   |
| Taxes                on income                                                                                                                                  |   |   | 10,191                                                                                       |   |   | 10,400     |   |   | 28,744     |   |
| Deferred                taxes on income ,see a(2)                                                                                                               |   |   | 4,160                                                                                        |   |   | (11,435    | )      |   | 706        |   |
| Minority                interest in respect of the above                                                                                                        |   |   | (1,491                                                                                       | )      |   | (2,549     | )      |   | 3,307      |   |
| Net                income according to U.S. GAAP                                                                                                                |   |   | 88,340                                                                                       |   |   | 166,724    |   |   | 97,301     |   |
|                                                                                                                                                            |   |   |                                                                                         |   |   |       |   |   |       |   |
| Net                income per share per Israeli GAAP:                                                                                                           |   |   |                                                                                         |   |   |       |   |   |       |   |
|                                                                                                                                                            |   |   |                                                                                         |   |   |       |   |   |       |   |
| Basic                                                                                                                                                           |   |   | 2.32                                                                                         |   |   | 5.46       |   |   | 3.55       |   |
| Diluted                                                                                                                                                         |   |   | 2.26                                                                                         |   |   | 4.92       |   |   | 3.42       |   |
|                                                                                                                                                            |   |   |                                                                                         |   |   |       |   |   |       |   |
| Net                income per share Per U.S. GAAP:                                                                                                              |   |   |                                                                                         |   |   |       |   |   |       |   |
| Basic                                                                                                                                                           |   |   | 2.27                                                                                         |   |   | 4.25       |   |   | 2.30       |   |
| Diluted                                                                                                                                                         |   |   | 2.27                                                                                         |   |   | 4.23       |   |   | 2.30       |   |
|                                                                                                                                                            |   |   |                                                                                         |   |   |       |   |   |       |   |
| Weighted                average number of shares used for computation of earning per share                                                                      |   |   |                                                                                         |   |   |       |   |   |       |   |
|                                                                                                                                                            |   |   |                                                                                         |   |   |       |   |   |       |   |
| Basic                                                                                                                                                           |   |   | 38,832,663                                                                                   |   |   | 39,207,214 |   |   | 42,355,339 |   |
| Diluted                                                                                                                                                         |   |   | 44,443,433                                                                                   |   |   | 44,939,831 |   |   | 45,134,184 |   |

|  | *) | Includes: |
|--|----|-----------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Consolidated                balance sheets: |
|--------|----|---------------------------------------------|

|                                                                                                                                                        |   | **December 31, 2006**      |         | **December 31, 2007** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------------|---------------------------------|--------|
|                                                                                                                                                        |   | **As per Israeli****GAAP** |         | **Adjustment**                  |   | **As per****U.S. GAAP** |   | **As per Israeli****GAAP** |   | **Adjustment** |   | **As per****U.S. GAAP** |   |
|                                                                                                                                                        |   | **NIS                in thousands**  |         |
|                                                                                                                                                        |   |                                 |         |                            |   |   |   |   |   |   |   |   |   |
| Other                accounts receivable                                                                                                                    |   |                                 | 102,022      |                            |   | — |   |   | 102,022 |   |   | 122,730 |   |   | — |   |   | 122,730 |   |
| Severance                pay fund (3)                                                                                                                       |   |                                 | —      |                            |   | **150,902 |   |   | 150,902 |   |   | — |   |   | 176,560 |   |   | 176,560 |   |
| Cost                of property, plant and equipment (14)                                                                                                   |   |                                 | **3,365,525  |                            |   | 314,078 |   |   | 3,679,603 |   |   | 3,573,155 |   |   | 318,801 |   |   | 3,891,956 |   |
| Accumulated                depreciation and amortization (including impairment of property,                plant and                equipment (6) (11) (14) |   |                                 | **(1,586,770 | )                               |   | (129,664 | ) |   | (1,716,434 | ) |   | (1,712,952 | ) |   | (166,207 | ) |   | (1,879,159 | ) |
| Investment                property(14)                                                                                                                      |   |                                 | **222,057    |                            |   | (222,057 | ) |   | — |   |   | 315,778 |   |   | (315,778 | ) |   | — |   |
| Intangible                assets and deferred                                                                                                               |   |                                 |         |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| charges                (5) (9)                                                                                                                              |   |                                 | **99,358     |                            |   | 50,623 |   |   | 149,981 |   |   | 251,994 |   |   | 52,559 |   |   | 304,553 |   |
| Deferred                income taxes, net (2) (4) (6) (9) (11) (14)                                                                                         |   |                                 | 3,597        |                            |   | (25,671 | ) |   | (22,074 | ) |   | (12,417 | ) |   | 6,540 |   |   | (5,877 | ) |
| Other                long-term receivables(4)                                                                                                               |   |                                 | 2,618        |                            |   | 11,779 |   |   | 14,397 |   |   | 48,289 |   |   | 11,867 |   |   | 60,156 |   |
| Other                accounts payable and accrued expenses (9) (14) (15)                                                                                    |   |                                 | (409,153     | )                               |   | (4,779 | ) |   | (413,932 | ) |   | (447,230 | ) |   | (17,264 | ) |   | (464,494 | ) |
| Other                long -term liabilities (4) (14)                                                                                                        |   |                                 | **(119,574   | )                               |   | (1,868 | ) |   | (121,442 | ) |   | (293,280 | ) |   | (5,348 | ) |   | (298,628 | ) |
| Accrued                severance pay (3)                                                                                                                    |   |                                 | (35,527      | )                               |   | **(150,902 | ) |   | (186,429 | ) |   | (43,909 | ) |   | (176,560 | ) |   | (220,469 | ) |
| Debentures                and convertible debentures (9)                                                                                                    |   |                                 | (1,096,058   | )                               |   | 9,528 |   |   | (1,086,530 | ) |   | (985,844 | ) |   | (3,079 | ) |   | (988,923 | ) |
| Minority                interest *                                                                                                                          |   |                                 | (239,142     | )                               |   | 8,493 |   |   | (230,649 | ) |   | (274,311 | ) |   | 26,060 |   |   | (248,251 | ) |
| Additional                paid-in capital (7)                                                                                                               |   |                                 | (737,756     | )                               |   | (72,006 | ) |   | (809,762 | ) |   | (845,168 | ) |   | (85,925 | ) |   | (931,093 | ) |
| Other                comprehensive income (16)                                                                                                              |   |                                 | —      |                            |   | — |   |   | — |   |   | — |   |   | (1,262 | ) |   | (1,262 | ) |
| Retained                earnings **                                                                                                                         |   |                                 | (201,752     | )                               |   | 61,544 |   |   | (140,208 | ) |   | (122,572 | ) |   | 179,036 |   |   | 56,464 |   |
| Total                shareholders' equity                                                                                                                   |   |                                 | (992,922     | )                               |   | (10,462 | ) |   | (1,003,384 | ) |   | (1,024,834 | ) |   | 91,849 |   |   | (932,985 | ) |

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | The                effect of the foregoing GAAP difference on comprehensive                income                on                reporting comprehensive income                is                as follows: |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                   |   | **Year ended December 31,**           |    |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|---------|
|                                                                                                                                   |   | **2005**                                             |    | **2006** |   | **2007** |   |
|                                                                                                                                   |   | S                **NIS                in thousands** |    |
| Net                income, as reconciled to U.S GAAP, see b. above                                                                     |   |                                                 | 88,340  |   |   | 166,724 |   |   | 97,301 |   |
| Other                comprehensive income- -                                                                                           |   |                                                 |    |   |   |   |   |   |   |   |
| Unrealized                gains on marketable securities (net of taxes and minority interest),                see                a(16) |   |                                                 | — |   |   | — |   |   | 1,262 |   |
| Comprehensive                income                                                                                                    |   |                                                 | 88,340  |   |   | 166,724 |   |   | 98,563 |   |

|  | 4. | Consolidated                statements of cash flows: |
|--|----|-------------------------------------------------------|

|                                                 |   | **Year                ended December 31,** |     |
|------------------------------------------------------|--------|--------------------------------------------|----------|
|                                                 |   | **2005**                                   |     | **2006** |   | **2007** |   |
|                                                 |   | **NIS                in thousands**        |     |
| Cash                flows from operating activities: |   |                                       |     |   |   |   |   |   |   |   |
|                                                 |   |                                       |     |   |   |   |   |   |   |   |
| As                per Israeli GAAP                   |   |                                       | 209,760  |   |   | 269,971 |   |   | 292,216 |   |
| Adjustment                see a 8(a)                 |   |                                       | —  |   |   | (64,972 | ) |   | 25,380 |   |
| Adjustment                see a 8(b)                 |   |                                       | 1,779    |   |   | 10,167 |   |   | 11,392 |   |
| As                per U.S. GAAP                      |   |                                       | 211,539  |   |   | 215,166 |   |   | 328,988 |   |
|                                                 |   |                                       |     |   |   |   |   |   |   |   |
| Cash                flows from investing activities: |   |                                       |     |   |   |   |   |   |   |   |
|                                                 |   |                                       |     |   |   |   |   |   |   |   |
| As                per Israeli GAAP                   |   |                                       | (569,452 | ) |   | (157,445 | ) |   | (130,577 | ) |
| Adjustment                see a 8(a)                 |   |                                       | —  |   |   | 64,972 |   |   | (25,380 | ) |
| Adjustment                see a 8(b)                 |   |                                       | (1,779   | ) |   | (10,167 | ) |   | (11,392 | ) |
| As                per U.S. GAAP                      |   |                                       | (571,231 | ) |   | (102,640 | ) |   | (167,349 | ) |

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | c. | Recently                issued accounting pronouncements in the United                States: |
|--|----|-----------------------------------------------------------------------------------------------|

|  | 1) | In                September 2006, the FASB issued Statement of Financial                Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”).                SFAS 157 defines fair value, establishes a framework and gives guidance                regarding the methods used for measuring fair value, and expands                disclosures about fair value measurements. SFAS 157 is effective for                financial statements issued for fiscal years beginning after                November 15, 2007, and interim periods within those fiscal years                (January 1, 2008, for the Company). Subsequent to the issuance of                SFAS 157, the FASB issued FASB Staff Positions (FSP) 157-1,                "Application of FASB Statement No. 157 to FASB Statement No. 13                and Other Accounting Pronouncements That Address Fair Value Measurements                for Purposes of Lease Classification or Measurement under Statement                13"                and FSP 157-2 "Effective Date of FASB Statement No. 157." FSP 157-1                excludes, in certain circumstances, SFAS 13 and other accounting                pronouncements that address fair value measurements for purposes                of lease                classification or measurement under Statement 13 from the provision                of                SFAS 157. FSP 157-2 delays the effective date of SFAS 157 for                nonfinancial assets and nonfinancial liabilities, except those that                are                recognized or disclosed at fair value in the financial statements                on a                recurring basis (at least annually). FSP 157-2 defers the effective                date                of SFAS 157 for such instruments to fiscal years beginning after                November                15, 2008, and interim periods within those fiscal (January 1, 2009,                for                the Company). The Company is currently assessing the impact that                SFAS 157                will have on its consolidated financial                statements. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2) | In                February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for                Financial Assets and Financial Liabilities, Including an Amendment                of FASB                Statement No. 115,” which will become effective in 2008. SFAS No. 159                permits entities to measure eligible financial assets, financial                liabilities and firm commitments at fair value, on an                instrument-by-instrument basis, that are otherwise not permitted                to be                accounted for at fair value under other generally accepted accounting                principles. The fair value measurement election is irrevocable and                subsequent changes in fair value must be recorded in earnings. The                Company                is currently evaluating the impact of the adoption of SFAS No.159                will                have on its consolidated financial                statements. |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3) | In                December 2007, the FASB issued SFAS No. 141(R), “Business                Combinations.” This standard improves reporting by creating greater                consistency in the accounting and financial reporting of business                combinations. Additionally, SFAS No. 141(R) requires the                acquiring entity in a business combination to recognize all (and                only) the                assets acquired and liabilities assumed in the transaction; establishes                the acquisition-date fair value as the measurement objective for                all                assets acquired and liabilities assumed; and requires the acquirer                to                disclose to investors and other users all of the information they                need to                evaluate and understand the nature and financial effect of the business                combination. SFAS No. 141(R) is effective for business                combinations for which the acquisition date is on or after the beginning                of the first annual reporting period years beginning after                December 15, 2008. Early adoption of this standard is prohibited. The                company is currently evaluating the impact, if any, of adopting this                standard on the Company's financial position, results of operations                and                liquidity. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 4) | In                December 2007, the FASB issued SFAS No. 160, “Noncontrolling                Interests in Consolidated Financial Statements.” This standard clarifies                that a noncontrolling or minority interest in a subsidiary is considered                an ownership interest and, accordingly, requires all entities to                report                such interests in subsidiaries as equity in the consolidated financial                statements. SFAS No. 160 is effective for fiscal years beginning                after                December 15, 2008. The Company is currently evaluating the impact,                if any,                of adopting this standard on the Company's financial position, results                of                operations and liquidity. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 5) | In                December 2007, the FASB ratified EITF Issue No. 07-01, "Accounting                for                Collaborative Arrangements" ("EITF 07-01"). EITF 07-01 defines                collaborative arrangements and establishes reporting requirements                for                transactions between participants in a collaborative arrangement                and                between participants in the arrangement and third parties. EITF 07-01                also                establishes the appropriate income statement presentation and                classification for joint operating activities and payments between                participants, as well as the sufficiency of the disclosures related                to                these arrangements. EITF 07-01 is effective for fiscal years beginning                after December 15, 2008 (January 1, 2009, for the Company). EITF                07-01                shall be applied using modified version of retrospective transition                for                those arrangements in place at the effective date. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 6) | In                March 2008, the Financial Accounting Standards Board (FASB) issued                Statement of Financial Accounting Standards (SFAS) No. 161,                “Disclosures about Derivative Instruments and Hedging Activities-an                amendment of FASB Statement No. 133.” SFAS No. 161 expands the                current disclosure requirements of SFAS No. 133, “Accounting for                Derivative Instruments and Hedging Activities,” such that entities must                now provide enhanced disclosures on a quarterly basis regarding how                and                why the entity uses derivatives; how derivatives and related hedged                items                are accounted for under SFAS No. 133 and how derivatives and related                hedged items affect the entity’s financial position, performance and cash                flow. Pursuant to the transition provisions of the Statement, the                company                will adopt SFAS No. 161 in fiscal year 2009 and will present the                required disclosures in the prescribed format on a prospective basis.                This                Statement will not impact the Consolidated Financial Statements as                it is                disclosure-only in nature. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 7) | In                April 2008, the FASB issued FASB Staff Positions (FSP No. FAS 142-3,                "Determination of the Useful Life of Intangible Assets"). FSP FAS                142-3                applies to recognized intangible assets that are accounted for pursuant                to                FASB Statement No. 142 "Goodwill and Other Intangible Assets". FSP                FAS                142-3 requires an entity to consider its own historical renewal or                extension experience in developing renewal or extension assumptions                used                in determining the useful life of a recognized intangible asset.                In the                absence of entity specific experience, FSP FAS 142-3 requires an                entity to                consider assumptions that a marketplace participant would use about                renewal or extension that are consistent with the highest and best                use of                the asset by a marketplace participant. FSP FAS 142-3 is effective                prospectively for all newly acquired intangible assets after the                effective                date. Additional disclosures are required for all capitalizable intangible                assets as of the effective date. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**BLUE      SQUARE – ISRAEL LTD.**

| **NOTE              21 -** | **EFFECT                OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                IN ISRAEL AND IN THE U.S.A**(continued): |
|----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 8) | In                December 2007 the Securities and Exchange Commission has issued a                final                rule allowing foreign private issuers ("FPI") to file financial statements                with the SEC in accordance with IFRS as issued by the International                Accounting Standards Board without reconciliation to US                GAAP. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**APPENDIX      **

**BLUE      SQUARE – ISRAEL LTD.**

| **Holding                Company**                                     |   | **Name of Company**                           |   | **Percentage of****ownership and****control by holding****company as of****December 31,****2007** |   |                              |
|------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
| Blue                Square-Israel Ltd.                                 |   | The                Blue Square Chain                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Investments                & Properties Ltd.        |   | 80%                                                                                                                                  |   | Subsidiary                        |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Blue                Square Real Estate Ltd.             |   | 80%                                                                                                                                  |   | Subsidiary                        |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Bee                Group Ltd.                           |   | 60%                                                                                                                                  |   | Subsidiary                        |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Eden                Briut Teva Market Ltd.              |   | 51%                                                                                                                                  |   | Subsidiary                        |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Diners                Club Israel Ltd.                  |   | 36.75%                                                                                                                               |   | see                note 9b(1)     |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Loyalty                plan-partership                  |   | 75%                                                                                                                                  |   | see                note 10b(1)    |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
| The                Blue Square Chain Investments & Properties Ltd. |   | The                Blue Square Chain (Hyper Hyper) Ltd. |   | 100%                                                                                                                                 |   | Subsidiary                        |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Center                Investments 1108 Ltd.             |   | 50%                                                                                                                                  |   | Proportionatelyconsolidated       |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Izdarehet                Investments Company Ltd.       |   | 50%                                                                                                                                  |   | Proportionatelyconsolidated       |
| The                Blue Square Chain (Hyper Hyper) Ltd.                |   | Hyper                Lod Center Ltd.                    |   | 100%                                                                                                                                 |   | Subsidiary                        |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Kenyon                Malha Jerusalem Partnership       |   | 100%                                                                                                                                 |   | Subsidiary                        |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Shefa                Mehadrin Ltd.                      |   | 100%                                                                                                                                 |   | Subsidiary                        |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Radio                Non-Stop Ltd.                      |   | 33%                                                                                                                                  |   | Associated                company |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
| Blue                Square Real Estate Ltd.                            |   | Kenyon                Hadar Management Company Ltd.     |   | 50%                                                                                                                                  |   | Proportionatelyconsolidated       |
|                                                                   |   | Joint                venture Blue Square - Hadar        |   | 50%                                                                                                                                  |   | Proportionatelyconsolidated       |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
| Bee                Group Ltd.                                          |   | Vardinon                Textile Ltd.                    |   | 85%                                                                                                                                  |   | Subsidiary                        |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Sheshet                                                 |   | 75%                                                                                                                                  |   | Subsidiary                        |
|                                                                   |   |                                                    |   |                                                                                                                                 |   |                              |
|                                                                   |   | Naaman                Porcelain Ltd                     |   | 56%                                                                                                                                  |   | Subsidiary                        |

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| Tel-Aviv,                    Israel |   | KOST,                    FORER GABBAY & KASIERER                       |
|-------------------------------------|--------|----------------------------------------------------------------------------|
| March                    22, 2007   |   | A                    Member of Ernst & Young                    Global |

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| Tel-Aviv,                    Israel |   | KOST,                    FORER GABBAY & KASIERER    |
|-------------------------------------|--------|---------------------------------------------------------|
| March                    20, 2007   |   | A                    Member of Ernst & Young Global |

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|         |                                                                 |                                    |
|--------------|----------------------------------------------------------------------|-----------------------------------------|
|         | BLUE              SQUARE-ISRAEL              LTD.                    |
|    |                                                            |                               |
|         | By:                                                        | /s/ Zeev                Vurembrand |
|         | Name: Zeev              Vurembrand                              |
|         | Title: President              and Chief Executive  Officer |
|   |                                                                             |                          |
|--------|----------------------------------------------------------------------------------|------------------------------------|
|   | By:                                                                    | /s/ Dror                Moran |
|   | Name: Dror              Moran                                               |
|   | Title: Vice              President and Chief Financial              Officer |

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