Alon Blue Square Israel 20F 2009 Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

¨	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

For the fiscal year ended December 31, 2009

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

For the transition period from __________ to __________

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report ________

Commission file number 1-14426

BLUE SQUARE-ISRAEL LTD.

(Exact name of Registrant as specified in its charter)

Israel

(Jurisdiction of incorporation or organization)

2 Amal Street, Rosh Ha’ayin 48092, Israel

(Address of principal executive offices)

Elli Levinson-Sela, General Counsel & Corporate Secretary;

Tel: (972)-3-9282670; Fax: (972)-3-9282498

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

Title of class		Name of each exchange on which registered
American Depositary Shares, each representing one Ordinary Share (1)		New York Stock Exchange, Inc.

Ordinary Shares, par value NIS 1.0 per share (2)		New York Stock Exchange, Inc.

(1)	Evidenced by American Depositary Receipts.

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

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

None

(Title of Class)

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

None

(Title of Class)

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

43,717,058 Ordinary Shares, par value NIS 1.0 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act 1934.

Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ¨

International Financing Reporting Standards as issued by the International Accounting Standards Board x

Other ¨

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ¨ Item 18 ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

INTRODUCTION

Unless otherwise indicated, as used in this Annual Report, (a) the term “Blue Square” or the “Company” means Blue Square-Israel Ltd., (b) the terms “we,” “us” and “our,” mean Blue Square and its consolidated subsidiaries, (c) “Mega Retail” means Mega Retail Ltd. (formerly known as Blue Square Chain Investments & Properties Ltd.), our wholly-owned subsidiary, (d) "BSRE" means Blue Square Real Estate Ltd., a corporation of which we held 78.35% of the outstanding shares as of May 31, 2010, and the balance of whose shares are publicly held and traded on the Tel Aviv Stock Exchange, and its subsidiaries and (e) "Bee Group" means Bee Group Retail Ltd. (formerly known as Hamachsan Hamerkazi Kfar Hasha’ashuim Ltd.), a corporation of which we held 85% of the outstanding ordinary shares as of May 31, 2010.

We operate in three reporting segments. In our Supermarkets segment, we are the second largest food retailer in the State of Israel. In our "Non-Food" segment, we sell “Non-Food” items both in our supermarkets and in stand alone retail outlets. In our Real Estate segment, we own, lease and develop yield-generating commercial properties.

Through our supermarkets, which are owned and operated through Mega Retail, we offer a wide range of food and beverages products and “Non-Food” items, such as houseware, toys, small electrical appliances, computers and computer accessories, entertainment and leisure products and textile products (called “Non-Food” in this Annual Report), and “Near-Food” products, such as health and beauty aids, baby and young children products, cosmetics and hygiene products (called “Near-Food” in this Annual Report). As of December 31, 2009, we owned and operated 203 supermarkets under the brand names Mega, Mega in Town, Shefa Shuk, Mega Bool and Eden Briut Teva Market Ltd. (“Eden Teva”).

In addition, as of December 31, 2009, the Bee Group consisted of 260 non-food retail outlets, mostly through franchisees, with activities in the houseware and home textile, toys, leisure, and baby and young children sectors. The Bee Group operates under the brand names Naaman, Vardinon, Sheshet, Kfar Hasha’ashuim, Rav-Kat, Dr. Baby and All for a Dollar.

As of December 31, 2009, we were the legal owner (including through long-term leases from the Israel Land Administration and the Municipality of Tel Aviv) of 101 properties owned in connection with our Supermarkets and "Non Food" segments (including warehouses and offices), totaling approximately 218,900 square meters, 39 yield generating real estate properties (including property leased to third parties), totaling approximately 60,800 square meters, and approximately 210,000 square meters of unutilized building rights. For further information regarding our real estate, see “Item 4. Information on the Company - B. Business Overview – Our Real Estate.”

Our revenues and profits during the years described in this Annual Report were principally derived from the operation of our supermarkets. In recent years, we have increased our activity in the "Non-Food" retail, mainly through acquisitions. We expect that the acquisitions we have made in the "Non-Food" retail area will have an increasing effect on our financial results in the coming years.

In May 2010, we signed a share purchase agreement with our controlling shareholder, Alon Israel Oil Company Ltd., or Alon, to acquire from Alon all of Alon's approximately 80% holdings in Dor-Alon Energy In Israel (1988) LTD., or Dor Alon. Dor Alon is one of the four largest fuel retail companies in Israel based on the number of gas stations and is a leader in the convenience stores sector. The closing of the transaction is subject to satisfaction of closing conditions, including shareholder approval. See “Item 7. Major Shareholders and Related Party Transactions – Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD."

Please note that unless otherwise indicated, as used in this Annual Report, the term “owned” or “ownership” with respect to our supermarkets means the ownership of the operations of our supermarkets, and not legal title to the real estate underlying our supermarkets.

We were incorporated in June 1988. In 1996, we completed our initial public offering and our American Depositary Shares, or ADSs, were listed for trading on the New York Stock Exchange. In November 2000, our ordinary shares were listed for trading on the Tel Aviv Stock Exchange.

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

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

All references in this Annual Report to dollars or $ are to U.S. dollars and all references in this Annual Report to NIS are to New Israeli Shekels. Unless mentioned otherwise, all figures in U.S. dollars are based on the representative exchange rate between the NIS and the dollar as published by the Bank of Israel for December 31, 2009, which was NIS 3.775 per $1.00, except figures for the first quarter of 2010, which are based on the representative exchange rate between the NIS and the dollar as published by the Bank of Israel for March 31, 2010, which was NIS 3.713 per $1.00.

Presentation of Financial and Share Information

We prepare our consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). Until and including our financial statements for the year ended December 31, 2007, we prepared our consolidated financial statements in accordance with Israeli GAAP. The influence of the transition to IFRS (from financial statements prepared in accordance with generally accepted accounting principles in Israel, referred to in this Annual Report as Israeli GAAP) on our financial statements for the year ended December 31, 2007 and our results of operations for that year, is detailed in note 36 to our consolidated annual financial statements for the year ended December 31, 2008. Following the Company's adoption of IFRS, as issued by the IASB, the Company is no longer required to reconcile its financial statements prepared in accordance with IFRS to U.S.GAAP.

TABLE OF CONTENTS

		Page
PART I		2
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	2
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	2
ITEM 3.	KEY INFORMATION	2
ITEM 4.	INFORMATION ON THE COMPANY	27
ITEM 4A.	UNRESOLVED STAFF COMMENTS	71
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	72
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	107
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	132
ITEM 8.	FINANCIAL INFORMATION	154
ITEM 9.	THE OFFER AND LISTING	160
ITEM 10.	ADDITIONAL INFORMATION	163
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	180
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	183
PART II		183
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	183
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	183
ITEM 15.	CONTROLS AND PROCEDURES	184
ITEM 16.	[RESERVED]	185
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	185
ITEM 16B.	CODE OF ETHICS	185
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	185
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.	186
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.	186
ITEM 16F.	CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT	187
ITEM 16G.	CORPORATE GOVERNANCE	187
Part III		189
ITEM 17.	FINANCIAL STATEMENTS	189
ITEM 18.	FINANCIAL STATEMENTS	189
ITEM 19.	EXHIBITS	189

PART I

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.

KEY INFORMATION

Selected Financial Data.

We have derived the following selected consolidated financial data as of December 31, 2007, 2008 and 2009 and for each of the years ended December 31, 2007, 2008 and 2009 from our consolidated financial statements and notes included elsewhere in this Annual Report. We have derived the selected consolidated financial data as of December 31, 2005 and 2006 and for each of the years ended December 31, 2005 and 2006 from our audited consolidated financial statements not included in this Annual Report. We prepare our consolidated financial statements in conformity with IFRS. Until and including our financial statements for the year ended December 31, 2007, we prepared our consolidated financial statements in accordance with Israeli GAAP. To facilitate comparison with the financial results of the years 2008 and 2009, results from the year ended December 31, 2007 have been adjusted in accordance with IFRS and differ from the results reported previously. You should read the selected consolidated financial data together with the section of this Annual Report titled “Item 5. Operating and Financial Review and Prospects”, our consolidated financial statements included elsewhere in this Annual Report, the related notes, and the independent registered public accounting firm's report.

The selected information also includes certain items for the years 2005 and 2006 in accordance with U.S. GAAP. Israeli GAAP differs in certain significant respects from U.S. GAAP. For a summary of certain significant differences, see note 21 to our consolidated financial statements for the year ended December 31, 2007.

	For the year ended December 31,
	2007			2008			2009			2009
	NIS (In thousands, except per ordinary share or ADS data)										$(1)
Statement of Income Data: In accordance with IFRS
Sales		6,981,984			7,429,121			7,349,076			1,946,775
Cost of sales		5,129,578			5,369,149			5,291,012			1,401,593
Gross profit		1,852,406			2,059,972			2,058,064			545,182

Selling, general and administrative expenses		1,563,208			1,794,720			1,817,099			481,351
Operating profit before other gain and losses and net gain from adjustment of investment property to fair value		289,198			265,252			240,965			63,831
Other gains		15,835			12,233			4,699			1,245
Other losses		(12,755	)		(14,716	)		(32,803	)		(8,690	)
Net gain from adjustment of investment property to fair value		10,456			19,067			20,775			5,503

Operating profit		302,734			281,836			233,636			61,889

Finance income		60,978			60,700			64,780			17,160
Finance expenses		(118,297	)		(166,295	)		(177,454	)		(47,006	)

Finance expenses, net		57,319			105,595			112,674			29,846

Share in profit (loss) of associates		186			(33	)		(37	)		(10	)

Income before taxes on income		245,601			176,208			120,925			32,033

Taxes on income		69,779			43,806			23,124			6,125

Profit for the year		175,822			132,402			97,801			25,908

Attributable to:

Equity holders of the company		143,628			104,586			77,163			20,441

Minority interests		32,194			27,816			20,638			5,467

Earnings per Ordinary share or ADS attributable to equity holders of the Company:
Basic		3.39			2.41			1.77			0.47
Diluted		3.39			1.62			1.77			0.47

Cash dividends declared per ordinary share or ADS		6.52			3.46			-			-
Number of Ordinary Shares Outstanding at the end of each year:		43,372,819			43,372,819			43,717,058			43,717,058

Selected Operating Data:
Number of supermarket stores (at year end)		185			194			203		N.A.
Increase (decrease) in same store sales(2)		1.20	%		1.10	%		(3.9	%)	N.A.
Total square meters (at year end)		342,705			354,531			365,000		N.A.
Supermarket sales per square meter (in NIS)(3)		19,905			19,898			19,023			5,039
Supermarket sales per employee (in thousands)		937			954			997			264

	For the year ended December 31,
	2005			2006
	NIS (In thousands, except per ordinary share or ADS data)
Statement of Income Data: In accordance with Israeli GAAP

Sales		5,797,018			6,515,035

Cost of sales		4,298,211			4,812,952

Gross profit		1,498,807			1,702,083
Selling, general and administrative expenses		1,269,760			1,396,877

Operating income		229,047			305,206

Financial expenses, net		(59,529	)		(42,368	)

Amortization of goodwill		(6,508	)		-

Other income, net		690			78,022

Income before taxes on income		163,700			340.860

Taxes on income		58,490			96,660

Share in profit of associate		498			1,284

Minority interest		15,717			31,573

Net income		89,991			213,911

Earnings per ordinary share or ADS (basic)		2.32			5.46
Earnings per ordinary share or ADS (fully diluted)		2.26			4.92
Cash dividends declared per ordinary share or ADS		2.35			2.81

In accordance with U.S. GAAP:

Net income		88,340			166,724

Earnings per ordinary share or ADS (basic)		2.27			4.25
Earnings per ordinary share or ADS (fully diluted)		2.27			4.23
Number of Ordinary Shares Outstanding:		38,950,091			39,692,983
Selected Operating Data:

Number of supermarket stores (at year end)		168			175

Increase in same store sales (2)		1.7	%		5.3	%

Total square meters (at year end)		312,000			323,304
Supermarket sales per square meter (in NIS)(3)		18,621			19,739
Supermarket sales per employee (in thousands)		899			938

(1)

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, 2009 (NIS 3.775 =$1.00), as published by the Bank of Israel. During 2009, the US dollar depreciated in value vis-à-vis the NIS by approximately (0.7)%.

(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, were resized significantly during the period or were significantly renovated or expended during the period. Store resizing is considered significant if it exceeds 5% or more of the store’s original size.

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

	At December 31,
	2007			2008			2009		2009
	NIS (in thousands)								$(1)
Balance Sheet Data:
In accordance with IFRS
Working capital (deficit)		62,436	*		(48,333	)*		492,156		130,372
Total assets		4,219,071			4,445,027			5,163,277		1,367,756
Short-term credit from banks and others and current maturities of debentures		240,869			236,900			351,296		93,059
Long-term debt, net of current maturities		1,202,858			1,497,880			2,009,243		532,250
Total equity		1,247,680			1,096,002			1,221,830		323,664

*Reclassified

	At December 31,
	2005			2006
	NIS (in thousands)
Balance Sheet Data:
In accordance with Israeli GAAP:
Working capital (deficit)		(450,044	)		335,376
Total assets		3,683,035			4,071,733
Short-term credit from banks and others and current maturities of debentures		359,316			264,858
Long-term debt, net of current maturities		1,102,810			1,161,926
Shareholders’ equity		865,308			992,922
In accordance with U.S. GAAP:
Total assets		3,757,640			4,247,394
Shareholders’ equity		928,504			1,003,384

(1)	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, 2009 (NIS 3.775= $1.00), as published by the Bank of Israel.

Capitalization and Indebtedness.

Not applicable.

Reasons for the Offer and Use of Proceeds.

Not applicable.

Risk Factors.

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

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

Supermarkets

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

We believe that an important factor in the purchase decisions of a large portion of the Israeli public is the price of the products it purchases. As a result, in recent years, we and our competitors have established or expanded low-price and hard discount store formats. In 2007, we launched our “Mega In Town” format designed to bring discount shopping to neighborhoods and city centers, and in 2008, we launched our new hard discount store format, "Mega Bool".

In addition, smaller supermarket chains during 2009 continued to aggressively increase their market share and expand their presence in selected areas in Israel, often geographically beyond their original locations, increasing competition in an already difficult market. Based on A.C. Nielsen, we estimate that the smaller supermarket chains' market share was approximately 27.7% of the bar-coded market in Israel during 2009. The low barriers of entry, including the relatively low cost of establishing a new smaller supermarket chain, have contributed to the increase in number and expansion of smaller supermarket chains in recent years. These smaller supermarket chains have been able to capture a significant part of the sales from the major chains in their areas by using lower cost non-unionized labor and having lower operating costs and, in some cases by operating on Saturdays and offering non-kosher food. Large supermarket chains in Israel, including us, are kosher and therefore do not offer non-kosher food or generally operate on Saturdays.

In 2005, a number of smaller supermarket chains which operate on local geographic level combined to form a separate entity, Fourth Chain Company Ltd., in order to develop a private label and to jointly negotiate with suppliers. In 2006, the Fourth Chain Company started to market a private label brand. This combination, and possible similar combinations of other smaller supermarket chains, may generate efficiencies of a major national-spread chain and enable them to compete more efficiently with us.

Since the merger of Shufersal with ClubMarket, another major chain, in 2005, we have faced a larger competitor, many of whose stores are characterized by the every day sale of products at low prices. Based on A.C. Nielsen, we estimate that Shufersal's market share was approximately 37.3% of the bar-coded market in Israel during 2009, as opposed to our own approximately 21.8% share of the bar-coded market during 2009. This difference in market share may give Shufersal a greater competitive advantage in its dealings with customers, suppliers and other third parties.

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

Non-Food Retail

The merchandise we sell in our non-food retail business through Bee Group is varied, and we therefore compete in several different markets. Accordingly, our "Naaman", "Sheshet" and "Vardinon" stores compete in the houseware, home textile and accompanying accessories markets. Our "Dr. Baby" stores compete in the baby and young children accessories market, and our "All for a Dollar" and "Kfar Hasha’ashuim" stores compete in the toys and leisure accessories market and the back-to-school products market.

In recent years competition in the non-food retail industry has increased, primarily due to the entry of retail chains and stores outside the food industry, such as Toys “R” Us, Office Depot, do-it-yourself chains such as Home Center and ACE (a franchisee of Ace Hardware), household stores, home textile stores, such as Golf & Co. Ltd. and Kitan Textile Industries Ltd., houseware stores, electricity appliances stores and also due to the expansion of the houseware and home textile departments in supermarkets. This competition affects the sales prices of our products and the scope of our sales. Nevertheless, our Sheshet chain is positioned as a chain that provides products at competitive prices. Increased competition may adversely affect our scope of sales and our profitability.

In addition, the barriers of entry are low in some of the markets in which the Bee Group competes due to the price and availability of products from overseas suppliers, although the establishment of a network of stores throughout the country together with the required import and marketing of products requires a high level of investment. The entrance of new competitors may reduce our market share and may reduce the sale prices of our products and lead to a reduction in our profitability.

Economic conditions in Israel affect our financial performance.

Supermarkets and Non-Food Retail

All of our supermarket sales are made in Israel, and we acquire a substantial majority of the goods that we sell from Israeli suppliers. Consequently, our financial performance is dependent to a significant extent on the economy of Israel. During 2007 and 2008, Israel's Gross Domestic Product rose by 5.3% and 4.1%, respectively. However, in 2009 the global economic crisis, instability and uncertainty affected the economic conditions in Israel, and initial reports of the Israeli Central Bureau of Statistics indicate that during 2009 Israel's Gross Domestic Product rose by only 0.7%. Initial reports indicate that the Israeli economy increased by 3.3% (annualized) at the first quarter of 2010. We believe that the economic slowdown has affected the buying patterns of our customers, as more customers shift their purchases to low-price and hard discount stores, which have a lower profit margin. As a result, we have expanded our low-price and hard discount store formats. The economic slowdown in Israel may have an adverse effect on our financial performance, among other things, by reducing our sales and our profitability.

The global economic crisis, instability and uncertainty have also affected our non-food retail business by causing a slowdown in the growth of private consumption, which could affect the growth of our houseware, home textile, toys, leisure, and baby and young children accessories businesses. Beginning in the second quarter of 2009, the Israeli economy began to recover and there has been an improvement in the growth of private consumption.

In addition, the global economic crisis has also reduced the availability of credit, increased the costs of financing and the terms under which banks agree to provide financing. These developments may reduce our sales, increase our costs of borrowing and reduce our profitability.

Real Estate

We value our yield-generating real estate property according to IAS 40R and changes to the fair value of our real estate are reflected in our financial statements. The fair value of our properties could be impacted by a number of factors, including the global economic and financial market crisis, as well as the retail sector in Israel because most of our assets are intended for retail businesses. Reductions in the fair value of our real estate may materially adversely affect our financial results.

During 2010, we entered into the residential building sector in Israel. A recession may cause a decrease in the scope of marketing and sales and a decrease in the price of apartments. In addition, government policies may affect the availability and value of real estate designated for building and may also affect the prices of the apartments.

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

Our business is subject to fluctuations in quarterly sales and profits. These fluctuations are primarily attributable to increased sales and higher operating income in the holiday seasons occurring in different quarters from year to year. Thus, for example, in our supermarkets, and in our "Naaman", "Vardinon" and "Sheshet" chains, increased sales attributable to Passover, which occurs in either March or April, may be realized in either the first or the second quarter, and sales attributable to the Jewish New Year, which occurs in either September or October, may be realized in either the third or the fourth quarter. In our "Kfar Hasha'ashuim" chain, increased sales are generally attributable to Purim, which occurs in March, and to the "Back-to-School" season in August. However, the timing of the holidays does not affect our semiannual results.

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

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

Since the issuance of our 5.9% unsecured debentures issued in August 2003, we have limited the cash dividends that we pay on our ordinary shares.

In connection with our issuance of NIS 400 million in aggregate principal amount of unsecured 5.9% convertible and nonconvertible debentures in August 2003, Blue Square’s board of directors resolved that Blue Square would not distribute dividends in any quarter if the ratio of our net financial obligations (as defined by S&P-Maalot, an Israeli rating agency owned by S&P) to EBITDA for any quarter exceeds 3.5 until June 30, 2006 or exceeds 3.0 thereafter. Blue Square’s board of directors also resolved that Blue Square would not distribute dividends in any quarter if the ratio of the unencumbered fixed assets (following depreciation) and investment property as set forth on our financial statements to financial obligations (as defined by S&P-Maalot) for any quarter is below 120%. At the time of the issuance of our debentures, S&P-Maalot informed us that the rating was based among other things upon the Board of Directors resolution and a change in this resolution may lead to a change of the rating on our 5.9% unsecured debentures.

On January 14, 2010, Blue Square's board of directors decided that in view of the changes and development of Blue Square since 2003, including the transfer of Blue Square's and Mega Retail's real estate properties to BSRE (which operates under financial obligations to EBITDA ratios appropriate for real estate companies and currently holds a major part of the consolidated debt), the purchase of Bee Group (a Non Food retailer), and the reorganization of Blue Square's food retail activities in its subsidiary, Mega Retail Ltd., that the ratio of net financial obligations to EBITDA is to be calculated by deducting from the net financial obligations Blue Square's debt which is related by the company to real estate that is not in use by Blue Square (which is equal to 75% of the investment property as recorded on the balance sheet). On December 31, 2009, the net financial obligations to EBITDA (calculated in accordance with the deduction described above) was less than 2. Our board of directors further resolved that Blue Square would not distribute dividends in any quarter if the ratio of our net financial obligations (calculated in accordance with the deduction described above) to EBITDA for any quarter exceeds 4.5.

The 5.9% unsecured debentures that we issued in August 2003 are subject to downgrading upon the occurrence of certain events. A downgrading of the rating on these debentures to "ilBBB" or lower may require us to repurchase our 5.9% unsecured debentures issued in August 2003.

The 5.9% unsecured debentures that we issued in August 2003 are subject to downgrading upon the occurrence of certain events, including as described above. A downgrading of the rating on these debentures to "ilBBB" or lower may require us to repurchase our 5.9% unsecured debentures issued in August 2003.

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

We purchase most of our dairy, fresh produce and poultry products from the Tnuva corporation, which holds a leading position in the domestic dairy and poultry markets. In 2009, Tnuva’s products accounted for approximately 14.4% (which percentage includes for the first time, data for Tnuva's subsidiary, Tirat Zvi) of all the products sold at our supermarkets. For more information on our arrangements with Tnuva, see "Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transaction – Arrangements with Tnuva." In addition, the Strauss group, an Israeli food manufacturer, accounted in 2009 for approximately 9.2% of all products sold at our supermarkets, and the Osem group accounted for approximately 7.5% of all products sold at our supermarkets in 2009. Because of our status as a leading food retailer in Israel as a result of which we are able to offer a wide exposure and promotion, on a national level, to these suppliers’ products, and the fact that we maintain an excellent and long-standing relationship with Tnuva, Strauss group and Osem, we do not believe that there is a material risk of future stoppage of supply of products of these key suppliers. However, we do not have a written contract with Tnuva, Strauss group or Osem obligating them to supply products to us. The ten largest suppliers accounted for approximately 55.7% of our product purchases in 2009. Due to the relatively large market share of these suppliers, we depend on them and on a number of other suppliers that supply brands characterized by high customer loyalty, such as the Central Company for the Manufacture of Soft Drinks Ltd., which is the exclusive franchisee of Coca Cola and also distributes other popular soft drinks. For example, during the third and fourth quarters of 2007 and during 2008, some of our suppliers raised the prices of various products that they supply us, principally due to an increase in raw materials prices, which caused an increase in our costs. Increases in prices by our suppliers are generally not offset, fully or as quickly, by increases in our selling prices and revenues because of competitive pressures. We cannot assure that, in the future, Tnuva, Strauss group, Osem or any of these other suppliers will not significantly raise the prices of the products they supply us in the future, or encounter difficulties in providing these products to us, in either of which cases our operating results might be adversely affected.

Alon Retail Ltd. is able to control the outcome of matters requiring shareholder approval.

As of May 31, 2010, Alon Retail Ltd., ("Alon Retail"), owned approximately 68.62% of Blue Square’s outstanding ordinary shares. So long as Alon Retail, or any successor to its shareholdings in Blue Square, continues to own beneficially more than 50% of our outstanding ordinary shares and voting power, it will be able to control the outcome of matters requiring shareholder approval that do not require a special majority, including the election of all Blue Square directors, other than Blue Square two external directors whose election, under the Israeli Companies Law, requires that at least one-third of the non-controlling shareholders who participate in the vote, vote for their nomination, or that the total number of shares of non-controlling shareholders voted against their nomination does not exceed one percent of the aggregate voting rights in the company.

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.

In addition to our wholly owned subsidiary, Mega Retail, our two main subsidiaries are Bee Group, in which we owned an 85% interest (with an option to further increase our holdings to 100%) as of May 31, 2010, and BSRE, in which we owned a 78.35% interest as of May 31, 2010.

Through our subsidiary, Bee Group, as of May 31, 2010, we held approximately 66.85% of the outstanding shares of Naaman Porcelain Ltd., which held approximately 88.74% of the share capital interest in Vardinon Textile Ltd., both of which are publicly held and traded on the Tel Aviv Stock Exchange. In addition, as of May 31, 2010 we owned nine supermarkets through our 51% subsidiary, Eden Teva. The ordinary shares of Eden Teva that are not owned by us are held by private third parties (including the CEO of Eden Teva).

Mega Retail leases from BSRE the real estate underlying a substantial portion of the supermarkets that it owns. The ordinary shares of BSRE that are not owned by Blue Square are publicly held and traded on the Tel Aviv Stock Exchange.

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

In recent years, we have expanded our non-food retail business by acquiring businesses with stand alone retail outlets. We may not be able to successfully consolidate these business operations with our supermarket business or to capitalize on potential synergies of the internal reorganization of our non-food retail businesses.

As part of our strategy to expand our presence in “Non-Food” stand alone retail outlets, we acquired 50% of Bee Group in 2005 and by 2008 we had increased our holdings in Bee Group to 85%. Concurrently, Bee Group acquired the controlling interest in Vardinon Textile Ltd. (home textile retailer and wholesaler) and the controlling interest in Naaman Porcelain Ltd. (houseware retailer and wholesaler) (the "Bee Group Acquisition"), and Bee Group effected an internal reorganization of its own subsidiaries in order to improve Bee Group's operating efficiency. Realization of the anticipated benefits of our Bee Group acquisitions, including anticipated operating synergies among the various subsidiaries of the Bee Group, and between the Bee Group and the Company as a whole will depend, in large part, on our ability to successfully eliminate redundant corporate functions and consolidate company and shared service responsibilities. We will be required to devote significant management attention and resources to the consolidation of business practices and support functions while maintaining the independence of the Bee Group's stand alone brand names.

The process of consolidating corporate level operations could cause an interruption of, or loss of momentum in, our business and financial performance. The diversion of management’s attention and any delays or difficulties encountered in connection with our Bee Group acquisitions and the realization of corporate synergies and operational improvements could have an adverse effect on our business, financial results, financial condition or share price. The consolidation and integration process may also result in additional and unforeseen expenses. There can be no assurance that the contemplated synergies and other benefits anticipated from the Bee Group acquisition will be realized.

In addition, our expansion into the non-food retail business has required us to enter new markets in which we have no or limited experience and where competitors in such markets may have stronger market positions. If we are not able to successfully compete against our more experienced competitors in the stand alone retail outlet businesses, our business may be adversely affected.

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

Our operation of supermarkets in Israel requires permits from municipal authorities, which are conditioned on the prior approval of various agencies, including the health and environment ministries, and the police and fire departments. Some of these permits are currently in the name of the Co-Op Blue Square Services Society, or the Co-Op, our former controlling shareholder, and entities other than us, and have not yet been transferred or re-issued to us. Furthermore, as a result of the reorganization of our supermarket retail and real estate activities, these permits are to be transferred in the name of Mega Retail, in which all of our retail activity has been centralized. Also, some of our stores require permits that have not yet been obtained, or have expired or require renewal.

Some of our Bee Group stores do not have permits according to the requirements of Israeli Business Permits Law, 1968. A lack of such permits by any store would be considered a breach of the tenancy agreement for such store, which would allow the landlord to annul the lease agreement. As of May 31, 2010, none of the landlords had made use of this right.

In addition, Kfar Hashashuim received a court issued order to vacate its logistics center due to a lack of a permit to conduct its business in the logistics center and a lack of building permits. However, BSRE is in the process of building a new logistics center for the Bee Group, and therefore Kfar Hasha'ashuim has requested a delay in the execution of the closure order. On February 2, 2009, the court decided that the execution of the order to vacate will be delayed until after further hearing on the matter, a date of which has yet to be determined. On March 15, 2010, the court set the date of July 12, 2010 for receiving further updates on moving into the new logistics center.

As a result of the hostilities between Israel and the Palestinians, the relevant authorities, including the police, have required us to adopt various security measures. These safety requirements prescribe extensive investment in safety equipment, the retaining of security personnel and may lengthen the time dedicated for obtaining permits from the municipal authorities. If we are unable to obtain or maintain one or more required permits, we may be required to close one or more stores or to take other remedial action to obtain or maintain these permits.

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

A substantial portion of our employees’ wages is adjusted upon a change in the minimum wage in Israel. Under Israeli law, the minimum wage, which is increased from time to time as a result of various economic parameters and updating of employee-union agreements, equals approximately 47.5% of the average wage for an employee in Israel, unless otherwise determined by government regulations. Pursuant to existing legislation, the minimum monthly wage was increased on July 1, 2008, to NIS 3,850 or approximately $1,005 (as of May 31, 2010). On May 23, 2010, a governmental committee of ministers approved a proposal to amend the Minimum Wage Law, 1987, to gradually increase the minimum wage to NIS 4,600 (approximately $1,201 (as of May 31, 2010)) over a period of 15 months. The Knesset has not yet approved such amendment of the Minimum Wage Law and it is unknown if and when such amendment will be approved. An increase in minimum wage will increase our labor costs and thus adversely affect our operating results.

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

Out of the NIS 400 million in aggregate principal amount of unsecured 5.9% debentures that we issued in August 2003, NIS 200 million in aggregate principal amount were convertible debentures (principal repayable in three equal installments in the years 2007, 2009 and 2011) which as of February 12, 2010 are convertible into Blue Square ordinary shares at a per share price of NIS 18.390. This conversion ratio is subject to adjustment in the event of distribution of bonus shares, cash dividends and the issuances of rights. On May 31, 2010, the closing price per share of our ordinary shares on the Tel Aviv Stock Exchange was NIS 46.19. As of May 31, 2010, the remaining principal balance of our convertible debentures was approximately NIS 7.5 million. In January, 2008, we adopted a share option plan for officers and employees of Blue Square and its subsidiaries and affiliates. As of May 31, 2010, the total number of shares available for issuance under the plan was 2,584,995 shares, subject to adjustments.

In connection with our proposed acquisition from Alon of all of Alon's approximately 80% holdings in Dor Alon, subject to satisfaction of closing conditions, we expect to issue to Alon an aggregate of 20,327,710 ordinary shares of Blue Square. See “Item 7. Major Shareholders and Related Party Transactions – Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD."

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

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

Our strategy includes expanding our market presence in existing retail food markets and entering into new retail food and “Non-Food” markets. The Israeli Antitrust Authority may limit our ability to execute our strategy, inter alia, by limiting our ability to acquire existing stores or enter into mergers to acquire existing stores.

On January 5, 2005, the Commissioner of the Israeli Antitrust Authority issued his final position regarding “commercial restrictive practices between the dominant food suppliers and the major supermarket retail chains”. According to the Commissioner’s final position, some of these practices were found to be restrictive trade agreements under the antitrust laws. The Commissioner prohibited these practices unless approved by the Restrictive Trade Practices Court or exempted by the Commissioner himself.

We have been applying most of these directives among others, by an internal compliance program that we have adopted.

Presently we do not know how, if at all, our business would be affected should the Commissioner take any action against us with respect to those issues under dispute which we believe are legal based on our consultations with our legal counsel.

In August 2006, the Restrictive Trade Practices Court approved a consent decree reached between the Commissioner and certain specific food suppliers. The consent decree stipulates various prohibitions, conditions and restrictions that would apply to certain practices of these suppliers. The consent decree addresses the following practices: arrangement by which suppliers influence the number or identity of competing suppliers; acquisition of shelf and off-shelf display space; category management; the use of suppliers’ representatives to physically arrange the shelves in the chains’ stores; discounts and rebates in exchange for meeting sales targets; arrangements that determine a supplier’s market share; exclusivity in sales and price dictation by suppliers. The Company is not a party to the consent decree; however, it could nevertheless have an effect on the practices of the Company’s suppliers and indirectly on the Company.

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

The sharp increase in oil prices in recent years has led to the increase in our electricity prices and raw materials used in the plastic packing industry. In 2008, a number of our suppliers increased their product prices to us due to increases in raw material prices. While these suppliers have not raised prices further during 2009 , we cannot assure that they will not raise prices in the future. Further increase in oil, raw material and product prices would impose on us significant expenses and costs, which could have an adverse effect on our operation results.

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

Our non-financial assets and shareholders equity are not adjusted to the inflation in Israel, while the repayment of interest and principal under part of our loans and all debentures are adjustable, linked to changes to the Israeli consumer price index, as provided in our loan and debenture agreements. As a result, an increase in inflation in Israel would have the effect of increasing our financial expenses without any corresponding offsetting increase in our assets and revenues on our financial statements, leading to lower reported earnings and shareholders equity. The extent of this effect on our financial statement would be dependent on the rate of inflation in Israel. The Company has an excess of CPI-linked liabilities over CPI-linked assets (mainly in respect of outstanding debentures). Toward the end of 2008 and during 2009, we engaged in transactions to partially hedge this inflation risk. We engage in these transactions from time to time to reduce our risk to inflation, although we do not eliminate the risk of inflation.

In addition, some of our operating expenses are either linked to the Israeli consumer price index (such as lease payments payable by us under various real estate property leases in connection with our operations) or are indirectly affected by an increase in Israeli consumer price index. As a result, an increase in the inflation rate in Israel would have the effect of increasing our operating expenses, thereby affecting our operating income. The extent of this effect on our operating income depends on the rate of inflation in Israel.

The value of our securities portfolio may be adversely affected by a change in the capital markets, interest rates or the status of the companies in whose securities we have invested.

As of December 31, 2009, we held approximately NIS 188 million in Israeli corporate and government bonds at fixed interest rates, a portion of which is linked to the Israeli CPI. Therefore, a decrease in the market value of these bonds or interest rates or a change in the status of the companies in whose bonds we have invested could lead to a material increase in our net financing expenses.

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

Our brand names, including some of our store format brands, are among the most well recognizable brands in Israel. For example, according to internal surveys, the Mega brand is one of the most prominent and well-known brands in Israel. Damage to our reputation or to the reputation of our store format brands due to reports in the media or otherwise may have material adverse effect on our level of sales with a corresponding impact on our profitability and operating results.

We are dependent on franchisees who own and operate a large portion of our Bee Group stores. We have limited control over franchisees, and our financial results could be negatively impacted by the performance of the franchisees.

Our 85% subsidiary, Bee Group, holds and operates through subsidiaries large retail chains with 268 stores as of May 31, 2010, of which 189 stores of our "Kfar Hasha'ashuim", "Dr. Baby" and "Rav-Kat", "Sheshet", "All for a Dollar" and "Naaman" chains, are owned and operated by franchisees. This store ownership mix presents a number of drawbacks, such as our limited control over franchisees and our limited ability to facilitate changes in the ownership and management of their store.

Subject to the terms of our franchise agreement, franchisees independently operate and oversee the daily operations of their stores, and they have a significant amount of flexibility in running their operations. Their employees are not our employees. Although we can exercise control over our franchisees and their store operations to a limited extent through our franchise agreements, the quality of franchise store operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other store personnel. While we ultimately can take action to terminate franchisees that do not comply with the standards contained in our franchise agreements, we may not be able to identify problems and take action quickly enough and, as a result, our image and reputation may suffer, and our franchise and property revenues could decline.

In addition, our franchise agreements limit our ability to open new stores in the vicinity of existing franchised stores, which may limit our ability to expand our business.

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

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

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

changes in financial estimates by securities analysts;

conditions or trends in our business;

changes in the market valuations of our competitors;

announcements by us or our competitors of significant acquisitions;

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

the political, economic, security and military conditions in Israel;

additions or departures of key personnel; and

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

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

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

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

In addition, because our financial results are denominated in NIS and are translated into US dollars for the convenience of US investors, currency fluctuations of the NIS against the US dollar may impact our US dollar translated financial results.

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

We have a distribution center in Rishon Letzion from which we distribute to our supermarkets a large portion of the products they carry. The products distributed by our distribution center to our supermarkets generated approximately 21.5% of our total percentage purchases during 2009. In addition, during 2010 and 2011 we intend to open a new distribution center for non-food sold in our supermarkets and by Bee Group. Our inability to utilize the distribution centers for any reason may significantly impair our ability to distribute our products to our supermarkets and to our Bee Group stores and would adversely affect our profit margin.

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 run programs under which we issue and sell gift certificates and electronic prepaid cards to institutions, companies and individuals, particularly during the High Holiday and Passover seasons. The gift certificates and prepaid cards can be used in our stores as well as other stores with which we entered into collaboration agreements. Based on our experience, we are exposed to risks connected with the issuance of gift certificates, including risks that they may be fraudulently forged or stolen, and we are exposed to risks of computer fraud or errors in connection with the issuance of prepaid cards. A substantial or large scale forgery, theft, fraud or error may cause a reduction in our revenue and increase our expenses.

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

Since the second half of March 2008, the media has published reports that certain segments of Israel’s ultra-orthodox population are considering the declaration of a boycott against our Shefa Shuk stores due to the operation of stores owned by our controlling shareholder on the Jewish sabbath. Although the Company is unaware of any public declaration of a boycott, since the end of March 2008, the Company has experienced a significant decrease in the sales of several Shefa Shuk stores which appeal to the ultra-orthodox community and/or are located within ultra-orthodox neighborhoods. During 2008 and with the launching of "Mega Bool" chain at the end of 2008, we have converted most of our Shefa Shuk stores to "Mega in Town" and "Mega Bool" stores. As of May 31, 2010, we operated 17 Shefa Shuk stores compared to 21 as of December 31, 2008. An actual declaration of a boycott may adversely affect the company's financial results.

The failure of our use of technological information systems and computer systems may adversely affect our day-to-day operations.

We use several technological information systems and computer systems. Our day-to-day operations are dependent on the proper function of these systems. We take various measures to ensure the integrity and reliability of the data and computer systems, including data protection and data back up. However, a failure of our data and/or computer systems may adversely affect our day-to-day operations.

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

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, the Income Tax Authority issued to the Company deduction assessment orders for the years 2001-2004 in the amounts of approximately NIS 44 million. The Company has filed appeals with the District Court contesting these assessment orders, which as of the date of this Annual Report are still pending. 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. The Israeli Tax Authority did not accept most of the Company's position, although it agreed to reduce the total amount to approximately NIS 16.3 million. On February 29, 2009, the Company filed an appeal with the District Court, which as of May 31, 2010 is 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.

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

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

In the last few years, the establishment of a Hamas government in Gaza has created additional unrest and uncertainty in the region and has increased hostilities between Israel and the Palestinians. These hostilities have included terrorist acts in Israel and military operations in the West Bank and Gaza. In December 2008 Israel was engaged in an armed conflict with Hamas in the Gaza Strip, which reduced the sales of some of our stores that are located in the southern region of Israel. In July 2006, a conflict with Hezbollah escalated significantly on Israel’s northern border. Due to the hostilities in the northern part of Israel and Lebanon, a number of our stores located in the northern region did not operate according to their usual schedule. We cannot predict the effect on our business if hostilities are renewed or the security situation deteriorates in any part of the country.

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

Disruptions of the Israeli ports may affect our ability to import products used in our Bee Group business.

The Bee Group acquires most of its products from suppliers outside of Israel, and most of its products are imported via the sea. A prolonged general strike, shutdown or a disruption of any of the Israeli ports for an extended period of time, including as a result of a military conflict, would affect our ability to import such products or increase their prices. In addition, since the peak selling season of some of our Bee Group stores is during the holidays, disruptions in the ports during or adjacent to such holiday seasons may adversely affect our sales and financial results.

Political and economic conditions in China may affect the operating results of the Bee Group.

Our imports from China are affected by costs and risks inherent in doing business in Chinese markets, including, changes in regulatory requirements or tax laws, export restrictions, quotas, tariffs and other trade barriers, and general economic problems.

Any of these risks could have a material adverse effect on our ability to deliver or receive non-food products on a competitive and timely basis and on our sales and profitability.

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

We do not believe that current price controls have any material adverse effect on our business or operating results. However, any imposition of more extensive price controls in the future may have a material adverse effect on our operating results. We cannot assure you that broader price controls will not be imposed in the future.

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

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

Risks Relating to Real Estate

We are subject to risks regarding the ownership of real estate assets.

We own, through our subsidiaries, real-estate assets, most of which are currently used in connection with the retail operation of our stores, and the remainder is leased to third parties or for future development. These assets are subject to risks with regard to ownership of real-estate assets, including decline in demand and surplus of supply of commercial properties, which might have a material adverse effect on the real-estate markets, occupancy rates, rental fees and revenues from third parties and on the value of the assets in the Company's financial statements. These risks include increase of operational costs, decline of the financial conditions of the lessees and additional factors which are beyond our control. In addition, from time to time we acquire real estate with the intention of changing the zoning of such real estate. We cannot assure that the relevant planning authorities will approve these contemplated zoning changes or, if approved, that we will be able to sell our real estate at a profit following the change of zoning.

The slowdown in the Israeli yield-generating real estate market may adversely affect our business.

Commencing from the beginning of the fourth quarter of 2008 and as a result of global economic and financial market conditions, there has been a slowdown in the Israeli yield-generating real estate market which is evidenced by a decline in the number of real estate transactions, a reduction in the availability of credit sources, an increase in financing costs and stricter requirements by banks for providing such financing. Although in the last few months the availability of credit sources has improved somewhat, we cannot assure that this trend will continue. During 2009, the Israeli market was also affected by the volatility in exchange rates of principal currencies versus the NIS and the volatility of inflation rates within the local market. If the economic conditions in Israel continue, there may be a continued decline in demand for commercial real estate, a reduction in rental fees, a decline in the fair value of our real estate assets and an increase in the cost and availability of financing from Israeli banks, which could adversely affect our real estate business.

BSRE may not be able to obtain additional financing for its future capital needs on favorable terms, or at all, which could limit its growth and increase its costs and could adversely affect the price of its ordinary shares.

BSRE's activities are financed from external sources. We cannot be certain that BSRE will be able to obtain financing on favorable terms for its activities, or at all, and BSRE cannot be certain that its existing credit facilities will be renewed. In addition, an adverse change can occur in the terms of the financing that it receives. Any such occurrence could increase BSRE's financing costs and/or result in a material adverse effect on the results of the Company and its ability to develop its real estate business. In addition, in connection with the transfer of real estate properties from Mega Retail to BSRE in September 2009, BSRE incurred additional loans, which as of December 31, 2009, were in the principal amount of approximately NIS 248 million, secured by a lien on most of the properties transferred by Mega Retail. The amount of long term loans currently outstanding may inhibit BSRE's ability to obtain additional financing for its future capital needs, inhibit BSRE's long-term expansion plans, increase its costs and adversely affect the price of its ordinary shares.

A recession and/or government policies may have a negative impact on BSRE's new operation in residential building, by causing a decrease in the scope of marketing and sales and a decrease in the prices of apartments.

During 2010, we entered into the residential building sector in Israel. A recession may cause a decrease in the scope of marketing and sales and a decrease in the prices of apartments. In addition, government policies may affect the availability and value of real estate designated for building and may also affect the prices of apartments.

Risks Relating to the Proposed Acquisition of Alon’s Equity Interest in Dor-Alon Energy In Israel (1988) LTD.

On May 17, 2010, we signed a share purchase agreement with our controlling shareholder, Alon, to acquire from Alon all of Alon's approximately 80% holdings in Dor Alon. The closing of the transaction is subject to satisfaction of closing conditions, including shareholder approval. See "Item 7. Major Shareholders and Related Party Transactions – Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD." Below are risks relating to our proposed acquisition of Alon's equity interest in Dor Alon.

The Acquisition may not result in the benefits that we currently anticipate.

Achieving the expected benefits of our acquisition of Alon's equity interest in Dor Alon depends, among other things, on the ability to synergize the different sales, retail, and marketing platforms, as well as the different operational and logistical platforms. The acquisition process also may result in the need to invest unanticipated additional cash resources, which may divert funds that we expect to use for pursuing new opportunities and other purposes. If we are unable effectively to synergize the different sales, retail, and marketing platforms, as well as the different operational and logistics platforms, the benefits of the acquisition will not be realized and, as a result, our operating results may be adversely affected and our share price may decline.

Our shareholders will experience an immediate dilution of their relative holdings upon completion of our acquisition of Alon's equity interest in Dor Alon.

Immediately following our cquisition of Alon's equity interest in Dor Alon, Alon will beneficially own in the aggregate, directly and indirectly, approximately 78.44% of our outstanding ordinary shares (as opposed to approximately 68.62% of the outstanding shares immediately prior to the acquisition), and all other Blue Square shareholders would then own approximately 21.56% of our outstanding ordinary shares (as opposed to approximately 31.38% of the outstanding ordinary shares immediately prior to the acquisition). As such, our current shareholders will experience an immediate dilution in the aggregate of approximately 31.3% of their holdings in Blue Square after the acquisition.

The market price of our ordinary shares after our acquisition of Alon's equity interest in Dor Alon may be affected by factors different from those currently affecting our ordinary shares.

Our business differs from Dor Alon’s business in important respects and, accordingly, the results of operations of the combined company and the market price of our ordinary shares following the acquisition may be affected by factors different from those currently affecting the independent results of our operations and of Dor Alon’s operations. For a discussion of Dor Alon's business and of certain risks to consider in connection with Dor Alon's business, see our report on Form 6-K submitted to the Securities and Exchange Commission on May 27, 2010.

Our acquisition of Alon's equity interest in Dor Alon will result in our becoming a majority shareholder in Dor Alon, a publicly held company. As such, we will be subject to certain limitations in our efforts to synergize our and Dor Alon's operations.

Some transactions between us and Dor Alon, including any cancellation of such transactions, will require the approval of the audit committee, the directors, and, under certain circumstances, approval of the shareholders of Dor Alon by special vote and are subject to the receipt of applicable permits and approvals. In addition, any dividend or distribution from Dor Alon requires the approval of the directors of Dor Alon. As such, we may be limited in our ability to fully realize the synergies and other benefits of the acquisition.

Our acquisition of Alon's equity interest in Dor Alon is subject to the receipt of consents and approvals from various entities, which may impose conditions on, or jeopardize the completion of the acquisition or reduce the anticipated benefits of the acquisition.

Completion of our acquisition of Alon's equity interest in Dor Alon is conditioned upon the satisfaction of closing conditions, including approval of the related share purchase agreement by our shareholders and receipt of all necessary regulatory approvals, including approval by the Israeli court of our distribution of a dividend and, if applicable, approval of the Acquisition by the Israeli Antitrust Authority, all as set forth in the share purchase agreement with Alon. The required conditions to closing may not be satisfied in a timely manner, if at all, or, if permissible, waived, and the acquisition may not be consummated. Failure to consummate the acquisition could negatively impact our share price, future business and operations, and financial condition. Any uncertainty about the consummation of the acquisition may adversely affect the future business, growth, revenue and results of operations of either or both of the companies.

The violation of various conditions determined by the Israeli Tax Ordinance and/or the pre-ruling issued by the Israeli tax authorities in connection with the split of the gas exploration activity from Dor Alon to Alon Natural Gas Exploration Ltd. and the transfer of Dor Alon shares from Dorgas to Dor Alon may result in Dor Alon and Dorgas becoming obligated to pay taxes under Israeli law.

In connection with the split of the gas exploration activity from Dor Alon to Alon Natural Gas Exploration Ltd. (the "Split") and the transfer ("Share Transfer") by Dorgas (a subsidiary of Dor Alon) of approximately 4.4% of the outstanding Dor Alon shares held by Dorgas (the “Treasury Shares”) to Dor Alon, Dor Alon received a pre-ruling from the Israeli Tax Authority that provides that the Split and the Share Transfer will be tax free. However, the abovementioned pre-ruling is subject to several conditions, which include, among other things, that:

(i)

in relation to the Share Transfer (a) the Treasury Shares will remain held by Dor Alon indefinitely from the date of the Transfer or will be erased; (b) Dor Alon will take no action in relation to the Treasury Shares, including any sale of the Treasury Shares (including an involuntary sale), any encumbrance of the Treasury Shares or issuance of the Treasury Shares in the future as capital; and (c) for at least two years from the date of the transfer there will be no change in Dor Alon’s rights in Dorgas subject to section 104 of the Israeli Tax Ordinance; and

(ii)

in relation to the Split (a) for at least two years from the date of the Split, both of Dor Alon Natural Gas Exploration Ltd. and Dor Alon will have independent and separate economic activity the income from which is subject to tax in accordance with Section 2(1) to the Israeli Tax Ordinance, and that originated in Dor Alon’s activity prior to the Split; (b) for at least two years from the date of the Split there will not be any loans between Dor Alon and Alon Natural Gas Exploration Ltd., except for loans given and/or taken in the ordinary course of business; (c) for at least two years from the date of the Split, most of the assets (as defined in the Israeli Tax Ordinance) of Dor Alon after the Split and most of the assets (as defined in the Israeli Tax Ordinance), which were transferred Alon Natural Gas Exploration Ltd. through the Split, will not be sold by any of those companies and will be used as customary in the Dor Alon's ordinary course of business; (d) Dor Alon's primary economic activities that occurred during the two years prior to the split will continue to be performed by Dor Alon or Alon Natural Gas Exploration Ltd. have continued for a period of at least two years from the date of the Split; (e) immediately after the Split, and for two years thereafter, the shareholders of Dor Alon and Alon Natural Gas Exploration Ltd. will maintain the same rights and portions thereof that they held in Dor Alon (not including the Acquisition) all subject to the date of the Split and Section 105c(a)(8) of the Israeli Tax Ordinance; (f) for at least two years from the date of the Split, there will be no transfer of cash or assets, guarantees or any other activities between Dor Alon and Alon Natural Gas Exploration Ltd., except as customary in Dor Alon's ordinary course of business.

If Dor Alon or Alon Natural Gas Exploration Ltd. do not comply with one or more of those conditions (the Israeli Tax Ordinance and/or the pre-ruling issued by the Israeli tax authority), Dor Alon and/or Dorgas may become obligated to pay Israeli income taxes as a result of these transactions, linked to the Israeli consumer price index, plus interest and penalties, and the benefits may be discontinued, in whole or in part. Such a result with respect to Dor Alon would adversely affect our results of operations and financial condition.

Under the terms of the share purchase agreement with Alon, Alon has agreed to compensate and indemnify Blue Square and/or Dor Alon for taxes and/or damages and/or losses and/or deficiencies and/or expenses ("Damages") that may be caused to Dor Alon as a result of a breach of subsection (ii) above in respect of the Split, although the indemnification will not apply to any breaches of the conditions of the pre-ruling resulting from any act or omission of Dor Alon occurring after the closing of the Acquisition. This indemnification is subject to agreed upon terms and conditions, and there is no guarantee that Alon will indemnify BSI and/or Dor Alon for all Damages.

The conditions imposed by the Israeli Tax Ordinance and/or the pre-ruling issued by the Israeli tax authorities in connection with the acquisition restricts the manner in which we may conduct our business in the future.

We and Alon have received a pre-ruling from the Israeli Tax Authority that provides that our acquisition of Alon's equity interest in Dor Alon will all be tax free. However, this pre-ruling is subject to several conditions, including, among other things, that:

(a)

for a period commencing on the closing date of the Acquisition and ending two years from the end of the fiscal year in which the closing date of the Acquisition took place, or the Required Term, we will continue to hold all the rights in Dor Alon that it held on the effective date of the acquisition;

(b)

most of the assets (as defined in section 103c(a)(2) of the Israeli Tax Ordinance) transferred from Dor Alon to Blue Square in the framework of the acquisition and most of the assets held by Blue Square on the date of the acquisition, were not sold during the Required Term, and during such term the assets were used properly, under ordinary circumstances, and as is customary in Dor Alon's ordinary course of business; and

(c)

each rights' holder in Blue Square (other than those rights' holders that hold rights tradable on the TASE and are not deemed to be controlling shareholders on the date of the acquisition) maintains during the Required Term all the rights that he/she held in Blue Square immediately following the acquisition, subject to Sections 103c(a)(9), (9a) in the Israeli Tax Ordinance.

These conditions restrict the manner in which we may conduct our business in the future.

Failure to complete our acquisition of Alon's equity interest in Dor Alon could negatively impact the market price of our ordinary shares and our future business and financial results.

If our acquisition of Alon's equity interest in Dor Alon is not completed for any reason, the on-going business of Blue Square may be adversely affected and will be subject to a number of risks, each of which, among others, may have a negative impact on the market price of our ordinary shares. The risks associated with a failure to complete the acquisition include, but are not limited to:

failure to pursue other beneficial opportunities as a result of the focus of management of each of the companies on the acquisition, without realizing any of the anticipated benefits of the acquisition;

the market price of our ordinary shares may decline to the extent that the current market price reflects a market assumption that the acquisition will be completed;

we may experience negative reactions to the termination of the acquisition from licensors, collaborators, suppliers, customers or other strategic partners; and

Blue Square's costs incurred related to the acquisition, such as legal and accounting fees, must be paid even if the acquisition is not completed.

ITEM 4.

INFORMATION ON THE COMPANY

History and Development of Blue Square.

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

In 1996, Blue Square completed its initial public offering and its ADSs were listed for trading on the New York Stock Exchange. In November 2000, Blue Square’s ordinary shares were listed for trading on the Tel Aviv Stock Exchange.

Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD.

On May 17, 2010, Blue Square announced that its audit committee and board of directors had approved a transaction with Blue Square's controlling shareholder, Alon Israel Oil Co. ("Alon"), and signed a share purchase agreement (the "Share Purchase Agreement") with Alon, pursuant to which Blue Square would acquire from Alon all of Alon's approximately 80% holdings in Dor-Alon Energy In Israel (1988) LTD. ("Dor Alon"), a publicly traded company listed on the TASE (the "Acquisition"). Dor Alon is one of the four largest fuel companies in Israel based on number of gas stations and is a leader in the convenience stores sector.

In exchange for each share in Dor Alon, Blue Square would issue to Alon 1.8 shares of Blue Square, for an aggregate of 20,327,710 shares of Blue Square (which would materially increase the capital of Blue Square). As a result of the transaction, Alon's direct and indirect ownership interest in Blue Square would increase to approximately 78.44% of the outstanding share capital of Blue Square from approximately 68.62% of the outstanding share capital of Blue Square. Within the framework of the Acquisition, the audit committee and board of directors of Blue Square approved the distribution of a dividend (after the share issuance to Alon) to Blue Square's shareholders not out of profits, of NIS 800 million, or approximately US$ 208.9 million (based on the representative rate of exchange on May 31, 2010), which represents a dividend of approximately NIS 12.32, or approximately $3.22 (based on the representative rate of exchange on May 31, 2010), per ordinary share of Blue Square (after taking into account the shares to be issued to Alon in the acquisition). The dividend per share is subject to change based on the number of shares outstanding on the record date for the dividend. The dividend would be subject to the approval of the Israeli courts and to the completion of the Acquisition.

The Acquisition would combine the retail operations of Blue Square and Dor Alon into one group creating the largest retail group in Israel. Additionally, the Acquisition could enable Blue Square to achieve a strong foothold in the convenience store sector and enable substantial synergies and cost savings when combining the retail platforms of both companies.

The Acquisition and the dividend distribution are subject to approval of Blue Square's general meeting of shareholders, approval of the dividend distribution by the Israeli courts and customary closing conditions. A general meeting of shareholders is scheduled to be held on June 28, 2010 to approve, among other things, the Acquisition. For further information on the Acquisition, see “Item 7. Major Shareholders and Related Party Transactions – Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD."

Prior to the Acquisition, we and Dor Alon will continue to operate as separate companies. Accordingly, except for specific references to the pending Acquisition, the description of our business set forth below relates solely to Blue Square and its current consolidated subsidiaries.

Developments of Blue Square During 2009

In December 2008 and January 2009, our board of directors approved a reorganization of our supermarket retail and real estate activities pursuant to which our supermarket retail activities are now centralized in Mega Retail, and our real estate activities are now centralized in Blue Square's subsidiary, BSRE. The reorganization of the real estate activities was approved by BSRE's shareholders at BSRE's extraordinary general shareholder meeting held on February 18, 2009, and the transfer of real estate properties from Mega Retail was completed on September 13, 2009 and, pursuant to the approval of the Israeli Tax Authority, was effective as of March 31, 2009. Following discussions between Mega Retail and BSRE and the Israeli Tax Authority regarding the structure of the real estate reorganization, the Israeli Tax Authority granted an approval pursuant to which the transaction would be performed as a split pursuant to Section 105 of the Israel Income Tax Ordinance. Under such approval, Mega Retail transferred to BSRE the real estate properties, and as part of the consideration for the transaction, BSRE assumed Mega Retail's financial liabilities to a bank in an amount of approximately NIS 390 million that were attributed to the transferred properties and paid the Company in cash the balance of NIS 68 million, representing the difference between the value of the transferred properties (less certain expenses associated with the transfer) and the assumed liabilities. In addition, as part of the reorganization of the retail activities, Mega Retail's wholly owned subsidiary, The Blue Square Chain (Hyper Hyper) Ltd. ("Hyper Hyper"), is to merge into Mega Retail, as a tax exempt transaction, and all of the retail activity of Hyper Hyper is to be transferred to Mega Retail. The merger was approved by the Tax Authority, and it is anticipated that the merger will be completed in the next few weeks, effective as of January 1, 2009. For a description of Blue Square's supermarket retail and real estate activities reorganization, please see “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions”.

The following is a description of certain events that have occurred during the last number of years:

·	Changes in our store formats, including:

The launch of "Mega Bool", a hard discount store format. As of May 31, 2010, this initiative included the conversion of 46 existing "Mega" and "Shefa-Shuk" stores of various sizes to the new brand and the opening of an additional three new "Mega Bool" stores;

The launch of “Mega In Town”, a discount supermarket brand designed to combine discount prices and convenience for neighborhood shoppers. As of May 31, 2010, we had 121 “Mega In Town” stores; this initiative has included the conversion of over 100 existing SuperCenter and Mega stores to the new brand; and

The completion of the first stage of our strategy to establish our Eden Teva format as the leader in Israel's organic/health food market by expanding the number of organic/health food supermarkets operated by Eden Teva to nine stores as of May 31, 2010. We announced our intention to implement the second stage of our strategy by establishing Eden Teva branches within our existing large store formats under the concept of a "store within a store";

·	The launch of a new internet sale site, Mega by Internet, in October 2009;

The launch of a private label called "Mega" that was expanded throughout our "Mega Bool", "Mega in Town" and "Mega" store formats beginning in December 2008. During the first four months of 2010, the products that we sold under the "Mega" private label constituted approximately 6.1% of our supermarket sales;

As part of our strategy to expand our presence in “Non-Food” stand alone retail outlets, we acquired 50% of Bee Group in 2005, and by 2008 we had increased our holdings in Bee Group to 85%. Concurrently, Bee Group acquired the controlling interest in Vardinon Textile Ltd. (home textile retailer and wholesaler) and the controlling interest in Naaman Porcelain Ltd. (houseware retailer and wholesaler). During the fourth quarter of 2009, we completed the concentration of our Bee Group subsidiaries into three sectors: houseware and home textile, toys and leisure, and baby and young children products. We also centralized all of the financial activity, import and information systems of the Bee Group subsidiaries under a single headquarters in one location;

The reorganization of our real estate assets, including the transfer of all related rights and obligations and certain liabilities (including lease agreements of which we were lessor and Mega Retail or third parties were lessees) to BSRE, a then new wholly owned subsidiary. In addition, on September 13, 2009 and effective for tax purposes as of March 31, 2009, we completed the transfer of all of the real estate held by our wholly-owned subsidiary, Mega Retail, and its subsidiaries to BSRE;

The establishment of a joint loyalty plan (the "You Plan") with Dor Alon in 2005, including the offering to our customers of a 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), the launching in 2009 of a new "You" Mastercard credit card and the expansion in 2009 of our customer loyalty plan through the launching of a new membership card in August 2009. As of May 31, 2010, approximately 550,000 new customers had joined the "You" club through the membership card (see “Item 4. Information on The Company - B. Business Overview -Related Businesses”); and

·	As part of our strategy to increase our operational efficiency by improving our distribution capabilities and IT systems, the investment in new IT and logistics systems.

Capital Expenditures

A key component of our business strategy is the establishment and relocation of new stores, the remodeling of existing stores and the improvement of our distribution facilities. During the three months ended March 31, 2010, we invested approximately NIS 38.7 million, or $10.4 million, in property, plant and equipment, intangible assets and investment property. In 2009, we invested approximately NIS 234 million, or $62 million, in property, plant and equipment, intangible assets and investment property, a 24.9% decrease from our 2008 investment of NIS 311.7 million. Of our investment in property, plant and equipment and investment property in 2009, we invested NIS 46.2 million, or $12.3 million, in land and buildings, including land that we lease, as compared with NIS 107.5 million in 2008. As of December 31, 2009, we had entered into agreements for investments in fixtures, equipment and leasehold improvements in an aggregate of NIS 39 million, or $10 million.

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

Business Overview.

General

As of May 31, 2010, we have 207 supermarkets with brands including "Mega Bool", "Mega In Town", "Mega", "Shefa Shuk", "Eden Teva". In addition, as of May 31, 2010, we had 268 Non-Food retail outlets (partly through franchisees) under the control of our subsidiary, Bee Group Retail Ltd. ("Bee Group") under the brand names Naaman, Vardinon, Sheshet, Kfar Hasha’ashuim, Rav-Kat, Dr. Baby and All for a Dollar. Through our supermarkets, we offer a wide range of food and beverages products and also “Non-Food” items, such as houseware, toys, home textile products, small electrical appliances, computers and computer accessories, entertainment and leisure products, and “Near-Food” products, such as health and beauty aids, infants products, cosmetics and hygiene products. We also operate several toy and houseware departments within most of our large stores. Through our stand alone "Non-Food" retail outlets, we offer a range of houseware and home textile, toys, leisure and baby and young children products.

Our activities are carried out via our consolidated subsidiaries, the largest of which are Mega Retail, which has supermarket retail activities, Bee Group, which conducts non-food retail activities, and BSRE, which owns and invests in yield-generating commercial real estate. As of May 31, 2010, Blue Square owned 100% of the outstanding shares of Mega Retail, 85% of the outstanding shares of Bee Group, and 78.35% of the outstanding shares of BSRE. The balance of BSRE shares is publicly held and traded on the Tel Aviv Stock Exchange.

Following the reorganization of Blue Square's supermarket retail activities pursuant to which Blue Square's supermarket retail activities were transferred to Mega Retail, and as of May 31, 2010, Mega Retail and its direct and indirect subsidiaries were the owners of all 207 of our supermarkets. As of December 31, 2009, the total consolidated assets of Mega Retail and its subsidiaries aggregated approximately NIS 2.36 billion, or $625 million, constituting approximately 46% of our total consolidated assets at that date.

Following the reorganization of Blue Square's real estate activities pursuant to which Blue Square's and Mega Retail's real estate was transferred to BSRE, BSRE is the owner of all of our real estate properties. BSRE's revenues are primarily derived from real estate lease payments received from Mega Retail and third parties. As of December 31, 2009, the total consolidated assets of BSRE aggregated approximately NIS 2.1 billion, or $561 million, constituting approximately 41% of our total consolidated assets at that date.

As of May 31, 2010, Bee Group and its direct and indirect subsidiaries were the owners of 79 of our Non-Food retail stores, while the remaining 189 of our Non-Food retail stores are owned and operated by franchisees of Bee Group and its subsidiaries. As of December 31, 2009, the total consolidated assets of Bee Group and its subsidiaries (excluding the stores owned and operated by franchisees) aggregated approximately NIS 523 million, or $138 million, constituting approximately 10% of our total consolidated assets at that date.

Supermarkets

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

	No. of Stores		Store Space (square meters)

As of December 31, 2005		168		312,000
As of December 31, 2006		175		323,000
As of December 31, 2007		185		342,705
As of December 31, 2008		194		354,531
As of December 31, 2009		203		365,000

We have five supermarket store formats - Mega Bool, Mega, Mega In Town, Shefa Shuk and Eden Teva. Our "Mega Bool" chain stores are hard discount stores designed to provide customers with name brand quality at everyday affordable prices. In the “Mega” chain stores, our larger stores which are located primarily outside residential areas, we offer a wide selection of food, “Near-Food” and “Non-Food” items. In the “Mega In Town” chain stores, the stores are usually smaller than “Mega” stores, located primarily in local neighborhoods and city centers, and combine discount prices with convenience for neighborhood shoppers. Our “Shefa Shuk” chain stores are low priced stores oriented towards Israel’s growing ultra-orthodox population. In our "Eden Teva" stores, we focus on offering organic, natural and health food products. As of December 31, 2009, we operated 11 Mega Stores, consisting of approximately 46,000 square meters space, 119 Mega In Town stores, consisting of approximately 133,000 square meters space, 47 Mega Bool stores, consisting of approximately 143,000 square meters space, 17 Shefa Shuk stores, consisting of approximately 29,000 square meters space, and nine Eden Teva stores, consisting of approximately 14,000 square meters.

In August, 2007, we launched our “Mega In Town” supermarket format designed to bring discount shopping to the neighborhood and city centers. The initiative included the conversion of over 100 of our existing SuperCenter and Mega stores to the new brand. “Mega In Town” is a discount supermarket brand designed to combine discount prices and convenience for neighborhood shoppers. “Mega In Town” stores are differentiated by their reduced prices, narrowing the gap between them and those of Hard Discount centers located in peripheral areas. In addition, such stores offer a greater variety of items than were previously carried by SuperCenters and Megas in residential areas.

On October 31, 2007, we acquired 51% of the outstanding shares of Eden Briut Teva Market Ltd. (“Eden Teva”) for a total consideration of approximately NIS 22.5 million. Eden Teva is one of Israel’s largest retailers of organic, natural and health food products, and as of May 31, 2010 operated nine supermarket stores, specializing in organic, natural and health food products. As part of this transaction, (i) we provided Eden Teva with shareholder loans in the amount of NIS 47 million, (ii) we have the right to appoint a majority of the board of directors and a majority of the executive committee of Eden Teva, (iii) the other shareholder has the various minority protection rights, and (iv) we are to provide all guarantees and financing required in connection with Eden Teva’s operations in the future, the repayment of existing shareholder loans in the amount of NIS 4.7 million, which has since been repaid, and the payment of a bonus to Eden Teva’s CEO upon the satisfaction of various thresholds which have not yet been satisfied. In addition, during 2010 we intend to launch a new Eden Teva store format by establishing Eden Teva branches within our existing large store formats under the concept of a "store within a store".

In December 2008, we launched our "Mega Bool" hard discount store format, designed to provide customers with name brand quality at everyday affordable prices, in response to an increase in consumer preference for hard discount stores that we have identified in the recent years. As of May 31, 2010, the initiative included the conversion of 46 of our existing stores of various sizes to the new brand, including large stores from the "Mega" and "Shefa Shuk" formats and smaller stores located within residential neighborhoods and city centers. As of May 31, 2010, we also opened three new "Mega Bool" stores.

In parallel, we also announced the launch of our new "Mega" line of private label goods that are sold in our "Mega Bool", "Mega", and "Mega In Town" stores. Private label products provide customers with an attractive alternative selection of products that are comparable in quality to name brand products. We believe that our private label products enhance customer loyalty, differentiate our stores from those of our competitors and provide a competitive product to those offered by our suppliers. In addition, usually the average gross profit from private label products is higher than the average gross profit from other products. During the first four months of 2010, the products that we sold under the "Mega" private label constituted approximately 6.1% of our supermarket sales.

Non-Food Retail

As of May 31, 2010 we operated, through Bee Group, its subsidiaries and franchisees, a total of 268 non-food retail stores, 189 of which are operated by franchisees.

As part of our strategy to increase our market share of “Non-Food” and “Near-Food” products and to offer a wider selection of these products to consumers in our stores, in May 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")), in April 2007, we increased our holdings in Bee Group to 60%, and in September 2008, we increased our holdings in Bee Group to 85%. See "Item 10. Additional Information – C. Material Contracts – Purchase of Additional Shares in the Bee Group." During 2009, we completed the reorganization of our Bee Group subsidiaries by concentrating them into three sectors: (i) houseware and home textile, concentrated in our Naaman, Vardinon and Sheshet stores, (ii) toys and leisure, concentrated in our Kfar Hasha'ashuim and All for a Dollar stores, and (iii) baby and young children products, concentrated in our Rav- Kat and Dr. Baby stores. During 2009, we also centralized all of the financial activity, import, and information systems of the Bee Group subsidiaries under a single headquarters in one location.

Bee Group holds and operates through subsidiaries large retail chains in Israel of houseware and home textile, toys, leisure and baby and young children stores, with 268 stores, located throughout Israel, owned and operated mostly by franchisees as of May 31, 2010. The chain operates under a number of different brand names: (i) "Naaman", which sells houseware products; (ii) "Vardinon", which sells home textile products and accompanying accessories; (iii) "Sheshet", which sells houseware and small electrical appliances; (iv) "Kfar Hasha’ashuim" (Toy Village), which sells toys; (v) "Rav-Kat" and Dr. Baby, which sells baby and young children accessories; and (vi) “All for a Dollar". The stores of our "Naaman", "Vardinon" and "Dr. Baby" chains are primarily owned and operated by us, while the stores of our "Kfar Hasha'ashuim", "Sheshet" and "All for a Dollar" chains are primarily owned and operated by franchisees. In addition to these stores, we have established toy and houseware departments within most of our large supermarket stores.

On April 22, 2007, Bee Group acquired approximately 85.8% of the share capital of Vardinon Textile Ltd. ("Vardinon") a company traded on the Tel Aviv Stock Exchange for a total consideration of approximately NIS 38 million. Vardinon imports, designs and distributes home textile products and accompanying accessories, such as linen, towels and bathrobes under the brand name "Vardinon" and other products such as blankets, bed covers, curtains, pillows, other houseware products, candles and spa products. The products are distributed by Vardinon's chain of retail stores (37 stores as of May 31, 2010) and by wholesale to customers that include other wholesalers, retail chains, employee committees and catalogues. Following the termination of an earlier supply agreement between us and Vardinon that was terminated effective from January 2010, Vardinon signed a new services agreement with our subsidiaries Mega Retail and Hyper Hyper following approval of Vardinon's board of directors and shareholders. See “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions” for more information.

On October 31, 2007, Bee Group acquired 57.87% of the outstanding shares of Naaman Porcelain (51.5% on a fully diluted basis) ("Naaman"), a company traded on the Tel Aviv Stock Exchange, for a total consideration of approximately NIS 101 million. Naaman is one of Israel’s major branded houseware retailers which imports and markets various houseware products, such as kitchen utensils, cutlery and dinner sets. As of May 31, 2010, Naaman had its own chain of 30 houseware stores, five of which are operated by franchisees, and is a supplier to Mega Retail. Naaman also sells its products to wholesale customers, including privately owned stores, retail chains, institutional customers, employee committees and sales promotion companies.

On August 11, 2008, Bee Group and the other Sheshet shareholders contributed to Naaman all of the shares in "Sheshet" in exchange for shares in Naaman. In addition, on September 25, 2008, Bee Group contributed to Naaman all of Bee Group's interest in Vardinon (approximately 84.79% voting power and 67.98% of the share capital, at that time) in exchange for approximately NIS 36.9 million in cash. On March 22, 2009, Bee Group acquired an additional approximately 8% of the shares of Naaman for cash. Following all of these transactions, Bee Group's holdings in Naaman were increased to approximately 66.85% of the outstanding shares. On June 1, 2009 Naaman acquired an additional approximately 3% of the shares of Vardinon. As a result of this acquisition, Naaman increased its holding in Vardinon to approximately 88.74% of the share capital. As of May 31, 2010, Bee Group held approximately 66.85% of the outstanding shares of Naaman, and Naaman held approximately 88.74% of the outstanding shares of Vardinon.

Industry Overview

Supermarkets

We estimate that retail sales of food, beverages and tobacco in Israel were approximately NIS 56.0 billion, or $14.8 billion, in 2009. This estimate is based on the data published by the Israeli Central Bureau of Statistics of the retail sales of food, drinks and tobacco in Israel in 2008 (2009 has not yet been published) and the growth of expenditure for the consumption of food, beverages and tobacco of household in Israel at current prices in 2009 (2%).

The retail sales of food, beverages and tobacco in Israel includes supermarkets, grocery stores, mini-markets and retail sales of fruit and vegetables, meat, poultry and fish. The supermarket retail chain market consists of two large chains: Shufersal and us, as well as other smaller but developing chains.

Based on A.C. Nielsen and on data published by the Israeli Central Bureau of Statistics of the retail sales of food, drinks and tobacco in Israel, we estimate that approximately 37% of the total retail sales of food, beverages and tobacco in Israel in 2009 was made by the two large chains and approximately 46% of the estimated retail sales made by supermarkets, groceries and mini-markets in Israel in 2009 was made by the two large chains - a percentage that is considerably lower than the estimated market shares of the major supermarkets prevailing in Europe and the United States. Accordingly, we believe that there is an opportunity for us to grow correspondingly with the general growth of the supermarket sector in Israel.

Non-Food Retail

The Non-Food retail sales of houseware in Israel includes houseware departments in large retail chains, do-it-yourself retail chains, and private specialty stores and boutiques. The sale of these products through catalogs and internet sales sites has also increased in recent years. We do not have enough information to assess our market share in this market, as most of our competitors are privately owned companies.

The Non-Food retail sales of home textile in Israel includes home textile departments in large retail chains, department stores and private stores. There are also many companies and distributors that market and sell home textile products to wholesale customers. We do not have any formal information about the size of the home textile market and the market share of the various competitors in this market; however, we estimate that our "Vardinon" chain is one of the leading retailers in the premium home textile market.

The non-food retail sales of baby products and toys in Israel includes mainly smaller privately owned stores. We do not have enough information to assess our market share in these markets, as most of our competitors are privately owned companies.

Yield-Generating Real Estate

The yield-generating real estate market in Israel includes the development, promotion, planning, construction, marketing and operating of real estate properties intended for leasing primarily for the purpose of commercial, industrial, office space, parking garage and warehouse use. The yield-generating real estate market is affected by growth or slowdown in the Israeli economy, and by changes in the demand and the available supply of commercial areas, as well as the construction of additional commercial areas. The real estate market is also affected by governmental, municipal and tax authority policies regarding planning, building, marketing and taxation of land. Commencing from the beginning of the fourth quarter of 2008 and as a result of the global economic and financial market conditions, there has been a slowdown in the Israeli yield-generating real estate market which is evidenced by a decline in the number of real estate transactions, a reduction in the availability of credit sources, an increase in financing costs and stricter requirements by banks for providing such financing. Although in the last few months the availability of credit sources has improved somewhat, we cannot assure that this trend will continue. As a result of the recent economic conditions in Israel, BSRE estimates that there is some increase in the demand for yield-generating properties. While, demand for office space and industrial properties is still relatively low due to the effects of the slowdown in the economic activity, demand for industrial properties is stable, specifically, when the properties in are located in good locations

With respect to the residential building sector in Israel, a recession may cause a decrease in the scope of marketing and sales and a decrease in the prices of apartments. In addition, government policies may affect the availability and value of real estate designated for building and may also affect the prices of apartments.

Seasonality

Our business is subject to fluctuations in quarterly sales and profits. These fluctuations are primarily attributable to increased sales and higher operating income in the holiday seasons occurring in different quarters from year to year. Thus, for example, in our supermarkets and in our "Naaman", "Vardinon" and "Sheshet" chains increased sales attributable to Passover, which occurs in either March or April, may be realized in either the first or the second quarter, and sales attributable to the Jewish New Year, which occurs in either September or October, may be realized in our financial reports in either the third or the fourth quarter. In our "Kfar Hasha'ashuim" chain, increased sales are generally attributable to Purim, which occurs in March, and to the "Back-to-School" season in August. Generally, purchases for a particular holiday occur during the two-week period prior to the commencement of that holiday. However, the timing of the holidays does not affect our semiannual results.

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

Our Strategy

Our strategy in our retail activities is: (i) to take advantage of our position as a leading food retailer in Israel, by expanding our market presence in existing retail food markets and (ii) to capitalize on potential synergies and our internal reorganization in order to improve our operating efficiency. To achieve this goal, we intend to pursue a number of operating and growth strategies, which include:

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

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

·	increasing our market share of “Non-Food” and “Near-Food” products and capitalizing on potential operating synergies between the Bee Group and the Company as a whole;

·	solidifying and expanding our market share in the organic/health food market with the goal of establishing Blue Square as a leader of Israel's emerging organic/health food market;

·	expanding our "Mega" private label line to encompass additional product categories and increasing the percentage of our sales from our private label line, and thus differentiating our store brands and products from those of our competitors;

·	increasing operational efficiency, including by improving our distribution capabilities and IT systems;

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

·	expanding and improving our loyalty plan, which currently offers a new credit card and a new membership card, through joining other businesses to the plan; and

·	combining our retail operations with those of Dor Alon with a view to becoming the largest retail group in Israel, achieving a strong foothold in the convenience store sector and capitalizing on potential operating synergies and cost savings between Dor Alon and the Company.

Our strategy in our real estate activities is to become a substantial owner of yield-generating properties and developer of commercial real estate through our subsidiary, BSRE. To achieve this goal, we intend to pursue a number of operating and growth strategies, which include:

·	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 continue to examine acquisitions abroad in light of market conditions, while diversifying our real estate property base.

Our Real Estate

Most of our real estate is currently used in connection with the retail operation of our stores.

Recent Activities in Our Real Estate Sector

Agreement with the Wholesale Market Company

On June 3, 2010, BSRE, Gindi Investments 1 Ltd. and an additional entity controlled by Moshe and Yigal Gindi (together with Gindi Investments 1 Ltd., "Gindi") (through two subsidiaries owned 50% by BSRE and 50% by Gindi), signed agreements to acquire rights to a long term lease of property in the wholesale market site in Tel Aviv for the purpose of building and marketing on the property an apartment buildings complex and a shopping mall from the municipality of Tel Aviv and the Wholesale Market for Agricultural Produce in Tel Aviv Company Ltd. (the "Wholesale Market Company"). On June 2, 2010, the shareholders of BSRE approved the signing of the final agreements. The agreements are subject to approval by the Israeli Minister of the Interior within 60 days of the date on which such agreements were signed. For more information on the transaction with the Wholesale Market Company, see "Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Agreement with the Wholesale Market Company."

Purchase of Property in Point Wells, Washington

On June 1, 2010, BSRE completed the acquisition of an approximately 240-dunam parcel of property in Point Wells, near Seattle, Washington, which serves primarily as a plant for storage and distribution of fuel and oils. BSRE purchased the property through a wholly owned special purpose entity established in the United States, BSRE Point Wells, LP, which had entered into a purchase agreement, dated May 7, 2010, with Paramount of Washington LLC (“POW”) for the property. BSRE Point Wells, LP also entered into a development agreement, dated June 1, 2010, with POW and Paramount Petroleum Corporation (“PPC”). PPC leases the property from POW and operates and maintains it. POW and PPC are wholly owned subsidiaries of Alon USA Energy Inc., a public company whose shares are traded on the NYSE, ("Alon USA") and is controlled by our indirect controlling shareholder, Alon Israel Oil Co. Ltd. ("Alon").

BSRE Point Wells, LP paid POW a sum of $19.5 million in consideration for the rights in and to the property (apart from the buildings and the existing equipment/property on the property (including fuel storage tanks, technical systems, pipes and various installations) which remain under the ownership of POW). BSRE Point Wells, LP bore the expenses relating to the transaction, including the transfer tax (estimated at approximately $350,000) and ancillary costs for completion of the transfer of the rights in its name.

Upon the closing of the transaction, BSRE Point Wells, LP granted POW and PPC a right of use of the property, without consideration, for a period commencing on June 2, 2010 and terminating upon the earlier of: (1) June 2, 2020 or (2) the time of sale of the property, after the enhancement thereof, to a third party in accordance with the development agreement. For more information on the purchase and development agreements, see "Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Purchase of Property in Point Wells, Washington from Indirect Subsidiary of Alon ".

Other Recent Activities in Our Real Estate Sector

During 2009, BSRE invested a total amount of NIS 9.4 million, including investments in rental offices and land in areas used for commercial and industrial development.

In addition, we have obtained a building permit and we are in the process of completing construction of an additional distribution and logistic center, as of May 31, 2010 held 100% by BSRE, which would be used for storage and distribution of Non-Food and Near-Food products for our Non Food chains and our supermarket stores. The distribution center would be operated on a 22,000 square meter site and would be leased to Bee Group. Including the initial expense of NIS 19.0 million to purchase the property, BSRE expects to invest a total of approximately NIS 105 million in building the distribution center.

Transfer of Real Estate Assets from Blue Square to BSRE

In 2006, pursuant to and under agreements entered with BSRE on June 21, 2006 (the "Transfer Agreement") and on April 2, 2006 (the "Split Agreement"), both of which were effective as of December 31, 2005, the Company transferred its real estate assets, all related rights and obligations and certain liabilities (including lease agreements of which the Company was lessor and Mega Retail or third parties were lessees) to Blue Square Real Estate Ltd. (BSRE), a then new wholly owned subsidiary, to manage approximately 146,300 square meters currently occupied by our stores and other lessees, as well as the unoccupied land and unused building rights under our ownership. At the time of the transfer, the transferred assets did not include: (i) real estate owned by Mega Retail and its subsidiaries and (ii) real estate that the Company leases from Mega Retail or third parties in connection with our retail activities. Among the rights transferred were those pursuant to long term lease agreements, lease agreements, partnership agreements, purchase agreements, easements and any other agreements between the Company and third parties relating to the transferred properties (including certain liabilities to banks for certain credit received by the Company).

Further, in August 2006, BSRE completed its initial public offering (IPO) of ordinary shares, unsecured convertible and non-convertible debentures on the Tel Aviv Stock Exchange. As a result of the offering, the Company holding in BSRE was reduced to 80% of the outstanding shares (78.35% as of May 31, 2010). The balance of BSRE shares is publicly held and traded on the Tel Aviv Stock Exchange.

For more information about additional agreements between the Company and BSRE, see “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions”.

Tax Authority Approval of Transfer by Blue Square to BSRE

On May 4, 2006, the Israeli Tax Authority approved our application for a ruling stating that the transfer of properties to BSRE would receive favorable tax treatment under the provisions of Sections 104A and 105A(2) and 105(I) to the Income Tax Ordinance, subject to certain conditions. In particular, the Israeli Tax Authority ruled that, assuming compliance with all conditions in the approval and the related provisions of the Israeli Income Tax Ordinance, there would be no capital gains or betterment tax, sales tax or, if applicable, stamp tax in connection with the transfer of the properties to BSRE (and BSRE is to be charged a reduced 0.5% of the asset value for purchase tax). The Israeli Tax Authority agreed with BSRE that the value of the transferred assets for purchase tax purposes (in the rate of 0.5%) is approximately NIS 1.3 billion.

The tax approval did not constitute an approval of the principles of allocation of obligations with respect to the transfer of properties to BSRE between the Company and BSRE prior to December 31, 2005. This allocation may be subject to review by the Israeli Tax Authorities and result in an adjustment. If an adjustment is required by the Israeli Tax Authorities, the Company and BSRE have agreed if additional obligations are imposed on BSRE, an indemnification arrangement will be implemented providing that the balance of the equity capital derived to BSRE from the Split Agreement will not be changed.

The Israeli Tax Authority approval was one of several permits and approvals necessary for completing the legal transfer of the assets and recording such assets under BSRE's ownership. The Israeli Tax Authority began the process of issuing tax approvals for the assets that were transferred only after December 31, 2007, until which time the Company and BSRE were required to comply with certain conditions of the Israeli Tax Authority ruling, as described below. BSRE received tax approvals for the transfer of all the assets transferred by the Company in the Split Agreement and for the majority of assets that were transferred by the Company in the Transfer Agreement.

A breach of the conditions set forth in the Israeli Tax Authority's approval and the related provisions of the Israeli Income Tax Ordinance may result in the Company being charged with capital gains or betterment tax and sales tax, and BSRE being charged for the full rate (5%) of purchase tax (and stamp tax, if applicable). Based on the Israeli Tax Authority's agreement with BSRE that the value of the transferred assets for purchase tax purposes is approximately NIS 1.3 billion, the full rate (5%) of purchase tax for the transferred properties is approximately NIS 65.6 million. Conditions of the Israeli Tax Authority ruling included the following:

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 was 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 was permitted to 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 was required to hold all of its rights in BSRE for two years. Notwithstanding the foregoing, the following circumstances would not be deemed a change in rights provided that until December 31, 2007, the Company was not permitted to 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 was 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 was prohibited from selling most of the remaining assets of the Company (i.e., which were not transferred under the Split Agreement), and BSRE was prohibited from selling most of the assets transferred to BSRE under the Split Agreement, and in each case during such period such assets would be used for acceptable uses in light of the circumstances.

A breach of a condition under the Israeli Tax Ordinance and/or under the tax approval with respect to one of the transferred properties under the Transfer Agreement will be deemed only a breach of the transfer of such property and not a breach of the entire restructuring under the Transfer Agreement. Therefore, in such case, applicable full tax charges will only be applicable to such property.

In addition, in accordance with the Israeli Tax Ordinance, the construction of buildings on unimproved land transferred to BSRE must be completed within four years of transfer. To the extent this construction is not completed within this four year period, which ended on December 31, 2009, the Company and BSRE may approach the Tax Authority for its determination as to whether such delay constitutes a default for purposes of the tax benefits. The Company and BSRE may be considered to be in breach of the conditions set forth in the Israeli Tax Authority's approval and the related provisions of the Israeli Income Tax Ordinance with respect to eleven properties on unimproved land transferred by the Company on which BSRE has not yet commenced or completed construction of buildings. BSRE submitted a request to the Israeli Tax Authority to change the basis for the tax exemption under the Income Tax Ordinance for the transfer of eight of the eleven properties, and during 2009 the Israeli Tax Authority granted the exemption. In connection with the exemption, BSRE paid additional purchase tax in the amount of NIS 1.4 million and received the tax permits for the transfer of the eight properties. BSRE believes that it complies with the conditions set forth in the Israeli Tax Authority's approval with respect to the remaining three properties. For additional information about our real estate, please see “- D. Property, Plant and Equipment” below.

Transfer of Real Estate Assets from Mega Retail to BSRE

In January 2009, Blue Square's board of directors approved a reorganization of its real estate activities pursuant to which Blue Square's wholly-owned subsidiary, Mega Retail, would transfer all of the real estate held by it to BSRE. On February 18, 2009, BSRE's shareholders approved the transaction, and the transfer was completed on September 13, 2009, and, pursuant to the approval of the Israeli Tax Authority, was effective as of March 31, 2009.

As part of the approved transaction, all real estate property (and related leases) held by Mega Retail and Mega Retail's subsidiaries were transferred to BSRE. All real estate property used by Mega Retail prior to the transfer was leased back by BSRE to Mega Retail for its retail activities under terms similar to existing lease agreements between BSRE and Mega Retail and existing lease agreements between BSRE and Blue Square that were previously transferred to Mega Retail, as described below. The periods of the existing lease agreements were extended to match the period of the new lease agreement, i.e., 10 years from the effective date of the transfer of the Mega Retail real estate assets to BSRE, with an additional option period of five years exercisable by Mega Retail.

The lease agreements between BSRE and Mega Retail contain terms similar to the existing lease agreements, which provide for annual rent for property used for supermarkets to be the higher of 2% of the annual turnover of that store or 9% of the amount paid by BSRE to purchase the underlying real estate of that store (excluding consideration paid for certain unused building rights), plus amounts invested by BSRE in the asset, reduced by certain costs and payments and increased according to Israel’s CPI. The annual rent for property not used for stores is equal to 9% of the amount paid by BSRE, linked to increases in Israel’s CPI.

The sale of Mega Retail's real estate property (and related leases) to BSRE was for an aggregate consideration of approximately NIS 463 million. As part of the consideration for the transaction, BSRE assumed Mega Retail's financial liabilities to a bank in an amount of approximately NIS 390 million that were attributed to the transferred properties and paid the Company in cash the balance of NIS 68 million, representing the difference between the value of the transferred properties (less certain expenses associated with the transfer) and the assumed liabilities. BSRE financed the assumption of the liabilities by paying the bank NIS 140 million and entering into a loan agreement with the bank for a 15-year loan for the remaining amount of NIS 250 million. Pursuant to the loan agreement, BSRE must comply with certain financial terms and covenants. As of December 31, 2009, BSRE met these covenants. In addition, BSRE has pledged 15 of the transferred properties (including income from the lease agreements with Mega Retail) as collateral for the loan, and agreed that it will not grant any floating charge on its assets without prior consent from the bank.

Tax Authority Approval of Transfer by Mega Retail to BSRE

During 2009, the Israeli Tax Authority approved Mega Retail and BSRE's application for a ruling stating that the transfer of properties from Mega Retail to BSRE would receive favorable tax treatment under the provisions of Section 105 to the Income Tax Ordinance, subject to certain conditions. In particular, the Israeli Tax Authority ruled that, assuming compliance with all conditions in the approval and the related provisions of the Israeli Income Tax Ordinance, Mega Retail will be able to defer its payment of betterment tax by the depreciation rate of the depreciable properties, or, if earlier, upon the realization of the properties (so far as realized) by BSRE, and BSRE would be charged a reduced 0.5% of the asset value for purchase tax, or NIS 2.5 million.

The tax approval did not constitute an approval of the principles of allocation of obligations with respect to the transfer of properties to BSRE between the Company and BSRE prior to December 31, 2005. This allocation may be subject to review by the Israeli Tax Authorities and result in an adjustment. In addition, the tax approval did not constitute an approval of the valuation of the transferred properties, and such valuation may be subject to review by the Israeli Tax Authority.

A breach of the conditions set forth in the Israeli Tax Authority's approval and the related provisions of the Israeli Income Tax Ordinance may result in Mega Retail being charged with capital gains or betterment tax and sales tax, and BSRE being charged for the full rate (5%) of purchase tax. Conditions of the Israeli Tax Authority ruling included the following:

Until March 31, 2011, the Company, Mega Retail and BSRE may not transfer one to the other assets, cash, the granting of guarantees or any other activity except in the ordinary course of business. In addition, until March 31, 2011, Mega Retail and BSRE may not grant and/or receive loans to each other except in the ordinary course of business.

Until March 31, 2011, Mega Retail and BSRE shall each conduct its economic activity independently from the other, and the income deriving from such economic activity shall be subject taxation according to Section 2(1) of the Israeli Tax Ordinance, and shall originate in the activities of each of Mega Retail and BSRE prior to the split.

Until March 31, 2011, Mega Retail is prohibited from selling most of the remaining assets of Mega Retail (i.e., which were not transferred under the split), and BSRE is prohibited from selling most of the assets transferred to BSRE under the split, and in each case during such period such assets will be used for acceptable uses in the ordinary course of business.

Until March 31, 2011, the Company is required to hold all of the rights that it held in BSRE prior to the split. Notwithstanding the foregoing, the following circumstances will not be deemed a change in rights provided that at any time until March 31, 2011, 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.

Description of Real Estate Properties

Following the reorganization of our real estate activities, all of our real estate is owned by our 78.35% subsidiary, BSRE, and includes commercial areas which are mainly designated for the use of our supermarket branches and for the operation of our retail chain, a 50% holding in Hadar Mall, small commercial sites, office buildings, logistics sites, our holdings in the Wholesale Market Company and additional undeveloped properties for use as commercial areas, office buildings, and logistics centers.

As of December 31, 2009, the total square meters of developed property that we owned was approximately 243,600 square meters, the total square meters of property in development that we owned was approximately 36,100 and the total square meters of unutilized building rights that we owned was approximately 210,000 square meters.

The following table provides certain details regarding our real estate properties of which we are the legal owner (including through long-term leases from the Israel Land Administration), as of December 31, 2009:

	Number of properties for use or rent	Area in sq. m. for leasing (property space)	Occupancy rate
Commercial areas, including supermarket branches	216	183,600		98	%
Warehouses and Logistics centers	8	43,800		95	%
Offices	16	16,200		83	%
Total developed property	240	243,600		88	%

Offices	1	14,100
Warehouses	1	22,000
Total property in development	2	36,100

Total unutilized building rights		210,000

Below is a short description of a number of these properties:

Commercial areas, including supermarket branches

The properties designated for supermarkets are individual units or integrated units in buildings in industry, residential or commercial areas. Some of the properties have parking lots and operational areas that are not included in the sq. meters calculated for lease. The majority of the supermarkets properties are leased to BSI. Below are the two additional commercial areas not designated for supermarkets that BSRE owns:

Hadar Shopping Mall - BSRE owns 50% of the property, which is located in Talpiot industrial area in Jerusalem. The other 50% is held by a third party. The lease from the Israel Land Administration ends in 2021 with an option to extend the lease for an additional 49 years, subject to a fee. The two-floor mall includes 18,000 sq. meters of commercial space, including 780 parking spots. The space is leased to third parties, including 4,700 sq. meters to Hyper Hyper. As of May 31, 2010, the occupancy rate of the mall is 100%. The property is managed by a joint management company. BSRE and the third party have applied to the zoning committee for a permit for an additional commercial floor above the existing floors of 9,000 sq. meters, an additional upper level parking garage and an additional 6% building rights for commercial purposes and additional floors (the "Expansion Project"). As a result of the global economic and financial market conditions during 2009, and the uncertainty regarding future commercial activity, the parties decided to suspend the execution of the Expansion Project. During 2010 the parties intend to reassess the Expansion Project and will decide after such assessment whether to continue with the Expansion Project. As of May 31, 2010, all conditions to receive building permits for the Expansion Project have been met, except for payment of a fee.

Property designated for a shopping center in Netanya- a 19 dunam property with rights for 30,000 sq. meters of commercial spaces and offices. The cost of this property was approximately NIS 27 million. BSRE intends to build a shopping mall of approximately 14,500 sq. meters on the first and second floors with an underground parking garage of approximately 12,000 sq. meters, as a first stage of development of the property, and BSRE estimates that the cost of this first stage of development will be approximately NIS 100 million and is targeting completion for 24 months from the beginning of construction. BSRE has begun marketing the areas of the project for lease. As of May 31, 2010, BSRE had registered the property under its name; however, since BSRE acquired the property in the framework of a foreclosure of a mortgage registered on the property, the status of the property is still being contested in legal proceedings.

In addition, BSRE holds 50% of the share capital of 1108 Center Investments Ltd., an investment company that holds the rights in a commercial property of 14,130 sq. meters in Beer Sheva on which a commercial center is built.

Offices

BSRE is the owner of the following three major office building and properties designated for office building construction:

Kiryat Arie, Petach Tikva- BSRE, owns a property of three office buildings of total area of 14,000 sq. meters with rights to build two more stories to the existing building. The cost of the acquisition of this property was approximately NIS 32 million. BSRE intends to renovate the three buildings for office use and to add an additional two stories to the existing building. BSRE has obtained building permits for the construction. BSRE estimates that the additional cost of renovation and building of the additional floors would be approximately NIS 45 million and is targeting completion for 18 months from the beginning of construction. BSRE estimates that it will begin construction on the buildings during 2010 at which point BSRE will begin to market some or all of the spaces. In addition, BSRE has submitted a request to the district zoning committee to promote a zoning plan for additional building rights on this property for commercial and office use.

Afek Industrial Park, Rosh Ha'ayin- during 2009, within the framework of the transfer of real estate from Mega Retail to BSRE, Mega Retail transferred to BSRE an office building in Afek Industrial Park. The office building, which is built on a 13,770 sq. meter property, includes two floors of offices with a total area of 9,300 sq. meters, which are leased to the Company and serve as the Company's executive offices. The ground floor of the buildings also includes a supermarket, taxi cab station and a small gas station operated by Mega Retail. The property also includes parking areas for the offices and the supermarket. There are approximately 3,784 sq. meters of unutilized building rights, which are designated for light industrial and commercial use. BSRE is currently examining the possibility of building another office building on this portion of the property.

North Ra'anana – during the first quarter of 2008, BSRE completed the acquisition of ownership rights in an 11 dunam plot designated for commercial and office buildings located in the northern industrial area of Ra'anana. As of May 31, 2010, a total of 4,000 sq. meters of the property are leased for a parking lot. In September 2009, the local zoning committee approved BSRE's application to build a 20 story high-tech office building on the property containing a total of 26,000 sq. meters which would include one commercial floor and an underground parking area of 16,000 sq. meters. BSRE is in the process of meeting the requirements for a building permit for this office building. BSRE is not currently able to estimate the amount of time or the scope of the investment that will be involved in this project.

Logistics Areas

Below is a short description of the logistic areas owned by BSRE or for which BSRE has agreements to purchase:

Kibbutz Einat – BSRE holds 50% of Einat Yield Generating Real Estate Cooperative Ltd. ("Einat Ltd."), which has received from Kibbutz Einat its rights to lease a property of 26 dunam of industrial use (all of which is leased to different lessees). The cost of BSRE's share of the rights in this property was approximately NIS 24.4 million. The property includes four warehouses containing a total of 14,000 sq. meters which are leased to different lessees with options to renew. On August 23, 2009, Kibbutz Einat signed a long term lease with the Israel Land Administration, and shortly thereafter submitted a request to the Israel Land Administration to allow Kibbutz Einat to transfer the lease to Einat Ltd. As of May 31, 2010, the Israel Land Administration had not yet responded to this request. According to the assessment of BSRE's legal counsel, it is likely that the lease will be transferred to Einat Ltd.

Be'er Tuvia - BSRE owns, through its wholly owned subsidiary Logistic Center Bee Square Real Estate Ltd. ("Logistic Center "), a 74 dunam property of which 63 dunam are designated for industrial (and storage) areas. BSRE estimates that it has rights to build 72,000 sq. meters of commercial areas and office buildings. Logistic Center has entered into an agreement with the Bee Group to build the distribution center which would be used for storage and distribution of Non-Food and Near-Food products for our Non Food chains and our supermarket stores. The lease would be for a period of 12 years from beginning of use of the property with an option to renew for additional three year periods (but not to exceed a total renewal period of 24 years) for an annual payment equal to 9% of the total investment made by Logistic Center in acquiring and building this distribution center, linked to the CPI. The distribution center would be operated on a 22,000 square meter site and would be leased to Bee Group. Including the initial expense of NIS 19.0 million to acquire the property, BSRE expects to invest a total of approximately NIS 105 million in building the distribution center. BSRE estimates that the project will be completed and the buildings will be occupied by tenants during 2010.

Kibbutz Eyal - BSRE and Eyal Hasharon, an agriculture cooperative society Ltd. ("Eyal Hasharon"), signed an agreement for the development of a 57 dunam property for storage and logistics usage. Under the agreement, BSRE and Eyal Hasharon will jointly hold in equal parts a new company to which Kibbutz Eyal will transfer the property. Closing of the transaction is subject to various conditions, including the approval of the Israel Land Administration which, as of May 31, 2010, has approved the transfer of 41 dunam only. Various other closing conditions have also not yet been satisfied. The validity of the agreement is dependent on the conditions being satisfied by November 19, 2010, and BSRE has the right to extend this period at its sole discretion. In addition, pursuant to this agreement BSRE will transfer to the new company an amount based on the purchasing costs, development costs and an additional cost, but not less than $70,000 per dunam. In the event that the costs exceed $100,000 per dunam, BSRE will have the right to terminate the Agreement.

Rishon LeTzion- Blue Square's logistic center is located in the western industrial area of Rishon Letzion. Part of the property is an open area used by Blue Square for container storage and as a loading area and includes unutilized building rights of approximately 14,838 sq. meters that may be used for industrial, commercial and storage purposes.

Properties with development potential

As of December 31, 2009, BSRE has rights to build a total of 210,000 sq. meters (202,000 sq. meters mainly for commercial purposes and 8,000 sq. meters for residential purposes). Because the utilization of building rights is dependant on economic feasibility, satisfaction of various conditions, payment of costs and other factors, it is not clear if and when BSRE would utilize these building rights.

Wholesale Market Company

As of June 3, 2010, BSRE, Gindi Investments 1 Ltd. and an additional entity controlled by Moshe and Yigal Gindi (through two subsidiaries owned 50% by BSRE and 50% by Gindi), signed agreements to acquire rights to a long term lease of property in the wholesale market site in Tel Aviv for the purpose of building and marketing on the property an apartment buildings complex and a shopping mall from the municipality of Tel Aviv and the Wholesale Market Company Ltd. The agreements are subject to approval by the Israeli Minister of the Interior within 60 days of the date on which the agreements were signed. For more information, see "Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Agreement with Wholesale Market Company."

Point Wells, Washington

On June 1, 2010, BSRE completed the acquisition of an approximately 240-dunam parcel of property in Point Wells, near Seattle, Washington, which serves primarily as a plant for storage and distribution of fuel and oils. BSRE purchased the property through a wholly owned special purpose entity, BSRE Point Wells, LP, which had entered into a purchase agreement with Paramount of Washington LLC ("POW") for the property and also entered into a development agreement with POW and Paramount Petroleum Corporation ("PPC"). PPC leases the property from POW and operates and maintains it. POW and PPC are wholly owned subsidiaries of Alon USA Energy Inc., which is controlled by our indirect controlling shareholder, Alon Israel Oil Co. Ltd. ("Alon").

The present zoning of the property is for heavy industrial use, and BSRE, through BSRE Point Wells, LP, is furthering a plan for a change of zoning of the property from heavy industrial zoning to an urban center zoning. To the best of BSRE’s knowledge, as of May 31, 2010, such change in the zoning of the property has been approved in principle, subject to completion of local statutory proceedings, the hearing of objections and additional approval proceedings, including the preparation and approval of a detailed plan which will, inter alia, make it possible to erect residential buildings and commercial space on the property.

Competition

Supermarkets

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

Based on A.C. Nielsen, we estimate that our market share of the bar-coded market in Israel in 2009 was approximately 21.8% (which percentage includes for the first time, data for our 51% subsidiary, Eden Teva), Shufersal's market share of the bar-coded market in Israel in 2009 was approximately 37.3%, and the smaller supermarkets' market share of the bar-coded market in Israel in 2009 was approximately 37.6%.

In recent years, we and our competitors have established or expanded low-price and hard discount store formats. In December 2008 we launched our "Mega Bool" hard discount store format to address the hard discount store market. In addition, smaller supermarket chains in 2009 continued to aggressively increase their market share and expanded their presence in selected areas in Israel, often geographically beyond their original locations. The low barriers of entry, including the relatively low cost of establishing new smaller supermarket chains, have contributed to the increase in number and expansion of smaller supermarket chains in recent years.

Shufersal, the other major supermarket chain, has taken numerous initiatives in the last few years to improve its competitive position. Since 2005, when Shufersal merged with ClubMarket, the then third major supermarket chain, we have faced a major competitor, with a broader national presence, especially in the northern part of Israel where many of ClubMarket stores were located. Many of Shufersal's stores are characterized by every day sale of products at low prices. The competitive position of Shufersal, together with the expansion of smaller supermarket chains in recent years, has contributed to the intensified competition we experienced in recent years, particularly at our larger stores.

In November 2005, the Commissioner of the Israeli Antitrust Authority approved certain arrangements between the Fourth Chain Company Ltd. (“the Fourth Chain”) and certain smaller supermarket chains. This approval was granted subject to certain conditions for an initial period of two years and has since been extended until February 17, 2011. The Fourth Chain combines a number of smaller supermarket chains (the “Members”) which operate on local geographic level and its purpose is to develop a private label and to jointly negotiate with suppliers. Pursuant to the approved arrangement, the Fourth Chain is expected to perform the following actions for its Members: to develop and market a private label which shall be marketed exclusively in the Member stores; to purchase for the Members complementary services and products; to negotiate with suppliers from abroad for the import of products for the Members and, in a later stage, to negotiate prices and commercial conditions with suppliers; to operate a central joint warehouse; and to sell products to retails other than its Members. The aforesaid arrangement, and possible similar combinations of other smaller supermarket chains, may generate some of the efficiencies of a major national-spread chain and therefore enable them to compete more efficiently with the major chains.

In the sale of cosmetic, toiletries and hygiene products, we compete against establishments that sell such products, including the drug store chains SuperPharm and NewPharm.

Non-Food Retail

In addition, due to our sale of other “Near-Food” and “Non-Food” products in our supermarkets and in our stand alone non-food stores, and our acquisitions of controlling interests of “Non-Food” chains, Bee Group, Vardinon Textile Ltd. and Naaman Porcelain, we also face competition in the non-food retail market. In recent years, this competition has increased primarily due to the entry of retail chains and stores outside the food industry, such as Toys “R” Us, Office Depot, do-it-yourself chains such as Home Center and ACE (a franchisee of Ace Hardware), household stores, home textile stores, houseware stores, electricity appliances stores and also due to the expansion of the houseware and home textile departments in supermarkets. This competition affects the sales prices of our products and the scope of our sales. Increased competition may adversely affect our scope of sales and our profitability.

The merchandise we sell in our non-food retail business through Bee Group is varied, and we therefore compete in several different markets.

In the houseware market, in which our "Naaman" and "Sheshet" stores compete, there has been a consistent increase in competition in recent years, both due to the entry of the do-it-yourself chains, such as Home Center and ACE, and due to the expansion of houseware departments within the supermarket retail chains, such as Shufersal. The sale of these products through catalogs and internet sales sites has also increased in recent years. We do not have enough information to assess our market share in this market, as most of our competitors are privately owned companies.

The home textile and accompanying accessories market in Israel in which our "Vardinon" stores compete is highly competitive. Vardinon's competitors in this market include home textile departments in large retail chains, department stores and privately owned stores. In addition, there are also many companies and distributors that market and sell home textile products to wholesale customers. We do not have any formal information about the size of the home textile market and the market share of the various competitors in this market, however, we estimate that our "Vardinon" chain is one of the leading retailers in the premium home textile market.

Our "Dr. Baby" stores compete in the baby and young children accessories market, and our "All for a Dollar" and "Kfar Hasha’ashuim" stores compete in the toys and leisure accessories market and the back-to-school products market. We do not have enough information to assess our market share in this market, as most of our competitors are privately owned companies.

Yield-Generating Real Estate

The yield-generating real estate market in Israel is highly competitive and is characterized by a large number of competitors. The main factor affecting competition in this market is geographic location of property. There are properties in close proximity to some of our properties that are similar in purpose and use, which has the effect of increasing competition for the leasing of those properties as well as reducing the rental rates for those properties. Other factors affecting competition are the leasing price, the physical condition of the properties, the finishing of the properties and the level of the management services provided to tenants. Furthermore, the economic and financial market crisis may further increase competition, leading to a reduction of rental fees and a decline in demand for properties.

Our Operations

Supermarkets

Our supermarket operations are conducted under the Mega Bool, Mega, Mega In Town, Shefa Shuk and Eden Teva store formats, which are among the most well-recognized retail names in Israel.

Our supermarkets offer a wide selection of supermarket goods. The mix of products of each supermarket format varies to address the preferences of its target customers. Many of our supermarkets offer specialty departments such as full service bakeries, delicatessens, fresh meat and prepared food departments; certain supermarkets also contain franchise operations, which sell a variety of goods. In addition, we offer a range of “Non-Food” and “Near-Food” items and operate several toy and houseware departments within most of our large stores. We also launched a private label for the Company, called "Mega", that was expanded throughout our "Mega Bool", "Mega in Town" and "Mega" store formats beginning on December 2008. Following the reorganization of our retail activities, all of our supermarket stores operations are owned by Mega Retail and its subsidiaries. As part of the reorganization of our real estate activities, BSI transferred all of its supermarket store leases to Mega Retail, and Mega Retail now leases the real estate underlying the stores that it operates from BSRE and third parties.

The following table provides certain information regarding our supermarket stores as of December 31, 2009:

Retail Format	Number of Stores	Store Space (square meters)

Mega Bool (1)	47	143,000

Mega (2)	11	46,000

Mega in Town (3)	119	133,000

Shefa Shuk (4)	17	29,000

Eden Teva (5)	9	14,000
Total	203	365,000

(1) Hard discount stores designed to provide customers with name brand quality at everyday affordable prices.

(2) Large stores (average size of approximately 4,100 square meters), primarily located outside residential areas, offering a wide selection of food items and other departments.

(3) Medium and small size stores primarily located in city centers and local neighborhoods which combine discount prices with convenience for neighborhood shoppers. This format is designed to bring discount shopping to the neighborhood and city centers.

(4) Low-priced supermarkets with a selection of products designed to compete with local competition and also oriented to ultra-orthodox Jewish population.

(5) Supermarkets that specialize in organic, natural and health food products, operated by Eden Teva, which is held 51% by Mega Retail.

Non-Food Retail

Our 85% subsidiary, Bee Group, holds and operates through subsidiaries large retail chains with 268 stores, some of which are owned and operated by the subsidiaries and some 189 of which are owned and operated by franchisees as of May 31, 2010. The stores are operated under the following brand names: (i) "Naaman", which sells houseware products; (ii) "Vardinon", which sells home textile products and accompanying accessories; (iii) "Sheshet", which sells houseware and small electrical appliances; (iv) "Kfar Hasha’ashuim" (Toy Village), which sells toys; (v) "Rav-Kat" and Dr. Baby, which sell baby and young children accessories; and (vi) “All for a Dollar". The stores of our "Naaman", "Vardinon" and "Dr. Baby" chains are primarily owned and operated by us, while the stores of our "Kfar Hasha'ashuim", "Sheshet" and "All for a Dollar" chains are primarily owned and operated by franchisees. In addition to these stores, we have established toy and houseware departments within most of our large stores, which are owned by us, and we expect to expand the variety of products offered in such departments in 2010. As part of a pilot program, in 2009, our Bee Group subsidiaries, Naaman and Vardinon, jointly opened two stores operated by Vardinon that offer both houseware and home textile products in one store. In 2010, we also plan to expand this initiative and to establish stores that combine different Bee Group store formats into one store format that will offer houseware and home textile products.

Each of the subsidiaries of the Bee Group separately manages its own operations. During the fourth quarter of 2009 we centralized all of the financial activity, import and information systems of the Bee Group subsidiaries under a single headquarters, which provides some of the services that were previously managed separately by each of the subsidiaries. The relationship with the franchisees is generally governed by franchise agreements between the relevant Bee Group subsidiary ("Franchiser") and the franchisee. The majority of the franchise agreements provide for a term of 10 years with two renewal options, each for a period of five additional years. Under most of the agreements, the Franchiser and the franchisee may terminate with prior written notice.

The franchisee generally commits to establishing its store(s) in designated locations and purchasing products for the stores only from the Franchiser or from third party suppliers designated by the Franchiser. While the Franchiser typically has no similar obligation to sell its products only through its franchisees, in practice, aside from sales to the franchisees or through the Franchiser's own stores, the Franchisers primarily sell their products only to Blue Square and to the Alon Group.

Bee Group has one material franchisee that operates, both on its own and with other third parties, seven "Kfar Hasha’ashuim" stores, two "All for a Dollar" stores, and eight "Sheshet" stores.

The following table provides certain information regarding our non-food retail stores as of December 31, 2009:

Retail Format	Number of Franchised Stores	Number of Self Operated Stores	Total

All for a Dollar	39	1	40

Kfar Hasha’ashuim	83	1	84

Dr. Baby and Rav-Kat	7	12	19

Sheshet	53	—	53

Vardinon	—	36	36

Naaman	5	23	28

Total	187	73	260

Purchasing and Distribution

Supermarkets

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

Through our distribution center in Rishon Letzion, we can distribute products from suppliers, manufacturers and importers, thus reducing prices and broadening the range of available products. The distribution center is operated on a 40,000 square meter site. At this site, we operate approximately 20,000 square meters as warehouse space. We conduct the administration of the warehouses and distribution by means of a computerized system that consolidates orders from all the branches while giving consideration to inventory levels, store requests and company planning.

We purchase products for our supermarkets from approximately 700 suppliers, including manufacturers, importers and distributors. In 2009, approximately 84% of our grocery items and 93% of our meat and fish were delivered directly by suppliers to some of our stores. For certain other items, including 86% (in 2009) of fruits and vegetables, we provide distribution to our supermarkets through our distribution center. For the year ended December 31, 2009, approximately 21.1% of our supermarket purchases were of products distributed from the distribution center.

We actively seek to diversify our suppliers. However, we purchase most of our dairy, fresh produce and poultry products from the Tnuva Corporation, which holds a leading position in the domestic dairy and poultry markets. In 2009, Tnuva’s products accounted for approximately 14.4% (which percentage includes for the first time, data for Tnuva's subsidiary, Tirat Zvi) of all the products sold at our supermarkets. For more information on our arrangements with Tnuva, see "Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transaction – Arrangements with Tnuva." In addition, the Strauss group, an Israeli food manufacturer, accounted for approximately 9.2% of all products sold at our supermarkets in 2009, and the Osem group accounted for approximately 7.5% of all products sold at our supermarkets in 2009. Because of our status as a leading food retailer in Israel as a result of which we are able to offer a wide exposure and promotion, on a national level, to these suppliers' products, and the fact that we maintain an excellent and long-standing relationship with Tnuva, Strauss group and Osem, we do not believe that there is a material risk of future stoppage of supply of products of these key suppliers. However, we do not have a written contract with Tnuva, Strauss group or Osem obligating them to supply products to us. In addition, in recent years, there has been a process of consolidation among our suppliers. As a result, our largest suppliers now account for a larger percentage of our product purchasers. The ten largest suppliers for our supermarkets accounted for approximately 55.7% of our product purchases in 2009. We have not experienced any material problems in obtaining products of the quantity and type required.

Non-Food Retail

Naaman, Sheshet, "Kfar Hasha’ashuim" and "All for a Dollar" acquire the products and accompanying accessories which they market from numerous suppliers in Israel and abroad, mainly from the Far East. The overseas suppliers are generally manufacturers.

Vardinon purchases its home textile products either as finished products or through subcontractors, each of which is generally responsible for a certain part of the manufacturing process. Vardinon has many suppliers and subcontractors in Israel and abroad, mainly the Far East, India and Turkey, and they may vary from season to season based on various factors.

Vardinon is dependent on one material supplier, Office Textile Ltd., which supplies Vardinon with dyed fabric. Purchases from this supplier accounted for 33% and 26% of Vardinon's total purchases of materials and outsourced projects in 2008 and 2009, respectively.

As of May 31, 2010, we had obtained a building permit and we are in the process of completing construction of an additional distribution and logistic center, as of May 31, 2010 held 100% by BSRE, which would be used for storage and distribution of Non-Food and Near-Food products for our Non Food chains and our supermarket stores. The distribution center would be operated on a 22,000 square meter site and would be leased to Bee Group. Including the initial expense of NIS 19.0 million to purchase the property, BSRE expects to invest a total of approximately NIS 105 million in building the distribution center.

Marketing

We endeavor to create an awareness of our supermarkets as offering a combination of broad selection, high-quality service and competitive prices. Our primary advertising outlets, in addition to point-of-sale marketing, are television, newspapers, radio, internet, billboards and direct mail. Store promotions are conducted, from time to time, in all our supermarkets, in specific chains or in individual stores. These promotions include, among other things, price reductions, gifts, coupons or deferred payment terms and are often available exclusively to members of our Loyalty Plan - "You", and customer clubs for Shefa Shuk and Eden Teva.

The goal of our Loyalty Plan, which we established together with Dor-Alon Energy In Israel (1988) LTD. and offers to our customers credit cards (Diners and Mastercard) bearing the name "You", or a new membership card, is to promote customer loyalty to the Company and Dor Alon by, among other things, granting exclusive benefits to the Loyalty Plan members, including establishing a cash-based reward mechanism, and providing discounts and benefits at other businesses that would join the Loyalty Plan. In addition, through the Loyalty Plan the Company may provide other services such of personal finance, insurance products and tourisms packages. The benefits are advertised and disseminated each month via e-mail to the members of the Loyalty Plan. During 2009, we closed our “Buy & Bonus” frequent-buyer incentive program and offered the members of such programs membership in our new "You" membership club, which is designed to increase consumer traffic and encourage customers to patronize our stores. These customer clubs grant a variety of discounts and benefits to participants.

The Loyalty Plan also owns a 50% share in the Israeli Hebrew-language free daily newspaper, Israel Post, the distribution of which began in August 2007, mainly in establishments such as Blue Square supermarkets, AM-PM convenience stores and Dor Alon gas stations.

Supermarkets

We have joint advertising and sales initiatives together with some of our suppliers. The stores accept cash, checks, credit cards, gift certificates and prepaid electronic cards.

During the High Holiday and Passover seasons, we run gift certificates programs, under which we issue and sell gift certificates and prepaid cards to institutions, companies and individuals. The gift certificates and the prepaid cards can be used in our stores as well as other stores with which we entered into collaboration agreements. We also participate in tenders in connection with the sale of our gift certificates and prepaid cards. From time to time, we also operate joint marketing promotions with other entities.

In addition, we operate the Mega by Internet website which allows customers to place orders via the Internet 24 hours a day and to have the products in our stores delivered to our customers’ homes from a nearby store within a few hours. Likewise, customers may order products by phone (through a calling center) or by fax. The service is provided (through 20 centers located at Mega and Mega Bool stores) in most of Israel.

Non-Food Retail

Our main marketing channels for our Non-Food products are (i) the Bee Group stores operating under Bee Group's various brand name retail chains, (ii) non-food departments in our supermarkets and (iii) direct sales to wholesalers and institutional customers.

Our Naaman chain markets its products to privately owned stores, retail chains, institutional customers, employee committees and sales promotion companies. Our Vardinon chain markets its products through stores that are owned and operated by Vardinon that are located primarily in shopping centers, as well as to other customers, including, wholesalers, retail chains, employee committees and catalogues.

As part of a pilot program, in 2009, Bee Group began establishing specialized departments for household products in our supermarkets that sell Naaman, Sheshet and Vardinon products. Bee Group plans to expand these departments in 2010.

As part of a pilot program, in 2009, our Bee Group subsidiaries, Naaman and Vardinon, jointly opened two stores operated by Vardinon that offer both houseware and home textile products in one store. In 2010, Bee Group also plans to expand this initiative and to establish stores that combine different Bee Group store formats into one store format that will offer houseware and home textile products.

Government Regulation

Supermarkets

Our operation of supermarkets in Israel requires permits from municipal authorities, which are conditioned on the prior approval of various agencies, including the health and environment ministries, the police and fire departments. If we are unable to obtain or maintain one or more required permits, we may be required to close one or more stores or to take other remedial action to obtain or maintain these permits. See “Item 3. Key Information - D. Risk Factors - Failure to obtain or maintain permits required for our operations may adversely affect our operating results”.

Price Control

The Israeli government is authorized to control the retail and wholesale prices of goods and services offered in Israel. At present, a few of the products we offer in our stores, including bread, flour, eggs, milk and margarine are subject to government-imposed price controls. Any imposition of more extensive price controls in the future than those that currently exist may have a material adverse effect on our operating results. See “Item 3. Key Information – D. Risk Factors - Government-imposed price controls may have a material adverse effect on our operating results”.

Deposits for Drink Containers

We are required to charge a deposit for drink containers of less than 1.5 liters and more than 0.1 liter and accept the return of empty containers for refund. The Knesset, the Israeli legislative body, considers from time to time amendments to this law which, among other things would require stores to also charge a deposit for drink containers of 1.5 liters and more and accept the return of empty containers for refund.

We have incurred expenses to allocate storage space for the empty containers and dedicate special cashiers for returning the deposits. We have also incurred expenses for additional personnel and equipment, including equipment in some of our stores that enable consumers to automatically receive their deposits while bringing back the empty containers without the need for store personnel.

Limits on Expansion

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

Arrangements between Major Supermarkets Chains and Large Suppliers

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

On January 5, 2005, the Commissioner of the Israeli Antitrust Authority issued his position regarding “commercial restrictive practices between the dominant food suppliers and the major supermarket retail chains”. According to the Commissioner’s position, some of these practices were found to be restrictive trade agreements under the antitrust laws. The Commissioner prohibited these practices unless approved by the Restrictive Trade Practices Court or exempted by the Commissioner himself.

After the publication of the position paper, the Commissioner stated his position that these directives constitute a position paper, which is “intended to provide the guidance concerning the normative status of various practices in the food retail industry as perceived by the Antitrust Authority”. The Commissioner indicated that this document does not have normative status.

We have been applying most of these directives among others, by an internal compliance program that we have adopted.

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. In February, 2009, the above period was extended by 36 months, until February 2012.

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 of 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 possesses 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.

The consent decree clarifies that nothing in the provisions contained therein prevents the chain from allocating shelf space at its own independent discretion, even if such allocation exceeds half the available shelf space, so long as there is no involvement or interference from the supplier and so long as there is no prior coordination or understanding with said supplier.

The Company is not a party to the consent decree; however, it could nevertheless have an effect on the practices of the Company’s suppliers and indirectly on the Company.

Consumer Protection Laws

We are obligated to label prices on our products on the basis of two main laws: The Consumer Protection Law, 1981, and the Commodities and Services (Control) Law, 1957. Contravention of these laws constitutes a criminal offense. In 2009, new regulations under the Consumer Protection Law became effective under which we are obligated to indicate on the shelf the price per measurement unit with respect to most of our products. Said regulations impose on us additional costs and could increase the risk for discrepancies between the prices that appear on the products, the prices that appear on the shelf and the prices charged by the cash register. In 2007, we were convicted in a plea bargain in connection with discrepancies between the prices appearing on products, and the prices charged by the cash register at the point of sale. As of the date of this Annual Report, two indictments were filed against us and Hyper Hyper regarding the violation of the Consumer Protection Law. See “Item 8. Financial information - A. Consolidated Statements and Other Financial Information - Legal Proceedings”. These discrepancies are the result of human error by personnel responsible for labeling our products and other circumstances beyond the Company's control. We are making efforts to minimize these errors, including directing store management to charge the lower price in situations where a discrepancy is found between the price on a product and the price appearing at the cash register.

We are also obligated under these laws to advertise and conduct our business in a manner that is not misleading to our customers. Our obligations include, among other things, ensuring that our advertised prices are the prices that are actually charged by the cash registers in our stores, and ensuring that our coupons may be used in our stores as advertised. In December 2005, the applicability of the Consumer Protection Law with respect to the prohibition of misleading conduct was expanded to apply also to conduct following the completion of the transaction between the consumer and the supplier.

In addition, under the Consumer Protection Law, we are obligated to post our merchandise return policy in our stores. The law and regulations promulgated thereunder impose various requirements regarding the location, details, size and shape of the notice of such policy.

In addition, under the Consumer Protection Law, a remedy of exemplary (punitive) damages may be provided to plaintiffs for specific violations of the law under certain circumstances.

Regulations under the Consumer Protection Law also regulate the warranty and post-sale services of certain electrical appliances. Under the regulations, sellers of new electrical appliances (priced in excess of NIS 400) to the end user consumer are required to assume the responsibilities of the manufacturer(s) of the appliances in the event such manufacturer cannot be located. Such responsibilities include repairing any defect in the appliance (or, if necessary, exchange for non-defective appliance) during the warranty period, which repairs must be made within a certain period of time for certain appliances and, upon consumer request, supply of spare parts during the warranty period (and for certain appliances also one year thereafter). In addition, sellers must deliver to consumers a manufacturer warranty certificate with the delivery of the products.

Recent proposed amendments to the Consumer Protection Law, 1981 and to the regulations promulgated thereunder, would also grant to consumers rights to cancel a transaction and receive a refund under various circumstances.

The Class Actions Law (the “Law”) codified prior existing class actions arrangements, including under the Consumer Protection Law, by among other things, substantially extending the causes of action under which one can bring a class action, alleviating the prerequisites for certifying and maintaining a class action and lowering the eligibility requirements for a class action representative. The Law is not unique to the line of business in which we engage; however, the expansion of the availability of the Law to potential claimants increases our exposure to potential lawsuits.

Product Liability

We market various products, including foods and cleaning and hygiene products, which may affect consumer health, and, as such, we are subject to legislation and supervision (for example, Liability for Defective Products Law, 1980) relating to these areas, including orders of the Ministry of Health relating to the import and sale of food and cleaning and hygiene products, as well as veterinary supervision of the marketing of meats. In addition, many laws and regulations govern the rights of persons that may have been injured by products that we manufacture, assemble, store, market or sell.

Manufacturing and Import Standards

We are required to comply with certain manufacturing standards in connection with our manufacturing activities, and specifically those activities that relate to the manufacturing of our private label products. We endeavor to ensure that that the products that are manufactured on our behalf comply with any relevant standards and legal requirements.

In addition, we must comply with import standards relating to the sale of imported products, including obtaining a general import license from the Ministry of Health for importing food products that we sell, as well as requirements relating to electrical appliances.

Several proposed legislations have been submitted to the Knesset regarding the reduction of usage of plastic (nylon) bags. Under the proposed legislations, it is proposed, among other things, that: (i) business establishments (including food retail chains) will not keep or use bags which are not bio-degradable; (ii) food retail chains would be required to provide to its consumers with packing bags designated for more than one use, free of charge or for minimal consideration; (iii) a levy in the sum of NIS 1 would be imposed for each plastic bag (with certain exceptions) to be collected from the consumers by the business establishment and to be transferred to a cleaning protection fund; (iv) the business establishment would offer to consumers the ability to purchase packing bags for more than one use for not less than NIS 4.5 which are exempt from the levy; and (v) various reporting obligations would be imposed on business establishments to the supervisor of the Ministry of environment protection. This proposed new legislation and other similar proposed legislation may increase our operational expenses and may require us to make additional investments in our stores if they were to become effective.

Proposed Business License Regulation

By virtue of The Businesses License Law, 1968, and the regulations promulgated thereunder, and as a condition of the receipt of permits, we are required to comply with various safety, security, health, environment and other requirements. Under the proposed new Businesses License Regulation (Proper Sanitation Conditions to Grocery), some existing requirements will be tightened and new requirements will be imposed on the operation of our stores. The new regulation would contain new or more stringent requirements relating to the following: requirements as to the building of our stores, designation of separated space to some specialty departments, drainage system requirements, sanitation, ventilation, lighting, temperature, water, sewage, waste handling, food storage, signage, food transportation and maintenance requirements, cooling device requirements and display and quality requirements. This proposed new Business License Regulation, would require us to make additional investments in our stores if it were to become effective.

Regulations for Equal Rights for Persons with Disabilities (accommodation for accessibility of service)

To the best of the Company's knowledge, in May 2008, a draft of the Regulations for Equal Rights for Persons with Disabilities (accommodation for accessibility of service), 2008 was published and as of May 31, 2010, had not yet been approved. The proposed regulations would require public service providers to make necessary modifications at their own expense to ensure that their services are accessible to people with disabilities. The provision of public services is defined, among other things, as services provided in a public place. According to the Equal Rights for Persons with Disabilities Law, 1998, supermarkets are considered public places. The proposed regulations include various requirements to increase accessibility for people with disabilities in public places to be implemented within the timeframe provided in the proposed regulations, such as modifying passages between fixtures in public places, modifying procedures, proceedings and customs, modifying signposts and public address and loudspeaker systems, installing aids and accessories to ensure accessibility and to provide services to aid in ensuring the accessibility of services for people with disabilities, publicizing the accommodations made to ensure accessibility of, appointment of a coordinator to ensure accessibility, among others.

Reduction and Recycling of Packaging Waste

In June 2009, the Reduction and Recycling of Packaging Waste Bill, 2009 was presented to the Knesset. According to the bill, its purpose is to prevent and reduce the production of packing waste, limit the use of heavy metal in packaging, encourage repeated use of packaging and the recycling of packaging and packing waste and the use of recycled materials from recycled packaging waste. Under the proposed bill, any manufacturer, importer, distributor or marketer that uses packaging materials would be required to take steps to reduce the use of packaging materials, to use such materials more efficiently, and to prevent the production of packing waste in a manner to prevent and reduce its impact on the environment. In addition, the proposed legislation imposes additional obligations on manufacturers or importers (as defined in the bill), including, in connection with the collection of the packaging waste of their products and in connection with the recycling of a relative portion on the basis of market share of such packaging waste.

Gasoline Stations

We are also subject to numerous laws and regulations relating to, among other things, environment protection, licensing and permits proceedings, standardization requirements and other requirements in connection with the construction, establishment and operation of gasoline stations on our properties described below in “ - D. Property, Plants and Equipment.” As part of a pilot program to examine the feasibility of establishing and operating gasoline stations on properties adjacent to our stores, in 2006, we began operating our first gasoline station on one of our properties. As of May 31, 2010, we operated two gasoline stations, one in Rosh Ha'ayin and one in Bat Yam. We purchase our gasoline from Dor Alon. In May 2010, we signed a share purchase agreement with our controlling shareholder, Alon, to acquire from Alon all of Alon's approximately 80% holdings in Dor Alon. Dor Alon is one of the four largest fuel retail companies in Israel based on the number of gas stations and is a leader in the convenience stores sector. The closing of the transaction is subject to satisfaction of closing conditions, including shareholder approval. See “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions – Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD”.

Non-Food Retail

Our non-food retail business is subject to Israeli laws relating to imports, customs, labeling of products and consumer protection laws, as well as to labor laws and license and permit laws as they apply to the operation of our network of stores.

Our sales activities are subject to general laws such as the Liability for Defective Products Law, 1980, pursuant to which, under certain circumstances, we may be liable for personal injuries resulting from defects in products that we market. We are also subject to the Consumer Protection Law, 1981, which is described above under " - Supermarkets". We are also subject to the Supervision of Products and Services Law, 1957, and orders promulgated pursuant to such law.

Houseware Products

We are subject to safety tests, quality control and certification by the Standards Institution of Israel. These are primarily related to the release of metals from ceramic appliances/wares, marking of wares/dishes, pressure cookers, lighters and plasticware used for food and drink.

Business Permits

Some of our Bee Group stores do not have permits according to the requirements of the Business Permits Law, 1968. A lack of such permits by any store would be considered a breach of the tenancy agreement for such store, which would allow the landlord to annul the lease agreement. As of May 31, 2010, none of the landlords has made use of this right.

Environmental Laws Related to Real Estate

As the owner or long-term lessee of real estate property, we may be held liable for any violation of law, including of environmental laws, which takes place on real estate property that we either own or lease pursuant to a long term lease, and we may be required to bear the costs associated with compliance with such laws.

Due to the fact that most of our real estate properties are leased to commercial businesses, which are not polluting factories, and in light of the division of liabilities between us and the lessees, we do not anticipate material exposure in the area of environmental law with respect to our real estate properties.

In addition, pursuant to authorization agreements with cellular companies, we allow cellular companies to place and operate cellular communication devices in certain locations on our properties. Under such agreements, the cellular companies have agreed to operate and use the devices in accordance with the standards of the Ministry of Environmental Protection and the commissioner of radiation, and in accordance with the provisions of any other law.

Planning and Construction Law, 1965

The Planning and Construction Law and the regulations promulgated thereunder determine the regulatory and supervisory scheme, among other things, in matters relating to construction permits, licensing, and rights, changes in the designated uses of real estate property and betterment taxes levied on improved properties. In addition, under the Planning and Construction Law, the owner of real estate may be held criminally liable for an offense committed by a lessee on such property.

Related Businesses

Diners Israel

In connection with the establishment of our joint Loyalty Plan with Dor Alon, in November, 2005, we and Dor Alon purchased 49% of the shares of capital stock of Diners Club Israel Ltd. (“Diners Israel”) (36.75% to Blue Square and 12.25% to Dor Alon) from Credit Cards for Israel Ltd. (“CAL”). Diners Israel, a credit card company in Israel and a licensee of Diners Club International, is a subsidiary of CAL which itself is a subsidiary of Israel Discount Bank Ltd.

Under the agreement with CAL, we and Dor Alon are entitled to share with CAL the net income of Diners Israel in connection with the activities of the credit cards bearing the "You" name based on our respective ownership interests in Diners Israel. The percentage of the net income of Diners Israel in connection with credit cards activities outside the Loyalty Plan is to be allocated to us and to Dor Alon in accordance with various ratios determined based on the number of "activated" credit cards (as defined in the agreement) issued to members of the Loyalty Plan from time to time, so long as certain target numbers of such issued credit cards are met. In addition, we signed an agreement with CAL pursuant to which Loyalty Plan members are to be issued Mastercard "You" credit cards that will be treated the same as the Diners "You" credit cards for the purpose of our agreement with Dor Alon. See “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions” for more information on the agreement with CAL and Diners Israel.

Mega Nofesh Yashir (Mega Direct Vacation) In January, 2008, Blue Square entered into an agreement with Issta Israel Ltd, ("Issta") a subsidiary of Issta Lines Ltd, Israel’s largest travel agency, to acquire 50% of Issta’s operated "Nofesh Yashir" (direct vacation) enterprise, operating travel services through an internet portal and a travel services call center, for the consideration of US $250,000. Pursuant to the agreement, the parties established a jointly owned (50% each) company that operates the travel and tourism joint enterprise and develop it within Blue Square's supermarkets, through its marketing and through the Nofesh Yashir Internet travel services portal and call center.

C. Organizational Structure

Following the reorganization of our supermarket retail activities pursuant to which our supermarket retail activities are centralized in our wholly-owned subsidiary, Mega Retail, Mega Retail operates all of our supermarkets and nine supermarkets which are owned by Eden Teva (our 51% subsidiary). Following the reorganization of our real estate activities, Mega Retail leases from BSRE and third parties the real estate underlying the stores that it operates.

We operate all of our "Non-Food" outlets through our 85% owned subsidiary Bee Group, which in turn held, as of May 31, 2010, approximately 66.85% of the outstanding shares of Naaman Porcelain Ltd., which held, as of May 31, 2010, approximately 88.74% of the share capital in Vardinon Textile Ltd., both of which are publicly held and traded on the Tel Aviv Stock Exchange.

Below is a chart indicating our holdings in our material subsidiaries as of May 31, 2010:

* Certain shareholders of Dr. Baby Ltd., or Dr. Baby, and its former general manager, are disputing the issuance of an additional 5,000 shares of Dr. Baby to Bee Group, which resulted in the dilution of their holdings, and the dismissal of the former general manager of Dr Baby. As a result of the issuance, Bee Group's holdings in Dr. Baby increased by an additional 48.1% to 98.08%. The dispute is in the process of a hearing before an arbitrator. See "Item 8. Financial Information – A. Consolidated Statements and Other Financial Information – Legal Proceedings – We are in the process of arbitration proceedings in connection with our holdings in our Bee Group Subsidiary, Dr. Baby Ltd."

BSRE, Bee Group and each of Bee Group's subsidiaries has its own board of directors. We appoint all or a majority of the board of directors of each of these companies and typically our appointee serves as the chairman of the board of directors of each company. Although we appoint all or most of the board of directors of each of BSRE, Bee Group and Bee Group's subsidiaries, each company’s board of directors has independent fiduciary obligations to all of its shareholders and to the company itself. Blue Square is obligated to deal with its partially owned subsidiaries at “arm’s-length.” Moreover, in the case of BSRE, Vardinon and Naaman which are publicly traded on the Tel Aviv Stock Exchange, the board of directors must include at least two external directors appointed under Israeli law. These external directors must satisfy all the requirements of external directors under the Israeli Companies Law, 1999, referred to as the Israeli Companies Law.

Blue Square owned 100% of the outstanding shares of Mega Retail as of May 31, 2010. Mega Retail, in turn, through a wholly owned subsidiary, is the owner of our interests in a number of its other subsidiaries and affiliates. Blue Square receives fees from its subsidiaries, including Mega Retail and Hyper Hyper, as payment for the management and consulting services it provides to them for purchasing, marketing, finance, store development, budgets and control, accounting and financial reporting, taxation, law, internal auditing and data processing services.

Blue Square owned 78.35% of the outstanding shares of BSRE as of May 31, 2010. The balance of BSRE’s outstanding shares are publicly held and traded on the Tel Aviv Stock Exchange. Blue Square receives fees from BSRE as payment for the management services it provides to BSRE for Chairman of the board of directors services, financial and accounting management services (including bookkeeping), computer management and maintenance service, legal consulting and corporate secretary services, office space and related office services, and internal audit services.

See “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions” for a description of the agreements relating to the fees Blue Square receives from its subsidiaries. For information concerning the flow of funds between Blue Square and its direct and indirect subsidiaries, see also “Item 5. Operating and Financial Review and Prospects - Liquidity and Capital Resources.”

Set forth below is a list of our significant holdings as of May 31, 2010. The companies marked with an asterisk (*) are not consolidated in our financial statements.

Company (1)	Operations	% Ownership Held by Blue Square

Mega Retail Ltd.	Supermarkets		100	%
The Blue Square Chain (Hyper Hyper) Ltd.	Supermarkets		100	%(2)
Blue Square Real Estate Ltd. **	Real estate		78.35	%(3)
Bee Group Retail Ltd.	Retail and wholesale of houseware and home textile, toys, leisure and baby and young children products		85	%(4)
Diners Club Israel Ltd.*	Credit cards		36.75	%(5)
Eden Briut Teva Market Ltd. (Eden Teva)	Organic/Health Food Products		51	%(6)
Radio Non-Stop Ltd.*	Local radio station		33	% (7)

(1)

All companies are incorporated under Israeli law.

(2)

Mega Retail’s wholly owned subsidiary. As part of the reorganization of Blue Square's retail activities, Hyper Hyper is to merge into Mega Retail. The merger was approved by the Tax Authority, and it is anticipated that it will be completed in the next few weeks, effective as of January 1, 2009. For a description of Blue Square's supermarket retail and real estate activities reorganization, please see “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions”.

(3)

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

(4)

We have the option to increase our holding in Bee Group Retail Ltd. to 100%. For a description of this option, please see “Item 10. Additional Information – C. Material Contracts”. As of May 31, 2010, Bee Group Retail Ltd., held approximately 66.85% of the outstanding shares of Naaman Porcelain Ltd., which held an approximately 88.74% of the share capital in Vardinon Textile Ltd., both of which are companies traded on the Tel Aviv Stock Exchange.

(5)

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.

(6)

Mega Retail's 51% subsidiary.

(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 18,000 square meter shopping mall in Jerusalem owned by BSRE and a 100% interest in warehouses owned by BSRE covering approximately 22,000 square meters.

D. Property, Plants and Equipment.

As of December 31, 2009 we owned or leased (including through our subsidiaries) approximately 524,700 square meters of space for our own use. In addition, we owned or leased 60,800 square meters of yield generating real estate and 210,000 square meters of unutilized building rights.

The following table provides certain details regarding the properties that we own and lease.

Properties	Number		Space (sq. meters)
Existing Stores
Owned (including long term lease from Israel Land Administration)		95		161,000
Leased under 5 years		50		27,800
Leased between 6-10 years		60		55,400
Leased over 10 years		71		134,400
		276		378,600

Stores in Development
Owned		-		-
Leased between 5-25 years		33		48,300
		33		48,300

Existing Offices and Warehouses
Owned Office		1		9,400
Leased Offices		5		5,500
Owned Warehouses		4		26,500
Leased Warehouses		8		34,400
		18		75,800

Warehouses in development		1		22,000

Total owned or leased for our own use		328		524,700

Properties for Investment
Leased to Third Parties (1) (2)		26		27,600
Unutilized Properties		12		19,100
Offices in development		1		14,100
		39		60,800
Owned and leased unutilized building rights:
Unutilized building rights				210,000

(1)

Including a 50% interest owned by BSRE in a 18,000 square meter shopping mall in Jerusalem, in which we operate a 5,000 square meter store.

(2)

Including a 50% interest owned indirectly by BSRE in a 14,000 square meter shopping mall in Be’er Sheva.

In 2010, we opened and plan to open approximately six additional supermarkets, totaling approximately 8,000 square meters of store space, in localities whose populations are currently under-served by supermarkets or in localities in which we do not have sufficient market presence. In 2010, we opened four supermarket stores.

In addition, we plan to continue to remodel some of our supermarkets to give them a more “upscale” orientation, offering improved product selection and increased focus on customer service. Remodeling typically includes the installation of new display fixtures, additional shelf space, specialty departments and checkout counters. Our experience has been that supermarket remodeling, which is conducted in each store every eight to twelve years, usually improves sales per square meter. During 2010, we have spent and currently plan to spend more than NIS 78.6 million (or $20.5 million at the exchange rate as of May 31, 2010) on the acquisition and development of new supermarkets and the remodeling of our existing supermarkets.

As part of a pilot program to examine the feasibility of establishing and operating gasoline stations on properties adjacent to our stores, in 2006, we began operating our first gasoline station on one of our properties. As of May 31, 2010, we operated two gasoline stations, one in Rosh Ha'ayin and one in Bat Yam. We purchase our gasoline from Dor Alon. In May 2010, we signed a share purchase agreement with our controlling shareholder, Alon, to acquire from Alon all of Alon's approximately 80% holdings in Dor Alon. Dor Alon is one of the four largest fuel retail companies in Israel based on the number of gas stations and is a leader in the convenience stores sector. The closing of the transaction is subject to satisfaction of closing conditions, including shareholder approval. See “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions – Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD.”

Generally, franchisees of our Bee Group chains lease their own store space directly. However, there are a few franchisees that either sublease their stores from the relevant Bee Group subsidiary, or lease their stores jointly with such subsidiary. All Bee Group stores that are operated directly by Bee Group's subsidiaries and not by franchisees, lease their own store space.

For further information regarding our real estate, including the transfer of the Company's real estate to BSRE and the transfer of Mega Retail's real estate to BSRE, please see “Item 4. Information on The Company - B. Business Overview - Our Real Estate” and “Item 7. Major Shareholders – B. Related Party Transactions.”

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

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

General

The year 2009 was principally characterized by the continued effects of the economic slowdown which impacted our markets, leading to the continued expansion of our low-price and hard discount store formats, by our internal reorganization and by our implementation of efficiency measures, which is part of our strategy to enable us to address current competitive and marketplace conditions in Israel.

Supermarket Segment

The year 2009 was marked by a shift from an economic slowdown in the first quarters of the year to the beginning of a recovery of the Israeli economy toward the end of the year. The global economic crisis in 2008 and the beginning of 2009 and the resulting slowdown in the Israeli economy changed the markets in which we operate and continues to affect the buying patterns of our customers, as more customers are shifting their purchases to low-price and hard discount stores, which have a lower profit margin. The slowdown has also affected the volume of purchases made by our customers in our local neighborhood stores and reduced the sales at our Mega and Shefa Shuk stores. As a result, in December 2008, we launched our "Mega Bool" format, a hard discount store format. As of May 31, 2010, this initiative included the conversion of 46 existing "Mega" and "Shefa-Shuk" stores of various sizes to "Mega Bool" stores and the opening of three new "Mega Bool" stores. This continued the trend of recent years during which we and our competitors have established or expanded low-price and hard discount store formats.

As part of our strategy to improve our competitive position, during 2009, we worked to increase our sales of our new "Mega" line of private label goods that are sold in our "Mega Bool", "Mega", and "Mega In Town" store formats. Private label products provide customers with an attractive alternative selection of products that are comparable in quality to name brand products. We believe that our private label products enhance customer loyalty, differentiate our stores from those of our competitors and provide a competitive product to those offered by our suppliers. In addition, usually average gross profit from private label products is higher than the average gross profit from other products.

We believe that the volume of annual sales in the organic food market in Israel has been growing consistently and will continue to increase during the next few years. In order to benefit from this growth, in October 2007, we acquired approximately 51% of the holdings of Eden Teva, which operates organic/health food supermarkets, to take advantage of the growing local demand for organic, natural and health food. By the end of 2009, we operated nine Eden Teva stores, with the goal of establishing Blue Square as the clear leader of Israel's emerging organic/health food sector.

We currently operate our supermarket stores under five brands: Mega Bool, Mega In Town, Mega, Shefa Shuk and Eden Teva. In planning the mix of our stores, we have taken a regional view, with the goal of bringing our store brands within the shopping range of every Israeli consumer. As expected, the conversion of our neighborhood stores to a lower margin format has impacted our gross margins from our supermarkets sales; however, we were compensated by an increase in sales which resulted in an increase in total gross profit.

In 2009, smaller supermarket chains continued to aggressively increase their market share and expanded their presence in selected areas in Israel, often geographically beyond their original locations, increasing competition in an already difficult market. The low barriers of entry, including the relatively low cost of establishing a new smaller supermarket, has contributed to the increase in number and expansion of smaller supermarket chains in recent years. In addition, in recent years smaller supermarket chains have transitioned from competing only in the local neighborhood markets to joining with other smaller supermarket chains and competing on a national scale with a joint private label which competes with the private labels of the large supermarket chains. We and other major chains have also responded to consumers’ focus on the price of products by establishing or expanding low-price and hard discount store formats.

We are increasing the variety of products sold in our stores in three categories: “Fresh Food” items - such as bakery items, delicatessen, pastry, fresh meat and vegetables offered in specialty departments, “Non-Food” items - such as houseware, toys and infants products, entertainment and leisure products, small electrical appliances, computers and computers accessories and textile products, and “Near-Food” items - such as health and beauty aids, toiletries, cleaning products, paper goods and baby supplies. “Non-Food” and “Near-Food” items generate more revenues per square meter than our food items and increase the portion of our customers’ shopping needs that are addressed in our supermarket stores.

Non-Food Segment

We have also expanded our presence in “Non-Food” stand alone retail outlets in an effort to establish Blue Square as a major player in the non-food retail market. In September 2008, we increased to 85% our holdings (with an option to further increase our holdings to 100%) in Bee Group Retail Ltd. (formerly known as “Hamachsan Hamerkazi Kfar Hasha’ashuim Ltd.”) ("Bee Group"), a company that is a wholesaler and that operates (mostly through franchisees) retail outlets, with activities in the houseware and home textile, toys, leisure and baby and young children sectors. In 2007 we acquired, through Bee Group approximately 85.79% of the holdings of Vardinon Textile Ltd. ("Vardinon"), a company which imports, designs and distributes home textile products and accompanying accessories. In 2007 we acquired, and in 2009 we increased our holdings in Naaman Porcelain Ltd. ("Naaman"), one of Israel’s major branded houseware retailers and wholesalers, which imports and markets various houseware products, such as kitchen utensils, cutlery and dinner sets. As of May 31, 2010, through Bee Group, we held approximately 66.85% of the outstanding shares of Naaman, which as of such date held approximately 88.74% of the share capital of Vardinon. We are working to capitalize on potential operating synergies between Bee Group and the Company as a whole.

Internal Reorganization

In order to increase the efficiency of our activities and compete more effectively in the markets in which we operate, during 2008 and 2009 we implemented a comprehensive internal reorganization, by concentrating all of our food retail activities under Mega Retail, our wholly owned subsidiary since November 2008, concentrating our non-food activities under the Bee Group, and concentrating all our real estate activities under our subsidiary, BSRE (78.35% owned by us as of May 31, 2010), with Blue Square as a holding company. In addition, in September 2008 we increased our holdings in Bee Group to 85% with an option to further increase our holdings to 100% and concentrated all of our houseware activity under Bee Group's subsidiary, Naaman, and we are working to capitalize on potential operating synergies between our non-food activity and our supermarket activity. During the fourth quarter of 2009, we completed the concentration of our Bee Group subsidiaries into three sectors: houseware and home textile, toys and leisure, and baby and young children products. We also centralized all of the financial activity, import and information systems of the Bee Group subsidiaries under a single headquarters in one location. In addition, as part of our strategy to increase our operational efficiency by improving our distribution and IT systems, we invested in new IT and logistics systems.

Proposed Acquisition of Shares of Dor Alon

The acquisition of Dor Alon would combine our and Dor Alon's retail operations into one group creating the largest retail group in Israel. Additionally, the acquisition could enable us to achieve a strong foothold in the convenience store sector and enable substantial synergies and cost savings when combining the retail platforms of both companies. See “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions – Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD.”

Prior to the acquisition, we and Dor Alon will continue to operate as separate companies. Accordingly, except for specific references to the pending acquisition, the descriptions of strategy and discussion and analysis of our results of operations and financial condition set forth below relate solely to Blue Square and its current consolidated subsidiaries.

Operating Results

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

	Year Ended December 31,
	2007		2008		2009
	%		%		%
Sales		100.00		100.00		100.00
Gross profit		26.5		27.7		28.0
Selling, general and administrative expenses		22.4		24.2		24.7
Operating profit before other gain and losses and net gains from adjustment of investment property to fair value		4.1		3.6		3.3
Operating profit		4.3		3.8		3.2
Taxes on income		1.0		0.6		0.3
Profit for the year		2.5		1.8		1.3

Year Ended December 31, 2009 compared with year ended December 31, 2008

Sales. Sales in 2009 were approximately NIS 7,349 million, or U.S. $1,946.8 million, a decrease of approximately 1.1% compared with sales of approximately NIS 7,429 million in 2008.

Supermarket segment – a decrease in sales of 1.5% from NIS 6,966.8 million in 2008 to NIS 6,863.0 million (U.S $1,818.0 million) in 2009. The decrease in sales derived primarily from a decrease of 3.9% in supermarket same store sales (SSS) for the period due to the recession and increased competition and erosion of prices in hard discount chains. The decrease in sales was offset by the net addition of nine new stores during the 12-month period of approximately 10,500 square meters.

Non-Food segment - an increase in sales of 5.0% from NIS 442.1 million in 2008 to NIS 464.3 million (U.S. $123.0 million) in 2009. The increase derived mainly from the increase of sales in the houseware sector and the increase of sales in infants sector, due to opening of new stores during 2009 and a full year revenues of the stores that were opened at the end of 2008.

Real Estate segment - an increase in sales of 7.9% from rental fees from external parties from NIS 20.2 million in 2008 to NIS 21.8 million (U.S. $5.8 million) in 2009. The increase derived from the increase of the CPI during 2009, and an increase in rent and full year revenues from stores that were vacant for a part of 2008.

Gross profit. Gross profit in 2009 was approximately NIS 2,058 million, or U.S. $545.2 million (28.0% of sales), a decrease of 0.1% compared with gross profit of approximately NIS 2,060 million (27.7% of sales) in 2008. The increase in our gross profit as a percentage of sales was the result of an increase in sales in our Non Food segment which is characterized by a relatively higher gross profit margin compared to the gross profit margin that is characteristic of the Supermarket segment. In addition, gross profit as a percentage of sales increased from trade agreements with suppliers, some of which relate to the establishment of Mega Bool chain that offset the effect of the planned erosion in the gross profit margin as a result of establishing the chain.

Selling, general and administrative expenses. Selling, general and administrative expenses in 2009 were approximately NIS 1,817 million, or U.S. $481.4 million (24.7% of sales), an increase of 1.2% compared with selling, general and administrative expenses of approximately NIS 1,795 million (24.2% of sales) in 2008. This increase mainly derived in the Supermarket segment from (i) the net addition of nine new supermarket stores, part of which relate to accelerated opening of four branches of Eden Teva during the last 12 months, (ii) costs associated with launch of the "Mega Bool" chain, (iii) re-launch costs of the "You" club, and, (iv) in both in the Supermarket segment and the Non Food segment, an increase in the CPI, which affected an increase of expenses of rental fees and municipal taxes. The increase was partially offset by the efficiency measures taken by the Company which resulted in a decrease in payroll and related expenses, principally in the Supermarket segment.

Operating profit before other gains and losses and net gain from adjustment of investment property to fair value. Operating profit in 2009 before other gain and losses and net gain from adjustment of investment property to fair value was NIS 241 million (U.S. $63.8 million) (3.3% of sales) compared to NIS 265.3 million (3.6% of sales) in 2008. The decrease in operating profit was affected by the decrease in sales and increase in selling and administrative expenses, as mentioned above.

Net gain from adjustment of investment property to fair value. In 2009, the Company’s recorded gain in the Real Estate segment from appreciation of investment property of NIS 20.8 million (U.S. $5.5 million) compared with NIS 19.1 million in 2008. This increase in valuation mainly resulted from the increase of the CPI during 2009.

Other losses (gains). In 2009, the Company recorded other losses, net of NIS 28.1 million (U.S. $7.4 million) compared with other losses, net of NIS 2.5 million during 2008. These losses primarily resulted from a provision for the impairment of property and equipment and intangible assets mainly in the Supermarket segment in the amount of NIS 20 million (U.S. $5.2 million), expenses for the reorganization in the Non Food segment in the amount of NIS 2.7 million (U.S. $0.7 million) and capital losses in the amount of NIS 4.8 million (U.S. $1.3 million). These losses were partially offset by a capital gain in the amount of NIS 1.5 million (U.S. $0.4 million) and capital gain from changes in holding shares in subsidiaries, principally in the Non Food segment, in the amount of NIS 3.2 million (U.S. $0.8 million). In 2008, the Company recorded other losses of NIS 2.5 million (U.S. $0.7 million). These losses primarily resulted from a NIS 6.0 million (U.S. $1.6 million) termination benefit expense associated with the Company’s efficiency program, consisting mainly of the reduction of headcount at the Company’s headquarters, and a provision of NIS 6 million (U.S. $1.6 million) associated with the reduction of property value and depreciation. These losses were partially offset by other gains in the amount of NIS 9 million (U.S. $2.4 million), which derived from the decrease in the Bee Group‘s holdings in its subsidiaries, primarily Sheshet, following Bee Group's reorganization which included the transfer of Bee Group's holdings in Vardinon and Sheshet to Naaman.

Operating profit. Operating profit for 2009 was NIS 233.6 million (U.S. $61.9 million) (3.2% of sales) compared to NIS 281.8 million (3.8% of sales) in 2008, a decline of 17.1%. Operating profit includes segment profit as described below and unallocated headquarter expenses and changes in holding shares in subsidiaries.

Supermarket segment – a decrease in segment profit of 22.5% from NIS 246.1 million in 2008 to NIS 190.9 million (U.S $50.6 million) in 2009. The decrease in segment profit derived primarily from a decrease of 3.9% in supermarket same store sales, an increase in selling, general and administrative expenses and an increase in other losses as mentioned above.

Non-Food segment - segment profit of NIS 23.2 million in 2008 and NIS 23.2 million (U.S. $6.2 million) in 2009. The increase in sales as mentioned above was offset by other losses arising from the reorganization and the increase in selling, general and administrative expenses as mentioned above.

Real Estate segment - increase in segment profit of 24.2% from NIS 26.5 million in 2008 to NIS 32.9 million (U.S. $8.7 million) in 2009. The increase derived from the increase of the CPI in 2009, and an increase in rent and full year revenues from stores that were vacant part of 2008, and from decrease in selling, general and administrative expenses due to a decrease in expenses related to search for investment properties.

Financial expenses, net. Financial expenses, net in 2009, increased by 6.7% to approximately NIS 112.7 million, or U.S. $29.9 million, compared with financial expenses of approximately NIS 105.6 million in 2008. This increase derived mainly from the increase in the financial net debt of the Company compared to 2008, which resulted in an increase in financial expenses for debentures and loans in the amount of NIS 12.2 million (U.S. $3.2 million) and a decrease in income on deposits by NIS 7.6 million (U.S. $2 million). In addition, a change in the conversion rate of our convertible debentures in 2009 contributed to financial expenses of NIS 11.7 million (U.S $3.1 million) compared to income of NIS 32.7 million in 2008. The increase in financial expenses was partly offset by financial income from forward contracts (CPI\NIS) in 2009 in the amount of NIS 21.3 million (U.S. $5.6 million) compared to expenses of NIS 11.6 million in 2008 and from an increase in financial income from financial instruments in the amount of NIS 16.2 million (U.S. $4.3 million) in 2009 compared to 2008.

Taxes on income. Taxes on income in 2009 were NIS 23.1 million, or U.S. $6.1 million, compared with approximately NIS 43.8 million in 2008. As a percentage of income before taxes on income, taxes on income decreased to approximately 19.1% in 2009, compared with 24.9% in 2008. The decrease in the effective tax rate derived primarily from recording a tax benefit due to a change in tax rates, as a result of legislation of the Law for Economic Efficiency (Legislation Amendments for the Implementation of Economic Plan for 2009- 2010) 5769 - 2009, which prescribed, among others, the gradual decrease of the corporate tax rate to 18% in the 2016 tax year and onwards. The implications of the change in the tax rate were reflected in the results of this period by a decrease in deferred taxes and recording a tax benefit in the amount of NIS 14.2 million (U.S $3.8 million) of which the portion attributed to the Company's shareholders is NIS 9.1 million (U.S $2.4 million).

Profit for the year. Net profit for 2009 was NIS 97.8 million (U.S. $25.9 million) compared to NIS 132.4 million for 2008. The portion of the net profit attributable to shareholders, was NIS 77.2 million (U.S. $20.4 million), or NIS 1.77 per ADS (U.S. $0.47), while the portion attributable to the share of minority interests was NIS 20.6 million (U.S. $5.5 million). The decrease in net profit derived from the decrease in operating income and an increase in financial expenses net of decrease in tax expenses, as explained above.

Year Ended December 31, 2008 compared with year ended December 31, 2007

In accordance with the instructions of the Israeli Accounting Standard No. 29, “Adoption of International Financial Reporting Standards (IFRS)”, which was published in July 2006, we adopted IFRS as issued by the IASB, with effect from January 1, 2008, based upon the guidance in IFRS 1, "First-time adoption of IFRSs", and have prepared our consolidated financial statements according to IFRS as issued by the IASB. The influence of the transition to IFRS (from financial statements prepared in accordance with Israeli GAAP) on our financial statements for the year ended December 31, 2007 and our results of operations for that year, is detailed in note 36 to our consolidated annual financial statements for the year ended December 31, 2008. To facilitate comparison with the financial results of the years 2008, results from the year ended December 31, 2007 have been adjusted in accordance with IFRS and differ from the results reported in the Annual Report on Form 20-F for the year ended December 31, 2007.

Sales. Sales in 2008 were approximately NIS 7,429 million, or $1,954 million, an increase of approximately 6.4% compared with sales of approximately NIS 6,982 million in 2007.

Supermarket segment – an increase in sales of 4.7% from NIS 6,655.8 million in 2007 to NIS 6,966.8 million (U.S $1,832.4 million) in 2008. This growth in sales derived primarily from:

the opening of ten new supermarkets in 2007, which were open for the entire 2008 and only a portion of 2007, and the opening of nine new supermarkets in 2008 (taking into account one supermarket that closed), including the accelerated expansion of the Eden Teva format;

an increase of 1.1% during 2008 in supermarket Same Store Sales, reflecting the continued growth of the Mega In Town store format, partially offset by declining sales in the Shefa Shuk store format and Mega stores before their conversion to the Mega Bool store format.

Non-Food segment - an increase in sales of 42.4% from NIS 310.4 million in 2007 to NIS 442.1 million (U.S. $116.3 million) in 2008. The increase mainly derived from an increase of NIS 132 million in connection with the ongoing expansion of stores of Bee Group Retail (“Bee Group”), and the consolidation in 2008 of the full-year results from Naaman Porcelain Ltd. ("Naaman") and Vardinon Textile Ltd. ("Vardinon"), compared with the previous year, in which the revenues of Naaman and Vardinon were only partially consolidated into the Company’s financial results.

Real Estate segment - increase in sales of 27.8% from rental fees from external parties from NIS 15.8 million in 2007 to NIS 20.2 million (U.S. $5.3 million) in 2008. The increase derived from increase of the CPI in 2008, the rental of vacant properties in 2008 and sales from stores that were open during a portion of 2007 and were open during the entire 2008.

Gross profit. Gross profit in 2008 was approximately NIS 2,060 million, or $541.8 million (27.7% of sales), an increase of 11.2% compared with gross profit of approximately NIS 1,852 million (26.5% of sales) in 2007. The increase in our gross profit as a percentage of sales was the result of improved supplier terms; a shift in the mix of sales between the Company’s store formats, and the expansion of the Non- Food segment, which is characterized by a higher sales gross margin compared to the Supermarket segment. The increase in our gross profit was partially the result of a positive influence from increased prices.

Selling, general and administrative expenses. Selling, general and administrative expenses in 2008 were approximately NIS 1,795 million, or $472 million, an increase of 14.8% compared with selling, general and administrative expenses of approximately NIS 1,563 million in 2007. This increase was mainly due to increased expenses in the Supermarket segment associated with (i) the opening of new stores and the accelerated development of the Eden Teva format; (ii) expenses associated with the launch of the Mega Bool store format; (iii) a rise in the operating expenses of existing stores due to the increase in energy and electricity prices; an increase in the Israeli CPI, which increased CPI-linked expenses such as rent and municipal taxes in both in the Supermarket segment and the Non Food segment; and the increased expenses of the Non Food segment associated with its expansion of the number of its stores and the consolidation of the full-year expenses of Naaman and Vardinon in 2008, compared with the consolidation of only a portion of their expenses in the Company's 2007 results.

Operating profit before other gains and losses and net gain from adjustment of investment property to fair value. Operating profit in 2008 before other gain and losses and net gain from adjustment of investment property to fair value was NIS 265 million ($69.8 million) (3.6% of sales) compared to NIS 289 million (4.1% of sales) in 2007. The decrease in operating income was primarily due to the decrease in profitability of our Supermarket segment, mainly from stores which were converted to the Mega Bool format, and the increased expenses of Eden Teva due to the expansion of this store format during 2008. In our Non Food segment, operating profit decreased due to the operating loss at Bee Group’s Dr. Baby store format resulting from the opening of eight self-operating stores in 2008.

Net gain from adjustment of investment property to fair value. In 2008, the Company’s recorded income of NIS 19.1 million (U.S. $5.0 million) associated with the increase in value of its investment property compared with NIS 10.5 million in 2007 in our Real Estate segment. This increase in valuation mainly resulted from Hadar Talpiyot mall which is located in Jerusalem, in which the company holds a 50% interest.

Other losses (gains). In 2008, the Company recorded other losses of NIS 2.5 million (U.S. $0.7 million) compared with other gains of NIS 3.1 million during 2007. These losses primarily resulted from a NIS 6.0 million (U.S. $1.6 million) termination benefit expense associated with the Company’s efficiency program, consisting mainly of the reduction of headcount at the Company’s headquarters, and a provision of NIS 6 million (U.S. $1.6 million) associated with the reduction of property value and depreciation, principally in the Supermarket segment. These losses were partially offset by other gains in the amount of NIS 9 million (U.S. $2.4 million) in the Non Food segment, which derived from the decrease in the Bee Group‘s holdings in its subsidiaries, primarily Sheshet, following Bee Group's reorganization which included the transfer of Bee Group's holdings in Vardinon and Sheshet to Naaman.

Operating profit. Operating profit for 2008 was NIS 281.8 million (U.S. $74.1 million) (3.8% of sales) compared to NIS 302.7 million (4.3% of sales) in 2007, a decline of 6.9%. Operating profit includes segment profit as described below and unallocated headquarter expenses and changes in holding shares in subsuduaries.

Supermarket segment – a decrease in segment profit of 14.1% from NIS 286.4 million in 2007 to NIS 246.1 million (U.S $64.7 million) in 2008.The decrease in segment profit derived primarily from increased selling, general and administrative expenses and other losses in the Supermarket segment as mentioned above.

Non-Food segment - an increase in segment profit of 17.8% from NIS 19.7 million in 2007 to NIS 23.2 million (U.S. $6.1 million) in 2008. This increase principally derived from the increase in sales, as mentioned above, that was partially offset by the increase in the CPI, which increased expenses of rental fees and municipal taxes and from other losses arising from expansion of the number of stores and the consolidation of the full-year expenses and revenues of Naaman and Vardinon in 2008, compared with the consolidation of only a portion of their expenses and revenues in the Company's 2007 results as mentioned above.

Real Estate segment - increase in segment profit of 30.7% from NIS 20.2 million in 2007 to NIS 26.4 million (U.S. $6.9 million) in 2008. This increase derived from an increase of the CPI in 2008, the rental of vacant properties in 2008 and stores that were open during a portion of 2007 and were open during the entire 2008.

Financial expenses, net. Financial expenses, net in 2008, increased by 84% to approximately NIS 106 million, or $27.8 million, compared with financial expenses of approximately NIS 57 million in 2007. This increase derived from the increase in the consumer price index in 2008 compared to 2007, an increase in net financial debt and hedging against a rise in the consumer price index, partially offset by financial income of NIS 24 million in connection with the revaluation of the Company's financial instruments.

Taxes on income. Taxes on income in 2008 were NIS 43.8 million, or $11.5 million, compared with approximately NIS 69.8 million in 2007. As a percentage of income before taxes on income, taxes on income decreased to approximately 24.9% in 2008, compared with 28.4% in 2007. The decrease in the effective tax rate derived primarily from the decline in the statutory tax rate from 29% in 2007 to 27% in 2008.

Profit for the year. Net income for 2008 was NIS 132.4 million (U.S. $34.8 million) compared to NIS 175.8 million for 2007. The portion of the net profit attributable to shareholders, was NIS 104.6 million (U.S. $27.5 million), or NIS 2.41 per ADS (U.S. $0.63), while the portion attributable to the share of minority interests was NIS 27.8 million (U.S. $7.3 million). The decrease in net profit derives from the decrease in operating profit, and the increase in the financial expenses as explained above.

Quarterly Fluctuations

Our business is subject to fluctuations in quarterly sales and profits. These fluctuations are primarily attributable to increased sales and higher operating income in the holiday seasons occurring in different quarters from year to year. Thus, for example, in our supermarkets and in our "Naaman", "Vardinon" and "Sheshet" chains increased sales attributable to Passover, which occurs in either March or April, may be realized in either the first or the second quarter, and sales attributable to the Jewish New Year, which occurs in either September or October, may be realized in either the third or the fourth quarter. In our "Kfar Hasha'ashuim" chain, increased sales are generally attributable to Purim, which occurs in March, and to the "Back-to-School" season in August.

The following table sets forth certain quarterly information.

	Net sales					Operating profit before other gains and losses and net gain from adjustment of investment property to fair value
	NIS		Percentage of Full Year			NIS		Percentage of Full Year
	(In thousands)					(In thousands)
2009		7,349,076		100.0	%		240,965		100.0	%
First quarter		1,764,788		24.0	%		60,168		25.0	%
Second quarter		1,843,951		25.1	%		60,685		25.2	%
Third quarter		1,925,473		26.2	%		58,734		24.4	%
Fourth quarter		1,814,864		24.7	%		61,378		25.4	%

2008		7,429,121		100.0	%		265,252		100.0	%
First quarter		1,821,158		24.5	%		77,487		29.2	%
Second quarter		1,918,403		25.8	%		83,335		31.4	%
Third quarter		1,936,236		26.1	%		59,770		22.6	%
Fourth quarter		1,753,324		23.6	%		44,460		16.8	%

Exchange Rates

At December 31, 2009, the representative rate of exchange of the NIS to the dollar, as published by the Bank of Israel, was NIS 3.775= $1.00. At June 18, 2010, the representative rate of exchange of the NIS to the dollar, as published by the Bank of Israel, was NIS 3.814 = $1.00. The table below sets forth, for the periods and dates indicated, certain information concerning the representative exchange rate of the NIS to the dollar, as published by the Bank of Israel for the years ended December 31, 2005 through 2009:

Year Ended December 31,	Period End			Average Rate(1)		High		Low
				(NIS per $1.00)

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		3.83
2008		3.80	(2)		3.59		4.02		3.23
2009		3.77	(2)		3.92		4.26		3.69

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

(2)	During 2006, 2007, 2008 and 2009, the US dollar depreciated in value vis-à-vis the NIS by 8.2%, 8.97%, 1.2% and 0.7%, respectively.

The following table sets forth certain information concerning the representative exchange rate of the NIS to the dollar, as published for the months December 2009 through May 2010:

Month	Period End		Average Rate(1)		High		Low
			(NIS per $1.00)
December		3.77		3.79		3.82		3.77
January		3.72		3.71		3.77		3.67
February		3.80		3.75		3.80		3.70
March		3.71		3.74		3.79		3.71
April		3.72		3.71		3.75		3.68
May		3.83		3.79		3.87		3.73

(1)	The average of the daily exchange rates.

Impact of Inflation and Currency Fluctuations

Inflation in Israel increases some of our expenses, which, because of competitive pressures, are generally not offset, fully or as quickly, by increases in our selling prices and revenues. See “Item 3. Key Information - D. Risk Factors - Impact of inflation may adversely affect our financial expenses and operating income" and “- Currency fluctuations might affect our operating results and translation of operating results."

Any devaluation of the NIS against various non-Israeli currencies in which we or our suppliers pay for imported goods has the effect of increasing the selling price of those products which we sell in Israel in NIS and affecting our operating results. In particular, a devaluation of the NIS against the Chinese currency could significantly increase the cost of production of our non-food products at our Bee Group stores and the selling price of those products to our customers. An increase in price of imported goods by our suppliers can usually be offset by an increase in the consumer price of such goods. This devaluation would have a greater affect on our non-food retail business because a higher proportion of the goods that we sell in our Bee Group stores is acquired from suppliers overseas. This devaluation would also cause an increase in our expenses as recorded in our NIS denominated financial results even though the expenses denominated in non-Israeli currencies will remain unchanged.

Political Conditions

We and all of our subsidiaries are incorporated under Israeli law and our principal offices and operations are located in the State of Israel. Political, economic, security and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying from time to time, in intensity and degree, has led to security and economic problems for Israel. Israel signed a peace treaty with Egypt in 1979 and a peace treaty with Jordan in 1994. Israel has not entered into any peace agreement with Syria and Lebanon. In the last few years, the establishment of a Hamas government in Gaza has created additional unrest and uncertainty in the region and has increased hostilities between Israel and the Palestinians. These hostilities have included terrorist acts in Israel and military operations in the West Bank and Gaza. These hostilities had a negative effect on the Israeli economy. In December 2008 Israel was engaged in an armed conflict with Hamas in the Gaza Strip, which reduced the sales of some of our stores that are located in the southern region of Israel. In July 2006, a conflict with Hezbollah escalated significantly on Israel’s northern border, as a result of which a number of our stores located in the northern region did not operate according to their usual schedule. We cannot predict the effect on our business if hostilities are renewed or the security situation deteriorates in any part of the country.

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

Most of Bee Group's imports during 2008 and 2009 were from suppliers located in China. Because most of the products sold by the Bee Group are manufactured overseas and imported from China, its activity may be affected by changes in the political and economic conditions in China. In addition, because the Bee Group acquires most of its products from suppliers outside of Israel, and most of its products are imported via the sea, a prolonged general strike, shutdown or a disruption of any of the Israeli ports for an extended period of time, including as a result of a military conflict, would affect our ability to import such products or increase their prices. In addition, since the peak selling season of some of our Bee Group stores is during the holidays, disruptions in the ports during or adjacent to such holiday seasons may adversely affect our sales and financial results.

Economic Conditions

All of our supermarket sales are made in Israel and we acquire a substantial majority of the goods that we sell from Israeli suppliers. Consequently, our financial performance is dependent to a significant extent on the economy of Israel. During 2007 and 2008, Israel's Gross Domestic Product rose by 5.3% and 4.1%, respectively. However, in 2009 the global economic crisis, instability and uncertainty affected the economic conditions in Israel, and initial reports of the Israeli Central Bureau of Statistics indicate that during 2009 Israel's Gross Domestic Product rose by only 0.7%. Initial reports indicate that the Israeli economy increased by 3.3% (annualized) at the first quarter of 2010. We believe that the economic slowdown in Israel has affected the buying patterns of our customers, as more customers shift their purchases to low-price and hard discount stores, which have a lower profit margin. As a result, we have expanded our low-price and hard discount store formats. The economic slowdown in Israel may have an adverse effect on our financial performance, among other things, by reducing our sales and our profitability.

The global economic crisis, instability and uncertainty have also affected our non-food retail business by causing a slowdown in the growth of private consumption, which could affect the growth of our houseware, home textile, toys, leisure and baby and young children accessories businesses. Beginning in the second quarter of 2009, the Israeli economy began to recover and there has been an improvement in the growth of private consumption.

In addition, the global economic crisis has also reduced the availability of credit, increased the costs of financing and the terms under which banks agree to provide financing. These developments may reduce the sales of our businesses, increase our costs of borrowing and reduce our profitability.

Trade Agreements

Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development, the International Finance Corporation, and since 2010, the Organization for Economic Co-operation and Development, also known as, OECD. Israel is a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan. These preferences allow Israel to export the products covered by these programs either duty-free or at reduced tariffs.

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

Corporate Tax Rate

We and our subsidiaries are subject to corporate tax in Israel at a flat rate of 25% in 2010 (27% in 2008 and 26% in 2009). This rate is scheduled to be gradually reduced to 18% by 2016.

Until 2008, our taxable income was determined under the Income Tax (Inflationary Adjustment) Law 1985 (the “Inflationary Adjustments Law”), which attempts to overcome some of the issues encountered by a traditional tax system with respect to inflation. In February 2008, the Knesset (Israeli legislative body) approved Amendment No. 20 to the Inflationary Adjustments Law. The Amendment repealed the Inflationary Adjustments Law as of January 1, 2008 and set certain transition rules.

For further tax information, see “Item 10. Additional Information - E. Taxation -Israeli Tax Considerations.”

Critical Accounting Policies and Estimates

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 2 to the Consolidated Financial Statements.

We base our estimates on historical experience, where applicable, and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and could have a material impact on our reported results.

We believe that the following accounting policies are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain

Impairment of non financial assets

We review 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 property, plant and equipment and identifiable intangibles. When such indicators of impairment are present, we evaluate whether the carrying value of the asset in our accounts can be recovered from the cash flows anticipated from that asset, and, if necessary, records an impairment provision necessary to adjust the carrying amount to the recoverable amount.

When it is not possible to assess whether an impairment provision is required for an individual asset which does not generate independent cash flows, the need for such a provision is assessed in relation to the recoverable value of the cash-generating unit to which that asset belongs. For a cash-generating unit to which goodwill has been allocated, any impairment loss relating to that unit initially reduces the goodwill and the balance reduces the carrying amount of the other assets.

In 2007, we evaluated impairment separately for each store as a cash-generating unit. In 2008, we reorganized the food retail activities to incorporate all activities under one subsidiary while, at the same time, organized the brand names in order that we could meet the needs of specific customers in each geographic area (promotions, prices and variety) and increase customer loyalty program activities. As such, beginning in 2008, we evaluated impairment separately for each store or the cash-generating unit to which the store belongs when the cash inflows of one store are dependent on the cash inflows of another store in the same geographic area. In evaluating impairment, we consider corporate assets relating to the stores or other cash-generating units as well as indirect costs that are directly attributable, or that can be reasonably and consistently allocated, to the stores or cash generating units.

The recoverable amount of an asset is the higher of the net selling price of the asset's fair value less cost to sell and its value in use. These calculations require the use of estimates. In calculating the impairment for the reported years, based on discounted expected future cash flows, we used a discount rate before tax for each cash-generating unit (CGU). For discount rates used by the Company, see note 8C to the Consolidated Financial Statements.

In 2009, we recorded impairment provisions resulting in the net amount of NIS 18.5 million. In 2008, we recorded impairment provisions resulting in the net amount of NIS 3.4 million. In 2007, we recorded a reversal of impairment provisions resulting in the net amount of NIS 11.7 million. Impairment provisions or the reversal of such provisions are included in the income statement within Other gain or losses.

Referring to property plant and equipment, when the discount rate differs by 0.5% from the management estimate, the carrying value of property, plant and equipment will be NIS 0.8 million lower or NIS 0.8 million higher. When growth rate differs by 0.5% from the management estimate, the carrying value of property, plant and equipment will be NIS 2.7 million lower or NIS 2.8 million higher.

Application of alternative assumptions and definitions, such as reviewing long-lived assets for impairment at a different organizational level, could produce significantly different results

Goodwill

Goodwill is tested annually for impairment and when circumstances indicate that the carrying value may be impaired, goodwill is carried at cost less any accumulated impairment losses. Impairment losses on goodwill are not reversed.

Goodwill is allocated to cash-generating units or groups of cash-generating units that are expected to benefits from the business combination in which the goodwill arose.

Goodwill is allocated to three identified groups of cash-generating units.

The amounts of goodwill allocated to the CGU are as follows:

	December 31
	2008		2009
	NIS in thousands
Supermarkets		162,780		163,980
Non - Food retail and wholesale:
Houseware		110,952		111,179
Leisure		26,106		26,106
		299,838		301,265

The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets approved by management and management estimation covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated in Note 8C to the Consolidated Financial Statements. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates.

The key assumptions used for value in-use calculations are as follows: expected gross margin, weighted average growth rate used to extrapolate cash flows beyond the budget management estimations covering a five-year period, and pre-tax discount rate applied to cash flow projections.

The annual impairment review requires the extensive use of accounting judgments and financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different results. Similar to our policy on impairment of long-lived assets, the cash flow projections embedded in our goodwill impairment reviews can be affected by several items, such as inflation, business valuations in the market, the economy and market competition.

We performed a sensitivity analysis for the key assumption used in our annual goodwill impairment test and determined that an increase in the pre-tax discount rate of 0.5% would result in the estimated recoverable amount of Leisure CGU falling below its carrying amount by NIS 2.7 million. At December 31, 2009, the recoverable amount of this CGU exceeded the carrying amount of goodwill allocated to this CGU by 6%. We believe that the Leisure CGU is at risk for goodwill impairment in case that the pre-tax discount rate will increase by 0.5%. The fair value of our other CGUs are substantially higher than the carrying value.

Adjustment of investment property to fair value

Investment property is presented at fair value. In certain cases, fair value is determined using discounted cash flows that are based on assumptions as to discount rate. Changes in the discount rate will change the calculated fair value and may therefore materially affect the results of our operations. The range of discount rates used is 8%-12% per annum (mainly 8-8.5%).

When the discount rate differs by 0.5% from the management estimate, the fair value of investment property will be NIS 17.7 million lower or NIS 20 million higher. When the discount rate differs by 1% from the management estimate, the fair value of investment property will be NIS 34.3 million lower or NIS 41.6 million higher.

Retirement benefit obligations and Provision for unutilized sick leave

1) Retirement benefit obligations

Labor laws and agreements, and the practice, require us to pay retirement benefits to employees dismissed or retiring in certain other circumstances.

We operate various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. We have both defined benefit and defined contribution plans.

Our obligation to pay retirement benefits is generally treated as a defined benefit plan. However, for employees for whom the retirement benefit obligation is covered by section 14 of the Israel Severance Pay Law, the obligation is treated as a defined contribution plan.

Defined Benefit Plan

The retirement benefit obligation recognized in the balance sheet is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated annually using the projected unit credit method.

The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows (after taking into account the expected rate of salary increases and other actuarial assumptions) by reference to Israeli Government bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability.

We determine the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the retirement obligations. In determining the appropriate discount rate, we consider the interest rates of Israeli government bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity that are comparable to the terms of the related retirement liability.

The present value of the obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost of retirement benefits include the discount rate. Other key assumptions, such as future wage increases and retirement rates, are based in part on current market conditions and on past experience. Any changes in these assumptions will impact the carrying amount of the obligations. Actuarial gains and losses are recognized outside of profit and loss in the "statement of recognized income and expense" in the period in which they arise.

Defined Contribution Plan

A defined contribution plan is a pension plan under which we pay fixed contributions into a separate entity. Our obligation to the employees for whom the retirement benefit obligation is covered by section 14 of the Israel Severance Pay Law as part of the defined contribution plan is to make regular contributions to a separate and independent entity, and we have no legal or constructive obligations to pay further contributions if the fund does not have sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

2) Provision for unutilized sick leave

Pursuant to employment agreements, certain employees are entitled to receive payment for a certain number of sick leave days per year which accumulate to future periods. Under these said agreements, the Company has undertaken to pay each employee, upon retirement, certain amounts which depend on the balance of the unutilized days and on the cumulative number of sick leave days the employee has utilized during his employment with the Company.

The provision for unutilized sick leave is based on an annual actuarial calculation: in making such a computation, the actuary makes actuarial assumptions (such as the rates of employee turnover, future salary levels). The cost of this benefit is recognized using the same method used for defined benefit retirement plans. Actuarial gains and losses are recognized outside of profit or loss in the Statement of Recognized Income and Expense the period in which they arise. Any changes in these assumptions will impact the carrying amount of the obligations.

For key management assumption used in the annual actuarial calculation for retirement benefit obligations and provision for unutilized sick leave, see note 22 to the Consolidated Financial Statements.

Provisions for claims

The provisions for legal claims are recorded based on the estimates of our management (after consulting with the legal counsel) as to the likelihood that cash flows will be required to settle these liabilities and as to the amount of such cash flows.

Income taxes and deferred taxes

There are many transactions and calculations for which the ultimate tax determination is uncertain. We recognize liabilities for anticipated tax issues based on estimates as to whether additional taxes will be due. Where the final outcome of these matters differs from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

In addition, we recognize deferred tax assets and tax liabilities based on the difference between the carrying value of such assets and liabilities and their amount for tax purposes. We continually assess the recoverability of deferred tax assets based on historical taxable income, expected taxable income, the expected timing of the reversals of temporary differences and the application of tax planning strategies. If we is unable to generate sufficient future taxable income or actual results differ from its other assumptions, we might be required to reduce our deferred tax assets or to increase our deferred tax liabilities, which will increase our effective tax rate, and negatively affect our operations.

Impairment of available-for-sale financial assets:

We follow the guidance in IAS 39 to determine when an available-for-sale financial asset is impaired. This determination requires significant judgment. In making this judgment, we evaluate, among other factors, the duration and extent to which the fair value of an investment is less than its cost as well as the financial position of and short-term business outlook of the issuer of the instrument, including factors such as industry and sector performance, changes in technology and operating and financing cash flows.

Fair value of derivative and other financial instruments

The fair value of financial instruments that are not traded in an active market (for example, derivatives) is determined by using valuation techniques. We use our judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at each balance sheet date. We have used discounted cash flow analysis for various derivative financial assets that are not traded in active markets. Changes in assumptions could affect the reported fair value of these financial instruments. For sensitivity analysis for the key assumptions see note 3a to our consolidated financial statements.

Recently issued accounting pronouncements

For information on recently issued accounting pronouncements, see note 2bb to our consolidated financial statements.

Liquidity and Capital Resources

Sources and Uses of Cash

Sources.

Our principal source of liquidity is the cash generated by our operations. Both Blue Square and its significant subsidiaries have generally generated sufficient cash from their operations to satisfy their respective operating requirements. The available cash resources of Mega Retail, BSRE, Bee Group and their subsidiaries have historically been used, and are expected to continue to be used, to finance the expansion of these companies. We believe our working capital is sufficient for our present requirements.

Cash generated by operations was approximately NIS 260 million, or $69.0 million, in 2009, a decrease of 37% compared with approximately NIS 410 million in 2008. This decrease in cash generated by operations in 2009 was mainly due to the decrease in operating income, which was partially offset by a decrease in net taxes paid compared to 2008, and an increase in trade receivables balance at the end of 2009 compared to a decrease in trade receivables balance in 2008, which was due to an improvement in the Company's operations in the fourth quarter of 2009 compared to 2008.

In 2009, approximately 34.5% of our supermarket sales were paid for with cash, checks and gift certificates issued by the Company at the point-of-sale, approximately 61.6% of supermarket sales were paid for with credit cards and approximately 3.9% of supermarket sales were paid for with other short-term credit arrangements.

During 2009, the average time period that we held inventory was 34.9 days and the average time period within which our accounts receivable were paid was 33.1 days. By contrast, as of such date the average time period for payment of our accounts payable was 57.5 days. Accordingly, increased capital resources are not required to support an increase in our receivables or inventories because we generally sell our products before we pay our suppliers.

Other sources of liquidity are long-term and short-term borrowing from banks and others. During 2009, we received from banks and other financial institutions long-term loans of NIS 387.7 million, or $102.7 million and short-term borrowings, net, of NIS 76.1 million, or $20.2 million, and during 2009, we repaid long-term loans in the amount of NIS 139.1 million, or $36.8 million and interest in the amount of NIS 93.9 million, or $24.9 million. For information regarding outstanding balances and repayment information, see " – Long-Term Loans from Banks and other Financial Institutions" and " – Debentures."

On May 20, 2009, the Israel Securities Authority approved the publication of a shelf prospectus filed by BSRE. The shelf prospectus is valid for a period of two years from publication, and it may be used by BSRE to raise capital in the future through the issuance of shares, debentures, and/or options at the election of BSRE. In October 2009, pursuant to the shelf prospectus, BSRE issued NIS 300 million in principal amount of unsecured non-convertible Series C debentures. BSRE received net proceeds of approximately NIS 294.3 million, or $78 million (net of issuance expenses of NIS 5.7 million, or $1.5 million) in consideration for the debentures. The proceeds from the issuance of the debentures were used for financing BSRE's business activities.

In September 2008, BSRE completed the issuance of NIS 125 million in principal amount of unsecured non-convertible (Series B) debentures (in addition to the non-convertible (Series B) debentures issued in August, 2006, described below). BSRE received net proceeds of approximately NIS 121.3 million or $31.9 million in consideration for the debentures. The proceeds from the issuance of the debentures were used, among other things, for investments in real estate and for working capital. The terms of these debentures are identical to the terms of the non-convertible (Series B) debentures issued by BSRE in August 2006.

In August 2006, BSRE completed its initial public offering of ordinary shares, unsecured convertible (Series A) and non-convertible (Series B) debentures on the Tel Aviv Stock Exchange. BSRE received net proceeds of approximately NIS 147.6 million in consideration for its ordinary shares and net proceeds of approximately NIS 731.2 million in consideration for the debentures. The proceeds from the issuance of the debentures were used, among other things, to repay long-term borrowings of NIS 518 million, or $122.6 million, that the Company transferred to BSRE at the time of the transfer of the real estate assets to BSRE while the Company retained the proceeds of the loan. These long-term loans were incurred by the Company as part of its preparations for the transfer of real estate assets and related financial obligations to BSRE prior to its initial public offering.

As of December 31, 2009, the remaining principal balance (linked to the Israeli CPI) of BSRE's convertible (Series A) and non-convertible (Series B) debentures was NIS 109.6 million and NIS 849.5 million, respectively, and the remaining principal balance (linked to the Israeli CPI) of BSRE's non-convertible Series C debentures was NIS 300.6 million.

In 2003, we issued NIS 200 million in aggregate principal amount of unsecured 5.9% convertible and NIS 200 million in aggregate principal amount of non-convertible debentures. The installments of principal on the convertible debentures are due in 2007, 2009 and 2011, and the installments of principal on the non-convertible debentures are due in 2012, 2013 and 2014. During 2009, we repaid convertible debentures in a principal amount of NIS 13.3 million, and we issued a total of 344,239 ordinary shares as a result of the conversion of our convertibles debentures in a principal amount of NIS 6.9 million. As of December 31, 2009, the remaining principal balance (linked to the Israeli CPI) of the convertible debentures (Series A) was approximately NIS 15.1 million and the remaining principal balance (linked to the Israeli CPI) of the non-convertible debentures (Series B) was approximately NIS 227.7 million.

In February 2010, we published a shelf prospectus that allows us to issue marketable securities in Israel during the next two years.

Uses.

During 2009, we repaid long-term loans in the amount of NIS 139 million, or $36.8 million, and interest in the amount of NIS 93.9 million, or $24.9 million, and we paid dividends to minority shareholders of subsidiaries in the amount of NIS 16.5 million or $4.4 million.

In recent years, we funded our renovation, remodeling and expansion programs primarily from cash generated by our operations and from long and short-term loans from banks. During 2009, we invested approximately NIS 234 million, or $62 million, in property, plant and equipment, intangible assets and investment property, a 24.8% decrease from our 2008 investment of NIS 311.7 million. Of our investment in property, plant and equipment, intangible assets and investment property in 2009, we invested NIS 46.2 million, or $12.3 million, in land and buildings, including land that we leased, as compared with NIS 89.5 million in 2008. During 2010, we have spent and currently plan to spend in excess of approximately NIS 78.6 million, or $20.5 million (based on the representative rate of exchange on May 31, 2010) for the development or acquisition of new supermarkets, the renovation and remodeling of our existing supermarkets and related investments. We intend to finance our store development, renovation, modeling, expansion and acquisitions mainly from cash generated by our operations and from borrowings from banks and others.

In November 2008, pursuant to a cash tender offer, we completed the acquisition of the Mega Retail shares that were not previously held by us, for the aggregate consideration of NIS 150.7 million, or $40.2 million (at that time). We currently own 100% of the shares of Mega Retail, and Mega Retail's shares are no longer traded on the Tel-Aviv Stock Exchange.

In September 2008, we acquired an additional 25% of the shares of Bee Group for the aggregate consideration of NIS 35.4 million, or $9.8 million (at that time), increasing our holdings in Bee Group to 85%.

In October, 2007, we purchased (through Bee Group) 57.87% of the holdings of Naaman Porcelain (51.5% on a fully diluted basis) in consideration for approximately NIS 101 million or approximately $26.26 million (at that time). In March 2009, we purchased (through Bee Group) additional shares of Naaman, in consideration for approximately NIS 7 million, or approximately $1.8 million, following which Bee Group's holdings in Naaman were approximately 66.85% of the outstanding shares.

In October, 2007, we purchased 51% of the holding of Eden Briut Teva Market Ltd. ("Eden Nature") in consideration for approximately NIS 22.5 million or approximately $5.85 million (at that time). In addition, under the agreement, (i) we provided Eden Nature with shareholder loans in the amount of NIS 47 million and (ii) we will provide all guarantees and financing required in connection with Eden Nature’s operations in the future, the repayment of existing shareholder loans in the amount of NIS 4.7 million which has since been repaid, and the payment of a bonus to Eden Nature’s CEO upon the satisfaction of various thresholds which have not yet been satisfied.

In April, 2007, we purchased (through Bee Group) 85.79% of the holdings of Vardinon Textile Ltd. in consideration for approximately NIS 38 million or approximately $9.88 million (at that time). On June 1, 2009 Naaman acquired an additional approximately 3% of the shares of Vardinon. As a result of this acquisition, Naaman increased its holding in Vardinon to approximately 88.74% of the share capital. As of May 31, 2010, Bee Group held approximately 66.85% of the outstanding shares of Naaman, and Naaman held approximately 88.74% of the outstanding shares of Vardinon.

Dividends

The following table sets forth dividends paid by the Company from January 1, 2007 until the date of this Annual Report:

Date of payment	Amount per share	Total amount(1)
February 25, 2010	NIS 1.70 ($0.45)	NIS 75 million (approximately $19.8 million)
October 7, 2008	NIS 3.46 ($0.99)	NIS 150 million (approximately $42.82 million)
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)

(1) In accordance with the representative rate of exchange of the NIS to the dollar as of the date of the payment of the dividend.

Within the framework of our proposed acquisition from Alon of all of Alon's approximately 80% holdings in Dor Alon, the audit committee and board of directors of Blue Square approved the distribution of a dividend (after the share issuance to Alon) to Blue Square's shareholders not out of profits, of NIS 800 million, or approximately US$ 208.9 million (based on the representative rate of exchange on May 31, 2010), which represents a dividend of approximately NIS 12.32, or approximately $3.22 (based on the representative rate of exchange on May 31, 2010), per ordinary share of Blue Square (after taking into account the shares to be issued to Alon in the acquisition). The dividend per share is subject to change based on the number of shares outstanding on the record date for the dividend. Blue Square intends to finance the dividend by NIS 400 million in cash and by NIS 400 million in long-term debt. The terms of the long-term debt have not yet been determined. The dividend is subject to the approval of Blue Square's general meeting of shareholders, the Israeli courts and to the completion of the acquisition by us of Dor Alon, as well as customary closing conditions, if applicable. For further information on the acquisition see “Item 7. Major Shareholders and Related Party Transactions – Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD."

In addition to the dividends described above, the following dividends were paid by the Company from 2002 to 2006:

Year of payment	Amount per share	Total amount(1)
2006	NIS 2.81 ($0.62)	NIS 110 million (approximately $24.4 million)
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)

(1) In accordance with the representative rate of exchange of the NIS to the dollar as of the date of the payment of the dividend.

On January 14, 2010, Blue Square's board of directors decided that in view of the changes and development of Blue Square since 2003, including the transfer of Blue Square's and Mega Retail's real estate properties to BSRE (which operates under financial obligations to EBITDA ratios appropriate for real estate companies and currently holds a major part of the consolidated debt), the purchase of Bee Group (a Non Food retailer), and the reorganization of Blue Square's food retail activities in its subsidiary, Mega Retail Ltd., that the ratio of net financial obligations to EBITDA is to be calculated by deducting from the net financial obligations Blue Square's debt which is related by the company to real estate that is not in use by Blue Square (which is equal to 75% of the investment property as recorded on the balance sheet). On December 31, 2009, the net financial obligations to EBITDA (calculated in accordance with the deduction described above) was less than 2.0. Our board of directors further resolved that Blue Square would not distribute dividends in any quarter if the ratio of our net financial obligations (calculated in accordance with the deduction described above) to EBITDA for any quarter exceeds 4.5.

Dividends paid by Mega Retail from 2004 until the date of this Annual Report:

Date of payment	Amount per share	Total amount(1), (2)
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)(3)
May 30, 2004	NIS 12.21 ($2.68)	NIS 400 million (approximately $87.8 million)

(1) In accordance with the representative rate of exchange of the NIS to the dollar as of the date of the payment of the dividend.

(2) Blue Square's share in the distribution of the dividends was approximately 80%.

(3) The dividend distribution required a court approval (which was granted on March 6, 2005) because the distribution did not meet the “profit test” under the Israeli Companies Law. The distribution was made from capital gains that were originally classified as a capital reserve that originated from a transaction in 1998 with a former controlling shareholder. 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.

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

In August 2006, the board of directors of BSRE adopted a policy that BSRE will distribute dividends in each of years 2006 to 2008 in the amount of no less than 25% of the net profits of BSRE in such year. In November 2008, BSRE's board of directors approved a decision to extend this policy for the years 2009 and 2010. Such distributions are subject to the “profit test” under the Israeli Companies Law at the relevant dates and to other decisions of BSRE board of directors, including decisions designating a different use of BSRE's profits and/or a change in the BSRE dividend policy.

Date of payment	Amount per share	Total amount(1) (2)
March 31, 2010	NIS 4.6 ($1.3)	NIS 57.6 million (approximately $15.5 million)
April 20, 2009	NIS 1.35 ($0.32)	NIS 16.8 million (approximately $4.0 million)
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)

(1) In accordance with the representative rate of exchange of the NIS to the dollar as of the date of the payment of the dividend.

(2) Blue Square's share in the distribution of the dividends was approximately 80%.

Short-Term Credit from Banks and Others

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

	December 31
	2008		2009
	NIS in thousands

Bank overdrafts		12,187		493
Bank loans		65,801		101,774
Commercial paper		-		40,819
Current maturities of long-term loans		132,913		131,512

		210,901		274,598

Long-Term Loans from Banks and other Financial Institutions

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

	December 31				Annual Interest Rate
	2008		2009		(1)
	NIS in thousands				%

In Israeli currency:

Linked to the Israeli CPI (2)		113,880		317,409		5.2
Unlinked and bearing a fixed interest rate (3)		305,456		243,324		7.1
Unlinked and bearing a variable interest rate (4)		55,163		167,500		3.2

Total		474,499		728,233

Less - current maturities		132,913		131,512

		341,586		596,721

(1) Weighted average rate as of December 31, 2009.

(2) As of December 31, 2009, includes approximately NIS 255 million at a weighted average interest rate of 4.8%, approximately NIS 61 million at a weighted average interest rate of 6.9% and the balance of approximately NIS 2.3 million at a weighted average interest rate of 4.1%.

(3) As of December 31, 2009, includes NIS 167 million at an interest rate of 5.9%, and the balance of approximately NIS 76 million at a weighted average interest rate of 9.8%.

(4) As of December 31, 2009, includes approximately NIS 130 million at a weighted average interest rate of 3.3%, approximately NIS 11 million at a weighted average interest rate of 3.7%, and the balance of approximately NIS 27 million at a weighted average interest rate of 1.9%.

The loans described in the table above include loans undertaken by Bee Group and its subsidiaries in an aggregate amount of approximately NIS 190 million and loans undertaken by BSRE in an aggregate amount of NIS 250 million. These loan agreements contain undertakings by Bee Group and its subsidiaries and BSRE to meet certain financial covenants. The financial covenants in Bee Group's loan agreements include a limitation on Bee Group and its subsidiaries' ability to distribute dividends. As of December 31, 2009, Bee Group and its subsidiaries and BSRE met the financial covenants contained in their respective loan agreements.

Debentures

The following table summarizes outstanding debentures in 2008 and 2009 of the Company and of our subsidiary, BSRE, of which we owned 78.35% of the shares as of May 31, 2010:

	December 31
	2008		2009
	NIS in thousands
Convertible debentures:
Issued by the Company		44,267		26,267
Issued by BSRE		112,086		115,660
		156,353		141,927

Less - current maturities		25,956		-
		130,397		141,927

Non-convertible debentures:
Issued by the Company		199,585		211,344
Issued by BSRE		786,259		1,116,642
		985,844		1,327,986

Less - current maturities		-		76,653
		985,844		1,251,333

In addition, Naaman, our subsidiary through Bee Group, has outstanding convertible debentures, which as of December 31, 2008 and December 31, 2009, had a principal balance of NIS 171,000 and NIS 139,000, respectively.

Blue Square Debentures

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

Blue Square Series A Debentures

The principal of the Series A Debentures is repayable in three equal annual installments on August 5 of each of the years 2012 to 2014, and the interest is payable semiannually. Notwithstanding the above, under the terms of the Debentures, on August 5 of each of the years 2006, 2008 and 2010, the holders of the Series A Debentures were entitled to early redemption of the principal provided that on each of such dates we do not repay more than one third of the par value of the Series A Debentures outstanding as of that date. No Series A Debentures have been redeemed to date.

Blue Square Series B Debentures

The principal of the Series B Debentures is repayable in three equal annual installments on August 5 of each of the years 2007, 2009 and 2011, and the interest is payable semiannually. The Series B Debentures are convertible into our ordinary shares at a conversion ratio that is subject to adjustment in the event of distribution of bonus shares and cash dividends and the issuance of rights. As of May 31, 2010, each NIS 18.390 par value of debentures was convertible to one ordinary share of NIS 1 par value. This conversion ratio is after adjustment for cash dividends distributed from the date of issuance of the Series B Debentures until May 31, 2010. As of May 31, 2010, the remaining principal balance of the Series B Debentures was approximately NIS 7.5 million.

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

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

On October 1, 2009, we announced that we received from S&P Maalot a report including affirmation of "ilA+" rating for the debentures, while revising the outlook to negative. In its rating, S&P Maalot stated that under the current rating it still expects us to maintain an adjusted debt to EBITDA ratio of less than 4.5. In April 2010, following BSRE's announcement regarding approval by its board of directors and audit committee of a draft agreement to jointly purchase real estate for residential and commercial development in the wholesale market site in downtown Tel Aviv, S&P-Maalot placed the rating of our debentures (Series A and Series B) on CreditWatch with negative implications. According to S&P-Maalot, because this is BSRE's first venture into the residential development sector, this could affect our business risk profile, and the downgrade reflects S&P-Maalot's opinion that BSRE's transaction could lead to increased financial risk for Blue Square. We have no knowledge whether our proposed acquisition of Alon's shares in Dor Alon will have an impact on the rating for the debentures.

BSRE Debentures

In August 2006, BRSE issued 2.5 million BRSE ordinary shares of NIS 1 par value each, together with NIS 100 million par value of registered BRSE Series A debentures, which are convertible into BRSE ordinary shares, and NIS 650 million par value of registered BRSE Series B debentures. In September 2008, BSRE completed the issuance of an additional NIS 125 million in principal amount of unsecured non-convertible (Series B) debentures to institutional investors. The terms of these debentures are identical to the terms of the non-convertible (Series B) debentures issued by BSRE in August 2006. In October 2009, BSRE issued NIS 300 million par value of registered Series C debentures.

BSRE Series A Debentures

The BSRE Series A debentures are to be redeemed in four equal annual installments on August 31 of each of the years 2013 to 2016. The Series A debentures are linked (principal and interest) to the known Israeli CPI and bear interest at an annual rate of 6.25%, which is payable semiannually. The Series A debentures are convertible into BSRE ordinary shares from the date that they are first listed for trade on the stock exchange through August 16, 2016, except during the periods from August 17 through August 31 in each of the years 2013 to 2015. The conversion rate is subject to adjustments in the event of distribution of cash dividends. Until August 31, 2008, the conversion was effected at the rate of NIS 96.83 par value of registered Series A debentures (following adjustments due to distributions of cash dividends) for each ordinary share of NIS 1 par value; since that date and through August 16, 2016, the conversion rate is NIS 268.71 par value of registered Series A debentures (following adjustments due to distributions of cash dividends) for each ordinary share of NIS 1 par value.

BSRE Series B Debentures

The BSRE Series B debentures are to be redeemed in four equal annual installments on August 31 of each of the years 2013 to 2016. The Series B debentures are linked to the known CPI and bear interest at an annual rate of 4.7%, which is payable semiannually.

If, at the time of making any redemption/payment on account of the principal and of interest of the Series A or Series B debentures, it is found that the payment index is less than the base index (the CPI for July 2006), BSRE is required to make such payment according to the base index.

100

BSRE Series C Debentures

The BSRE Series C debentures are to be redeemed in eight non-equal annual installments on October 31 of each of the years 2011 to 2018, of which six installments each in the amount of 7.5% of the debentures' principal amount are to be redeemed on October 31 of each of the years 2011 to 2016, and two installments each in the amount of 27.5% of the debentures' principal amount are to be redeemed on October 31 of each of the years 2017 to 2018. The Series C debentures are linked to the known CPI and bear interest at an annual rate of 4.2% which is payable semiannually on April 30 and October 31 of each of the years 2010 to 2018.

If, at the time of making any redemption/payment on account of the principal and of interest of the Series C debentures, it is found that the payment index is less than the base index (the CPI for August 2009), BSRE is required to make such payment according to the base index.

For additional information on charges pertaining to the collateralized long-term loans, see note 19 to our consolidated financial statements.

Rating of BSRE Debentures

On July 27, 2006, S&P-Maalot rated the BSRE debentures (Series A and Series B) at "ilAA-".

On September 28, 2008, S&P-Maalot rated the BSRE debentures (Series B), with an increased principal amount of up to NIS 250 million, at "ilAA-/Stable".

On May 27, 2009, following the recent downgrading of the rating of Blue Square's debentures (Series A and Series B) to "ilA+/Stable", S&P-Maalot informed BSRE that it had placed BSRE's debentures (Series A and Series B) on "credit watch negative". On October 7, 2009, S&P-Maalot removed BSRE's debentures (Series A and Series B) from "credit watch negative" and downgraded the rating on the debentures (Series A and Series B) to "ilA+/Negative" and rated up to a principal amount of NIS 300 million Series C debentures "ilA+/Negative". S&P-Maalot believes that there is a significant correlation between the rating of our debentures and the rating of BSRE's debentures due to our significant holdings in BSRE (78.5% at the time of the S&P-Maalot notice) and due to the fact that we are a major lessee of BSRE's properties (our lease payments to BSRE generated approximately 85% of BSRE's rental income in 2009).

On October 7, 2009, Midroog rated BSRE's debentures (Series A and Series B) "A1/Stable" and rated up to a principal amount of NIS 300 million Series C debentures "A1/Stable". On June 2, 2010, Midroog changed the outlook on the rating of BSRE's debentures (Series A, Series B and Series C) to "A1/Negative" and rated "A1/Negative" up to an additional principal amount of NIS 100 million BSRE debentures.

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Commitments for Capital Expenditures

As of December 31, 2009, we had entered into agreements for investments in fixtures, equipment and leasehold improvements in the total amount of approximately NIS 38.6 million, or $10.2 million. We intend to finance these investments from cash generated by our operations and from loans from banks or other financial institutions.

In addition, we have commitments under our agreements with the Wholesale Market Company which were signed on June 3, 2010 and are subject to approval by the Israeli Minister of the Interior within 60 days from the date on which the agreements were signed. For further information regarding our agreement with the Wholesale Market Company, please see "Item 7. Major Shareholders and Related Party Transactions – Agreement with the Wholesale Market Company." We intend to finance these investments from cash generated by our operations and from loans from banks or other financial institutions. In addition, in connection with our proposed acquisition from Alon of all of Alon's approximately 80% holdings in Dor Alon, subject to satisfaction of closing conditions, we expect to issue to Alon an aggregate of 20,327,710 ordinary shares of Blue Square. See “Item 7. Major Shareholders and Related Party Transactions – Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD."

C. Research and Development, Patents and Licenses.

Not applicable.

D. Trend Information.

Accordingly, we believe that there is an opportunity for us to grow correspondingly with the general growth of the supermarket sector in Israel. In addition, we believe that we have an opportunity to grow in locations where we do not have a strong presence and in particular in the northern part of the country and in the Jerusalem area.

The food retailing industry has been subject to increased competition in recent years. Since the 2005 merger between Shufersal and ClubMarket, another major chain, we have faced a larger competitor, many of whose stores are characterized by the every day sale of products at low prices. Based on A.C. Nielsen, we estimate that Shufersal's market share was approximately 37.3% of the bar-coded market in Israel in 2009, as opposed to our own approximately 21.8% share of the bar-coded market in 2009.

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In addition, as a result of consumers’ focus on the price of products, in recent years we and our competitors have established or expanded low-price and hard discount store formats. In 2009, very low-priced smaller supermarket chains continued to aggressively increase their market share and expand their presence in selected areas in Israel, often geographically beyond their original location. The increased competition has led to increased downward pressure on prices.

The global economic crisis and the resulting slowdown in the Israeli economy has impacted the food retail market by affecting the buying patterns of our customers, as more customers are shifting their purchases to low-price and hard discount stores, which have a lower profit margin. In response to these trends, in August 2007, we launched our Mega In Town store format to offer discount prices in neighborhood stores. In addition, in December 2008 we launched our Mega Bool heavy discount store format as well as our "Mega" line of private label goods that are sold in our "Mega Bool", "Mega In Town" and "Mega" stores. We expect to continue to expand our low-price and hard discount store formats and our sales of products under our "Mega" private label in 2010 in an effort to increase our market share.

In addition, during 2009, we launched a new membership card and a new "You" Mastercard credit card as part of our "You" loyalty club, which is designed to increase consumer traffic and encourage customers to patronage our stores.

In the past few years, we have witnessed a global trend of supermarkets specializing in organic and health products. In response to this trend, we purchased Eden Teva in October 2007, which operates a leading supermarket chain in Israel offering organic/health products. In 2009, we expanded the Eden Teva chain and it now includes nine stores. During 2010, we announced our intention to implement the second stage of our strategy to establish our Eden Teva format as the leader in Israel's organic/health food market by establishing Eden Teva branches within our existing large store formats under the concept of a "store within a store".

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

In 2009, we opened 11 new stores and closed two stores to compete in selective areas in which we did not believe we had sufficient market presence, and we converted three Mega stores into Mega In Town stores. We also converted ten "Mega" and "Shefa Shuk" stores to the new brand “Mega Bool”. In addition, we plan to continue to remodel some of our supermarkets to give them a more “upscale” orientation, offering improved product selection and increased focus on customer service.

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In 2010, we plan to open approximately six additional supermarkets, totaling approximately 8,000 square meters of store space, in localities whose populations are currently under-served by supermarkets or in localities in which we do not have sufficient market presence. In addition, in 2010, we plan to convert approximately three "Mega" supermarkets stores into "Mega Bool" stores. In 2010, until May 31, 2010, we opened four supermarket stores.

In 2010, we are taking action to further increase our market share of “Non-Food” and “Near-Food” products and to offer a wider selection of these products to consumers in our stores with the goal of increasing the portion of our customers’ overall shopping needs that are addressed in our stores. In addition, we intend to continue our expansion into the stand alone Non Food stores market by opening approximately 13 additional self-operating stores and nine additional stores operated by franchisees and to capitalize on potential synergies and an internal reorganization in order to improve our operating efficiency. In 2010, until May 31, 2010, we opened two self operating stores and six stores operated by franchisees.

In 2010, in order to improve our market share, we are looking to further broaden the variety of products offered under our private label and to improve our distribution capabilities by investing in a new distribution center.

In May 2010, we signed a share purchase agreement with our controlling shareholder, Alon, to acquire from Alon all of Alon's approximately 80% holdings in Dor Alon. Dor Alon is one of the four largest fuel retail companies in Israel based on the number of gas stations and is a leader in the convenience stores sector. The closing of the transaction is subject to satisfaction of closing conditions, including shareholder approval. The acquisition of Dor Alon would combine our and Dor Alon's retail operations into one group creating the largest retail group in Israel. Additionally, the acquisition could enable us to achieve a strong foothold in the convenience store sector and enable substantial synergies and cost savings when combining the retail platforms of both companies.

E.	Off-Balance Sheet Arrangements.

None.

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F.	Tabular Disclosure of Contractual Obligations.

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

	Expected Maturity (NIS in thousands)
	2010		2011		2012		2013		2014		2015		2016 and thereafter		Total

Long term loans from banks (1)		131,512		114,607		95,520		75,943		32,211		33,003		245,437		728,233
Non Convertible Debentures issued by the Company (2) (3)		75,906		-		50,604		50,604		50,604		-		-		227,718
Convertible Debentures issued by the Company (2) (4)		-		15,093		-		-		-		-		-		15,093
Non-Convertible Debentures issued by BSRE (5) (6)		-		22,543		22,543		234,921		234,921		234,921		400,237		1,150,086
Convertible Debentures issued by BSRE (5) (6)		-		-		-		27,404		27,404		27,404		27,404		109,616
Short term credit from banks (7)		102,267		-		-		-		-		-		-		102,267
Commercial paper (8)		40,000		-		-		-		-		-		-		40,000
Put option granted to a minority interest		23,317		-		-		-		-		-		-		23,317
Purchase Obligations		55,757		-		-		-		-		-		-		55,757
Non-cancelable Long term leases		214,530		201,450		188,394		149,649		113,184		88,228		220,550		1,175,985
Total contractual cash obligations		643,289		353,693		357,061		538,521		458,324		383,556		893,628		3,628,072

(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, or variable interest 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, 2009 (5.3% per annum), interest payments on the long-term loans (in thousands) would be NIS 34,125 in 2010, NIS 28,023 in 2011, NIS 22,365 in 2012, NIS 17,589 in 2013, and NIS 14,734 in 2014, NIS 63,631 in 2015 and beyond.

(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 13,435 in 2010, NIS 8,957 in 2011, NIS 8,981 in 2012, NIS 8,957 in 2013, and NIS 4,478 in 2014. Without taking into account any changes to the Israeli CPI, based on the principal amount of the Convertible Debentures as of December 31, 2009 and assuming no additional conversion of debentures, interest payments on the Convertible Debentures (in thousands) would be NIS 904 in 2010 and NIS 525 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 (Series A, Series B and Series C) bear interest at an annual rate of 6.25%, 4.7% and 4.2%, 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 52,932 in 2010, NIS 52,551 in 2011, NIS 51,746 in 2012, NIS 50,658 in 2013, NIS 39,729 in 2014, NIS 57,136 in 2015. Without taking into account any changes to the Israeli CPI, based on the principal amount of the Convertible Debentures as of December 31, 2009 and assuming no additional conversion of debentures, interest payments on the Convertible Debentures (in thousands) would be NIS 6,851 in each of the years 2010 to 2011, NIS 6,870 in 2012, NIS 6,851 in 2013, and NIS 5,138 in 2014, NIS 3,425 in 2015 and NIS 1,717 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.

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(6)

The principal of the debentures (Series A and Series B) are repayable in four equal annual installments on August 31 of each of the years 2013 to 2016. The principal of the debentures (Series C) is repayable in eight non-equal annual installments on October 31 of each of the years 2011 to 2018 (inclusive), where six installments each constituting 7.5% of the amount of the principal of the debentures would be paid on October 31 of each of the years 2011 to 2016 and two installments each constituting 27.5% of the amount of the principal of the debentures would be paid on October 1 of each of the years 2017 and 2018.

(7)

The table above does not include interest on our short term credit from banks (2009: 3.6% per year).

(8)

On June 30, 2009, the Company issued commercial paper to institutional investors in an amount of NIS 40 million for a period of four years. The commercial paper bears annual interest at a variable rate equal to the Bank of Israel Interest Rate plus 1.5%, payable semi-annually beginning on December 30, 2009. The average annual interest rate for the six months ended December 31, 2009 was 2.21%. Therefore, the table above does not include the amount of interest on commercial paper. The principal of the commercial paper is repayable every six months at the demand of the holders, but in any event, the last repayment date of the principal will be June 28, 2013.

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.

The table above does not include a provision for uncertain tax positions in the amount of NIS 4.2 million.

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ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management.

The following table lists the name, age and position of the directors and senior management of Blue Square and two officers of our subsidiaries as of June 15, 2010.

Name	Age	Position

David Wiessman (1)	55	Executive Chairman of the Board of Directors
Yitzhak Bader	64	Director
Shlomo Even	53	Director
Diana Bogoslavsky	51	Director
David Alphandary (2) (3)	75	Director
Uzi Baram (1) (2) (3)	73	Director
Avraham Meron (2)	71	Director
Zeev Vurembrand	59	President and Chief Executive Officer
Dror Moran	42	Vice President and Chief Financial Officer and General Manager of "You" Club
Ilan Buchris	58	Vice President Logistics, Planning and Maintenance Division
Gershon Wissman	51	Vice President Trade
Elli Levinson Sela	43	General Counsel and Corporate Secretary
Moshe Shatz	62	Head of Human Resources Division
Oren Lahat	63	Head of Real Estate Development Division
Odelia Levanon	47	Head of Information Technology Division
Shai Almog	44	Head of Marketing Division
Ittay Hazan	35	Head of Strategy Division
Eliezer Gayer	53	“Mega” and “Mega In Town” Manager
Rafi Masiach	51	“Mega Bool” and “Shefa Shuk” Manager
Zeév Stein	57	Chief Executive Officer of Blue Square Real Estate Ltd.
Shmuel Enchel	53	Chief Executive Officer of Bee Group

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

(3) External directors.

David Wiessman has served as Executive Chairman of our board of directors from November 15, 2005 and as the Vice Chairman of our board of directors from June 2003. Mr. Wiessman is also the Chairman of the board of directors of Mega Retail from March 12, 2007 and the Chairman of the board of directors of BSRE from December 21, 2005. In addition, Mr. Wiessman is currently the President and Chief Executive Officer of Alon Israel Oil Company Ltd. and President and Active Joint Chairman of the Board of Directors of Dor-Alon Energy In Israel (1988) LTD., Chief Executive Officer of Bielsol Investments (1987) Ltd., Chairman of the board of directors of Alon Retail, Executive Chairman of Alon U.S.A. Energy, Inc., Director of Rosebud Real Estate Ltd., and holds director and/or officer positions in other companies affiliated with the foregoing Alon entities, both in Israel and the United States. In addition, Mr. Wiessman also serves as a director in other companies not affiliated with Alon Israel Oil Company Ltd., or with Alon USA Inc. Mr. Wiessman is a member of the Compensation Committee of Blue Square.

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Yitzhak Bader has served as our director from June 2003. Mr. Bader is currently Chief Executive Officer of Granot, a purchasing organization of the kibbutzim. He is also Chairman of the board of directors of Alon Israel Oil Company Ltd. and Joint Chairman of Dor-Alon Energy In Israel (1988) LTD., and a director in the following companies: Alon Retail, Mega Retail, Dor Gas Ltd., Dor Alon Operating Service Stations Ltd., Dor Alon Gas Technologies Ltd., Alon USA Energy, Inc., Alon USA Operating, Inc., Alon USA GP, LLC, Alon USA Capital Inc., Alon Assets Inc., Alon USA Inc., BSRE, Pizza Hut Israel (2002) Limited Partnership, Pri-Gat Ltd., Rimon Counseling and Management Services Ltd., Meiram Water and Infrastructures Ltd., various entities under control of Granot, and One Technologies Software (ASD) Ltd.

Shlomo Even has served as our director since June 2003. Mr. Even is currently a certified accountant and partner of the accounting firm of Tiroshi Even, and a director of the following companies: Super Sol Bielsol Investments Ltd., Alon Israel Oil Company Ltd., Dor-Alon Energy In Israel (1988) LTD., Rosebud Real Estate Ltd., Alon Dor Operating Service Stations Ltd., Dor Gas Ltd., Dor Alon Gas Technologies Ltd., Alon USA Energy Inc., Alon USA Operating Inc., Alon USA GP LLC, Alon USA Capital Inc., Alon Assets Inc. and Alon USA Inc. Mr. Even holds a B.A. degree in Accounting and Economics from Bar-Ilan University.

Diana Bogoslavsky has served as our director since March 2006. She has served as the Chief Executive Officer of Mishkei Emek Hayarden and the Regional Plants since 2005. From 1996 to 2004, Ms. Bogoslavsky served as Manager of the Economic Department of Brit Hapikuach (the Supervision Alliance). From 2000 to 2004, Ms. Bogoslavsky also served as a member of the management of Brit Hapikuach and as the Chairman of the board of directors of Jenny Company, a subsidiary of Brit Hapikuach. From 1993 to 1996, Ms. Bogoslavsky served as Bank Mizrahi representative in Argentina. Ms. Bogoslavsky currently serves as a director in the Union of the Kibbutzim Industry, in Dor-Alon Energy In Israel (1988) LTD. and in several others companies. Ms. Bogoslavsky holds a Masters degree in Economics and Business Management (specializing in financing) and B.A. in Economics and Administration from Midreshet Rupin in the Hefer Valley in Israel.

David Alphandary has served as our external director since March 2006. He currently serves as an independent consultant to the retail industry. From 1991 to 1999, Mr. Alphandary served as President and Chief Executive Officer of Shufersal Ltd. and from 1982 to 1991 as Vice President to Shufersal. From 1976 to 1982, Mr. Alphandary served as President of Carmel Carpeting Industry in Ceasaria, Israel. He currently serves as a director of Yafora Tavori Ltd. Mr. Alphandary holds a degree in Public Administration from the Hebrew University in Jerusalem. Mr. Alphandary is a member and the Chairman of the Audit Committee of Blue Square.

Uzi Baram has served as our external director since March 2006. He served as a member of Israel’s parliament, the Knesset, from 1977 to 2001. He served as the Minister of Tourism of Israel from 1992 to 1996, and from February 1993 to August 1995 he served as the Minister of Interior Affairs of Israel. He currently serves as a director of Master Plan, a company for strategic communication consulting, and of Bank Otsar Ha-Hayal. Mr. Baram holds a degree in Political Sciences and Sociology from the Hebrew University in Jerusalem. Mr. Baram is a member of the Audit Committee and the Compensation Committee of Blue Square.

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Avraham Meron has served as our director and member of the audit committee since August 20, 2007. Mr. Meron is currently an independent advisor and is an external director in Africa Israel Properties Ltd., a director in Discount Mortgage Bank Ltd., a member of the investments committee in Clal Finance group, and a director in A.I. America Israel Investments Ltd. For a period of 13 years, until October 2005, Mr. Meron served as senior vice president-finance of Africa Israel Investments Ltd. Mr. Meron also served as a director of Africa Israel’s subsidiaries, including Alon Oil Company group, the controlling shareholder of Blue Square. Mr. Meron is a CPA and holds a degree in Accounting from the Hebrew University of Jerusalem.

Zeev Vurembrand has served as our Chief Executive Officer and President since March 2008. From September 2007 to February 2008, Mr. Vurembrand served as the Deputy to the Chief Executive Officer of The Phoenix Holding Ltd., and as the Chief Executive Officer of the Phoenix Investment and Finance Ltd. From 2002 to 2007 Mr. Vurembrand served as the Chief Executive Officer (and as the Chairman of the board of directors of various subsidiaries) of Clalit Health Services Group. Mr. Vurembrand also serves as a director and the chairman of the balance sheet committee of Israel Discount Bank Ltd., and as a director in U-Bank in Israel. Mr. Vurembrand holds a B.Sc. degree in Industrial Engineering and Management from the Technion (the Israeli Institute of Technology).

Dror Moran has served as our Vice President and Chief Financial Officer, since July 2006, and the General Manager of "You" Club, since June, 2009. Mr. Moran is a CPA and received a Bachelor of Business, Accounting and Finance from the College of Management Academic Studies in Tel Aviv. Mr. Moran was employed by Blue Square between 1997 and 2005 and his last position with Blue Square was Deputy CFO. Between April 2005 and June 2006, Mr. Moran served as Chief Financial Officer and as Deputy CFO of InSightec Ltd., a high-tech company.

Ilan Buchris has served as our Vice President of Logistics, Planning and Maintenance Division since November 2004. Mr. Buchris, Colonel (retired) in the Israeli Navy, holds a M.A. degree in Political Science from Haifa University and a B.A. degree in settlement geography from Bar Ilan University. Between 2000 and 2004 Mr. Buchris served as Authorities Coordinator at Derech Eretz Highways (1997) Ltd.

Gershon Wissman was appointed as our Vice President of Trade, as of March 2009. Prior to that, he served as our Head of Trade Division and a member of management, beginning in August 2008. From 2002 to 2005, Mr. Wissman served as the Vice President for Trade and Marketing and a member of management of the ClubMarket Chain. From 1992 to 2002, Mr. Wissman served in various capacities in our Trade Division, including as Manager of the Grocery Product Category and as Manager of Store Formats. Mr. Wissman holds a B.A. in Economics and Business from Haifa University.

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Elli Levinson-Sela, Adv. has served as our General Counsel and Corporate Secretary since February 2006. Prior to joining us, Mr. Levinson-Sela had more then 13 years of experience in private legal practice of commercial, corporate and civil law. He holds a LL.B. degree (with honors) from the Hebrew University in Jerusalem and is a member of the Israeli Bar Association.

Moshe Shatz has served as our head of the Human Resources Division since November 2003. Mr. Shatz served as a Vice President of Human Resources and Administration in the Tel-Aviv Municipality from 1999 until today. From 1993 to 1998, he served as the manager of personnel and administration division of UMI - Universal Motors Israel Ltd. Mr. Shatz holds a B.A. in Political Science from Bar Ilan University.

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

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

Shai Almog has served as our Head of Marketing Division since June 10, 2008. Prior to that, Mr. Almog served as Head of Marketing and Customers Relations in Clalit Health Services Ltd., from 2003 to 2008, and as Head of Coordination Division and CEO Consultant from 2001 to 2003. Mr. Almog holds a B.A. degree in Economic and Management and an MBA degree, both from the Bar Ilan University.

Ittay Hazan has served as our Head of Strategy Division since March 2010. Mr. Hazan has been employed by Blue Square since July 2008 as Business Assistant to the CEO. Between August 2005 and June 2008, Mr. Hazan served as Business Controller of Microsoft Israel Ltd. Mr. Hazan also served as Senior Business Consultant, between April 2001 and July 2005, at the consulting division of Ernst & Young Israel Ltd. Mr. Hazan is a CPA and holds MBA & BB degrees in Accounting and Finance from the College of Management Academic Studies in Rishon Le'Zion.

Eliezer Gayer has served as our "Mega" Manager since March 2009 and as our “Mega In Town” (previously SuperCenter) Manager since September 2005. From November 2004 to September 2005, Mr. Gayer served as the then “Super Center” Operation Manager in the Company, from 1999 to 2004, he served as a District Manager, from 1995 to 1999 he served as a Regional Manager and from 1989 to 1995, he served as a store Manager.

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Rafi Masiach has served as our “Mega Bool” Manager since December 2008 (upon its launch) and as our “Shefa Shuk” Manager since April 2008. From September 2005 to February 2009, Mr. Masiach served as "Mega" Manager. From November 2004 to September 2005, Mr. Masiach served as a “Mega” Operation Manager, from 1999 to 2004, he served as a District Manager in the Company, from 1996 to 1999, he served as a Regional Manager, and from 1991 to 1996, he served as a store manager. Mr. Masiach holds a degree in Political Science and International Relations from the Israeli Defense Force College of Command and Headquarters.

Zeév Stein has served as the Chief Executive Officer of Blue Square Real Estate Ltd., since July 2006. Mr. Stein is currently also the Deputy to the Chief Executive Officer of Dor-Alon Energy In Israel (1988) LTD. (25% of his working time) and also serves as a director in various companies affiliated with Alon Group. Until December 2004, Mr. Stein served as Vice President of Planning and Development in Alon Israel Oil Company Ltd. Mr. Stein holds a B.Sc. degree in Civil Engineering and a degree in Architecture and Urban Design Planning from the Technion (Israel Institute of Technology) in Haifa.

Shmuel Enchel has served as the Chief Executive Officer of Bee Group since September 2008. From 1995 to 2007, Mr. Enchel served as the Chief Executive Officer of Ten Petroleum Company Ltd. Between 1994 and 1995, he served as the Chief Executive Officer of Prostiv Ltd.

Arrangements for the Election of Directors

As of May 31, 2010, Alon Retail owned approximately 68.62% of our outstanding ordinary shares. So long as Alon Retail continues to own beneficially more than 50% of our outstanding ordinary shares and voting power, it will be able to control the outcome of matters requiring shareholder approval that do not require a special majority, including the election of all Blue Square directors, other than Blue Square's two external directors whose election, under the Israeli companies law, requires that at least one-third of the non-controlling shareholders who participate in the vote, vote for their nomination, or that the total number of shares of non-controlling shareholders voted against their nomination does not exceed one percent of the aggregate voting rights in the company.

Compensation.

The following table sets forth the aggregate compensation we paid or accrued on behalf of all persons who served as Blue Square directors or senior management for services they rendered Blue Square and its subsidiaries, for the year ended December 31, 2009. The table also includes compensation to individuals who ceased to serve as directors or executive officers during the year.

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	Salaries, fees, expenses, directors’ fees, commissions and bonuses			Pension, retirement and similar benefits
	(in thousands)			(in thousands)

All directors, senior management and Acting Chairman as a group	$	5,949 (NIS 22,459	)	$	423 (NIS 1,597	)

In addition, we recorded the sum of approximately NIS 6.2 million, or $1.6 million, in 2009 as a compensation cost related to the options granted to our senior management under our share option plan.

In April 2008, we agreed to pay to each director (including our external directors and expert external directors) other than the Chairman of the board of directors, the sum of NIS 97,500 per year and a meeting attendance fee of NIS 3,660, which amounts are equivalent to the amounts allowed to be paid to external directors of companies of comparable size under the second, third and fourth supplements to the Companies Regulations. The fees referred to above will be adjusted from time to time based on changes to the Israeli Consumer Price Index in the same manner as the fees described in the Regulations are adjusted. The directors would also be entitled to reimbursement of expenses incurred by them in connection with their service as directors.

We also agreed to pay David Wiessman, our Executive Chairman of the board of directors, a monthly payment of NIS 42,497 plus VAT commencing from November 15, 2005, the date Mr. Wiessman became Executive Chairman of the board of directors. The compensation is linked to changes in Israel’s CPI since November 2005, and is updated every three months. No additional fees would be paid to Mr. Wiessman for attending meetings of the board of directors or any committee of the board of directors. Mr. Wiessman is also entitled to reimbursement of actual expenses (upon submission of receipts) incurred by him in connection with his service as Executive Chairman of the board of directors. Our audit committee, board of directors and shareholders meeting approved this arrangement.

BSRE paid to its CEO, Mr. Zeev Stein, for the year 2009 a total payment which cost BSRE approximately NIS 1,945,000 (including an annual bonus). Under his employment agreement, Mr. Stein is entitled to a salary and customary fringe benefits, including a car lease and social benefits. In addition, Mr. Stein is entitled to severance compensation in excess of that which is required under law (200% of required severance in the case of dismissal and 175% of required severance in case of voluntary termination by Mr. Stein). Mr. Stein also serves as Deputy CEO of Dor Alon, a subsidiary of Alon, our indirect controlling shareholder. The scope of Mr. Stein's position in Dor Alon is limited to 25% and to the extent that such position does not place him in conflict of interest with BSRE. As part of this arrangement, the scope of Mr. Stein's position as CEO of BSRE is limited to 75% and does not include a fixed hour requirement.

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In March 2008, the Company granted 2,200,000 options to executive officers with an exercise price of NIS 39.06 (unlinked) per share, in May 2008, the Company granted 140,000 options to executive officers with an exercise price of NIS 39.06 (unlinked) per share, in August 2008, the Company granted 100,000 options to managers with an exercise price of NIS 39.06 (unlinked) per share, in March 2010, the Company granted 20,000 options to executive officers with an exercise price of NIS 47.70 (unlinked) per share and in March 15, 2010, the Company granted 274,000 options to managers with an exercise price of NIS 47.70 (unlinked) per share.

The vesting periods for the options are 66.7% at the end of two years from the date of grant and the remaining 33.3% at the end of three years from the date of grant. The options issued to executive officers and managers may be exercised during the six month period from the end of the vesting period, and options not exercised during this period will expire.

In January 2010, our indirect controlling shareholder, Alon, granted an option to D.B.W Investments Ltd. a company controlled by Mr. David Weissman, Alon's president and our Executive Chairman of the Board, to purchase 766,020 of our shares held by Alon, representing approximately 1.72% of our outstanding shares, as of May 31, 2010. The option is exercisable in five equal portions at the end of each calendar year from 2010 until 2014 and for a period of 18 months from the time each portion becomes exercisable.

Board Practices

Appointment of Directors and Terms of Officers

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

Pursuant to a recent amendment to the Israeli Companies Law, 1999, one may not be elected and may not serve as a director in a public company if he or she does not have the required qualifications and the ability to dedicate an appropriate amount of time for the performance of his duties as a director in the company, taking into consideration, among other things, the special needs and size of the company. In addition, a public company may convene an annual general meeting of shareholders to elect a director, and may elect such director, only if prior to such shareholders meeting, the nominee declares, among other things, that he possess all of the required qualifications to serve as a director (and lists such qualifications in such declaration) and that he has the ability to dedicate an appropriate amount of time for the performance of his duties as a director of the company. The above requirements do not apply to directors appointed prior to September 29, 2008.

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The terms of office of the directors must be approved, under the Israeli Companies Law, by the audit committee, the board of directors and the shareholders meeting. The appointment and terms of office of all our officers, other than directors and the general manager (Chief Executive Officer), are determined by the general manager, subject to the approval of our board of directors, audit committee and/or compensation committee.

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

Substitute Directors

Our Articles of Association provide that any director may appoint another person to serve as a substitute director and may cancel such appointment. The identity of a substitute director requires the approval of the board of directors. Under the Israeli Companies Law, a person who is not himself qualified to be appointed as a director, a person who is already serving as a director or a person who is already serving as a substitute director for another director, may not be appointed as a substitute director. Nevertheless, a director who is already serving as a director may be appointed as a substitute director for a committee of the board of directors so long as (s)he is not already serving as a member of such committee, and if the substitute director is to replace an external director, (s)he is required to qualify as an external director and to have either “financial and accounting expertise” or “professional expertise”, depending on the qualifications of the external director (s)he is replacing. Otherwise, a substitute director cannot be appointed as an external director.

The term of appointment of a substitute director may be for one meeting of the board of directors or until notice is given of the cancellation of the appointment. To our knowledge, no director currently intends to appoint any other person as a substitute director, except if the director is unable to attend a meeting of the board of directors.

Independent and External Directors

Israeli Companies Law Requirements

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

Under the Israeli Companies Law, companies incorporated under the laws of Israel whose shares are either (i) listed for trading on a stock exchange or (ii) have been offered to the public in or outside of Israel, and are held by the public (Public Company) are required to appoint at least two external directors. The Israeli Companies Law provides that a person may not be appointed as an external director if the person or the person’s relative, partner, employer, someone to whom he is subordinated or any entity under the person’s control, has, as of the date of the person’s appointment to serve as external director, or had, during the two years preceding that date, any affiliation with us, any entity controlling us or any entity controlled by or under common control with us. The term “affiliation” includes:

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·	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.

Regulations under the Israeli Companies Law, effective as of November 2006, provide for various instances and kinds of relationships in which an external director will not be deemed to have “affiliation” with the public company for which (s)he serves, or is a candidate for serving as an external director.

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

Under the Companies Law, at least one of the external directors is required to have “financial and accounting expertise” and the other external director(s) are required to have “professional expertise”. Under regulations, a director having financial and accounting expertise is a person who, due to his or her education, experience and qualifications is highly skilled in respect of, and understands, business-accounting matters and financial reports in a manner that enables him or her to understand in depth the company’s financial statements and to stimulate discussion regarding the manner in which the financial data is presented. Under the regulations, a director having professional competence is a person who has an academic degree in either economics, business administration, accounting, law or public administration or an academic degree in an area relevant to the main business sector of the company or in a relevant area for the board position, or has at least five years experience in a senior management position in the business of a corporation with a substantial scope of business, in a senior position in the public service or a senior position in the field of the company’s business.

Under the Companies Law, each Israeli public company is required to determine the minimum number of directors with “accounting and financial expertise” that such company believes is appropriate in light of the company’s size, the scope and complexity of its activities and other factors. Once a company has made this determination, it must ensure that the necessary appointments to the board are made in accordance with this determination. Our board of directors determined that two directors with “accounting and financial expertise” is appropriate for the Company. Our board of directors currently has at least two directors with such “accounting and financial expertise”.

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

The initial term of an external director is three years and may be extended for one additional three-year term. Nevertheless, Regulations under the Israeli Companies Law provide that companies, like Blue Square (whose shares are listed for trading both on the Tel Aviv Stock Exchange and on the New York Stock Exchange), may appoint an external director for additional three-year terms, under certain circumstances and conditions. External directors may be removed only in a general meeting, by the same percentage of shareholders as is required for their election, or by a court, and in both cases only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to us. Each committee of our board of directors is required to include at least one external director and our audit committee is required to include all of the external directors.

David Alphandary and Uzi Baram currently serve as Blue Square's external directors.

New York Stock Exchange Requirements

See below “- Audit Committees - New York Stock Exchange Requirements” for a description of the independence requirements for audit committee members under applicable NYSE rules.

Audit Committees

Israeli Companies Law Requirements

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

·	chairman of the board of directors;

·	controlling shareholder or his relative; and

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

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

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

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

New York Stock Exchange Requirements

Under New York Stock Exchange rules, Blue Square is required to maintain an audit committee consisting only of independent directors.

The independence requirements of Rule 10A-3 of the 1934 Act implement two basic criteria for determining independence: (i) audit committee members are barred from accepting directly or indirectly any consulting, advisory or other compensatory fee from the issuer or an affiliate of the issuer, other than in the member's capacity as a member of the board of directors and any board committee, and (ii) audit committee members may not be an "affiliated person" of the issuer or any subsidiary of the issuer apart from his or her capacity as a member of the board and any board committee.

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

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

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Corporate Governance Practices

Internal Auditor

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

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

Fiduciary Duties of Office Holders

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

The duty of care includes a duty to use reasonable means to obtain:

·	information on the appropriateness of a given action brought for his approval or performed by him by virtue of his position; and

·	all other important information pertaining to the previous actions.

The duty of loyalty of an office holder includes a duty to:

·	refrain from any conflict of interest between the performance of his duties in the company and his personal affairs;

·	refrain from any activity that is competitive with the company;

·	refrain from usurping any business opportunity of the company to receive a personal gain for himself or others; and

·	disclose to the company any information or documents relating to a company’s affairs which the office holder has received due to his position as an office holder.

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

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

Under Israeli law, an extraordinary transaction is a transaction:

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·	other than in the ordinary course of business;

·	other than on market terms; or

·	that is likely to have a material impact on the company’s profitability, assets or liabilities.

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

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

Controlling Shareholder Transactions and Actions

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

·	at least one-third of the shareholders who have no personal interest in the transaction and who are participating in the voting, in person, by proxy or by written ballot, at the meeting; or

·	The total number of shares voted against the proposal by shareholders without a personal interest does not exceed one percent (1%) of the aggregate voting rights in the Company.

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

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

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

The Israeli Companies Law further provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of 45% of the voting rights of the company, unless there is a holder of more than 45% of the voting rights of the company or would become a holder of 25% of the voting rights unless there is another person holding 25% of the voting rights. This restriction does not apply to: (i) an acquisition of shares in a private placement, if the acquisition had been approved in a shareholders meeting under certain circumstances; (ii) an acquisition of shares from a holder of at least 25% of the voting rights, as a result of which a person would become a holder of at least 25% of the voting rights; and (iii) an acquisition of shares from a holder of more than 45% of the voting rights, as a result of which the acquirer would become a holder of more than 45% of the voting rights in the company.

Regulations under the Israeli Companies Law provide that the Israeli Companies Law’s tender offer rules do not apply to a company whose shares are publicly traded outside of Israel, if, pursuant to the applicable foreign securities laws or stock exchange rules, there is a restriction on the acquisition of any level of control of the company, or if the acquisition of any level of control of the company requires the purchaser to make a tender offer to the public shareholders. It is the view of the Israeli Securities Authority, that U.S. securities laws and stock exchange rules do not impose the required restriction on the acquisition of any level of control of a company, and therefore the Israeli Companies Law’s tender offer rules would apply to a company whose shares are publicly traded in the United States.

The Israeli Companies Law further provides that a shareholder shall refrain from oppressing other shareholders. In addition, any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a company’s Articles of Association, has the power to appoint or prevent the appointment of an office holder in the company, or has any other power over the company, is under a duty to act with fairness towards the company. Under the Companies Law, the laws that apply to a breach of a contract will generally also apply to a breach of duty of fairness.

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Exemption, Insurance and Indemnification of Directors and Officers

Office Holder Exemption

Under the Israeli Companies Law, a company may not exempt an officer or director (each, an "Office Holder") from liability with respect to a breach of his duty of loyalty, but may exempt in advance an Office Holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care (except in connection with a distribution made by the company) if so provided in its articles of association. Our Articles of Association so provide.

Following approval by our audit committee and board of directors, on June 12, 2008 our shareholders approved a resolution exempting the Company's directors and officers, including any of the Company's controlling shareholders who serve as directors or officers of the Company, to the fullest extent permitted by law, from liability towards the Company with respect to any damage caused or that will be caused to the Company by its directors and officers as a result of a breach of their duty of care toward the Company or following a bona fide action taken by them in the connection with their position in the Company, including actions taken while serving as directors or officers in another company, in connection with their position in the Company.

BSRE had previously approved a prospective (in advance) exemption to BSRE's directors and officers from liability for damage resulting from a breach of his duty of care towards BSRE in connection with actions taken in good faith in their capacity as a director and/or officer of BSRE or in their capacity as an officer of another company at the request of BSRE.

Office Holder Insurance

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

a breach of such Office Holder's duty of care to the Company or to another person;

a breach of such Office Holder's duty of loyalty to the Company, provided that the Office Holder acted in good faith and had reasonable cause to assume that his act would not prejudice the Company’s interests;

a financial liability imposed upon such Office Holder in favor of another person concerning an act performed by him in his capacity as an Office Holder; or

a breach of any duty or any other obligation, to the extent insurance may be permitting by law.

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Pursuant to resolutions adopted by our shareholders, we obtained and will continue to hold a directors’ and officers’ liability insurance policy. Coverage under our policy has been set at $30 million (including our subsidiaries, excluding BSRE). We have purchased a directors’ and officers’ liability insurance policy for our directors and officers and those of our subsidiaries, which includes Mega Retail and its subsidiaries. The insurance policy is for a period beginning on December 1, 2009, and ending on November 30, 2010, for the maximum coverage of $30 million per claim and in the aggregate during the policy period. Our audit committee, board of directors and shareholders have approved any renewal and/or extension of the insurance policy and the purchase of any other insurance policy, provided that any such renewal, extension or purchase is for the benefit of the Company’s previous and/or current and/or future directors and officers and on terms substantially similar to those of the insurance policy and on condition that the premium will not increase by more than 25% in any year, as compared to the previous year. Our current insurance policies comply with these terms.

BSRE has obtained a separate directors’ and officers’ liability insurance policy with coverage of $15 million per claim and in the aggregate during the insurance policy term (beginning on December 1, 2009 and ending on November 30, 2010).

Indemnification of Office Holders

The Israeli Companies Law provides that a company may indemnify an Office Holder for the following liabilities or expenses imposed on him as a result of an act performed in his capacity as an Office Holder of the company, provided the company's articles of association include the following provisions with respect to indemnification:

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

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

On June 12, 2008, following approval of our audit committee and board of directors, our shareholders approved amendments to our Articles of Association pertaining to indemnification of directors and officers that reflect the provisions of the Israeli Companies Law described above.

Our Articles of Association provide that we may undertake to indemnify an Office Holder for obligations or expenses imposed on him as a result of an act done in his capacity as an Office Holder in the Company or as a result of being an Office Holder, in another company in which the Company holds shares or has interests, as specified above.

Our Articles of Association further provide that the aggregate amount of indemnification (in addition to any insurance proceeds received) shall not exceed 25% of the shareholders’ equity of the Company, as set forth in the Company’s most recent consolidated financial statements prior to the applicable payment of indemnification.

Limitations on Insurance, Exemption and Indemnification

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

a breach by the Office Holder of his duty of 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);

any act or omission done with the intent to derive an illegal personal benefit; or

any fine imposed on the Office Holder.

In addition, under the Israeli Companies Law, indemnification of, and procurement of insurance coverage for, our Office Holders must be approved by our audit committee and board of directors and, in specified circumstances, by our shareholders.

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Letters of Indemnification

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

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

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

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

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 or 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

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Each one of the circumstances stated above, all in connection with the Office Holder’s service on behalf of our subsidiaries or affiliated companies.

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

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

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

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

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

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

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;

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

An act committed with the intention to realize a personal illegal profit; or

A fine or monetary composition imposed on such officers and directors.

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On June 12, 2008, following approval of our audit committee and board of directors, our shareholders approved the grant of new indemnification letters to the Company's directors and officers (and to those who will serve as its directors and officers from time to time). The aggregate amount of the indemnification (in addition to any insurance proceeds received) may not exceed 25% of the Company's equity as set forth in the Company's most recent consolidated financial statements prior to the applicable payment of indemnification.

Under the new indemnification letter, the Company undertook to indemnify its directors and officers for obligations or expenses that may be imposed on them as a result of their actions in their capacity as an Office Holder in the Company or as a result of actions in their capacity as an Office Holder or the holder of any other position in another company in which the Company holds rights or is an interested party therein (unless fulfilling the position in the other company is not in connection with their function in the Company or at its request), as permitted by the Company's Articles of Association. See above "- Indemnification of Office Holders".

Under the new indemnification letter, the Company undertook to indemnify its directors and officers prospectively and retroactively with respect to following events:

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;

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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.

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Pursuant to the new indemnification letter, upon issuance of the new letter, all previous indemnification letters previously issued to each director or officer by the Company will be cancelled, effective as of the date of approval of the indemnity resolution. Notwithstanding, such revocation will not prejudice or derogate from the validity of previous indemnification letters that were issued to such director or officer by the Company, to the extent that such undertaking is valid according to law and applies to actions with respect to the period preceding the approval of the indemnity resolution, and provided that such entitlement to indemnity in respect of such liability and/or expense will only be in accordance with one of the indemnification letters.

Committees

Our board of directors has established a compensation committee and an audit committee. Our compensation committee, which consists of David Wiessman and Uzi Baram, administers issues relating to employee compensation for senior management. Our audit committee, which consists of David Alphandary, Uzi Baram and Avraham Meron, examines flaws in our business management and its approval is required to effect specified actions and transactions with interested parties. The audit committee also assists the board of directors in overseeing the quality and integrity of our accounting, auditing and reporting practices and in the approval of our financial statements. For more information regarding the role of our audit committee see also “Item 6. Directors, Senior Management and Employees - C. Board Practices - Audit Committees.”

D. Employees.

As of December 31, 2009, we employed 7,149 employees (including employees of Bee Group and Eden Teva), counting multiple employees sharing a single position as a single employee, including 2,198 temporary employees. 1,041 of our employees were employed in central management and administration and in our logistics center and 6,108 in our stores.

As of December 31, 2008, we employed 7,475 employees, counting multiple employees sharing a single position as a single employee, including 3,253 temporary employees. 1,054 of our employees were employed in central management and administration and in our logistics center and 6,421 in our stores.

As of December 31, 2007, we employed 7,421 employees, counting multiple employees sharing a single position as a single employee, including 3,181 temporary employees. 1,047 of our employees were employed in central management and administration and in our logistics center and 6,374 in our stores.

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

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During 2003, we agreed to make “good will grants” to management and employees. In August 2003, we entered into a collective bargaining arrangement with the Histadrut and the National Committee of the Co-Op Blue Square Employees in respect of various grants to our employees which were already paid. In addition under that agreement, we agreed (i) to pay to our permanent employees 1% of any cash dividend distributed to our shareholders, but not more than $2.5 million in the aggregate to our employees; and (ii) in any public issuance of our shares after the date of the agreement, our permanent employees will be entitled to purchase up to 10% of any such offering with a 20% discount over the minimum offering price (in the event that convertible securities will be offered, the employees will be entitled to a discount of 20% from the exercise price or the rate of conversion; in the event shares are offered to the public together with other securities, employees will be entitled to a discount of 20% only on the offering price of the shares). With respect to such a purchase by our employees of our shares in a public offering, we have agreed to make loans to our employees to enable them to pay the purchase price for the shares, and these loans are to be repaid by the employees with interest and linkage upon the sale of the shares following the expiration of the appropriate tax holding period for the shares or, if desired by the employee, until the earlier of five years from the expiration of the holding period or the end of the employee’s employment with us.

In January 2005, we entered into a special collective bargaining arrangement with the Histadrut and the National Committee of Blue Square-Israel. Under this agreement, the parties agreed that Blue Square’s employees that started their employment on or after January 1, 2003 (excluding stores managers and their deputies and departments managers and their deputies) will be entitled to night shift compensation and to compensation for working on Saturdays nights and the nights following holidays at variable rates which are lower than the payments currently being paid.

In April 2006, we entered into a special collective bargaining arrangement with the Histadrut and the employees' union (which amends a preceding general collective bargaining agreement adopted by the Company in 1996), regarding the rights of pregnant employees which are unable to work during their pregnancy due to medical reasons.

In May 2006, we entered into a special collective bargaining arrangement with the Histadrut and the employees' union, effective as of January 1, 2006, regarding the increase of the contributions and deductions made by employees and by the Company to a saving fund.

In 2006, we reached an understanding with the employees’ representative regarding the increase in the number of employees (quota) who will be deemed to be permanent employees (tenure) and shortening of the periods required for promotion. No special written collective bargaining agreement incorporating such understanding has been signed.

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In July 2007, we entered into a special collective bargaining arrangement with the Histadrut and the employees' union regarding the transition of store managers from a collective bargaining arrangement to personal employment agreements, without prejudice their social benefits (i.e., with no less favorable social benefits stipulated under the collective bargaining arrangement). Under the agreement, these store managers will continue to be subject to the applicable provisions of the collective bargaining agreement which require the prior approval of the employees' union and the Histadrut before their dismissal. In the event that a store manager will be transferred to more junior position, he will once again be subject to the collective bargaining agreement, and his compensation, rights and fringe benefits will be adjusted to his level prior to the transfer to a personal employment agreement.

In February 2007, we entered into a special collective bargaining arrangement with the Histadrut, the employees' union and “Meitavit” (a pension funds management company) regarding contributions and deductions made for our employees and for the provision of pension insurance. This agreement provides, among others things, for improved conditions and benefits to the insured employees.

In addition, we and our employees are also subject to certain provisions of the general collective bargaining agreements between the Histadrut and the Coordination Bureau of Economic Organizations (including the Industrialists Association) by virtue of an extension order of the Israeli Ministry of Labor. These agreements concern, among other things, the maximum length of the work day and the work week and other conditions of employment.

In 2007, an extension order with respect to a general collective bargaining agreement for pension insurance was signed by the Israeli Ministry of Industry, Trade and Labor which require all employers in Israel to obtain pension insurance for all their employees.

We entered into a special collective bargaining agreement with Mega Retail, the Histadrut and our employees' union, effective as of April 1, 2009 (which amends a preceding general collective bargaining agreement adopted by the Company in 1996). The agreement provides for a wage increase of 4% (to the base salary only) to employees who have completed or will complete 24 months of employment with us. In addition, in light of the transfer of our retail activities to Mega Retail, the agreement granted us the option to transfer some or all of our employees to Mega Retail. In addition, in the event that we transfer any of our employees to Mega Retail, Mega Retail will become responsible for the payment of all employee benefits as well as for their rights and seniority that had been accrued in respect of these employees during the term of employment of these employees with our company, to the extent these benefits were recorded on our records.

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In addition, in June 2009, a new general collective bargaining agreement was entered into between the New Histadrut and the Chamber of Commerce – Division of Retail Chains, which, by virtue of an extension order from February 2010, applies to all employees that are employed in the food retail chains sector of the Israeli market (except for certain employees that were excepted from the extension order). In our assessment, the new agreement will not have a material effect on our operations and results of operations in light of the fact that it does not apply to certain groups within the employees that are employed in the food retail chains sector of the Israeli market, and in light of the fact that better benefits apply to our employees by virtue of other collective bargaining agreements to which we are a party.

Under an amendment to the Employment of Employees by Manpower Contractors Act, 1996, effective as of January 1, 2008, employees of a manpower contractor (outsourced employees) will be deemed employees of the actual employer at which they were stationed following nine months from the date they were stationed at such employer, subject to certain exceptions. Under exceptional circumstances, the Ministry of Industry, Trade and Labor may approve the extension of this period to a period not exceeding 15 month. When a manpower contractor employee become an employee of the actual employer, the entire period of time that the manpower contractor employee was stationed at the actual employer will be taken into account for purposes of calculating his seniority for benefit and employee-related purposes.

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

E. Share Ownership.

As of May 31, 2010, other than indirect ownership through Alon Retail, none of our directors or officers owned more than 1% of our outstanding equity securities.

On January 21, 2008, we adopted a share option plan (the "Plan") for officers and employees of Blue Square and/or its subsidiaries and/or affiliated companies. As of May 31, 2010, the total number of shares available for issuance under the Plan was 2,584,995 shares (including options issuable to Blue Square's Chief Executive Officer, Mr. Zeev Vurembrand), subject to adjustments. The exercise price of each option will be at the fair market value per share on the date of grant, and all exercises of options under the plan are to be on a cashless basis. As of May 31, 2010, an aggregate of 1,215,829 options granted to employees under the Plan were outstanding, with an exercise price of NIS 37.41 per share (adjusted for 50% of the dividends paid), and 1,116,666 options granted to executive officers and managers under the Plan were outstanding with an exercise price of NIS 36.68 per share (adjusted for 50% of the dividends paid).

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The vesting periods for the options granted are 66.7% at the end of two years from the date of grant and the remaining 33.3% at the end of three years from the date of grant. The options issued to executive officers and managers may be exercised during the six month period from the end of the vesting period, and options not exercised during this period will expire. The options issued to employees may be exercised during the 30 days from the end of the vesting period, and options not exercised during this period will expire.

The Plan expires three years from the date of first grant of options under the Plan, which was on March 24, 2008. Unless otherwise decided by the Company's Board of Directors or a committee thereof, options granted under the Plan will vest and be exercisable pursuant to the time schedule set out below on condition that the option holder will be employed by the Company, a Company subsidiary or a company controlled by the Company on the date of issuance and on the applicable vesting date. Unless otherwise prescribed by the Company Board of Directors or a committee thereof, two-thirds of the options will be exercisable at the expiration of two years from the date of grant, and one-third of the options will be exercisable at the expiration of the third year after date of grant.

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders.

The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of May 31, 2010, by each person or entity known to own beneficially 5% or more of our outstanding ordinary shares based on information provided to us by the holders or disclosed in public filings with the Securities and Exchange Commission. Our major shareholders do not have voting rights different from the voting rights of our other shareholders.

Name	Number of Ordinary Shares Beneficially Owned			Percentage of Outstanding Ordinary Shares(1)
Alon Retail		30,604,303	(2)		68.60	%

Menorah Mivtachim Holdings Ltd.		4,277,963	(3)	9.59		%

(1)	The percentage of outstanding ordinary shares is based on 44,614,979 ordinary shares outstanding as of May 31, 2010 (excluding 89,888 ordinary shares held by Blue Square as treasury shares).

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(2)

Alon Retail Ltd. is a wholly owned subsidiary of Nissan Alon Retail Holdings Ltd., which is a wholly owned subsidiary of the Nissan Dor Chains Ltd., which is a wholly owned subsidiary of Dor Food Chains Holdings Ltd., a wholly owned subsidiary of Alon-Israel Oil Company Ltd. (“Alon”). To the Company’s best knowledge, Alon is owned approximately 46.9% (excluding shares held by Alon as treasury shares) by nine collective acquisition entities of kibbutzim in Israel and approximately 53.1% (excluding shares held by Alon as treasury shares) are held together by Bielsol Investments (1987) Ltd. and Mr. David Wiessman. To the Company’s best knowledge, the shareholders of Bielsol Investments (1987) Ltd. consist of Shibag Ltd. (whose shareholders are Advocate Shraga Biran, the Estate of Professor Shoshana Biran and Gara, Boaz and Iftah Biran), holding 79.4% of the capital and voting rights of Bielsol Investments, D.B.V Investments Ltd. (controlled by Mr. David Wiessman), holding 19.8% of the capital and voting rights of Bielsol Investments, Shibago Ltd. (whose partners are Shibag Ltd. (75%) and a company controlled by David Wiessman (25%)), holding 0.8% of the capital and voting rights of Bielsol Investments.

(3)

Includes shares held by Menora Mivtachim Insurance Ltd., Menora Mivtachim Finance Ltd., Menora Mivtachim Pensions Ltd., Menora Mivtachim Gemel Ltd., and Menora Mivtachim Mutual Funds Ltd. To the Company’s best knowledge, Menora Mivtachim Holdings Ltd. ("Menora Holdings") is an Israeli public company. Approximately 61.9% of Menora Holdings outstanding shares are held directly and indirectly by Menachem Gurevitch and the remaining of the outstanding shares are held by the public. Menora Mivtachim Insurance Ltd. and Menora Mivtachim Finance Ltd. are wholly owned subsidiaries of Menora Holdings. Menora Mivtachim Pensions Ltd. is a wholly owned subsidiary of Menora Mivtachim Insurance Ltd. Menora Mivtachim Gemel Ltd. and Menora Mivtachim Mutual Funds Ltd. are wholly owned subsidiaries of Menora Mivtachim Finance Ltd.

The shares reported as beneficially owned by Menora Holdings, Menora Insurance, Menora finance, Mivtachim Pension, Menora Gemel and Menora Mutual Funds are held for members of the public through, among others, provident funds, mutual funds, pension funds and insurance policies which are managed by Menora Insurance, Menora finance, Mivtachim Pensions, Menora Gemel and Menora Mutual Funds, all of which are wholly owned subsidiaries of Menora Holdings, each of which operates under independent management and makes independent voting and investment decisions.

As of May 31, 2010, Blue Square had approximately 34 shareholders of record with a United States address. As of May 31, 2010, these United States record holders held approximately 406,129 ordinary shares in the form of ADSs, representing approximately 0.91% of our then outstanding share capital.

Alon Retail acquired a 78.1% interest in Blue Square from the Co-Op in June 2003. As of May 31, 2010, Alon Retail Ltd., owned approximately 68.60% of Blue Square’s outstanding ordinary shares.

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B. Related Party Transactions.

Procurement Agreement with Dor Alon Stations

Dor Alon Service Station Operation Ltd., a subsidiary of Dor-Alon Energy In Israel (1988) LTD., which is controlled by Alon Israel Oil Company Ltd.) (hereinafter: “Dor Alon Stations”), operates convenience stores in fuel service stations and also in a number of cities in Israel that sell various food and “Non-Food” products. Under the terms of the agreement between us and Dor Alon Stations, we agreed to procure products that will be supplied to the convenience stores, either directly from suppliers or from our distribution center. In consideration of the procurement of products, Dor Alon Stations has agreed to pay us (i) for products sent directly from suppliers, an amount equal to the cost of such products to us as determined under the Procurement Agreement plus 2%, and (ii) for products sent from our distribution center, an amount equal to the cost of such products to us as determined under Procurement Agreement plus 2.75%, in each case plus VAT. The cost of the products to us will be audited by our independent public accountants. In the event that our revenues generated from the Procurement Agreement minus related expenses from the sale of products to Dor Alon Stations is less than NIS 1 million linked to the Israeli consumer price index in any year without VAT, Dor Alon Stations will pay us additional amounts in order that our income from such year will reach such NIS 1 million amount. To secure Dor Alon Station’s payment and other obligations to us under the Procurement Agreement, Dor Alon agreed to provide us with a floating lien or pledge, unlimited in amount, on all inventory in the convenience stores, subject to any legal prevention, and Dor-Alon Energy In Israel (1988) LTD. and Alon Israel Oil Company Ltd, the controlling shareholders of Dor Alon Stations, will guarantee all obligations of Dor Alon Stations under the agreement.

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

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

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

On November 29, 2005, we entered into the following agreements with Dor-Alon Energy In Israel (1988) LTD. (“Dor Alon”):

(i) an agreement establishing a joint loyalty plan for the benefit of Blue Square's and Dor Alon’s customers, formed as a partnership to be held 75% by Blue Square and 25% by Dor Alon (the “Loyalty Plan”). Pursuant to the agreement, the partnership is governed by a managers board (the “Board”), which is comprised of six (6) members, four (4) of whom appointed by the Company (one of whom serves as the chairman of the Board), and two (2) of whom are appointed by Dor Alon;

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(ii) an agreement under which Blue Square and Dor Alon purchased 49% of the shares of capital stock of Diners Club Israel Ltd. (“Diners Israel”) from Credit Cards for Israel Ltd. (“CAL”) for a total consideration of NIS 21.3 million (of which NIS 15.6 million was paid by us). The purchased shares were allocated 36.75% to Blue Square and 12.25% to Dor Alon. The consideration was funded through a non-recourse loan granted by CAL to the Company and Dor Alon. The loan is for a period of eight years, is linked to the CPI and bears interest in an annual rate of 6%. The loan is to be repaid in a single payment at the end of the period. Repayment of the loan is secured only by the acquired shares.

Under the agreement, the Company and Dor Alon are entitled to share with CAL the net income of Diners Israel in connection with the activities of the credit cards bearing the "You" name based on their respective ownership interests in Diners Israel. The percentage of the net income of Diners Israel in connection with its other credit card activities (i.e., those activities outside the Loyalty Plan) to be allocated to the Company and Dor Alon is to be determined based on the number of "activated" credit cards (as defined in the agreement) issued to members of the Loyalty Plan from time to time, so long as certain target numbers of such issued credit cards are met. In the event such target numbers are not met, the Company and Dor Alon may, during the first three years following the issuance of the first Diners Israel credit card to a member of the Loyalty Plan (the "Issuance Date"), purchase the right to the net income of Diners Israel arising from such other activities through a one-time payment.

The Company and Dor Alon may terminate the agreement by returning the purchased shares back to CAL on the fourth anniversary of the Issuance Date and canceling the CAL Loan. Under certain other circumstances, each of the Company and Dor Alon on the one hand, and CAL on the other hand, has the right to terminate the agreement. Upon such termination, the Company and Dor Alon are required to repay the CAL loan by returning the purchased shares to CAL and receive 49% of any increase in the value of Diners Israel that occurred since the Issuance Date. These circumstances include the following events: (i) if certain target numbers of issued Loyalty Plan credit cards are not met by the fourth or sixth anniversary of the Issuance Date, or (ii) the Loyalty Plan ceases to function or the customer club agreement (referred to in clause (iii) below) is terminated. In addition, the Company and Dor Alon have the option to terminate the agreement and repay the CAL Loan in kind by returning to CAL the purchased shares in the event that the representations made by Cal or Diners Israel in the agreement are breached; and

(iii) an agreement among Blue Square and Dor Alon, on one hand, and Diners Israel, on the other hand, pursuant to which the Loyalty Plan offers to its members a Diner Club Israel credit card bearing the name “You”. The agreement determines, among other things, the allocation of costs between the parties with respect to the costs of attracting new customers to the Loyalty Plan, mailing and advertising costs, including the participation of Diners in the advertising budget of the Loyalty Program, and clearing fees.

See “Item 4. Information on The Company - B. Business Overview - Marketing”.

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In April 28, 2009 we entered into a supplement to the above agreements. Under the supplement to the agreements, the parties agreed that commencing April 15, 2009, in addition to the "You" Diners Club credit card, a "You" Mastercard credit card which will also be issued by CAL. Under this agreement, CAL will provide operational and managing services in exchange to the same consideration as were determined in the original agreement with respect to the "You" Diners Club credit card. The parties agreed that for purposes of sharing with CAL the net income of Diners Israel, the termination rights of the parties under the agreement and otherwise, the activities of the "You" Mastercard credit card will be treated in the same manner as the "You" Diners card.

Agreement with the Wholesale Market Company

The long term lease on the Property is until August 31, 2099, and the Purchasers, including BSRE, intend to plan, build and market on such Property an apartment buildings complex and a shopping mall (the "Project"). The Property consists of building rights of approximately 97,460 square meters, of which approximately 62,640 square meters are designated for residential use, approximately 10,320 square meters are designated for mixed use (including for residential, office and/or retirement home use), and approximately 24,500 square meters are designated for commercial use, part of which would be located on the ground floor of the residential buildings.

The Purchasers are to pay the Sellers a purchase price of NIS 950 million payable in three installments. In addition to the purchase price, the Sellers may be entitled to additional consideration calculated as a percentage of the sale price of apartments that are sold in the apartment buildings complex, as described in the agreement.

Within the framework of the purchase agreements, the Purchasers have committed to plan and build a community sports center and a school on an approximately 10,000 square meter nearby public property and certain public community institutions on an approximately 2,430 square meter property that is within the area of the apartment building complex, and 85 parking spaces (collectively, the "Public Buildings"). The Sellers are to bear the expense of building the Public Buildings and are to pay the Purchasers a fee (linked to the Building Index) calculated as cost plus 10% plus VAT, based on certain milestones detailed in the agreement, up to a maximum of approximately NIS 98 to 102 million (including VAT). Any expenses that exceed this limit are to be borne by the Purchasers. The Purchasers also committed to build an additional 40 parking spaces and to develop, at their own expense, an open public space within the area of the Project on an area of nine dunam, which would remain under the exclusive ownership of the municipality of Tel Aviv.

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The Purchasers obtained a firm commitment letter from a bank, in a form acceptable to the Sellers, pursuant to which the bank certified that it will provide the Purchasers financing to complete the purchase of the Property, subject to certain conditions.

In an agreement of principles signed with Gindi, BSRE agreed to pay 60% of the first installment of the consideration in the amount of NIS 260 million, and any additional payment that may be required to further the project, until the payment of the second installment, if such payment amount cannot be obtained within the framework of a credit line provided by a bank. BSRE will be eligible to receive the excess amount (above its 50% share of the project), including interest, not later than eight years after the date on which the agreement of principles was signed. On May 20, 2010, most of the first installment of the consideration to be paid by BSRE was transferred to a trustee. Gindi is to provide management services for the Project in exchange for a management fee to be paid by the Purchasers and calculated as 16% of the profits from the Project, all subject to various terms of the agreement of principles between the parties.

Purchase of Property in Point Wells, Washington from Indirect Subsidiary of Alon

On June 1, 2010, BSRE completed the acquisition of an approximately 240-dunam parcel of property in Point Wells, near Seattle, Washington, which serves primarily as a plant for storage and distribution of fuel and oils. BSRE purchased the property through a special purpose entity established in the United States, BSRE Point Wells, LP, which entered into a purchase agreement, dated May 7, 2010, with Paramount of Washington LLC (“POW”) for the property and into a development agreement, dated June 1, 2010, with POW and Paramount Petroleum Corporation (“PPC”). PPC leases the property from POW and operates and maintains it. POW and PPC are wholly owned subsidiaries of Alon USA Energy Inc., a public company whose shares are traded on the NYSE ("Alon USA") and is controlled by our indirect controlling shareholder, Alon Israel Oil Co. Ltd. ("Alon").

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According to the development agreement signed between the parties, BSRE Point Wells, LP will take action to initiate a detailed plan in the scope of which progress will be made for approving the construction of at least 2000 residential units on the property. All of the expenses connected with approval of the change of zoning, including the initiation and preparation of a detailed plan will be borne by BSRE Point Wells, LP. BSRE assesses that these expenses will amount to approximately $4-5 million. If the detailed plan is not approved and/or if it does not contain at least 2000 residential units, BSRE Point Wells, LP will bear no responsibility to POW and/or PPC. In consideration for PPC’s right to participate in the development of the property and in the proceeds that will be received from the sale of the property to a third party after the enhancement thereof, PPC will pay BSRE Point Wells, LP quarterly participation fees in a sum of $438,750, which will be paid commencing from July 1, 2010 and throughout the entire License Period.

The development agreement further stipulates provisions regarding a division of the consideration that will be received from the sale of the property to a third party after the change of zoning and enhancement of the property.

Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD.

Blue Square and Alon, Blue Square’s controlling shareholder, entered into a Share Purchase Agreement that provides for the acquisition by Blue Square of Alon’s entire equity interest in Dor Alon (constituting approximately 80% of the outstanding shares of Dor Alon (not including treasury shares)), or the Transferred Shares, at the closing of the Acquisition. These shares constituted approximately 73.5% of the outstanding Dor Alon ordinary shares on a fully diluted basis as of May 27, 2010.

Under the terms of the Share Purchase Agreement, in consideration for each share held by Alon in Dor Alon, Blue Square is to issue to Alon 1.8 ordinary shares of Blue Square, and in exchange for all the Transferred Shares, Blue Square is to issue to Alon 20,327,710 ordinary shares of Blue Square, or the Issued Shares. Immediately following the Acquisition, Alon will beneficially own in the aggregate, directly and indirectly, approximately 78.44% of the outstanding ordinary shares of Blue Square (as opposed to approximately 68.62% of the outstanding shares immediately prior to the Acquisition), and all other Blue Square shareholders will own approximately 21.56% of the outstanding ordinary shares of Blue Square (as opposed to approximately 31.38% of the outstanding ordinary shares immediately prior to the Acquisition). Upon completion of the Acquisition, Dor Alon will become a majority-owned subsidiary of Blue Square and its shares will continue to trade on the TASE.

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As a condition to the closing of the Share Purchase Agreement, the Board of Directors of Blue Square also intends to declare an aggregate cash dividend of NIS 800 million, or approximately US $208.9 million (based on the representative rate of exchange on May 31, 2010), which represents a dividend of approximately NIS12.32, or approximately US $3.22 (based on the representative rate of exchange on May 31, 2010), per Blue Square ordinary share, to be paid to Blue Square’s shareholders, or the Dividend Distribution. The dividend per share is subject to change based on the number of shares outstanding on the record date for the Dividend Distribution. The Dividend Distribution is expected to be made following the issuance of Blue Square ordinary shares to Alon pursuant to the Share Purchase Agreement and is conditioned thereon. The Dividend Distribution is subject to approval by the Israeli District Court, an application for which was filed by Blue Square on May 31, 2010. In addition to court approval for the Dividend Distribution, the Acquisition is conditioned upon approval by a general shareholders meeting of Blue Square and approval of the TASE to register the Issued Shares to trade on the TASE and approval of the NYSE to the listing of the Issued Shares on the NYSE.

The Acquisition may be terminated in the event that not all of the conditions precedent therein are met within six (6) months of signing the Share Purchase Agreement, which include, among other things, the aforementioned shareholder and court approval. Each party to the Share Purchase Agreement has the right to extend, by written notice, the performance period of the Share Purchase Agreement for additional 90 day periods but in any event no longer than six months. If the conditions precedent are not fulfilled within 12 months from the date of the Share Purchase Agreement, the performance period of the Share Purchase Agreement will not be extended any further.

Alon agreed to compensate and indemnify BSI and/or Dor Alon for various damage and/or losses and/or expenses that may be caused to BSI or Dor Alon, provided that the accumulated amount of indemnification to be paid will be no more than the product of (i) the number of Issued Shares and (ii) the closing price of BSI shares on the TASE on the date of the issuance of the Issued Shares. Alon’s indemnification obligation will apply only to damages in an aggregate amount of over ten million NIS (NIS 10,000,000). However if the accumulated amount of damages to BSI or Dor Alon exceeds this amount, then Alon’s indemnification obligation will apply to the full amount of damages.

In connection with the proposed acquisition, Alon and BSI obtained a pre-ruling from the Israeli Tax Authority. The pre-ruling is subject to various conditions and provides, among other things, that the cost basis and the purchase date of the shares of Dor Alon for tax purposes in the possession of BSI following the acquisition will be the original price and acquisition date, respectively, as they had been for Alon prior to the acquisition. Alon has clarified to BSI that, in connection with the payment of tax at the time of any future sale by BSI of all or part of its shares in Dor Alon, if any, to a third party, Alon will pay that portion of any applicable tax payable in an amount equal to the amount of tax deferred by the Tax Authority in its pre-ruling (i.e., the amount of tax that would have been payable by Alon in connection with the acquisition had the acquisition not been tax exempt according to the pre-ruling).

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Arrangements between Blue Square and various subsidiaries

Arrangements with Bee Group

Investment Agreement

On December 31, 2008, we invested approximately NIS 25 million ("Investment Amount") in the Bee Group for a total of 7,058 Bee Group's Redeemable Preferred Shares in a purchase price of NIS 3,542.36 per share. The Redeemable Preferred Shares have a priority for any dividends or other distribution made by the Bee Group to its shareholders (the "Dividend Preference") of up to the Investment Amount to be increased annually by an amount equal to 7.5% of the Investment Amount minus dividends paid to us on account of our Redeemable Preferred Shares. Upon payment of the Dividend Preference, the Redeemable Preferred Shares will automatically convert into Deferred Shares, which will have no rights. Prior to conversion into Deferred Shares, subject to necessary corporate approvals of the Bee Group, we have the right to convert our Redeemable Preferred Shares into ordinary shares of the Bee Group on a one-for-one basis. In the event of an initial public offering of the Bee Group, subject to approval of the directors and shareholders of the Bee Group, we have the right to redeem our Redeemable Preferred Shares for an amount equal to Investment Amount minus dividends paid to us on account of our Redeemable Preferred Shares.

Supply Agreement with Bee Group

Mega Retail and Hyper Hyper are party to a supply agreement with Bee Group (then known as Hamachsan Hamerkazi Kfar Hasha’ashuim Ltd.), All For a Dollar Ltd., Sheshet Houseware Stores Ltd. and Fifo Babies Ltd., (collectively, the "Supplier") through January 2, 2015. Pursuant to the agreement, Mega Retail and Hyper Hyper purchase the Supplier's products, including, among others, toys, houseware, electrical appliances and market the products in Blue Square stores. The Supplier sells its products to Blue Square and Hyper Hyper at a discount to the list price of such products.

Arrangements among Blue Square, Mega Retail and Hyper Hyper

Below is a description of agreements entered into between us, Mega Retail and Hyper Hyper. As of November 3, 2008, we are the sole shareholder of Mega Retail (and indirectly, of Hyper Hyper). In addition, as part of the reorganization of our retail activities, Hyper Hyper is to merge into Mega Retail, as a tax exempt transaction, and all of the retail activity of Hyper Hyper is to be transferred to Mega Retail. The merger was approved by the Tax Authority, and it is anticipated that it will be completed in the next few weeks, effective as of January 1, 2009.

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On October 11, 2005, we entered into a general services framework and expenses allotment agreement with Mega Retail and Hyper Hyper (the “Agreement”). The Agreement was for an initial term of five years and under its terms was to automatically extend for three additional five-year terms unless terminated by one of the parties not less than six months prior to the end of the term or the extension, as the case may be (other than for lease of property arrangements, as described below). The following services and arrangement were provided under the Agreement:

Advertisement and Marketing. Advertisement and marketing expenses with respect to each store format are allocated between the parties in accordance with each party’s sales at stores operating under such store format. Advertisement and marketing expenses not relating to a specific store format are allocated between the parties in accordance with each party’s aggregate store sales.

Customer Clubs. Mega Retail provides management and operational services for the existing customer clubs of Mega Retail and Hyper Hyper (and will provide such services to any future customer club of Mega Retail and Hyper Hyper). Mega Retail and Hyper Hyper allocate between them the expenses and costs of operating such customer clubs. Such allocation differs according to the type of customer club. In the case of the existing customer clubs (and any similar customer club established by Mega Retail and Hyper Hyper in the future), the parties will allocate between Mega Retail and Hyper Hyper the expenses and cost of operating such customers clubs in accordance with the aggregate customer club points awarded in each party’s stores. In the case of future customer clubs to be established by Mega Retail together with third parties or in the form of a separate legal entity, Hyper Hyper and Mega Retail will allocate between them the following items in accordance with the ratio between the aggregate purchases of the members of such customer clubs in Hyper Hyper stores, on one hand, and Mega Retail stores, on the other hand: amounts to be contributed to such customer clubs to fund their operations, the costs and expenses associated with operations, income attributed to such customer clubs, and the profits and losses arising from such customer clubs.

In the case of future customer clubs to be established by Mega Retail together with third parties or in the form of a separate legal entity, these clubs will bear the costs of the benefits which each party will provide to the customer clubs’ members; such costs will be determined based on the sale prices of the relevant products; provided, that any customer club benefit (in the form of discounted purchase or gift of products) made by a cashier at the time of purchase to a customer club member will be funded by the party that provides such benefits.

These provisions in connection with future customer clubs are also applicable to our joint Loyalty Plan - "You" with Dor Alon.

Gift Certificates; Electronic cards. Mega Retail provides Hyper Hyper with services in connection with gift certificates and electronic cards. The parties allocate the costs derived from issuance of gift certificates and electronic cards between them in accordance with the ratio of redemptions of the gift certificates at each party’s stores.

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Other services. The parties allocate the costs and expenses of the following services (if such costs are not attributed to specific store(s)) in accordance with their respective stores’ monthly turnover: security, cleaning, cart gathering, employees training and guidance, and regional and brand operational management services.

Officer Costs. Because the Company’s CEO, controller and internal auditor are also Mega Retail’s CEO, controller and internal auditor, Mega Retail bears its share of the cost of their employment.

Elementary Insurance. The parties share elementary insurance expenses (including structure insurance, insurance for independent contractors, funds insurance, inventory insurance, vehicle insurance, third party liability insurance, employers liability insurance, etc.). The insurance costs and expenses are allocated between the parties in accordance with different ratios determined by the parties depending on the insurance involved.

Leasing of Property by the Company. The real property that the Company leased to Mega Retail and/or to Hyper Hyper has been transferred, and the related lease agreements have been assigned, by the Company to BSRE. See “Item 4. Information on the Company - B. Business Overview – Our Real Estate” and “Item 7.– B. Related Party Transactions –Arrangements between Blue Square, Mega Retail and Hyper Hyper" and "Arrangements between Blue Square and BSRE.”

Leasing of Property to the Company. The real property that Mega Retail and Hyper Hyper leased to the Company has been transferred, and the related lease agreements have been assigned, by Mega Retail to BSRE. See “Item 4. Information on the Company - B. Business Overview – Our Real Estate” and “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Arrangements between Mega Retail and BSRE.”

, The arrangement among the Company, Mega Retail and/or Hyper Hyper that was assigned by Mega Retail to BSRE was in accordance with the following terms and conditions:

The term was up to ten (10) years from September 1, 2005 (as a result of the transfer by Mega Retail to BSRE of the real property, the lease agreement was extended to a term of up to ten years commencing on March 31, 2009 with an option at the end of the term to extend for an additional five-year term under the same terms. See "Item 4. Information on the Company – D. Our Real Estate");

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 Mega Retail 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;

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The annual rent for property not used for stores will be 9% of the amount invested in that property by Mega Retail 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.

New lease agreements were to be entered into on the basis of the terms set forth above provided that (i) the audit committee and the board of directors of both the Company and Mega Retail would approve each new lease agreement, (ii) the term of any such new lease agreement entered into within the ten year period commencing on September 1, 2005 would be 10 years from the date such new lease agreement for a particular property is executed, and (iii) the aggregate properties Mega Retail and/or Hyper Hyper would lease to the Company could not exceed 45,000 square meters.

Expenses and Payments for Proceedings: To the extent permitted by law, in the event that either party (the “obligated party”) will be liable for any amounts related to its business activities, whether by virtue of legal proceeding, administrative proceeding, judgment, arbitration award, settlement agreement, administrative penalty or any other manner, the non-obligated party will indemnify the obligated party for the non-obligated party’s pro rata portion of such payment in accordance with its pro rata portion of the revenues earned by both parties in the category of activities (in the relevant period) with respect to which such proceeding was submitted. In the event that the relevant activity does not yield revenues, the allocation described above between the parties will be made in accordance with their respective quantitative share in such activity. In the event it is not feasible to determine the relevant period of time, the calculation will be based on each party’s proportional share of such activity in the previous calendar year.

In addition to the above-described agreement the Company currently has various arrangements with Mega Retail and Hyper Hyper, as described below:

Employee Lending Agreement

Mega Retail and Hyper Hyper have entered into an employee lending agreement with Blue Square according to which Blue Square agreed to make employees available to Mega Retail and Hyper Hyper according to Mega Retail and Hyper Hyper’s needs. In consideration for the use of these borrowed employees, Mega Retail and Hyper Hyper pay Blue Square the full amount to be made to, or on account of, these employees according to the terms of the collective labor agreement between Blue Square and the Histadrut. Blue Square is responsible for paying the salaries and other benefits to the borrowed employees.

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Service and Management Agreements

Mega Retail acts as the exclusive purchaser for Hyper Hyper, purchasing supermarket goods for which no mark-up is charged to Hyper Hyper. In addition, Mega Retail provides Hyper Hyper with storage, distribution, logistics and maintenance services, for which these companies generally pay their proportionate share of expenses. Under a management agreement, Mega Retail provides Hyper Hyper and its subsidiaries with administrative, management and site selection services for which Hyper Hyper pays a fee calculated based on its net sales, up to 2% of net sales. The fee is subject to modification every three years pursuant to a review by an external and independent examiner. The fee commencing from January 2002 was 1.95% of Hyper Hyper’s sales. During 2005 and pursuant to a review by an examiner, the fee rate was changed to 1.96%, and amounted to approximately NIS 76.8 million in 2009.

Blue Square provides certain services to Mega Retail pursuant to a management agreement in consideration for annual management fees of NIS 100,000 linked to the March 1996 CPI.

Mega by Internet Agreement

Blue Square and Hyper Hyper have an agreement for the joint operation of the Mega by Internet website, which is owned by Blue Square. Under this agreement, Hyper Hyper is obligated to pay Blue Square certain amounts for its investments in Mega by Internet, for the development costs and for operational costs of Mega by Internet, in consideration for the use of the Mega by Internet website by Hyper Hyper.

Inter-Company Accounts

We, Mega Retail and Hyper Hyper agreed to maintain inter-company accounts for day-to-day operations which bears interest at a rate equivalent to that charged by banks on short-term loans, provided that the rate is not lower than the monthly increase in the CPI. The average rate was 2.3% in 2009, 4.3% in 2008 and 4.6% in 2007.

Other Existing Arrangements

Other existing arrangements currently exist among the Company and Mega Retail and Hyper Hyper with respect to the allocation of costs, expenses and revenues incurred in connection with or derived from the following areas and services: storage and supply of products; maintenance; directors and officers insurance; use of premises; discounts and bonuses from suppliers and other arrangements relating to day-to-day operation. In addition, Mega Retail purchases from the Company meat, grocery and vegetables products, which are distributed through the distribution center, at cost price.

Arrangements between Blue Square and BSRE

Pursuant to the Transfer Agreement and Split Agreement entered into by the Company and BSRE, as described in “Item 4. Information on The Company - B. Business Overview - - Real Estate”, Blue Square transferred assets with a total book value as of December 31, 2005 of approximately NIS 1.1 billion and liabilities with a total book value as of December 31, 2005 of approximately NIS 759.3 million. In consideration, BSRE issued to the Company 22,642 ordinary shares.

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On May 4, 2006, the Israeli Tax Authority approved our application for a ruling stating that the transfer would receive favorable tax treatment under the provisions of Sections 104A and 105A(2) to the Income Tax Ordinance, subject to certain conditions, as described in " Item 4. Information on The Company - B. Business Overview - Tax Authority Approval".

In addition, in connection with the transfer of Company real estate assets to BSRE, and in addition to the agreements between the Company and BSRE, the Company and BSRE also entered into the following agreements:

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

Pursuant to arrangement entered on August 13, 2006, the Company and BSRE agreed that with respect to eight specified transferred real estate properties that as of December 31, 2005 were not free and clear from third party rights and/or claims, the Company will use its best efforts to complete the transfer of these properties, free and clear from any third party rights or claims. However, if the Company will be required or agree to return or transfer any of the said properties to third parties as a result of their rights and/or claims, then BSRE will waive its rights such properties and will be entitled to receive: (i) with respect to seven of the properties, the higher of the properties' book value or the consideration received by the Company from the third parties for these properties and (ii) with respect to one specified property, an amount equal to the consideration received for such property from the third parties.

Agreements with Respect to Properties Operated by the Company.

The Company and BSRE entered into a lease agreement on August 13, 2006 (effective as of January 1, 2006) with respect to the 52 supermarket stores that were operated directly by the Company prior to December 31, 2005 (plus one property for offices purposes). Under this agreement, the Company leases from BSRE these properties for an initial period of at least 10 years beginning as of January 1, 2006. The agreement will automatically be extended for an additional five-year term unless terminated by the Company no less than 24 months prior to the end of the initial term. The annual rent for the initial period 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 the Company (as calculated in accordance with the agreement), which amount is linked to changes in Israel’s consumer price index from the date of such investment. The agreement provides for these additional provisions:

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.

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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.

On January 1, 2009, as part of the reorganization of the Company's supermarket retail activities, the Company transferred all of its supermarket retail activities to Mega Retail and assigned all of its rights and obligations under this agreement to Mega Retail.

As a result of the transfer by Mega Retail of the real estate that it holds to BSRE, the lease agreement was extended to a term of up to ten years commencing on March 31, 2009. In addition, at the end of the term there is an option to extend for an additional term of five years under the same terms. See "Item 4. Information on the Company – D. Our Real Estate".

Agreements with Respect to Properties Operated by Mega Retail and Hyper Hyper.

On June 23, 2006, the Company entered into a lease agreement with Mega Retail pursuant to the lease agreement provisions of the general services framework and expenses allotment agreement which the Company entered with Mega Retail and Hyper Hyper on October 11, 2005 (the "Lease Agreement"). The Company assigned to BSRE all of its rights and obligations under the Lease Agreement. The underlying properties (23 supermarket stores) were also transferred by the Company to BSRE.

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The Lease Agreement provided that the annual rent for property used for stores is to be equal to the higher of 2% of the annual turnover of that store or 9% of the amount invested in that store (as calculated in accordance with the agreement), which amount is linked to changes in Israel’s consumer price index from the date of such investment. The annual rent for property not used for stores is 9% of the amount invested by the Company which amount is linked to changes in Israel’s consumer price index from the date of such investment. The term is for up to ten (10) years from September 1, 2005, and rent payments are charged on an annual basis.

Following the transfer by Mega Retail of the real estate that it held to BSRE on September 13, 2009, the Lease Agreement was extended to a term of up to ten years commencing on March 31, 2009. In addition, at the end of the term there will be an option to extend for an additional term of five years under the same terms. See "Item 4. Information on the Company – D. Our Real Estate".

Under the Lease Agreement, new lease agreements by Mega Retail and Hyper Hyper are to be entered into on the basis of the terms set forth above, provided that (i) the audit committee and the board of directors of both parties will approve each new lease agreement, (ii) the term of any such new lease agreement entered into within the ten year period commencing on September 1, 2005 will be for a period of up to 10 years from the date such new lease agreement is executed for a particular property, and (iii) the aggregate properties that BSRE leases to Mega Retail and/or Hyper Hyper may not exceed 80,000 square meters.

The forgoing lease agreements are "net lease" that is, the lessee pays all applicable payments and charges for the possession of the leased property and the usage during the lease period.

At BSRE's request to clarify the implementation of lease agreements dated June 23, 2006 and August 13, 2006 between Mega Retail and BSRE, Mega Retail confirmed that in the event of a sale or lien of any of the transferred assets, the following would apply:

(i) BSRE would assign to the buyer all of BSRE's rights and commitments towards Mega Retail under the lease agreements and the following would apply:

Mega Retail would enter into a separate lease agreement with the buyer of the transferred asset, the terms of which would reflect the terms appear in the BSRE-Mega Retail lease agreements, with the necessary adjustments.

The base rent ascribed to the transferred asset in the separate lease agreement will be in the amount that was determined by BSRE, as recommended by an independent assessor, linked to the CPI from January 1, 2006, plus 9% of the amount invested by BSRE in the transferred asset from January 1, 2006 and thereafter. The rent paid by Mega Retail to the buyer would be reduced from the lease payment paid by Mega Retail to BSRE under their lease agreement.

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(ii) The rent paid for the transferred asset would be reduced (commencing from the day of initial payment to the buyer) from the rent paid by Mega Retail to BSRE for all leased properties by Mega Retail prior to any of sale or lien of assets in a manner that as a result of any sale or lien of an asset, there would be no change in the amount of the rent paid by Mega Retail for all assets leased to Mega Retail.

Service Agreement

Pursuant to an agreement entered in August 2006, effective as of January 1, 2006, the Company provides to BSRE (directly or through its subsidiaries) the following services: Chairman of the board of directors services, financial and accounting management services (including bookkeeping), computer management and maintenance service, legal consulting and corporate secretary services, office space and related office services, and internal audit services. In consideration for these services, BSRE initially paid the Company an annual amount of NIS 2.5 million. In the event of the appointment of a Chairman of the board of directors of BSRE which is not an office holder of the Company, BSRE will bear the related cost, and the consideration payable under the agreement will be reduced to NIS 2 million. In addition, BSRE may request maintenance services and will pay additional consideration for such services in the amount of the direct costs to the Company plus 2%.

The consideration was based on an estimate of the Company total costs for these services attributable to BSRE. The consideration is linked to changes to the Israeli CPI (since December 2005). Commencing from 2007, the consideration is increased each year by an amount equal to 0.2% of the difference between (x) the cost of BSRE assets (prior to depreciation and amortization) ("BSRE Asset Cost") at the end of the preceding year and (y) the BSRE Asset Cost as of December 31, 2005, linked to changes to the Israeli CPI plus VAT. In 2009, in consideration for the foregoing services, BSRE paid the Company an annual amount of NIS 3.1 million.

The agreement is for an initial term of five years (as of January 1, 2006) and will be extended from time to time upon the parties' consent for additional five-year terms (or such other period agreed to by the parties at the extension date). The Company may terminate the agreement during the agreement term upon six months' prior notice.

Agreement with respect to the Allocation of Various Insurance Expenses

Pursuant to agreement entered on August 13, 2006, insurances obtained by BSRE, such as: elementary insurance including, structure insurance, insurance for independent contractors, funds insurance, third party liability insurance and employers liability insurance will be obtained within the group policy of the Blue Square group. The insurance costs and expenses are allocated between the parties in accordance with different ratios determined by the parties depending on the insurance involved.

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Deposit of Cash Balances Agreement

Pursuant to the agreement entered in August 2006, BSRE may, with the Company's consent from time to time, deposit funds with the Company and receive in return funds in an ON CALL terms (on an on-demand basis). The amount of funds lent from each party to the other party may not exceed NIS 200 million at any time. Under the agreement no collateral is granted in exchange for the deposited funds. The interest paid by each party for funds received according to this arrangement will be at a rate equivalent to the rate that the Company is charged by banks in such month for ON CALL credit (short-term loans) on a monthly weighted average basis. The term of the agreement was two years from its approval by the shareholders of BSRE (February 28, 2007), and may be terminated by either party upon seven days' prior notice. On January 8, 2009 BSRE's audit committee and board of directors approved an extension of the agreement for an additional two years until February 27, 2011.

In addition, the Company and BSRE entered into an agreement with respect to transfer of employees from the Company to BSRE.

Ordinary Course Transactions

From time to time, Blue Square enters into agreements and engages in transactions in the ordinary course of business with its subsidiaries and affiliates, such as for the purchases of merchandise, gasoline purchase agreements, including in connection with the operation of our gasoline station(s) and gas supply agreements with the Alon Group, joint sales and marketing promotions and legal consulting. Some subsidiaries enter into agreements and engage in transactions with other subsidiaries and affiliates of Blue Square.

The terms and conditions of all of these agreements and transactions are at “arm’s-length.” We intend to enter into similar agreements and to engage in similar transactions in the future. In addition to ordinary course agreements and transactions, Blue Square and certain of its affiliates have entered into other agreements and transactions.

Arrangements between Mega Retail and BSRE

In connection with the reorganization of the Company's real estate activities, the Company's wholly-owned subsidiary, Mega Retail, transferred all of the real estate property (and related leases) held by it and its subsidiaries to BSRE (the "Real Estate Transfer") on September 13, 2009 and, pursuant to the approval of the Israeli Tax Authority, was effective as of March 31, 2009. The Real Estate Transfer was approved by BSRE's shareholders at BSRE's extraordinary general shareholder meeting held on February 18, 2009. Following discussions between Mega Retail and BSRE and the Israeli Tax Authority regarding the structure of the real estate reorganization, the Israeli Tax Authority granted an approval pursuant to which the transaction would be performed as a split pursuant to Section 105 of the Israel Income Tax Ordinance. Under such approval, Mega Retail transferred to BSRE the real estate properties for an aggregate consideration of approximately NIS 463 million, based on an appraisal by an independent appraiser, and as part of the consideration for the transaction, BSRE assumed Mega Retail's financial liabilities to a bank in an amount of approximately NIS 390 million that were attributed to the transferred properties and paid us in cash the balance of NIS 68 million, representing the difference between the value of the transferred properties (less certain expenses associated with the transfer) and the assumed liabilities.

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BSRE financed the assumption of the liabilities by paying the bank NIS 140 million and entering into a loan agreement with the bank for a 15-year loan for the remaining amount of NIS 250 million. Pursuant to the loan agreement, BSRE must comply with certain financial terms and covenants. The principal of the loan will be repaid at a rate of 6.5% of the principal per year. The interest on the loan for the first five years is at a rate of 4.8% per year and the interest on the loan for the next five years will be calculated based on the weighted average rate of return on government bonds (as defined in BSRE's agreement with the bank) plus a margin of 4.4%. The interest payable on the loan after ten years will be determined by agreement between BSRE and the bank, or if no such agreement is reached, based on the standard interest rate for a loan of the type this type for a company like BSRE. In addition, BSRE has pledged 15 of the transferred properties (including income from the lease agreements with Mega Retail) as collateral for the loan and agreed that it will not grant any floating charge on its assets without prior consent from the bank.

Pursuant to the terms of the Real Estate Transfer, BSRE purchased from Mega Retail 17 of the Company's supermarket stores, 50% of a commercial center in Be'er Sheva that is leased to third parties, the Company's distribution and logistics center and warehouses and an office building used by the Company, which includes one supermarket store.

BSRE purchased the real estate from Mega Retail "as is" at the date of the closing, with no representations or warranties made by Mega Retail, other than limited exceptions. In addition, Mega Retail agreed to obtain any third party consents, to the extent necessary in order to complete the transaction.

Mega Retail agreed to pay any tax or levy in connection with the sale of the properties, and BSRE agreed to pay the purchase tax and any other tax or levy in connection with the purchase of the properties. Pursuant to the Tax Authority approval, the purchase tax is 0.5% of the purchase price, or approximately NIS 2.5 million. However, if the purchase tax is above 0.5% of the purchase price, then BSRE and Mega Retail agreed to each pay half of the purchase tax in excess of 0.5%. In any event, the portion paid by BSRE will not exceed NIS 14 million.

Pursuant to the Israeli Tax Authority approval, the cost basis and the purchase date of the transferred assets by BSRE will be as they had been prior to the split in the possession of Mega Retail. Therefore, and contrary to the terms of the transaction as originally contemplated by BSRE and Mega Retail, the entire fair value of the assets transferred to BSRE will not be recognized as a cost basis for tax purposes. As a result, BSRE and Mega Retail entered into an indemnification agreement pursuant to which Mega Retail agreed to compensate and indemnify BSRE for the tax effect of the difference between the actual cost of the assets transferred and the cost of such assets for tax purposes, such that the tax liabilities and tax benefits to BSRE (with regard to the sale of the transferred assets and with regard to the depreciation component of the transferred assets) would be the same as if the entire fair value of the transferred assets had been recognized as a cost for tax purposes by BSRE. The tax component for the above mentioned difference is estimated at approximately NIS 32 million, calculated based on the assumption that all the transferred assets would be sold close to the date on which the transfer of the assets was completed (although there is no certainty if and when such assets would be sold) in accordance with the current tax rates.

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Pursuant to the indemnification agreement, (a) Mega Retail will pay BSRE in cash once a year and no later than at the end of each taxable year, an amount equal to the net tax component for that year, for the depreciation with respect to the difference between the assessment of the fair value of the transferred assets for the purpose of the transaction, and the actual cost to BSRE of such assets for tax purposes on the date on which the transferred assets were transferred; and (b) in the event that one of the transferred assets is sold by BSRE, then, no later than on the date on which the tax for such sale is due by BSRE, Mega Retail will pay BSRE in cash an amount equal to the difference between the actual tax that is due for the sale of the asset and the tax that would have been due had the value of the transferred asset sold (less the depreciation for which indemnification was actually provided by Mega Retail according to (a) above) been recognized as cost to BSRE for tax purposes on the date on which the transferred assets were transferred. The calculation of the difference described in clause (b) will not take into account the effect of deductible expenses that were incurred by BSRE. Mega Retail has not provided any security to guarantee its indemnification obligations under the indemnification agreement.

In addition, in connection with the transfer of Mega Retail's real estate assets to BSRE, Mega Retail and BSRE also entered into the following agreements:

Agreements with Respect to Properties Operated by Mega Retail

As part of the Real Estate Transfer, all of the real estate property used by Mega Retail prior to the Real Estate Transfer is leased back by BSRE to Mega Retail for Mega Retail's retail activities under terms similar to existing lease agreements between BSRE and Mega Retail and existing lease agreements between BSRE and Blue Square that were previously transferred to Mega Retail.

Pursuant to the agreement, Mega Retail leases from BSRE 16 supermarket stores, the Company's distribution and logistics center and warehouses in Rishon Le'tzion and an office building used by the Company, which includes one supermarket store (the "Properties"). Mega Retail leases the Properties for an initial period (the "Initial Lease Period") of at least 10 years commencing on March 31, 2009. The agreement would automatically be extended for an additional five-year term unless terminated by written notice, by Mega Retail, no less than 24 months prior to the end of the Initial Lease Period. The annual rent for the Initial Lease Period of the supermarkets 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 BSRE (as calculated in accordance with the agreement) (the "Amount of the Investment"), which amount will be linked to changes in Israel’s consumer price index. The annual rent during the Initial Lease Period for assets that are not used for supermarkets will be 9% of the amount invested in the property by BSRE which amount will be linked to changes in Israel’s consumer price index.

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The agreement provides for these additional provisions:

Upon 12 months' notice, at the time of the extension of the agreement, Mega Retail may reduce the number of the Properties subject to the agreement, 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.

Upon 12 months' notice, Mega Retail may terminate the lease of some of the leased properties prior to the end of the Initial Lease Period, provided that the aggregate area of such properties does not exceed 5% of the total area of the properties that were leased to Mega Retail as of the beginning of the Initial Lease Period. However, in any event, such right of termination does not include the right to terminate the lease agreement of the distribution and logistics center and warehouses in Rishon Le'tzion.

Upon 12 months' prior notice, BSRE may shorten or temporarily suspend the lease of certain Properties (specified in the agreement) to the extent required to develop or build on the land on which such Properties are located, or to the extent required to sell the land on which such Properties are located. Such right to shorten or temporarily suspend the lease of such Properties is subject to the condition that, as of the date on which Mega Retail must vacate the premises, BSRE must have obtained a building permit for such development or building and/or BSRE must have signed an agreement to sell such property, as the case may be.

Upon 12 months' prior notice, BSRE may shorten or temporarily suspend the lease of any four Properties (three during the Initial Lease Period and one during the extension term) to the extent required to develop or build on the land on which such Properties are located, subject to the conditions that (i) as of the date on which Mega Retail must vacate the premises, BSRE must have obtained a building permit for such development or building, and that (ii) BSRE must bear the costs of vacating the premises and provide a substitute store, at the same location, with similar characteristics at its own expense within 24 months of Mega Retail vacating the premises.

Mega Retail will be entitled to sub-lease any of the Properties, subject to the condition that Mega Retail will remain liable for the fulfillment of all the provisions of the agreement, jointly and severally with the substitute tenant.

BSRE is entitled, to add building areas on each of the Properties to the extent permitted by the town planning schemes which apply and/or may apply in the future. In the event that, pursuant to this provision, BSRE plans to add building areas on the property on which the Company's distribution and logistics center in Rishon L'tzion is located, such additional building is subject to the prior consent of Mega Retail. In addition, in the event that BSRE adds buildings to the property on which the Company's offices in Rosh Ha'ayin are located, then, upon six months' notice from the date on which it receives notice from BSRE about BSRE's intention to build on such property, Mega Retail may notify BSRE of Mega Retail's intention to lease the additional buildings under the same terms as the existing lease agreement, with the ten year term beginning on the date on which the new buildings are transferred to Mega Retail's possession.

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Mega Retail is solely responsible for obtaining any permits or licenses required under law to operate the Properties.

Unless otherwise agreed by the parties, the lease agreement will be a "net lease" such that Mega Retail shall bear any and all payments and costs that arise in connection with the possession and use of the Properties during the lease period.

In the event that Mega Retail will request to erect and operate small gas stations on certain of the Properties, and BSRE will agree to such request, BSRE will bear the costs of erecting the station, apart from equipment, as shall be agreed by the parties. The costs of erecting the station will be added to the Amount of the Investment for the purpose of determining the annual rent for the Properties, but the income from the sale of gas from such station will not be considered store turnover for purposes of calculating the annual rent.

Arrangements between Mega Retail and Vardinon

In January 2008, we entered into a supply agreement with Vardinon pursuant to which Vardinon is to supply us with a variety of textile products manufactured by Vardinon under a new private label, which are to be designed by us in collaboration with Vardinon. The supply agreement was terminated effective from January 2010. On February 7, 2010, Vardinon's board of directors approved a new services agreement with our subsidiaries Mega Retail and Hyper Hyper, pursuant to which Vardinon is to coordinate between Mega Retail and Hyper Hyper and suppliers of both brand name and non brand name home textile products (the "Suppliers") so that Mega Retail and Hyper Hyper may purchase these products directly from the suppliers. In addition, Vardinon is to provide certain related services to Mega Retail and Hyper Hyper in connection with their agreements with these suppliers. In consideration for the services provided by Vardinon pursuant to the services agreement, Mega Retail and Hyper Hyper agreed to pay Vardinon a services fee in the amount of 12.5% of the amount of the invoices issued to Mega Retail and Hyper Hyper by the Suppliers plus VAT, subject to certain limitations. The services agreement was approved by Vardinon's shareholders at a shareholder meeting held on March 28, 2010. The term of the agreement is for five years beginning on March 28, 2010, and may be terminated by either party by three months prior written notice.

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Arrangements with Tnuva

We purchase most of our dairy, fresh produce and poultry products from the Tnuva corporation, which holds a leading position in the domestic dairy and poultry markets. To our knowledge, some of the collective acquisition entities of kibbutzim in Israel that hold shares of Alon, our indirect controlling shareholder, hold 21.5% of the shares of Tnuva. In addition, our director, Yitzhak Bader, also serves as a director on the board of directors of Tnuva. In 2009, Tnuva’s products accounted for approximately 14.4% (which percentage includes for the first time, data for Tnuva's subsidiary, Tirat Zvi) of all the products sold at our supermarkets. These arrangements are in the ordinary course of our business, and the terms and conditions of these arrangements are at "arm's-length".

Employment Agreement with Moran Wiessman

Beginning in January 2009, Ms. Moran Wiessman has been employed as a process engineer by our 85% subsidiary Bee Group. Ms. Wiessman is the daughter of Mr. David Wiessman, our executive chairman of the board of directors, who may be considered a controlling shareholder of the Company. Ms. Wiessman receives a monthly salary of NIS 10,000, a cell phone at the expense of Bee Group, and a monthly car maintenance allowance of NIS 600 plus gas expenses; alternatively, Bee Group is entitled to assign a car to Ms. Wiessman as customary in Bee Group for employees at the same level. In addition, Ms. Wiessman is entitled to standard social allocations by Bee Group (5% for provident fund, 8.33% for severance payments and 1% for disability insurance) and other social benefits that standard for an employee in her position.

Salary increases or bonuses shall be granted as is customary in Bee Group based on the professional performance of Ms. Wiessman. Ms. Wiessman's monthly salary may be increased by Bee Group management up to 20% annually, but any monthly salary (on an average basis, including bonuses) above NIS 18,000 requires the approval of our audit committee, board of directors and general meeting of shareholders. Bee Group management is entitled to grant Ms. Wiessman an annual bonus as is customary in Bee Group of only up to six monthly salaries a year. The grant requires the approval of our audit committee that will confirm that the bonus was given according to the grant's policy in Bee Group.

The employment agreement with Ms. Wiessman was approved by our audit committee, board of directors and the general meeting of shareholders.

C. Interests of Experts and Counsel.

Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information.

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

Board Resolution on Dividend Distributions

On January 14, 2010, Blue Square's board of directors decided that in view of the changes and development of Blue Square since 2003, including the transfer of Blue Square's and Mega Retail's real estate properties to BSRE (which operates under financial obligations to EBITDA ratios appropriate for real estate companies and currently holds a major part of the consolidated debt), the purchase of Bee Group (a Non Food retailer), and the reorganization of Blue Square's food retail activities in its subsidiary, Mega Retail Ltd., that the ratio of net financial obligations to EBITDA is to be calculated by deducting from the net financial obligations Blue Square's debt which is related by the company to real estate that is not in use by Blue Square (which is equal to 75% of the investment property as recorded on the balance sheet). On December 31, 2009, the net financial obligations to EBITDA (calculated in accordance with the deduction described above) was less than 2.0. Our board of directors further resolved that Blue Square would not distribute dividends in any quarter if the ratio of our net financial obligations (calculated in accordance with the deduction described above) to EBITDA for any quarter exceeds 4.5.

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Legal Proceedings

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

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 January 2009, the appeal was accepted with the consent of all parties.

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

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. The Israeli Tax Authority did not accept most of the Company's position, although it agreed to deduct the total amount to approximately NIS 16.3 million. In February 2009, the Company filed an appeal with the District Court, which as of the date of this Annual Report is 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.

Restrictive Trade Practices Inquiry

On January 5, 2005, the Commissioner of the Israeli Antitrust Authority issued his final position regarding “commercial restrictive practices between the dominant food suppliers and the major supermarket chains.” Following a meeting with the Commissioner in March 2005, the Commissioner delivered to us and to the other major chains a draft of a proposed consent decree with respect to the disputed issues. Please see “Item 4. Information on Blue Square - B. Business Overview - Government Regulation”.

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

During 2006, several of our employees were questioned by a Ministry of Industry, Trade and Labor representative with respect to the practice of various suppliers that reduce the weight and/or contents of certain packaged products, but do not reduce the size or change the appearance of the packages or reduce the prices of such products. The allegation is that these practices mislead the consumer because they are not informed of the reduction in weight and/or content of the products. As of the date of this Annual Report, a number of class actions have been filed against certain of our suppliers in connection with the reduction of weight and/or content of products. The Company believes that it has acted in accordance with applicable law in this regard.

We are subject to legal proceedings in connection with business licenses

As of May 31, 2010, 34 of our supermarket stores and four of our Eden Teva stores have no valid business permits/license. In 2009, as in previous years, we and some of our directors and managers were indicted in connection with business licenses and planning and building regarding some of our supermarkets stores. As of May 31, 2010, there are provisional closure orders pending against two of our supermarket stores. We are working towards obtaining the required permits and at the same time delaying the effectiveness of the provisional orders until such required permits are obtained. We estimate that neither the temporary lack of permits nor the provisional closure orders will have material adverse effect on our operation.

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

In June 2008, a claim was filed against our subsidiary, Blue Square Chain (Hyper Hyper) Ltd. 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. Hyper Hyper denied all foregoing allegations. On October 29, 2009, the request for certification as a class action was withdrawn by the plaintiffs with respect to Hyper Hyper.

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We may be subject to a class action in connection with the Fifteenth Amendment to the Pharmacists Directive [new edition] 1981.

On September 14, 2009 the Company was served with a claim and a request for approval as a class action, in which the Company is being sued regarding the sale of cosmetics and perfume products without marking the expiry date or the allowed period of use after opening the product, as is allegedly obligatory pursuant to the Fifteenth Amendment to the Pharmacists Directive [new edition] 1981 which is in effect since July 1, 2009 . The plaintiff's personal claim is estimated by him at approximately NIS 175 and if the claim is approved as a class action, the approximate claim is estimated by the plaintiff at least at NIS 13 million. In addition, the plaintiff requests that the court issue an injunction forbidding the Company from selling such products without the marked expiry date or the maximum allowed period of use after opening. The Company and the plaintiff signed a settlement agreement pursuant to which the Company will pay to the plaintiff an amount not material to the Company. The settlement agreement is subject to court approval.

We may be subject to a class action in connection with alleged misrepresentations in connection with a product under our "Mega" private label.

On December 8, 2009, the Company was served with a claim and a request for approval as a class action in which the Company is being sued regarding alleged misrepresentations as to the contents of fruit spreads sold by the Company under its private label "Mega". The plaintiff's personal claim is estimated by him at approximately NIS 52 and if the claim is approved as a class action, the approximate claim is estimated by the plaintiff at least at NIS 8.4 million. On April 28, 2010, the claim was dismissed following an agreement reached by the Company and the plaintiff.

We may be subject to class actions in connection with the grant of discounts to "YOU" card holder.

In February 2010, the Company was served with a claim and a request for approval as a class action in which the Company is being sued regarding the grant of discounts to "YOU" card holders. The plaintiffs have requested to certify the claim as a class action. The claim alleges that during a period of time unknown to the plaintiff, the Company held a special sale in which customers of Mega that are members of the YOU club loyalty plan will receive an additional discount of 10% on the sale price of certain products, and such discount was not granted fully as advertised. The plaintiff's personal claim is estimated at NIS 3.10, and if the claim is certified as a class action, the approximate claim is estimated by the plaintiff to be at least NIS 2 million. The Company is currently reviewing the claim and denies all above allegations; however, at this preliminary state of the proceedings, we are unable to evaluate its likelihood of success in the proceedings, including the likelihood that the claim will be certified as a class action. We will continue to assess this matter as the request for the class action develops.

On March 2010, the Company's wholly owned subsidiary Mega Retail Ltd. and its "YOU" customer loyalty plan were served with a claim and a request for approval as a class action (the "Claim"), in which they are sued together with Dor-Alon Energy In Israel (1988) LTD. (which holds 25% of the customers club) regarding the grant of discounts to "YOU" card holders in certain stores of "Alonit" chain. The Claim requests that the customer loyalty plan return discount amounts that according to the Claim should have been granted to "YOU" card holders who purchased in certain Alonit stores and did not receive a discount, or received a discount of 5% instead of allegedly Claimed discount of 10%. The plaintiff's personal Claim is estimated by him at approximately NIS 130, and if the Claim is approved as a class action, the approximate Claim is estimated by the plaintiff at approximately NIS 49.4 million. In addition, the plaintiff requests a declaratory relief according to which the customers club must grant a 10% discount in all Alonit chain stores. The Company is currently reviewing the Claim and denies all above allegations; however, at this preliminary state of the proceedings, we are unable to evaluate its likelihood of success in the proceedings, including the likelihood that the claim will be certified as a class action. We will continue to assess this matter as the request for the class action develops.

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We may be subject to a class action in connection with the Deposit on Drink Containers Law 1999.

During January 2009, the Company was served with a claim and a request for approval as a class action, in which it is being sued regarding the return of a credit note instead of cash, in accordance with the Deposit on Drink Containers Law 1999. The Claim alleges that Blue Square has to return cash returns to customers returning empty reusable bottles according to the law, while in fact instead of returning cash returns, it gives the customers a credit note. The plaintiff's personal claim is estimated at NIS 51.75, and if the claim is approved as a class action, the approximate aggregate claim is estimated by the plaintiff at NIS 5.8 million. On November 4, 2009, the request for approval as a class action and personal claim concerning refund in cash of the deposit on the beverages were both dismissed by the court upon the plaintiff's request.

We are in the process of arbitration proceedings in connection with our holdings in our Bee Group subsidiary, Dr. Baby Ltd.

Certain shareholders of Dr. Baby Ltd., or Dr. Baby, and its former general manager, are disputing the issuance of an additional 5,000 shares of Dr. Baby to Bee Group for an aggregate consideration in the amount of NIS 19.5 million, which resulted in the dilution of their holdings, and the dismissal of the former general manager of Dr Baby. As a result of the issuance, Bee Group's holdings in Dr. Baby increased by an additional 48.1% to 98.08%. The shareholders and the former general manager are demanding that the issuance will be cancelled, or alternatively, that Bee Group will compensate them with a payment in the aggregate amount of NIS 15 million. The dispute is in the process of a hearing before an arbitrator.

Other proceedings

In 2006, we were indicted in connection with discrepancies between the prices appearing on products, and the prices charged by the cash register at the point of sale. In 2007, Blue Square, Mega Retail and several branches managers were convicted in a plea bargain approved by the Court. Pursuant to the plea bargain Blue Square and Hyper Hyper were each fined NIS 70,000, in addition to a provisional fine of NIS 25,000 (each) in the event they will breach their undertaking not to commit the same offenses within three years. See “Item 4. Information on Blue Square - B. Business Overview - Government Regulation”.

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As of the date of this Annual Repot two indictments were filed against our company and Hyper Hyper regarding violation of the Consumer Protection Law, in connection with discrepancies between the prices appearing on products, and the prices charged by the cash register at the point of sale, way of presenting sales and other benefits and discrepancies in prices as a result of a failure in a certain product's bar code. As of the date of this Annual Report these indictments are still pending in court.

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

Independent Accountants

On July 9, 2009, Blue Square shareholders approved the reappointment of Kesselman & Kesselman as our auditors for the year ending December 31, 2009. Kesselman & Kesselman has no relationship with us or with any affiliate of us, except as auditors. At a shareholder meeting scheduled for June 28, 2010, Blue Square shareholders will vote on the reappointment of Kesselman & Kesselman for the year ending December 31, 2010.

B. Significant Changes.

Except as otherwise disclosed in this Annual Report, no significant change has occurred since December 31, 2009.

ITEM 9.

THE OFFER AND LISTING

A. Offer and Listing Details.

ADSs

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

Year	High		Low

2005	$	11.3	$	8.5
2006	$	14.8	$	9.8
2007	$	20.0	$	11.6
2008	$	14.4	$	5.6
2009	$	11.2	$	5.3

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

160

Year	High		Low

2008
First quarter	$	13.9	$	9.8
Second quarter	$	14.4	$	9.5
Third quarter	$	12.5	$	9.7
Fourth quarter	$	9.9	$	5.6

2009
First quarter	$	7.5	$	5.3
Second quarter	$	9.2	$	5.8
Third quarter	$	9.9	$	8.1
Fourth quarter	$	11.2	$	9.5

2010
First quarter	$	13.3	$	10.2
Second quarter (until June 18, 2010).	$	13.6	$	10.8

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

2009	High		Low

November	$	11.2	$	9.6
December	$	11.2	$	9.5
2010	High		Low

January	$	11.2	$	10.2
February	$	11.6	$	10.2
March	$	13.3	$	11.2
April	$	13.6	$	12.2
May	$	13.1	$	11.1
June (until June 18, 2010)	$	11.9	$	10.8

Ordinary Shares

The following table sets forth the annual high and low closing prices for Blue Square’s ordinary shares for the years 2005 to 2009 as reported by the Tel Aviv Stock Exchange. Shares are traded on the Tel Aviv Stock Exchange in NIS, and the translation of the NIS to dollars has been made at the representative exchange rate of exchange on the last day of each period, as published by the Bank of Israel.

Year	High				Low
	NIS		$		NIS		$

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
2008		52.4		13.8		21.4		5.6
2009		42.9		11.4		23.0		6.1

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

2008	High				Low
	NIS		$		NIS		$
First Quarter		52.4		14.8		33.8		9.5
Second Quarter		46.0		13.7		32.5		9.7
Third Quarter		41.0		12.0		34.7		10.1
Fourth Quarter		34.7		9.1		21.4		5.6

2009	High				Low
	NIS		$		NIS		$
First Quarter		29.4		7.0		23.0		5.5
Second Quarter		36.4		9.3		24.9		6.4
Third Quarter		36.7		9.8		32.2		8.6
Fourth Quarter		42.9		11.4		35.4		9.4

2010
First Quarter		50.1		13.5		38.1		10.3
Second Quarter (until June 17, 2010)		49.4		13.0		41.0		10.7

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

2009	High				Low
	NIS		$		NIS		$

November		42.9		11.3		37.4		9.9
December		41.9		11.1		36.4		9.6

2010	High				Low

January		41.8		11.2		38.1		10.2
February		42.5		11.2		39.7		10.5
March		50.1		13.5		43.0		11.6
April		49.4		13.3		46.4		12.5
May		48.5		12.7		44.2		11.5
June (until June 17, 2010)		45.7		12.0		41.0		10.7

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

B. Plan of Distribution.

Not applicable.

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C. Markets.

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

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

D. Selling Shareholders.

Not applicable.

E. Expenses of the Issue.

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital.

Not applicable.

B. Memorandum and Articles of Association.

Securities Registers

Our transfer agent and register is The Bank of New York Mellon (f/k/a The Bank of New York) and its address is 1 Wall Street, New York, New York 10286.

Objects and Purposes

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

Private Placements

Under Blue Square’s Articles of Association, resolutions of the board of directors regarding a private placement of Blue Square’s shares constituting, or securities convertible into, more than ten percent of our outstanding share capital require the approval of Blue Square’s shareholders. With respect to the aforesaid, securities convertible or exercisable into shares are deemed to have been converted or exercised on the date of their issue.

163

Under the Israeli Companies Law, if (i) as a result of a private placement a person would become a controlling shareholder or (ii) a private placement will entitle 20% or more of the voting rights of a company before the placement, and all or part of the private placement consideration is not in cash or in public traded securities or is not in market terms and if as a result of the private placement the holdings of substantial shareholder shall increase or as a result of it a person shall become a substantial shareholder, then in either case, the allotment must be approved by the board of directors and by the shareholders of the company. A “substantial shareholder” is defined as a shareholder that holds five percent or more of the company’s outstanding share capital, assuming the exercise of all of the securities convertible into shares held by that person. In order for the private placement to be in “market terms” the board of directors has to determine, on the base of detailed explanation, that the private placement is on market terms, unless proven otherwise.

Board of Directors

Under Blue Square’s Articles of Association, resolutions by the board of directors shall be decided by a majority of votes of the directors present (or participating, in the case of voting by media) and voting, each director having one vote.

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

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

164

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

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

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

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

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

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

Description of Securities

Ordinary Shares

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

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

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

Notices. Under the Israeli Companies Law and our Articles of Association, we are required to publish notices in two Hebrew-language daily newspapers at least 14 calendar days’ prior notice of an ordinary shareholders’ meeting and at least 21 calendar days’ prior notice of any shareholders’ meeting in which the agenda includes matters which may be voted on by voting instruments. Under regulations promulgated under the Israeli Companies Law, however, we are required to publish notice in two daily newspapers at least 35 calendar days prior any shareholders’ meeting in which the agenda includes matters which may be voted on by voting instruments. Regulations under the Israeli Companies Law exempt companies, like Blue Square, whose shares are listed for trading both on a stock exchange in and outside of Israel, from some provisions of the Israeli Companies Law. An amendment to these regulations exempts us from the requirements of the Israeli proxy regulation, under certain circumstances.

According to the Israeli Companies Law and the regulations promulgated thereunder, for purposes of determining the shareholders entitled to notice and to vote at such meeting, the board of directors may fix the record date not more than 40 nor less than four calendar days prior to the date of the meeting, provided that an announcement regarding the general meeting shall be given prior to the record date.

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

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

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

With the agreement of a meeting at which a quorum is present, the chairman may, and on the demand of the meeting he must, adjourn the meeting from time to time and from place to place, as the meeting resolves.

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

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

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

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

Private Placements

For information on private placements, see “Item 10. Additional Information - B. Memorandum and Articles - Private Placements.”

C. Material Contracts.

Purchase of Additional Shares in the Bee Group

On August 3, 2008, we entered into an agreement with the holders of 40% of the shares of Bee Group (the "Sellers") to purchase an additional 9,354 ordinary shares and 650 preferred shares of Bee Group, increasing our holdings in Bee Group by 25% to 85% of the shares of Bee Group, for consideration of NIS 35.4 million ($9.8 million at that time). The remaining 15% of the shares of Bee Group, which consist of 5,996 shares (including 150 preferred shares) (the "Remaining Shares"), were converted into ordinary shares of Bee Group on the transaction closing date (the "Closing Date"). In addition under the agreement, we have a call option to purchase the Remaining Shares from the Sellers during the five-year period from the date of the Closing Date for consideration in the amount of NIS 21.24 million plus 7.5% interest per year from the Closing Date and until the date on which the call option is exercised. In the event that Bee Group distributes dividends with a record date prior to payment for the exercise of the call option, the exercise price would be reduced by the amount of the dividend in cash plus 7.5% interest per annum for the period from the date of the dividend payment until exercise of the option. The Sellers have a put option to sell their Remaining Shares to us beginning 24 months from the closing date and for a period of 30 days at the same exercise price as the call option.

The Sellers have granted to us a fixed first lien on the Remaining Shares for the period of the call option and up to 21 days after the expiration of the call option. The Remaining Shares will be held in escrow for this period. The Sellers have also given us an irrevocable power of attorney giving us exclusive voting power over the Remaining Shares at Bee Group's general meetings of shareholders.

In addition, the sellers have agreed to non-compete provisions for periods between two to four years. Under the agreement, we agreed to continue to provide officers and directors insurance to Bee Group's officers and directors for a period of seven years from the Closing Date.

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In the event that an initial public offering is completed within 36 months from the Closing Date, and Bee Group's shares are registered on the TASE (the "IPO"), we must exercise the call option for the Remaining Shares within three days of commencement of trading of Bee Group's shares on the TASE begins at an adjusted exercise price. The adjusted exercise price of the Remaining Shares would be 15% of the value attributed to Bee Group in the public offering reduced by (a) expenses of the offering and by (b) investments in Bee Group's capital from the Closing Date. In the event that the call or put options are exercised prior to the initial public offering, the sellers would be entitled to the difference, if any, between the adjusted exercise price described above and the exercise price paid plus 7.5% interest per year on the exercise price paid commencing from the date of payment of the exercise price.

For a summary of other material contracts, see “Item 4. Information on The Company - B. Business Overview General”, “Item 4. Information on The Company - B. Business Overview - Related Businesses”, “Item 4. Information on The Company - B. Business Overview – Our Yield Generating Real Estate, “Item 5. Operating and Financial Review and Prospects - Liquidity and Capital Resources - Debentures”, “Item 6. Directors, Senior Management and Employees - C. Board Practices - Exemption, Insurance and Indemnification of Directors and Officers - Limitations on Insurance, Exemptions and Indemnification”, “Item 6. Directors, Senior Management and Employees - D. Employees”, “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions,” and our consolidated financial statements and notes included elsewhere in this Annual Report.

D. Exchange Controls.

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

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

E. Taxation

Israeli Tax Considerations

General

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

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This discussion does not purport to be a complete analysis of all potential tax consequences of owning the Shares. In particular, this discussion does not take into account the specific circumstances of any particular investor (such as tax-exempt entities, banks, certain financial companies, broker-dealers, investors that own, directly or indirectly, 10% or more of our outstanding voting rights, or foreign companies, if Israeli residents hold 25% or more of their shares or have the right to 25% or more of their income or profit, all of whom are subject to special tax regimes not covered in this discussion). The discussion is based on legislation yet to be subject to judicial or administrative interpretation, and there can be no assurance that the views expressed herein will accord with any such interpretation in the future. This discussion is not intended and should not be construed as legal or professional tax advice and does not cover all possible tax considerations.

Potential investors are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of the Shares, including, in particular, the effect of any foreign, state or local taxes.

Israeli Tax Reform

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

It should be noted that under the 2003 Tax Reform legislation, the Shares are no longer regarded and defined as “foreign traded securities” and thus certain associated Israeli tax aspects will accordingly be subject to change as discussed below.

A relatively short time after the 2003 Tax Reform, the Israeli Parliament approved on July 25, 2005 an additional income tax reform legislation (the "2006 Tax Reform") pursuant to the recommendations of a committee appointed by the Israeli Minister of Finance, which incorporated additional fundamental changes to Israeli tax law. The 2006 Tax Reform, inter alia, includes a gradual reduction of income tax rates for both individuals and corporations through 2010, and outlines a path towards uniformity in the taxation of interest, dividend and capital gains derived from securities. Most of the amendments to the tax law are effective as of January 1, 2006, subject to certain exceptions. Transition rules apply in certain circumstances.

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.

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General Corporate Tax Structure in Israel

The corporate tax rate applicable in 2009 was 26%. This rate was reduced to 25% in 2010 and is scheduled to be gradually reduced to 18% by 2016.

Dividends received by an Israeli corporation from Israeli subsidiaries are, generally, exempt from corporate tax.

TAXATION OF SHAREHOLDERS

Capital Gains

Capital gain tax is imposed on the disposal of capital assets by an Israeli resident, and on the disposal of such assets by a non-Israeli resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets located in Israel. The Israeli Tax Ordinance distinguishes between "Real Gain" and the "Inflationary Surplus". Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli CPI between the date of purchase and the date of disposal.

The real capital gain accrued by individuals on the sale of an asset purchased on or after January 1, 2003 will be taxed at the rate of 20%. However, if the individual shareholder is a "Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with another, 10% or more of one of the Israeli resident company's means of control) at the time of sale or at any time during the preceding 12 month period, such gain will be taxed at the rate of 25%. In addition, capital gain derived by an individual claiming deduction of financing expenses in respect of such gain will be taxed at the rate of 25%.

The real capital gain derived by a corporation generally will be subject to tax at the corporate tax rate (25% in 2010 and at the reduced capital gains tax rate of 25% in 2009). Real capital gain derived from the sale of securities (as defined in Section 6 of the Inflationary Adjustment Law) by a corporation that had been subject on August 10, 2005 to the provisions of Section 6 of the Inflationary Adjustment Law, such real capital gain will be taxed at the corporate tax rate (26% in 2009 and 25% in 2010).

However, the capital gain accrued on the sale of an asset purchased prior to January 1, 2003 will be subject to tax at a blended rate. The marginal tax rate for individuals (up to 46% in 2009 and 45% in 2010) and the regular corporate tax rate for corporations (26% in 2009 and 25% in 2010) will be applied to the portion of the gain amount which bears the same ratio to the total gain realized as the ratio which the holding period commencing at the acquisition date and terminating on January 1, 2003 bears to the total holding period. The remainder of the gain realized will be subject to capital gains tax at the rates applicable to an asset purchased after January 1, 2003.

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Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (26% in 2009 and 25% in 2010 tax rate for corporations and a marginal tax rate of up to 46% in 2009 and 45% in 2010 for individuals). Notwithstanding the foregoing, if the shareholder is a non-Israeli resident, then such taxation is subject to the provisions of any applicable double tax treaty. Moreover, capital gain derived from the sale of the Shares by a non-Israeli shareholder may be exempt under the Israeli income tax ordinance from Israeli taxation provided the following cumulative conditions are met: (i) the Shares were purchased upon or after the registration of the Shares on the stock exchange (not applicable in respect of Shares purchased on or after January 1, 2009) (ii) the seller does not have a permanent establishment in Israel to which the derived capital gain is attributed, and (iii) if the seller is a corporation, less than 25% of its means of control are held by Israeli resident shareholders. In addition, the sale of the Shares may be exempt from Israeli capital gain tax under an applicable double tax treaty. Thus, the U.S.-Israel Double Tax Treaty exempts a U.S. resident from Israeli capital gain tax in connection with the sale of the Shares, provided (i) the U.S. resident owned, directly or indirectly, less than 10% of an Israeli resident company's voting power at any time within the 12 month period preceding such sale; (ii) the U.S. resident, being an individual, is present in Israel for a period or periods of less than 183 days during the taxable year; and (iii) the capital gain from the sale was not derived through a permanent establishment of the U.S. resident in Israel.

Either the seller, the Israeli stockbrokers or financial institution through which the Shares are held are obligated, subject to the above mentioned exemptions, to withhold tax upon the sale of Shares from the real capital gain at the rate of 25% in respect of a corporation and 20% in respect of an individual.

Upon the sale of traded securities, a detailed return, including a computation of the tax due, should be filed and an advanced payment should be paid to the ITA on January 31 and June 30 of every tax year in respect of sales of traded securities made within the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Israeli Income Tax Ordinance and regulations promulgated thereunder, such return should not be filed and no advance payment should be paid. Capital gain is also reportable on the annual income tax return.

Dividends

A dividend distributed by the Company to an Israeli resident who is an individual, generally will be subject to income tax at a rate of 20%. However, a 25% tax rate will apply if the dividend recipient is a Controlling Shareholder, at the time of distribution or at any time during the preceding 12 month period. If the recipient of the dividend is an Israeli resident corporation, such dividend will be exempt from income tax, provided that the income from which such dividend is distributed was derived or accrued within Israel.

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A dividend distributed by an Israeli resident company to a non-Israeli resident (either individual or corporation) is generally subject to Israeli income tax on the receipt of dividends at the rate of 20% (25% if the dividends recipient is a Controlling Shareholder at the time of distribution or at any time during the preceding 12 month period); such rates are subject to a reduced tax rate under an applicable double tax treaty. Thus, under the Double Tax Treaty between the State of Israel and the U.S., a tax at the rate of 25% generally applies in respect of dividends distributed by an Israeli company to a U.S. resident. However, if the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of our Company's voting shares and not more than 25% of the gross income of our Company for such prior taxable year (if any) consists of certain types of interest or dividends, then the tax rate will be 12.5%. The aforementioned rates under the Double Tax Treaty between the State of Israel and the U.S. will not apply if the dividend income was derived through a permanent establishment of the U.S. resident in Israel.

The Company is obligated to withhold tax upon the distribution of a dividend at the following withholding tax rates: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual – 20% and (iii) non-Israeli resident – 20%, subject to a reduced tax rate under an applicable double tax treaty.

Proposed NIS 800 Million Dividend

Within the framework of the proposed acquisition by the Company of Alon's holdings in Dor Alon, the Company's audit committee and board of directors approved the distribution of a dividend (after the share issuance to Alon) to Blue Square's shareholders not out of profits, of NIS 800 million, or approximately US $ 208.9 million (based on the representative rate of exchange on May 31, 2010), which represents a dividend of approximately NIS 12.32, or approximately US $3.22 (based on the representative rate of exchange on May 31, 2010), per ordinary share of Blue Square (after taking into account the shares to be issued to Alon in the acquisition). The dividend per share is subject to change based on the number of shares outstanding on the record date for the dividend. The dividend would be subject to the approval of the Israeli courts and to the completion of the acquisition. For a description of the tax treatment of the proposed dividend, see our report on Form 6-K submitted to the Securities and Exchange Commission on May 27, 2010.

Estate and Gift Tax

Israeli law presently does not impose estate or gift tax.

United States Federal Income Tax Considerations

The following is a summary of the material U.S. federal income tax consequences that apply to U.S. Holders who hold Blue Square’s ADSs or ordinary shares (together “Shares”) as capital assets for tax purposes. This summary is based on current provisions of the Internal Revenue Code of 1986, as amended, current and proposed Treasury regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly on a retroactive basis. This summary does not address all U.S. federal income tax matters that may be relevant to a particular perspective holder or all tax considerations that may be relevant with respect to an investment in Blue Square’s Shares.

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This summary does not address tax considerations applicable to a holder of a Blue Square Shares that may be subject to special tax rules including, without limitation, the following:

dealers or traders in securities, currencies or notional principal contracts;

financial institutions;

insurance companies;

real estate investment trusts;

banks;

investors subject to the alternative minimum tax;

tax-exempt organizations;

traders that have elected mark-to-market accounting;

investors that hold Shares as part of a “straddle”, “hedge”, or “conversion transaction” with other investments;

regulated investment companies;

investors that actually or constructively own 10 percent or more of our voting shares;

· investors that are treated as partnerships or other pass through entities for U.S. federal income purposes and persons who hold the Shares through partnerships or other pass through entities; and

investors whose functional currency is not the U.S. dollar.

This summary does not address the effect of any U.S. federal taxation other than U.S. federal income taxation. In addition, this summary does not include any discussion of state, local, or foreign taxation or the indirect effects on the holders of equity interest in a holder of the Shares.

You are urged to consult your own tax advisor regarding the foreign and U.S. federal, state, and local and other tax consequences of an investment in the Shares.

For purposes of this summary, a “U.S. Holder” means a beneficial owner of a Share that is for U.S. federal income tax purposes:

·	an individual who is a citizen or resident of the United States;

·	a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States or any political subdivision thereof;

·	an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

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a trust (1) if (a) a court within the United States is able to exercise primary supervision over the administration of the trust; and (b) one or more U.S. persons have the authority to control all substantial decisions of the trust; or (2) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

If an entity that is classified as a partnership for U.S. federal tax purposes holds Shares, the U.S. federal tax treatment of its partners will generally depend upon the status of the partners and the activities of the partnership. Entities that are classified as partnerships for U.S. federal tax purposes and persons holding Shares through such entities should consult their own tax advisors.

In addition, certain material aspects of United States federal income tax relevant to a holder other than a U.S. Holder, referred to as a “non-U.S. Holder,” are discussed below. For purposes of this section, a “non-U.S. Holder” is any holder who is not a U.S. Holder.

In general, if you hold ADSs, you will be treated as the holder of the underlying shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.

The U.S. Treasury has expressed concerns that parties to whom Shares are released may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. holders of Shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate U.S. Holders. Accordingly, the analysis of the credibility of Israeli taxes and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, each described below, could be affected by actions taken by parties to whom the Shares are released.

U.S Taxation of Shares

Distributions

Subject to the discussion under “Passive Foreign Investment Companies” below, the gross amount of any distribution, including the amount of any Israeli taxes withheld from these distributions (see “Israeli Tax Considerations”), actually or constructively received by a U.S. Holder with respect to Shares will be taxable to the U.S. Holder as a dividend to the extent of our current and accumulated earnings and profits as determined under U.S. federal income tax principles. The U.S. Holder will not, except as provided by Section 245 of the Internal Revenue Code of 1986, as amended (the “Code”), be eligible for any dividends received deduction in respect of the dividend otherwise allowable to corporations. Distributions in excess of earnings and profits will be non-taxable to the U.S. Holder to the extent of, and will be applied against and reduce, the U.S. Holder’s adjusted tax basis in the Shares. Distributions in excess of such adjusted tax basis will generally be taxable to the U.S. Holder as capital gain from the sale or exchange of property. If we do not report to a U.S. Holder the portion of a distribution that exceeds earnings and profits, the distribution will generally be taxable as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above. The amount of any distribution of property other than cash will be the fair market value of that property on the date of distribution.

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Under the Code, certain dividends received by non-corporate U.S. Holders with respect to taxable years beginning on or before December 31, 2010, will be subject to a maximum income tax rate of 15%. This reduced income tax rate is only applicable to dividends paid by a “qualified foreign corporation” that is not a “passive foreign investment company” and only with respect to shares held by a qualified U.S. Holder (i.e., a non-corporate holder) for a minimum holding period (generally 61 days during the 121-day period beginning 60 days before the ex-dividend date). We should be considered a qualified foreign corporation because (i) we are eligible for the benefits of a comprehensive tax treaty between Israel and the U.S., which includes an exchange of information program, and (ii) the ADSs are readily tradeable on an established securities market in the U.S. In addition, based on our current business plans, we do not expect to be classified as a “passive foreign investment company” (see “Passive Foreign Investment Companies” below). Accordingly, dividends paid by us to individual U.S. Holders on shares held for the minimum holding period should be eligible for the reduced income tax rate. The reduced tax rate for qualified dividends is scheduled to expire on December 31, 2010, unless further extended by Congress.

The amount of any distribution paid in a currency other than U.S. dollars (a “foreign currency”) including the amount of any withholding tax thereon, will be included in the gross income of a U.S. Holder in an amount equal to the U.S. dollar value of the foreign currency calculated by reference to the exchange rate in effect on the date of the U.S. Holder’s (or, in the case of ADSs, the depositary’s) receipt of the dividend, regardless of whether the foreign currency is converted into U.S. dollars. If the foreign currency is converted into U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend. If the foreign currency received in the distribution is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any gain or loss on a subsequent conversion or other disposition of the foreign currency will be treated as ordinary income or loss.

Dividends received by a U.S. Holder with respect to Shares will be treated as foreign source income for the purposes of calculating the holder’s foreign tax credit limitation. Subject to certain conditions and limitations, any Israeli taxes withheld on dividends at the rate provided by the U.S.-Israel income tax treaty may be deducted from taxable income or credited against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to “passive” income and “general” income. The rules relating to foreign tax credits and the timing thereof are complex. U.S. Holders should consult their own tax advisors regarding the availability of a foreign tax credit under their particular situation (including, in the case of a U.S. corporation that owns 10 percent or more of our voting stock, the possible application of Section 902 of the Code).

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Sale or Other Disposition of Shares

If a U.S. holder sells or otherwise disposes of its Shares, gain or loss will be recognized for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and such holder’s adjusted basis in the Shares. Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if the holder had held the Shares for more than one year at the time of the sale or other disposition. Long-term capital gains realized by individual U.S. Holders generally are subject to a lower marginal U.S. federal income tax rate (15% for the taxable year ending December 31, 2010) than ordinary income. Under most circumstances, any gain that a holder recognizes on the sale or other disposition of Shares will be U.S. source for purposes of the foreign tax credit limitation and any recognized losses will be allocated against U.S. source income.

If a U.S. Holder receives foreign currency upon a sale or exchange of Shares, gain or loss will be recognized as described above and in addition, gain or loss, if any, recognized on the subsequent sale, conversion, or disposition of such foreign currency will be ordinary income or loss, and will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. However, if such foreign currency is converted into U.S. dollars on the date received by the U.S. Holder, the U.S. Holder generally should not be required to recognize any gain or loss on such conversion.

A U.S. Holder who holds Shares through an Israeli stockbroker or other Israeli intermediary may be subject to an Israeli withholding tax on any capital gains recognized if the U.S. Holder does not obtain approval of an exemption from the Israeli Tax Authorities. U.S. Holders are advised that any Israeli tax paid under circumstances in which an exemption from such tax was available will not give rise to a deduction or credit for foreign taxes paid for U.S. federal income tax purposes. U.S. Holders are advised to consult their Israeli stockbroker or intermediary regarding the procedures for obtaining an exemption.

Passive Foreign Investment Companies

For U.S. federal income tax purposes, we will be considered a passive foreign investment company (“PFIC”) for any taxable year in which either 75% or more of our gross income is passive income, or at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities, and the excess of gain over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning Shares. Accordingly, U.S. Holders are urged to consult their own tax advisors regarding the application of such rules.

If we are treated as a PFIC for any taxable year,

· a U.S. Holder would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of Shares ratably over its holding period for such Shares,

· the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year,

177

· the amount allocated to the year of the dividend payment or disposition would be taxable as ordinary income, and

· a U.S. Holder would be required to make an annual return on IRS Form 8621 regarding distributions received and gain realized with respect to Shares.

One method to avoid the aforementioned treatment is for a U.S. Holder to make an election to treat us as a qualified electing fund. A U.S. Holder that makes an election to treat us as a qualified electing fund (an “electing U.S. Holder”) is required for each taxable year to include in income a pro rata share of the ordinary earnings of the qualified electing fund as ordinary income and a pro rata share of the net capital gain of the qualified electing fund as long-term capital gain, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. A U.S. Holder may make a qualified electing fund election only if we furnish the U.S. Holder with certain tax information. We have agreed to supply an electing U.S. Holder with such information needed to report income and gain pursuant to a qualified election in the event Blue Square is classified as a PFIC. Alternatively, another method to avoid the aforementioned treatment is for a U.S. Holder to make a timely mark-to-market election in respect of its Shares. If a U.S. Holder elects to mark-to-market its Shares, any excess of the fair market value of the Shares at the close of each tax year over the adjusted basis in such Shares will generally be included in income. If the fair market value of the Shares had depreciated below the adjusted basis at the close of the tax year, the U.S. Holder may generally deduct the excess of the adjusted basis of the Shares over their fair market value at that time. However, such deductions generally would be limited to the net mark-to-market gains, if any, that were included in income by such holder with respect to Shares in prior years. Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of Shares with respect to which the mark-to-market election is made, is treated as ordinary income or loss.

Based on our estimated gross income, the average value of our gross assets, and the nature of our business, we do not believe that we will be classified as a PFIC in the current taxable year. Our status in any taxable year will depend on our assets and activities in each year and because this is a factual determination made annually at the end of each taxable year, there can be no assurance that we will not be considered a PFIC for any future taxable year. If we determine that we have become a PFIC, we will notify our U.S. Holders and provide them with the information necessary to comply with the qualified electing fund rules. If we are treated as a PFIC in any year during which a U.S. Holder owns Shares, certain adverse tax consequences could apply, as described above. Given our current business plans, however, we do not expect that we will be classified as a PFIC in future years.

You are urged to consult your own tax advisor regarding the possibility of us being classified as a PFIC and the potential tax consequences arising from the ownership and disposition (directly or indirectly) of an interest in a PFIC.

178

Backup Withholding and Information Reporting

Payments of dividends with respect to Shares and the proceeds from the sale, retirement, or other disposition of Shares made by a U.S. paying agent or other U.S. intermediary will be reported to the IRS and to the U.S. Holder as may be required under applicable U.S. Treasury regulations. We, or an agent, a broker, or any paying agent, as the case may be, may be required to withhold tax, currently at the rate of 28% (the backup withholding tax), if a non-corporate U.S. Holder that is not otherwise exempt fails to provide an accurate taxpayer identification number and comply with other IRS requirements concerning information reporting. Certain U.S. Holders (including, among others, corporations and tax-exempt organizations) are not subject to backup withholding. Backup withholding is not an additional tax. Any amount of backup withholding withheld may be used as a credit against your U.S. federal income tax liability provided that the required information is furnished to the IRS. U.S. Holders should consult their tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining an exemption.

U.S. Federal Income Tax Consequences to Non-U.S. Holders

Sale, Exchange or Retirement of Shares

A non-U.S. Holder generally will not be subject to U.S. federal income tax or any withholding thereof with respect to gain realized on a sale or other disposition of our Shares unless one of the following applies:

· the gain is effectively connected with the non-U.S. Holder’s conduct of a trade or business in the United States and, if required by an applicable income tax treaty, such gain is attributable to a permanent establishment maintained in the United States;

· the non-U.S. Holder is an individual who holds 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 meets certain other requirements; or

· the non-U.S. Holder is subject to tax pursuant to the provisions of United States tax law applicable to U.S. expatriates.

Backup Withholding and Information Reporting

Non-U.S. Holders generally are not subject to information reporting or backup withholding with respect to dividends paid on, or upon the disposition of Shares, provided that the non-U.S. Holder certifies to its foreign status and certain other conditions are met, or otherwise establishes an exemption.

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

Non-U.S. Holders are urged to consult legal and tax advisors in the countries of their citizenship, residence and domicile to determine the possible tax consequences of holding and selling Shares under the laws of their respective jurisdictions in light of their own particular circumstances.

F. Dividends and Paying Agents.

Not applicable.

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G. Statement by Experts.

Not applicable.

H. Documents on Display.

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

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

I. Subsidiary Information.

Not applicable.

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

The Company is exposed to various market risks, most of them related to changes in interest rates and changes in the Israeli CPI. Loans and Debentures in the amount of approximately NIS 2,030 million and marketable securities in the amount of approximately NIS 188 million bear interest at fixed rates, and therefore changes in the interest rates will affect the fair value of such loans and marketable securities. Other loans set forth below bear interest at variable rates (as a result of changing interest rates or CPI linkage), and therefore change in the CPI or the prime interest rate will affect future cash flow and interest expenses.

180

The table below provides information about Blue Square’s financial instruments as of December 31, 2009

	December 31, 2009 Expected maturity (NIS in thousands)
	2010		2011		2012		2013		2014		2015		2016 and thereafter		Total
Long term loan from banks - linked:
Linked to the Israeli CPI - 5.19% (weighted average rate as of December 31, 2009)		36,550		27,500		25,632		22,203		22,203		22,203		161,118		317,403

Long term loans from bank - unlinked:
Fixed annual interest rate of 7.11%		63,479		59,039		49,705		38,047		7,441		7,595		18,018		243,324
Variable interest (average annual rate as of December 31, 2009 of 3.19%)		31,483		28,068		20,183		15,693		2,567		3,205		66,301		167,500
		131,512		114,607		95,520		75,943		32,211		33,003		245,437		728,233
Non- Convertible debentures - Linked to the Israeli CPI:
Issued by the Company - fixed rate 5.9% (1)		75,906		-		50,604		50,604		50,604		-		-		227,718
Issued by BSRE - fixed rate 4.7%								212,379		212,379		212,379		212,379		849,516
Issued by BSRE - fixed rate 4.2%				22,543		22,543		22,543		22,543		22,543		187,856		300,571
Convertible Debentures Linked to the Israeli CPI:
Issued by the Company - fixed rate 5.9% (1)		-		15,093		-		-		-		-				15,093
Issued by BSRE - fixed rate 6.25%		-		-		-		27,404		27,404		27,404		27,404		109,616
		75,906		37,637		22,543		338,231		338,231		262,326		427,637		1,502,512
Marketable Securities - Linked to the Israeli CPI:		96,842														96,842
Marketable Securities – unlinked in NIS		91,070														91,070
Marketable Securities –in other currencies		-

(1)	See also “Item 5. Operating and Financial Review and Prospects - Liquidity and Capital Resources - Debentures”.

For CPI-linked financial instruments as stipulated in the table above, a one percent increase (decrease) in the CPI would cause an approximately NIS 13.3 million decrease (increase) in net income for the next year.

181

Inflation Risks

The Company has an excess of Israeli CPI-linked liabilities over Israeli CPI-linked assets (mainly in respect of outstanding debentures). As a result, an increase in inflation would have the effect of increasing our financial expenses without any offsetting increase in our assets and revenues on our financial statements, leading to lower reported earnings and shareholders equity. The extent of this effect on our financial statement would be dependent on the rate of inflation in Israel.

The table below provides information about the changes of the CPI and the “known" CPI index:

	CPI			The “known" CPI index

2007		3.4	%		2.8	%
2008		3.8	%		4.51	%
2009		3.9	%		3.82	%

The table below provides an analysis of monetary assets and liabilities by currency and linkage as of December 31, 2009:

	December 31, 2009
	NIS linked to CPI		NIS unlinked		US Dollar		Other currencies		Other*		Total
	NIS in thousands
Assets:
Cash and cash equivalents		-		612,227		-		-		-		612,227
Short term deposit		-		67		-		-		-		67
Investment in securities		96,842		91,070		-		-		25,000		212,912
Trade receivables		-		809,783		-		-		-		809,783
Other receivables		749		55,074		-		-		-		55,823
Income taxes receivable		84,274		-		-		-		-		84,274
Derivative financial instrument		9,690		-		425		-		12,266		22,381
Long-term receivables		3,275		-		-				-		3,275

Total assets		194,830		1,568,221		425		-		37,266		1,800,742

Liabilities:
Short-term bank credit and loans		365		142,721		-						143,086
Trade payables		-		913,948		3,460		177		-		917,585
Other accounts payable
and accrued expenses		24,860		462,818		-		-		-		487,678
Income tax payables		6,051		-		-		-		-		6,051
Provisions		-		51,298		-		-		-		51,298
Loans		317,409		410,824		-		-		-		728,233
Debentures		1,327,986		-		-		-		-		1,327,986
Convertible debentures		142,066		-		-		-		-		142,066
Long-term payable		8,398		3,357		9,164		-		-		20,919
Derivative financial instruments		-		-		1,075		6,516		-		7,591

Total liabilities		1,827,134		1,984,966		13,699		6,693		-		3,832,492

* Financial instruments that are not monetary assets.

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For further information regarding market risks, see note 3 to our consolidated financial statements.

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

A. to E. Not applicable.

183

ITEM 15.

CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. We performed an evaluation of the effectiveness of our disclosure controls and procedures that are designed to ensure that information required to be disclosed on Form 20-F and filed with the Securities and Exchange Commission is recorded, processed, summarized and reported timely within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There can be no assurance that our disclosure controls and procedures will detect or uncover all failures of persons within Blue Square to disclose information otherwise required to be set forth in our reports. Nevertheless, our disclosure controls and procedures are designed to provide reasonable assurance of achieving the desired control objectives. Based on our evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d) - 15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report are effective at such reasonable assurance level.

(b) Management’s Annual Report on Internal Control over Financial Reporting. Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that:

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.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

184

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework for Internal Control-Integrated Framework set forth by The Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and this framework, our management concluded that the Company's internal control over financial reporting were effective as of December 31, 2009.

(c) The effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 has been audited by Kesselman & Kesselman an independent registered public accounting firm in Israel and a member of PricewaterhouseCoopers International Limited, which has audited the financial statements included in this Annual Report on Form 20-F; their report is included in Item 17.

(d) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

The board of directors has determined that Avraham Meron is an "audit committee financial expert" as defined in Item 16A of Form 20-F and is independent in accordance with the NYSE listing standards for audit committees applicable to Blue Square.

ITEM 16B. CODE OF ETHICS

As of the date of this Annual Report, we have adopted a code of ethics that applies to our Chief Executive Officer, President, Chief Financial Officer, Corporate Controller and employees. This code of ethics is posted on our website, www.bsi.co.il/codeofethics.htm ..

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited, served as our independent public accountants for the fiscal years ended December 31, 2008 and 2009, for which audited financial statements appear in this Annual Report on Form 20-F.

The following table presents the aggregate fees for professional services rendered by such accountants to us during their respective term as our principal accountants in 2008 and 2009.

185

	2009		2008
	(NIS in thousands)		(NIS in thousands)
Audit Fees (1)		3,234		3,075
Audit-Related fees (2)		800		695
Tax Fees (3)		166		259
All Other Fees (4)		200		1,079
TOTAL		4,400		5,108

(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 Blue Square's and BSRE's shelf prospectuses and in connection with reports delivered to the Company's controlling shareholder.

(3)

Tax fees were for services related to tax compliance, including the preparation of tax returns and claims for refund, and tax planning and tax advice, including assistance with tax audits and appeals, advice related to mergers, acquisitions, transfer pricing, and assistance with respect to requests for rulings from tax authorities.

(4)

Other Fees were for general guidance related to accounting issues and due diligence in connection with potential acquisitions.

Audit Committee Pre-Approval Policies and Procedures

One of our audit committee’s main roles is to assist the board of directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and reporting practices of the Company. The Audit Committee oversees the appointment, compensation, and oversight of the public accounting firm engaged to prepare or issue an audit report on the financial statements of the Company. Our audit committee has adopted a pre-approval policy for audit and non-audit services.

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.

Not applicable.

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

Below is a list of purchases of the Company’s ordinary shares by the Company during calendar year 2010:

Period

Total

Number of

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

March 25, 2010

89,888

47.64

N/A

(1)

The Company purchased ordinary shares of the Company from certain officers of the Company, including the Chief Executive Officer, which shares were acquired by the executives upon their exercise of vested options granted to them under the Company's 2008 Share Option Plan. The total amount paid by the Company for such shares was NIS 4.3 million and the price per share was NIS 47.64.

186

On May 17, 2010, the audit committee and board of directors of the Company approved the acquisition by Blue Square from Alon Israel Oil Company Ltd. ("Alon") of all of Alon’s holdings in Dor-Alon Energy In Israel (1988) LTD. ("Dor Alon"), or the Acquisition, and it had signed a share purchase agreement with Alon, pursuant to which Blue Square would acquire from Alon all of Alon’s holdings in Dor Alon and each Dor Alon share held by Alon will be exchanged for 1.8 ordinary shares of BSI. This purchase is subject to the approval of the Acquisition by the general shareholders meeting of BSI, to be assembled on June 28, 2010.

ITEM 16F.

CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.

Not applicable.

ITEM 16G.

CORPORATE GOVERNANCE

Below is a summary of the significant differences between our corporate governance practices as a foreign private issuer and those required of U.S. domestic companies under New York Stock Exchange ("NYSE") listing standards.

Our corporate governance practices are derived from (i) the Israeli Companies Law, 1999 and the regulations promulgated thereunder, (ii) our Articles of Association and (iii) the rules of the NYSE applicable to foreign private issuers. As a foreign private issuer we are permitted to follow home country practice in lieu of certain provisions of Section 303A of the NYSE Corporate Governance Rules.

Majority of Independent Directors: Under NYSE Rule 303A.01, domestic listed companies must have a majority of independent directors. We do not have a majority of independent directors serving on our board of directors, although all of our audit committee members are independent directors.

Separate meetings of non-management directors: Under NYSE Rule 303A.03, the non-management directors of each domestic listed company must meet at regularly scheduled executive sessions without management. Our independent directors do not meet separately from directors who are not independent, other than in the context of audit committee meetings.

Nominating/corporate governance committee: Under NYSE Rule 303A.04, a domestic listed company must have a nominating/corporate governance committee composed entirely of independent directors. We do not have such a committee.

187

Compensation Committee: Under NYSE Rule 303A.05, a domestic listed company must have a compensation committee composed entirely of independent directors. We do have a compensation committee although it is not composed entirely of independent directors.

Audit Committee: Under NYSE Rule 303A.06, listed companies are required to have an audit committee that complies with the requirements of Rule 10A-3 of the Securities and Exchange Act of 1934. Rule 10A-3 requires the audit committee of a U.S. company to be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review, or attest services, and that each such firm must report directly to the audit committee.

Pursuant to the Israeli Companies Law, our auditors are appointed by the shareholders at the annual meeting of shareholders. Our shareholders have delegated to the board of directors and audit committee the authority to determine the amount to be paid to our auditors. Our audit committee is responsible for recommending to the shareholders the appointment of our auditors and for assisting the board of directors in overseeing the work of our auditors. In addition, pursuant to the Israeli Companies Law, our financial statements must be approved by our board of directors.

Equity Compensation Plans: Under NYSE Rule 303A.08, shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, with certain limited exemptions as described in the Rule.

We do not obtain shareholder approval of all our equity-compensation plans. Pursuant to the Israeli Companies Law, transactions with officers, directors, and controlling shareholders regarding the terms of their office and employment, including any compensation in securities, require special approval (including approval of the audit committee, the board of directors in the case of officers, and including approval of the board of directors and shareholders in the case of directors and controlling shareholders).

Corporate governance guidelines: Under NYSE Rule 303A.09, domestic listed companies must adopt and disclose their corporate governance guidelines. We have adopted a written Policy Regarding the Usage of Insider Information as well as Code of Ethics, although these do not satisfy the corporate governance guidelines referred to in Rule 303A.09.

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

ITEM18.

FINANCIAL STATEMENTS

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

ITEM 19.

EXHIBITS

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

Exhibit No.		Description

1.1		Memorandum of Association of the Registrant (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form F-1 (File No. 333-05024)).

1.2		Articles of Association of the Registrant.

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)).

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)).

189

Exhibit No.		Description

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) (incorporated by reference to Exhibit 4.11 to Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2008).

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).

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).

190

Exhibit No.		Description

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) (incorporated by reference to Exhibit 4.19 to Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2007).

4.20		Special Collective Bargaining Agreement made on April 5, 2009 among Blue Square, Blue Square Chain Investments & Properties Ltd., the MAOF Histadrut and Blue Square-Israel Employees' Union (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, 2008).

4.21		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).

4.22		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).

4.23		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).

4.24		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).

4.25		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).

4.26		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).

4.27		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).

4.28		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).

4.29		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).

191

Exhibit No.		Description

4.30		Transfer Agreement, dated March 31, 2009, between Blue Square Real Estate Ltd. and Blue Square Chain Properties & Investments Ltd., together with Addendum No. 1, dated September 13, 2009 (English translation).

4.31		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).

4.32		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).

4.33		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).

4.34		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).

4.35		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).

4.36		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).

4.37		Deed of Trust (for Series C to H Debentures) dated May 19, 2009, by and between Blue Square Real Estate Ltd. and Hermetic Trust (1975) Ltd., together with Addendum to Deed of Trust dated October 18, 2009 (English translation).

4.38		Deed of Trust (for Series C to G Debentures and Series H to J Debentures) dated February 18, 2010, between Blue Square and Hermetic Trust (1975) Ltd., together with First Schedule - Debenture Certificate for Series C to G, First Schedule - Debenture Certificate for Series H to J, and second schedule (English translation).

4.39		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) (incorporated by reference to Exhibit 4.35 to Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2007).

4.40		Sale Agreement, made on August 2, 2007, between Kfar Hasha'ashuim Central Warehouse Ltd. and Eldar Gil & Mahoney Assets Ltd., as amended (English translation) (incorporated by reference to Exhibit 4.36 to Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2007).

4.41		Share Purchase Agreement, dated August 3, 2008, between Bee Group Retail Ltd. and Twikor Ltd., Mr. Avner Katz, Mr. Doron Yanai, Mr. Ronen Levy, Avi Katz Marketing Ltd. and Levy R.S. Managements and Investments Ltd. (English translation) (incorporated by reference to Exhibit 4.38 to Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2008).

192

Exhibit No.		Description

4.42		Protocol, dated April 11, 2010, between Tel Aviv Wholesale Agricultural Produce Market Company Ltd., Tel Aviv Municipality, Lev Tel Aviv Towers Ltd. and Tel Aviv City Mall Ltd. (English translation)

4.43		Agreement, dated June 3, 2010, between Tel Aviv Wholesale Agricultural Produce Market Company Ltd., Lev Tel Aviv Towers Ltd. and Tel Aviv City Mall Ltd., together with Deed of Undertaking by the Interested Parties (English translation)

4.44		Agreement, dated June 3, 2010, between Tel Aviv Municipality, Lev Tel Aviv Towers Ltd., and Tel Aviv City Mall Ltd., together with Deed of Undertaking by the Interested Parties (English translation)

4.45		Document of Principles, dated April 15, 2010, between Blue Square Real Estate Tel Aviv Market Commercial Ltd., Blue Square Real Estate Tel Aviv Market Housing Ltd., Gindi Commercial Tel Aviv Ltd. and Gindi Housing Tel Aviv Ltd. (English translation)

4.46		Share Purchase Agreement, dated May 17, 2010, between Alon Israel Oil Company Ltd. and Blue Square Israel Ltd. (English translation) (incorporated by reference to Annex A to Blue Square’s report on Form 6-K, filed on May 27, 2010).

8.1		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 an Expert dated June 21, 2010.

14.(a).3		Consent of an Expert dated June 21, 2010.

14.(a).4		Consent of an Expert dated June 21, 2010.

193

BLUE SQUARE - ISRAEL LTD.

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2009

TABLE OF CONTENTS

		Page

REPORT OF INDEPENDANT REGISTERED PUBLIC ACCOUNTING FIRM		2-3

CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF NEW ISRAELI SHEKELS - NIS):

Statements of financial position		4-5

Statements of income		6

Statements of comprehensive income		7

Statements of changes in equity		8

Statements of cash flows		9-11

Notes to consolidated financial statements		12-102

APPENDIX - DETAILS OF PRINCIPAL SUBSIDIARIES, PROPORTIONATELY CONSOLIDATED COMPANIES AND ASSOCIATED COMPANIES		103


	Kesselman & Kesselman
	Certified Public Accountants
	1 Nathanson Street
	Telephone +972-4-8605000
	Facsimile +972-4-8605001

Report of Independent Registered Public Accounting Firm

To the shareholders of

BLUE SQUARE - ISRAEL LTD.

We have completed integrated audits of Blue Square - Israel Ltd and its subsidiaries and proportionately consolidated companies (collectively - "the Company") consolidated financial statements and of its internal control over financial reporting as of December 31, 2009, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our integrated audits, are presented below.

Consolidated financial statements

We have audited the accompanying consolidated statements of financial position of the Company as of December 31, 2009, 2008 and 2007 and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years ended on those dates. These consolidated financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our integrated audits.

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

In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of the Company as of December 31, 2009, 2008 and 2007 and the results of its operations, changes in equity and its cash flows for each of the years ended on those dates, in conformity with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

Internal control over financial reporting

Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


	Kesselman & Kesselman
	Certified Public Accountants
	1 Nathanson Street
	Telephone +972-4-8605000
	Facsimile +972-4-8605001

The Company’s Board of Directors and management are responsible for maintaining effective internal control over financial reporting and management is responsible for the assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting appearing under Item 15(b). Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our integrated audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includes performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Haifa, Israel		/s/ Kesselman & Kesselman
June 23, 2010		Certified Public Accountants (Isr.)
		A member of PricewaterhouseCoopers International Limited

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Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Alon Blue Square Israel (BSIRY) Inactive 20-F2009 FY Annual report (foreign)

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