Alon Blue Square Israel 20F 2011 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

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

For the fiscal year ended December 31, 2011

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 number1-14426

ALON HOLDINGS 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)

Ortal Klein, Corporate Secretary;

Tel: (972)-9-9618636; Fax: (972)-9-9618504

(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:

66,161,860 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.

xYes¨ 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 filerx 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 Boardx

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 “Alon Holdings” or the “Company” means Alon Holdings Blue Square - Israel Ltd., (b) the terms “we,” “us” and “our,” mean Alon Holdings and its consolidated subsidiaries, (c) “Mega Retail” means Mega Retail Ltd., (d) “Dor Alon” means Dor Alon Energy In Israel (1988) Ltd., a corporation of which we held approximately 78.38% of the outstanding ordinary shares as of March 31, 2012, and the balance of whose shares are publicly held and traded on the Tel Aviv Stock Exchange, and its subsidiaries (e) "Bee Group" means Bee Group Retail Ltd., a corporation of which we held 100% of the outstanding ordinary shares as of March 31, 2012, and (f) "BSRE" means Blue Square Real Estate Ltd., a corporation of which we held 78.22% of the outstanding shares as of March 31, 2012, and the balance of whose shares are publicly held and traded on the Tel Aviv Stock Exchange, and its subsidiaries.

We operate in four reporting segments. As of December 31, 2011, we were the largest retail company in Israel based on the number of stores. In our Supermarkets segment, we are the second largest food retailer in the State of Israel. In our “Commercial and Fueling Sites” segment, we operate a chain of fueling stations and convenience stores in different formats in Israel. We are conisdered to be one of the four major gas companies in 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 and projects.

Through our supermarkets, which are operated mostly through Mega Retail, we offer a wide range of food and beverage 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, 2011, we owned and operated 211 supermarkets under the brand names, Mega in Town, Mega Bool, Zol BeShefa (formerly known as "Shefa Shuk") and Eden Teva Market (“Eden Teva”).

As of December 31, 2011, Dor Alon supplied motor fuels, motor oil and other petroleum products to a network of 196 retail outlets operating under the “Dor Alon” brand. Integrated into most of Dor Alon’s public retail outlets are Diesel Fueling Centers (“DFC”) that sell diesel fuel for large vehicles such as trucks and buses at preferential terms. Dor Alon also supplies ARAL lubricants and Texaco lubricants in Israel. As of December 31, 2011, Dor Alon also operated 198 convenience stores, of which 149 were convenience stores branded “Alonit” and “Super Alonit” (called Alonit convenience stores in this Annual Report) and 49 convenience stores were operated by the AM:PM chain of stores. In addition, as of December 31, 2011, Dor Alon also operated 170 internal fueling stations.

As of December 31, 2011, our Non-Food segment consisted of 248 non-food retail outlets, mostly through franchisees, with activities in the houseware and home textile, toys, leisure, and baby and young children sectors. Our Non-Food segment operates under the brand names Naaman, Vardinon, Sheshet, Kfar Hasha’ashuim, All for a Dollar and Dr. Baby.

As of December 31, 2011, through BSRE, we were the legal owner (including through long-term leases from the Israel Land Administration and the Municipality of Tel Aviv) of 120 yield generating real estate properties (including properties owned in connection with our Supermarkets and "Non Food" segments, which includes warehouses and offices), totaling approximately 267,000 square meters, and approximately 182,000 square meters of unutilized building rights. In addition, we engaged in the development of the "Wholesale Market," a project totaling approximately 97,460 square meters (50% held by BSRE). In addition, BSRE operated in the area of residential real estate promotion and planning. For further information regarding our real estate, see “Item 4. Information on the Company - B. Business Overview – Our Real Estate.”

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

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 factors discussed 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, 2011, which was NIS 3.821 per $1.00, except figures for the first quarter of 2012, which are based on the representative exchange rate between the NIS and the dollar as published by the Bank of Israel for March 30, 2012, which was NIS 3.715 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

ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	7
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	7
ITEM 3.	KEY INFORMATION	7
ITEM 4.	INFORMATION ON THE COMPANY	39
ITEM 4A.	UNRESOLVED STAFF COMMENTS	98
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	98
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	142
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	165
ITEM 8.	FINANCIAL INFORMATION	187
ITEM 9.	THE OFFER AND LISTING	201
ITEM 10.	ADDITIONAL INFORMATION	204
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	220
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	223

PART II

ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	223
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	223
ITEM 15.	CONTROLS AND PROCEDURES	224
ITEM 16.	[RESERVED]	225
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	225
ITEM 16B.	CODE OF ETHICS	225
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	225
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.	226
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.	226
ITEM 16F.	CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.	227
ITEM 16G.	CORPORATE GOVERNANCE	227

Part III

ITEM 17.	FINANCIAL STATEMENTS	229
ITEM 18.	FINANCIAL STATEMENTS	229
ITEM 19.	EXHIBITS	229

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, 2009, 2010 and 2011 and for each of the years ended December 31, 2009, 2010 and 2011 from our consolidated financial statements and notes included elsewhere in this Annual Report. We prepare our consolidated financial statements in conformity with IFRS. We have derived the selected consolidated financial data as of December 31, 2007 and 2008 and for each of the years ended December 31, 2007 and 2008 from our audited consolidated financial statements not included in this Annual Report.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.

	For the year ended December 31,
Statement of Income Data	2007		2008		2009		2010		2011(3)		2011
In accordance with IFRS:	NIS (In thousands, except per ordinary share or ADS data)										$(1)

Revenues		6,981,984		7,429,121		7,349,076		9,227,453		15,296,255		4,003,207

Less – government levies		-		-		-		723,709		2,813,671		736,370

Net revenues		6,981,984		7,429,121		7,349,076		8,503,744		12,482,584		3,266,837
Cost of sales		5,129,578		5,369,149		5,291,012		6,192,352		9,566,876		2,503,762

Gross profit		1,852,406		2,059,972		2,058,064		2,311,393		2,915,708		763,075

Selling, general and administrative expenses		1,563,208		1,794,720		1,817,099		2,069,970		2,638,845		690,616

Operating profit before other gains and losses and changes in fair value of investment property		289,198		265,252		240,965		241,422		276,863		72,459

	For the year ended December 31,
Statement of Income Data	2007			2008			2009			2010			2011(3)			2011
In accordance with IFRS:	NIS (In thousands, except per ordinary share or ADS data)															$(1)

Other gains		15,835			12,233			4,699			3,258			1,358			355
Other losses		(12,755	)		(14,716	)		(32,803	)		(28,188	)		(19,577	)		(5,124	)

Changes in fair value of investment property, net		10,456			19,067			20,775			33,917			41,913			10,969

Operating profit		302,734			281,836			233,636			249,409			300,557			78,659

Finance income		60,978			60,700			64,780			85,852			156,837			41,046

Finance expenses		(118,297	)		(166,295	)		(177,454	)		(235,847	)		(332,839	)		(87,108	)

Finance expenses, net		57,319			105,595			112,674			149,995			176,002			46,062

Share of profit (loss) of associates		186			(33	)		(37	)		(518	)		5,746			1,504

Income before taxes on income		245,601			176,208			120,925			98,896			130,301			34,101

Taxes on income		69,779			43,806			23,124			36,287			46,588			12,192

Net income for the year		175,822			132,402			97,801			62,609			83,713			21,909

Attributable to:

Equity holders of the Company		143,628			104,586			77,163			47,839			59,513			15,576

Non-controlling interests		32,194			27,816			20,638			14,770			24,200			6,333

Earnings per Ordinary share or ADS attributable to equity holders of the Company:
Basic		3.39			2.41			1.77			0.96			0.90			0.24
Diluted		3.39			1.62			1.77			0.96			0.79			0.21

Cash dividends declared per ordinary share or ADS		6.52			3.46			-			14.01	(2)		1.13			0.3
Number of Ordinary Shares Outstanding at the end of each year:		43,372,819			43,372,819			43,717,058			65,990,879			66,161,860			66,161,860

(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, 2011 (NIS 3.821=$1.00), as published by the Bank of Israel. During 2011, the US dollar depreciated in value vis-à-vis the NIS by approximately 7.6%.

(2)

Including dividends paid of NIS 12.31 ($3.39) on October 18, 2010 after the issuance of 20,328 thousand shares as part of the acquisition of Dor Alon.

(3)

The statement of income for the year 2011 includes an impairment of trade receivables in the amount of NIS 10 million subsequent to the notice of Bee Group on April 18, 2012 that it had reached an agreement with a franchisee which had financial difficulties. See note 36f to the Consolidated Financial Statements.

	At December 31,
	2007		2008			2009		2010		2011			2011
	NIS (in thousands)												$⁽¹⁾
Balance Sheet Data:
In accordance with IFRS
Working capital (deficit)		47,436		(47,014	)		492,938		58,387		(484,400	)		(126,773	)

Total assets		4,215,725		4,444,873			5,165,497		8,770,208		9,094,217			2,380,062

Short-term credit from banks and others and current maturities of debentures		240,869		236,901			351,296		970,824		1,561,296			408,609

Long-term debt, net of current maturities		1,202,858		1,457,955			1,990,075		3,700,053		3,657,957			957,330
Total equity		1,247,680		1,100,896			1,226,724		1,582,139		1,543,200			403,874

(1)

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 Alon Holdings may decline. We cannot assure you that we will successfully address any of these risks.

Risks Related To Our Supermarkets

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.

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, 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. We intend to continue to expand our "Mega Bool" format, our hard discount store format, and our “Mega In Town” format designed to bring discount shopping to neighborhoods and city centers and our Zol Beshefa format.

In addition, smaller supermarket chains during 2010 and 2011 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. We estimate that our market share of the total retail market of food, beverages and tobacco decreased to 13.4% in 2011 from 14.3% in 2010. The market share of the other major supermarket chain, Shufersal, based on its financial reports was approximately 20.9% of the total retail market of food, beverages and tobacco in 2011 compared to 22.7% in 2010 (market share estimates are based on the calculation of the Central Bureau of Statistics of the total retail market for food, beverages and tobacco for 2010, and our estimate for market growth of 3.7% in 2011). The low barriers of entry, including the relatively low cost of establishing a new smaller supermarket chain, have contributed to the increase in the 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.

Since 2005, a number of smaller supermarket chains which previously operated on a 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. Since 2006, the Fourth Chain Company has marketed a private label brand. This combination, and possible similar combinations of other smaller supermarket chains, may generate the efficiencies of a major nationally-spread chain and enable them to compete more efficiently with us.

Shufersal is our main competitor in the supermarkets segment in Israel. In 2011, Shufersal had sales of NIS 11.5 billion (U.S. $3 billion) in the supermarket segment as opposed to our sales of NIS 6.7 billion (U.S. $1.7 billion). The 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 that we will be able to maintain our sales and market share.

Economic conditions in Israel affect our financial performance.

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 2009 and 2010, Israel's Gross Domestic Product rose by 0.7% and 4.7%, respectively. Reports of the Israeli Central Bureau of Statistics indicate that during 2011 Israel's Gross Domestic Product rose by 4.8% as a result of an increase in exports. Initial reports indicate that gross domestic product increased by 3.0% (annualized) during the first quarter of 2012. We believe that, despite the economic growth in 2011 and beginning of 2012, our customers continue to be cautious in their buying patterns and continue to choose to make their purchases at low-price and hard discount stores, which have a lower profit margin. As a result, we have continued to expand our low-price and hard discount store formats.

In addition, in connection with the public protests described under "Risks Related To Our Business As A Whole – Establishment of government committees and protests against high cost of living may adversely affect our business", there were protests in Israel against the supermarket chains and a number of the products that we sell. If these protests continue, this may materially adversely affect our sales and profits.

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. To the best of the Company's knowledge, some of the collective acquisition entities of Kibbutzim in Israel that hold shares in Alon, our controlling shareholder, also hold approximately 23% of Tnuva. In 2011, Tnuva’s products accounted for approximately 14.5% 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 2011 for approximately 9.1% of all products sold at our supermarkets, and the Osem group accounted for approximately 8% of all products sold at our supermarkets in 2011. Due to our status as a leading food retailer in Israel which allows us to offer a wide assortment of products and promotions, on a national level, of these suppliers’ products, and the fact that we maintain an excellent and long-standing relationship with Tnuva, the Strauss group and Osem, we do not believe that there is a material risk of future discontinuance of the 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 58.4% of our product purchases in 2011. 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 in Israel and which also distributes other popular soft drinks. 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.

The recommendations of the "Kedmi Committee" may materially adversely affect our ability to purchase additional branches or obligate us to sell some of our branches and may materially adversely affect our sales and profits.

In June 2011, the Kedmi Committee was appointed in order to examine the level of competition and prices in the food and retail industry. In November 2011, the Kedmi Committee published its interim recommendations, including restrictions on retailers' growth considering their market share, providing the regulator with authority to demand information regarding prices in the supply chain restrictions on the manufacturer's ability to affect competition, control on certain products' prices of substantial manufacturers, assistance to small businesses to integrate in the sales in the retail chains, among others, by limitating the shelves spaces of dominant suppliers, and recommendations regarding strengthening the consumer's power. To the Company's knowledge, the Kedmi Committee published a draft of most of its recommendations during January and February 2012 to the Minister of Industry, Trade and Employment Office and the Minister of Finance. As of the date of this Annual Report, we cannot estimate what will be the final recommendations of the Kedmi Committee, and therefore we cannot estimate their impact on the Company. However, if the aforementioned recommendations will be adopted, they materially adversely affect our ability to purchase additional branches in specific areas or could obligate us to sell some of our branches, may materially adversely affect our sales and profits, and may adversely affect our relationships with the suppliers due to limitations on shelves spaces. For additional information on this matter, see "Risks Related To Our Business As A Whole – Establishment of government committees and protests against high cost of living may adversely affect our business".

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 a large portion of the products we carry to our supermarkets. The products distributed by our distribution center to our supermarkets made up approximately 22.4% of our total purchases during 2011. In addition, we are planning an additional distribution center for our supermarkets which we expect to be completed by the end of the first half of 2013. Our inability to utilize the distribution centers for any reason may significantly impair our ability to distribute our products to our supermarkets and would adversely affect our profit margin.

Negative opposition by certain segments of Israel’s ultra-orthodox population against our Zol BeShefa (formerly known as "Shefa Shuk") stores in the future could affect our financial results.

In 2008, following media reports that certain segments in that community may declare a boycott against our Zol BeShefa stores, the Company 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. Although the Company is unaware of any negative opposition at this time, the Company could experience another decrease in sales of its Zol BeShefastores in the future. As of December 31, 2011, we operated 16 Zol BeShefastores compared to 12 as of December 31, 2010. Any negative opposition may adversely affect the company's financial results.

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. 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. In 2011, we requested to purchase four of our competitors' branches, in Ashkelon, Or Akiva, Beer Sheva and Hadera; however the Commissioner approved the purchase of only two of the branches, in Ashkelon and Or Akiva. Such limitations may materially adversely affect our ability to expand our business and compete effectively against our competitors.

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 issued a directive in which he prohibited these practices unless approved by the Restrictive Trade Practices Court or exempted by the Commissioner himself.

Among the practices that were found to be restrictive according to the Commissioner were the following: arrangements with suppliers that determine the suppliers of the retail chains, their identity and their number; arrangements for the management of product categories in conjunction with suppliers; arrangements regarding the retail selling price; arrangements for determining the market share of a particular supplier’s products and arrangements for determining prices made by suppliers to competing chains; and arrangements with regard to the use of suppliers’ manpower to stock merchandise on the shelves of the chains’ stores. Limits were imposed on financial incentives to the chains with regard to display areas and on special offers to chains for meeting certain sale targets. Although the Commissioner's 2005 position paper determined that the use of suppliers’ representatives to physically arrange the shelves in the chains’ stores may be considered a restrictive arrangement, the Commissioner agreed not to take enforcement measures with regard to such arrangements until February 2012 so long as such arrangements satisfy certain conditions. In February 2012, the Company submitted a request for an exemption from restricted agreement for 21 months (until September 2013), although the Company believes that such arrangements are not restrictive arrangements. The Commissioner is reviewing the request and agreed not to take enforcement measures with regard to such arrangements until his decision on the request. Self arrangements will require the employment by the Company of many new employees, increasing our employment costs. This may materially adversely affect the Company's profits unless the Company is able to pass these costs to suppliers.

We have been applying most of these directives using 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.

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; and 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.

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

The Israeli government is authorized to control the retail and wholesale prices of goods and services offered in Israel. At present, only a few of the products we offer in our stores are subject to government-imposed price controls. In addition, during periods of high inflation in the past, more extensive price controls were imposed throughout Israel.

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

Risks Related To Fueling Stations and Convenience Stores

Price increases in petroleum products and increases in excise tax rates may have a material adverse effect on the earnings and profitability of Dor Alon.

The primary factors affecting the price of petroleum products in Israel are the prices of petroleum products in the Mediterranean Basin, foreign exchange rates and the excise taxes imposed on the sale of petroleum products in Israel. In the last few years, fuel prices worldwide and in Israel have fluctuated significantly with a sharp increase in fuel prices in the first nine months of 2008 and a sharp decrease in the last quarter of 2008 and the beginning of the first quarter of 2009. Since 2009, there has been an increase in fuel prices. Fluctuations in fuel prices have a direct effect on Dor Alon’s working capital.

Generally, an increase in fuel prices causes increases in the value of Dor Alon’s inventory and increases the volume of customer credit that Dor Alon extends to its customers and, therefore, also increases Dor Alon’s working capital requirements and increases its exposure to customer credit risk. Increased working capital requirements result in increased finance expenses.

The excise tax component of certain fuel prices such as diesel oil, kerosene and gasoline is significant. Excise tax is imposed directly on fuel companies at the time of sale of fuel to customers and is generally payable within 10 days after the sale, while the credit line provided by Dor Alon to its customers is significantly longer. Since 2006, the excise tax on diesel fuel and kerosene has been increased substantially. As Dor Alon’s working capital requirements increase due to the increases in excise taxes, it will be required to procure additional credit facilities and incur additional financing expenses. Failure to obtain additional credit facilities would have a material adverse effect on the business, financial condition and results of operations of Dor Alon.

The demand for Dor Alon’s petroleum products is materially affected by the state of the Israeli economy. An economic slowdown may cause a decrease in demand and have an adverseeffect on Dor Alon’s profit margins and exposure to customer credit risk.

The demand for Dor Alon’s products and petroleum products in general is materially affected by the state of the Israeli economy. An economic slowdown may cause a decrease in demand for Dor Alon's products and have an adverse effect on Dor Alon's profit margins and exposure to customer credit risk. However, some petroleum products sold by Dor Alon are considered basic products which have a fixed demand.

Dor Alon is exposed to fluctuations in the foreign exchange rate, interest rates and the consumer price index, which could materially adversely affect its financial results.

Dor Alon has loans in New Israeli Shekels and in U.S. Dollars, some of which are subject to floating interest rates and some are linked to the Israeli consumer price index. Due to these loans and the consumer price index linked debentures issued by Dor Alon, Dor Alon is exposed to changes in bank interest rates, in the Israeli consumer price index, and in the U.S. Dollar - New Israeli Shekel exchange rate. Additionally, Dor Alon is exposed to fluctuations in the U.S. Dollar - New Israeli Shekel exchange rate due to credit that Dor Alon obtains from its suppliers (mostly from Oil Refineries Ltd., which is linked to the U.S. Dollar). Increases in interest rates or in the Israeli consumer price index and depreciations of in the New Israeli Shekel vis-a-vis the U.S. Dollar exchange rate could materially adversely affect Dor Alon’s financial results.

Competition in the energy industry is intense, and an increase in competition in the market in which Dor Alon sells its products could adversely affect the earnings and profitability of Dor Alon.

Competition in the Israeli energy industry is intense and has even increased in recent years. Dor Alon’s major competitors are large fuel companies in Israel: Paz Oil Company Ltd. (“Paz”), The Delek Israel Fuel Corporation Ltd. (“Delek”) and Sonol Israel Ltd. (“Sonol”). The principal competitive factors affecting the retail fuel marketing business are location of retail outlets, brand identity, product price, the variety of related services offered to customers, the level of service, financial strength allowing the establishment of new retail outlets, procurement of petroleum products at competitive prices and the terms offered to fleet customers, real estate owners and/or owners of retail outlets.

With respect to its direct marketing operations, Dor Alon expects to face continued competition from Paz, Delek and Sonol, the fueling companies Pazgas, Amisragas and Supergas, and small fuel marketing companies as well as LPG marketing companies, consisting mainly of subsidiaries of Paz, Delek and Sonol. The principal competitive factors in the direct marketing business are product price, credit terms and levels of service. Increases in competition may adversely affect the earnings and profitability of Dor Alon. In addition, Dor Alon may face competition from Oil Refineries Ltd., or ORL, after its privatization and increased competition from Paz which now owns one of the two oil refineries in Israel.

If ORL fails to supply refined products or supplied them at non-competitive prices, this may have a material adverse effect on the profitability and results of operations of Dor Alon.

Oil Refineries Ltd., or ORL, constitutes the main source of supply for Dor Alon and other fuel companies in Israel. If ORL fails to supply refined products or supplied them at non-competitive prices, Dor Alon would have to increase the volume of refined petroleum products it imports. If Dor Alon cannot import such products in adequate quantities or at competitive prices, it would have a material adverse effect on the business and results of operations of Dor Alon. The privatization of ORL may therefore have a material adverse effect on the profitability and results of operations of Dor Alon.

The recommendations of the Trachtenburg Committee may have a material adverse effect on Dor Alon's results of operations.

In July 2011, a public protest began in Israel with regard to high housing costs. In response to these protests, in August 2011 the Israeli Government formed the Trachtenburg Committee whose role, inter alia, was to examine the living costs in Israel and the influence that the lack of competition in the marketplace has had on these costs and to propose solutions to these issues. In September 2011, the Trachtenburg Committee published its recommendations regarding competition in the fueling stations sector, including the imposition of price control on diesel oil, strengthening independence of fueling stations and providing priority to the establishment of independence fueling stations which are not large fuel companies. Due to such recommendations, in December 2011, Dor Alon received a letter from the Joint Committee of Prices, the Ministry of Energy and Water and the Ministry of Treasury, stating that the committee intends to examine the imposition of price control on the marketing margin of diesel oil for transportation in the fueling stations. The committee's recommendations regarding competition in the LPG market were published in December 2011. If the aforementioned recommendations will be adopted, they could materially adversely affect Dor Alon's results of operations. For additional information on this matter, see "Risks Related To Our Business As A Whole – Establishment of government committees and protests against high cost of living may adversely affect our business".

Dor Alon is exposed to risks associated with changes in regulatory arrangements which may influence the financial results of Dor Alon, including as a result of marketing margins in connection with the sale of 95 octane gasoline.

Dor Alon’s activities are affected by regulatory changes, which apply from time to time to the fuel industry in Israel, including with respect to the procurement of petroleum products by fuel companies, the price of petroleum products that are subject to regulation and maintenance of an emergency supply of fuel.

The removal of the regulation of prices at the gate of ORL as a result of the privatization of ORL allows the refineries to modify sale prices on a daily basis (and not on a monthly basis as had previously been the practice), while the prices of one of the products which Dor Alon sells (benzine octane 95) has remained regulated and is set once a month, which exposes Dor Alon to risks associated with the change of prices of refined products. Dor Alon may not be able to pass the increased costs of refined products on to customers.

On February 15, 2011, Dor Alon received a letter from the Ministry of Energy and Water (formerly known as the Israeli Ministry of National Infrastructure). The letter included a report addressing, among other things, the methodology used in determining marketing margins in connection with the sale of 95 octane gasoline, the price of which is currently regulated. On August 31, 2011, Dor Alon received from the Israeli Ministry of Energy and Water an order pursuant to which the Ministers of Treasury and National Infrastructure decided to reduce the marketing margin in connection with the sale of full service gasoline. The decrease in marketing margins is expected to have a material adverse effect on Dor Alon’s profits. On September 1, 2011 Dor Alon submitted a petition to the Supreme Court sitting as the High Court of Justice to suspend the effectiveness of the order and to nullify it. On September 19, 2011, the Supreme Court ruled that the Ministry of Energy and Water and the Pricing Committee must reevaluate their decision based on updated data that Dor Alon and the other gas companies will submit to the Ministries, and present their decision on the matter within three months of the hearing, during which time the order shall remain in effect. On April 5 2012, Dor Alon received from the Israeli Ministry of Energy and Water a document which was sent to the top five large gas companies in Israel, with a reevaluation of the marketing margin in connection with the sale of 95 octane gasoline (the "Draft Reevaluation"). The Draft Reevaluation relates to data received from Dor Alon with respect to years 2009 and 2010, and is in connection with the legal proceedings carried out in the Israeli Supreme Court in this matter. The Draft Reevaluation includes, among others, recommendations to reduce the marketing margin in the sale of self service 95 octane gasoline, from NIS 0.589 (including VAT) per liter to approximately NIS 0.575 (including VAT) per liter, as well as to reduce the full service charge from NIS 0.18 (including VAT) per liter to approximately 0.11 (including VAT) per liter. In a side letter to the Draft Reevaluation, it is clarified by the Prices Committee that the Draft Reevaluation is deemed as a draft before hearing procedure, and that the gas companies are invited to forward their reference to the Draft Reevaluation in writing, by April 26, 2012. Under the discretion of the Prices Committee, an oral hearing will be carried out with companies that will send their response. If the recommendations of the Draft Reevaluation are adopted in whole or in part, they are expected to have an adverse effect on Dor Alon’s results. As of the date of this Annual Report, we cannot evaluate the final measure of impact so long as a final decision has not been made. Dor Alon argues the conclusions reached by the Ministry of Energy and Water (through its Oil Administration), and the methodology used by it in its examination. To Dor Alon's opinion, based on its examinations, the Oil Administration should have materially increased the marketing margin. Dor Alon will continue to act in all legal means in order to change the said recommendations of the Draft Reevaluation, including through the legal proceedings held at the Supreme Court sitting as the High Court of Justice. Dor Alon is also examining steps to mitigate the effect on its profits resulting from the reduction of the marketing margins, among others, by reducing the discounts in fueling stations and to fleet customers and reducing its expenses. Dor Alon began taking such steps during the fourth quarter of 2011 and is also working to improve its profitability by broadening its business activities, such as supplying automobile gas, holdings in the "Tamar" gas field, and entering into the indusrty of power plants for creating electricity.

Changes in the regulatory arrangements, as described above, or new arrangements may influence the results of Dor Alon.

Dor Alon may incur costs to comply with petroleum product and environmental regulatory controls related to its operating activities.

The sale and distribution of petroleum products in Israel is subject to extensive regulation and supervision that is focused on preventing potential harm to the environment (principally water, air and soil contamination) and maintaining public safety. Petroleum products are classified, under certain circumstances, as hazardous materials that are potentially contaminating. Therefore, handling and dealing with these products in Israel is subject to regulation and supervision. In recent years, enforcement of the laws in Israel concerning environmental issues has become more stringent. These developments will likely increase the costs required to construct and maintain Dor Alon’s retail outlets and private fueling stations. If Dor Alon does not comply with the abovementioned regulatory controls, it may be subject to litigation by regulatory authorities, third party claims, class action lawsuits and other litigation in addition to the risk of losing, conditioning or delaying the business permit of fueling stations with environmental contamination. Furthermore, defending ourselves against regulatory violations alleged by regulatory authorities or consumers may in the future require substantial financial and management resources.

Dor Alon is dependent on the Palestinian Authority as a principal customer.

Dor Alon is the exclusive supplier of certain petroleum products to the Gaza Strip.

In October 2008, the Ministry of Defense imposed certain restrictions on Dor Alon, following which Dor Alon ceased to provide certain petroleum products to the Gaza Strip (while continuing to provide other products). Following Israel’s December 2008 military operation in the Gaza Strip, there was a sharp decrease in sales to the Palestinian Authority, and Dor Alon’s gross profits decreased as a result of the decrease in fuel prices during the operation. Commencing July 2009, Dor Alon was allowed to renew providing petroleum products to the Palestinian Authority, subject to certain limitation imposed by the Ministry of Defense.

In 2008 and 2009, sales to the Palestinian Authority sharply decreased as a result of operation "Cast Lead". During 2011, Dor Alon provided relatively small quantities of LPG and other petroleum products, some of which were ordered by the Palestinian Authority and some of which were ordered by donor countries.

If sales to the Palestinian Authority were to be interrupted in the future, it may have an adverse effect on the results of operations of Dor Alon’s direct marketing sector.

Dor Alon is exposed to customer credit risk that may increase with future increases in the price of petroleum products.

Currently, accepted practice in the fuel marketing industry in Israel is to grant customers (especially fleet customers and commercial customers) a credit line for the purchase of products for extended periods without any security interest. In each of the Retail Outlets and Convenience Stores operation and the Direct Marketing operation, Dor Alon grants customers credit for up to 90 days. During 2011, Dor Alon had an average of NIS 588 million in outstanding customer credit (30 credit days) in the Retail Outlets and Convenience Stores operation, and an average of NIS 428 million in outstanding customer credit (90 credit days) in the Direct Marketing operation. As a result of the extension of customer credit, Dor Alon is exposed to the risk of delayed collections and nonpayment of debt.

For more information on the effects of credit risks on Dor Alon, see the risk factor above entitled “Dor Alon is dependent on the Palestinian Authority as a principal customer.”

Increases in the price of petroleum products and in excise taxes as well as competition in the industry in which Dor Alon operates lead to increases in the amount of credit granted to customers. This would lead to a potential increase in the exposure to credit risks and to an increase in Dor Alon's working capital requirements. This would require Dor Alon to obtain additional credit lines. Inability to obtain such additional credit lines may limit Dor Alon’s ability to conduct its business.

Rights to fueling stations in the Dor Alon Chain are subject to agreements with third parties who may not renew the agreements or worsen their terms which could affect Dor Alon's profitability.

The majority of fueling stations in the Dor Alon Chain are stations owned by third parties with whom Dor Alon entered into agreements to rent and operate fueling stations or to supply fuel. The expiration of such agreements may result in the owners of stations not renewing their agreements with Dor Alon and entering into agreements with other gas companies, or the owners of the stations may worsen the terms of the agreements with Dor Alon, which would result in a loss of profits.

Some of Dor Alon’s convenience stores operate on the Jewish Sabbath, holidays and nights. If Dor Alon is required to close some of its stores at these times, it may have an adverse effect on its results of operations.

Most of Dor Alon’s fueling stations and some of its convenience stores operate on the Jewish Sabbath (Saturday). According to Section 9 to the Hours of Work and Rest Law, 1951, or the Work and Rest Law, the employment of Jewish workers on Saturday is subject to a permit issued by the Labor Minister. Dor Alon does not possess such a permit. The Work and Rest Law also prohibits a store owner from trading in his store during the days of rest as they are defined in the Arrangements of Government and Law Ordinance, 1948.

Anyone who employs workers in violation of the Work and Rest Law, is subject to a fine or imprisonment of up to a month, or both. According to the Administrative Offence Regulations, a violation of Section 9 or 9A to the Work and Rest Law is an administrative offence subject to an administrative fine.

The convenience stores in the AM:PM chain of stores also operate during the night and on Saturdays. Based on information obtained from Dor Alon, in the cities in which AM:PM operates, there are municipal regulations limiting activities during the night and on Saturdays. Most of the AM:PM stores have obtained permits to operate at night. If some of these stores are required to close on Saturdays or at night, it may have an adverse effect on Dor Alon’s results of operations.

The involvement of the Israeli Anti-Trust Commissioner in the Israeli fuel industry may restrict Dor Alon’s activity and its expansion by way of acquiring businesses and companies in its field of activity.

In the past, the Israeli Anti-Trust Commissioner has become involved in the fuel industry on a number of occasions, including in relation to the privatization of ORL, exclusivity agreements involving Paz, Delek and Sonol and in approving the acquirement of a controlling stake in Dor Alon by Alon. In each of these cases, the Israeli Anti-Trust Commissioner imposed restrictions on the companies involved relating to their activities in the fuel industry.

Continued involvement by the Israeli Anti-Trust Commissioner in the Israeli fuel industry in the future may restrict Dor Alon’s future operations as well as limit its ability to expand by acquiring businesses and companies.

Political, economic and military instability in Israel may impede Dor Alon’s ability to operate and harm its financial results.

In addition to the risks described below in the risk factor entitled "Risks Related To Our Business As A Whole - Political conditions in Israel affect our operations and may limit our ability to sell our products," the security situation in Israel tends to affect recreational activities of private automobile owners in Israel, and as a result, affects their consumption of petroleum products. Deterioration in the security situation causes a decrease in the consumption of petroleum products in Israel. Additionally, a substantial customer of Dor Alon for the past few years has been the Palestinian Authority, and any deterioration in relations between Israel and the Palestinian Authority may lead to deterioration in trade relations between the Palestinian Authority and Israeli parties, including Dor Alon, could adversely affect Dor Alon’s results of operations in the direct marketing sector. Additionally, the supply of fuel to the Gaza Strip is affected by the restrictions imposed on Dor Alon by the Israeli Ministry of Security. Moreover, during 2010 the Ministry of Defense restricted the fuel supply from the fuel terminal at Nahal Oz, resulting in Dor Alon having to supply fuel through the Kerem Shalom terminal.

In addition, the general security situation in Israel affects the incoming and outgoing tourist industry in Israel and the airlines’ volume of activity, which in turn affects Dor Alon’s activities in supplying jet fuel to these airlines.

Risks Related To Our Non-Food Segment

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

The merchandise we sell in our non-food retail and wholesale business is varied, and we therefore compete in several different markets. 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 and wholesale industry has increased, primarily due to the entry of retail chains and stores from outside the food industry, such as Toys “R” Us, Red Pirate and other specific stores in the toy industry, and 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., Fox Home 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, in the houseware industry. This competition affects the selling prices of our products and the level of our sales. Our Sheshet chain is positioned as a chain that provides products at competitive prices. Increased competition may adversely affect our level of sales and our profitability.

In addition, the barriers of entry are low in some of the markets in which our non-food retail segment 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 selling prices of our products and lead to a reduction in our profitability.

Economic conditions in Israel affect our financial performance.

Our financial performance is dependent to a significant extent on the economy of Israel. Global economic instability and uncertainty affected our non-food retail and wholesale business in the past by causing a slowdown in the growth of private consumption, which affected the growth of our houseware, home textile, toys, leisure, and baby and young children accessories businesses. Although there has been a recovery in the Israeli economy which resulted in an improvement in the growth of private consumption, further economic instability, uncertainty or slow down could affect the growth of our businesses.

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.

Some of our bed textile products are sewn in the Palestinian Authority. If there is a closure of the borders between Israel and the areas governed by the Palestinian Authority for security reasons, this could affect the transport of persons and goods and can harm the supply of products from these sewing workshops. From our past experience, there were no significant delays in the supply of products from these sewing workshops during such closures. Furthermore, sudden and unexpected interruption in supply by one of Vardinon's suppliers can cause a shortage in products which that supplier supplied for a period of several months until the beginning of supply from an alternative supplier.

In addition, one of Naaman's key suppliers operates in Turkey. There have recently been significant tensions between Turkey and the State of Israel that have raised questions as to whether commercial arrangements between companies in these countries would be adversely impacted. If tensions between Turkey and Israel continue or worsen, our Turkish supplier may cease supplying products to Naaman in the short run, and then we would need to locate and qualify alternate suppliers, which could take time, increase our costs and adversely affect the quality of our products. We may also experience a delay in receiving products from an alternate supplier which could materially and adversely impact our reputation and results of operations.

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

We hold and operate, through our subsidiaries, large retail chains with a total 248 stores as of December 31, 2011, of which 147 stores of our "Kfar Hasha'ashuim", "Dr. Baby", "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 the franchised stores.

Subject to the terms of our franchise agreements, 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, some of 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.

In addition, we provide our franchisees with credit as part of our franchise agreements. We have had difficulties collecting amounts due to us from franchisees, and during the second half of 2011, we wrote off some of the debt owed to us by franchisees. If we continue having difficulties collecting debt from franchisees, we may decrease our sales to the franchisees and increase our doubtful accounts, which could materially and adversely impact our sales and 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 Be'er Tuvia from which we distribute a large portion of the products we carry to our non-food retail outlets. The products distributed by our distribution centers to our non-food retail outlets made up approximately 55% of our total purchases during 2011 (In the year 2010, this distribution center only served Vardinon and Kfar Hasha’ashuim and during the second half of 2011, this distribution center began to be fully used and also served Naaman, "Dr. Baby" and Mega Retail). A shortage of inventory in our distribution center and our inability to utilize this distribution center for any reason may significantly impair our ability to distribute our products to our non-food retail outlets and would adversely affect our profit margin.

Disruptions of the Israeli ports may affect our ability to import products used in our non-foodretail business.

Our non-food retail segment 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 non-food retail stores is before or during the holidays, disruptions in the ports before or during such holiday seasons may adversely affect our sales and financial results.

Political and economic conditions in China may affect the operating results of our non-foodretail segment.

Most of our non-food retail segment's imports are from suppliers located in China. Because most of the products sold by our non-food retail segment are manufactured in and imported from China, its activity may be affected by changes in the political and economic conditions in China. For instance, any material change in the NIS-Chinese currency exchange rate may increase our manufacturing costs and increase the price of those imported products from China.

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 the state of the economy.

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.

Risks Related 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 is held 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 a change of zoning.

A 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 was 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. The year 2010 was marked by a shift from an economic slowdown in Israel in the first half of the year to the beginning of a recovery of the Israeli economy toward the end of the year, and such recovery continued during 2011. However, the signs of an economic slowdown and the resulting consequences may have not yet completely subsided and the debt crises generated in Europe may have a future adverse affect on the economic conditions in Israel. During 2011 and the begining of 2012, it was still difficult to receive financing from the banks and other sources in Israel and abroad, which has adversely affected the yield-generating real estate market. In addition, the public protest which began in July 2011 among others with regard to high housing costs in Israel led to a slowdown in the Israeli yield-generating real estate market which was evidenced by a decline in the demand for real estate during the second half of 2011 due to the sharp increase in real estate prices and the public's anticipation that such prices will decrease due to the public protest. If the economic conditions in Israel were to deteriorate, 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.

Most of BSRE's activities, including its wholesale market project, are largely 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. As of December 31, 2011, BSRE had long term loans including debentures in the outstanding amount of approximately NIS 1.7 billion. 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. For more information, see "Item 4. Information on the Company - B. Business Overview - Real Estate - Transfer of Real Estate Assets from Mega Retail to BSRE", "Item 5. Operating and Financial Review and Prospects - Liquidity and Capital Resources - BSRE Series D Debentures", and Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Agreement with the Wholesale Market Company.”

Economic conditions in Israel and Abroad affect our financial performance.

We value our yield-generating real estate property at fair value according to IAS 40 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.

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

Since 2010, we have entered into the residential building sector in Israel. A recession may cause a decrease in the scope of 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.

Moreover, since 2010, we have entered the area of promotion and planning of residential real estate. There are different risks in this sector including: exposure to changes in the demand for residential properties as a result of changes in the economy, especially as a result of a recession or a significant deterioration in the economy; the speed at which local planning authorities and cities that affect the project timetables approve the building projects; changes in and increases to the stringency of building and planning laws and regulations, which may require the Company to incur additional expenses; lack of human resources in the building sector, as a result of the government's policy for employing foreign workers, or 'closures' for security reasons as well as delays or continuing lack of raw materials, for example as a result of the closure of Israel's ports, that may affect the Company's ability to meet the original timetables as well as its originally contemplated costs; and changes in the government's policies for the granting of mortgages, which affect the level of demand for residential properties.

Risk Related To Our Business As A Whole

Establishment of government committees and protests against high cost of living may adversely affect our business.

In July 2011, a public protest began in Israel with regard to high housing costs. This protest evolved into a wide scale public demonstration encompassing many other issues, including claims that the cost of living has increased out of control and must be regulated. As a result of these protests, we saw a decline in sales in our Supermarket segment in the second half of 2011. In response to these protests, in August 2011 the Government of Israel formed the Trachtenburg Committee whose role, inter alia, was to examine the living costs in Israel and the influence of the alleged lack of competition in the marketplace has had on these costs and to propose solutions to these issues. The Knesset has already adopted the Trachtenburg Committee's recommendation relating to an increase in our corporate taxes and to an increase of competition between fueling stations. The public protests also added a greater urgency to the governmental-appointed Centralization Committee, which had been appointed in October 2010 to examine market concentration in the Israeli economy, which is characterized by a small number of groups that control major business areas, and its effect on the level of competition, market efficiency and financial stability, and propose measure to address. An additional committee has been appointed by the Israel Industry, Trade and Employment Office and by the Minister of Finance to examine the food market (the Kedmi Committee). These developments may have a material impact on the Israeli economy in general as well as the industries in which we compete, and proposals by any such committees could materially adversely affect our business by materially adversely affecting our growth and our profitability. These developments could materially adversely affect our ability to open new supermarkets and convenience stores and the profitability of our existing supermarkets and convenience stores and materially affect our real estate development business. These developments and proposals by any such committees could particularly adversely affect our Supermarkets segment in light of the fact that we are the second largest supermarket chain in Israel. For additional information on this matter, see "Risks Related To Our Supermarkets - The recommendations of the "Kedmi Committee" may have a material adverse effect on our ability to purchase additional branches or could obligate us to sell some of our branches and may materially adversely affect the Company's sales and profits", and "Risks Related To Fueling Stations and Convenience Stores - The recommendations of the Trachtenburg Committee may have a material adverse effect on Dor Alon's results of operations".

The recommendations of the Centralization Committee may have a material adverse effect on our operating results.

In October 2010, a Centralization Committee was appointed in order to examine the concentration of the Israeli economy, which is characterized by a small number of groups that control major business areas, and its effect on the level of competition, market efficiency and financial stability, and propose measure to address. The recommendations of the Centralization Committee were published in February 2012, however, the Company cannot estimate whether such recommendations will be implemented. In the current structure of the Company, implementation of the recommendations will not have any material effect on the Company; however, in the event the structure of the Company will be changed in the future, implementation of the recommendations would apply additional governmental corporation rules on the Company and may materially adversely affect our operating results.

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 Alon Holdings 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 semi-annual 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 Alon Holdings 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, Alon Holdings' board of directors resolved that Alon Holdings would not distribute dividends in any quarter if the ratio of our net financial obligations (as defined then 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. Alon Holdings' board of directors also resolved that Alon Holdings would not distribute dividends in any quarter if the ratio of the unencumbered fixed assets (net of depreciation) and investment property as set forth on our financial statements to financial obligations (as defined then by S&P Maalot, an Israeli rating agency owned by S&P) for any quarter is below 120%.

On January 14, 2010, Alon Holdings' board of directors decided that in view of the changes and development of Alon Holdings' since 2003, including the transfer of Alon Holdings and Mega Retail's real estate properties to BSRE (which has 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 Alon Holdings 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 Alon Holdings' debt which is related by the company to real estate that is not in use by Alon Holdings (which is equal to 75% of the investment property as recorded on the balance sheet). On December 31, 2011, the net financial obligations to EBITDA (calculated in accordance with the deduction described above) were 6 (taking into account Dor Alon’s financial obligations as of December 31, 2011). Due to the acquisition of Dor Alon in October 2010, the increase in fuel prices which increase our capital needs, the Company's investment plan to open additional Mega Retail branches, the entrance of BSRE to additional new projects and the launching of Alon Cellular, our board of directors further resolved that Alon Holdings 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 6.

A downgrading of the rating on our debentures may require us to repurchase some of our debentures and may require us to repay some of our bank loans.

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. As of December 31, 2011, the remaining principal balance of the Series A Debentures was NIS 239 million (approximately US $62.5 million). The Series B Debentures were fully converted or repaid in August 2011.

The credit rating of our Series A debentures is currently "A2/Stable" by Midroog Ltd., an Israeli rating agency and 51% subsidiary of Moody's ("Midroog").

In October 2010, Bank Hapoalim loaned us an aggregate amount of NIS 200 million with an interest rate of 2.8% per year linked to the CPI. As of December 31, 2011, the balance of the loan was NIS 189 million (approximately US $49.5 million). The decrease in the credit rating to “A3�� will cause an increase of 0.25% per year in the interest rate we pay under such loan. An additional decrease to "Baa2" (two credit levels) will cause a further increase of 0.25% per year in the interest rate we pay under such loan. A decrease in the credit level rating under "Baa2" will provide the bank the right to an immediate repayment of the balance of the loan.

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

As of March 31, 2012, Alon owned, directly and indirectly through Alon Retail Ltd., approximately 77.26% of Alon Holdings' outstanding ordinary shares. So long as Alon, or any successor to its shareholdings in Alon Holdings, 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 Alon Holdings directors, other than Alon Holdings' two external directors whose election, under the Israeli Companies Law, requires that a majority of the non-controlling shareholders who participate in the vote, vote for their appointment, or that the total number of shares of non-controlling shareholders that voted against their appointment does not exceed two percent of the aggregate voting rights in the Company.

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

In addition to our wholly owned subsidiaries, Mega Retail and Bee Group, our two main subsidiaries are BSRE, in which we owned a 78.22% interest as of March 31, 2012, and Dor Alon, in which we owned an approximately 78.38% interest as of March 31, 2012.

Through our subsidiary, Bee Group, as of March 31, 2012, we held approximately 77.03% of the outstanding shares of Naaman Porcelain Ltd., which is publicly held and traded on the Tel Aviv Stock Exchange, which held 100% of the share capital interest in Vardinon Textile Ltd., the shares of which were delisted from the Tel Aviv Stock Exchange on March 17, 2011. In addition, as of December 31, 2012 we owned 11 separate supermarkets and six stores within a Mega store 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 Alon Holdings 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 non-controlling shareholders of our partially owned subsidiaries, we endeavor to deal with each of these subsidiaries at “arm’s-length.” Some transactions between Alon Holdings and any of these subsidiaries, 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 and wholesale 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 and wholesale 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% (and subsequently increased our holdings to 100% in 2010). During this period, 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 the Non-Food segment, 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 Company has redefined certain of its Non-Food segment activities as non-synergetic with the Supermarkets segment. During 2011, we discontinued the sale of "Kfar Hashashuim" chain products and "All for a Dollar" chain products in our Supermarkets.

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 and wholesale business has required us to enter new markets in which we have limited experience and where competitors may have stronger market positions. If we are not able to successfully compete against our more experienced competitors in the stand alone Non-food retail and wholesale 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 stores and fueling stations 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 the permits for Mega Retail stores 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 activities, these permits are to be transferred in the name of Mega Retail, in which all of our food 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 stores do not have permits according to the requirements of the Israeli Business Permits Law, 1968. A lack of such permits by any store in many cases is considered a breach of the tenancy agreement for such store, which would allow the landlord to annul the lease agreement. As of March 31, 2012, 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. A court hearing was held on October 18, 2010 in which Kfar Hashashuim informed the court of its new logistics center and informed the court of its intention to completely vacate the logistics center by the end of November 2010. In August 2010, Kfar Hashashuim completed its transition 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 current minimum monthly wage is NIS 4,100 (approximately $1,090 as of April 20, 2012). On June 6, 2011, the Knesset approved an amendment to the Minimum Wage Law, 1987, to gradually increase the minimum wage to NIS 4,300 (approximately $1,125 as of January 3, 2012). Accordingly, on October 1, 2012, it will increase to NIS 4,300, or approximately $1,143. Such increases in minimum wage will increase our labor costs and thus may adversely affect our operating results.

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

The sharp fluctuation in oil prices in recent years has led to the fluctuation in our electricity prices and the price of raw materials used in the plastic packing industry. While 2010 was characterized by moderate changes in electricity and fuel prices, we cannot assure you that our suppliers will not raise prices in the future. Further increase in oil, raw material and product prices would impose significant expenses and costs on us, which could have an adverse effect on our operation results. During 2011, electricity prices increased by 13%. During 2012, until the date of this Annual Report, the electricity prices have further increased by 9%.

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

Our non-financial assets and equity are not adjusted for inflation in Israel, while the repayment of interest and principal of part of our loans and debentures are adjustable, linked to changes in 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 in our financial statements, leading to lower reported earnings and equity. The extent of this effect on our financial statements 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). From time to time, we engage in transactions to hedge a portion of this inflation risk through NIS – CPI swaps in order 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 the 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.

In addition, BSRE, a 78.22% subsidiary of the Company, is exposed to modifications of the construction valuation index, which may affect constructions costs.

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, 2011, we held approximately NIS 261.8 million in Israeli corporate and government bonds with fixed interest rates, a portion of which are linked to the Israeli CPI. 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.

Volatility of Alon Holdings' share and ADS price could adversely affect our shareholders.

The market price of Alon Holdings' 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 Alon Holdings’ controlling shareholder.

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

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

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 thereby our operating results. This devaluation would have a greater effect on our non-food retail and wholesale business because a higher proportion of the goods that we sell in our non-food retail stores are acquired from overseas suppliers. Any devaluation of the NIS 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 would remain unchanged.

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.

Also see “Risk Related To Our Business As A Whole - Increases in oil, electricity, raw material and product prices may affect our operating results”.

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

We use several IT 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 this assessment 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 amount 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. During 2011, the Company received deduction assessment for the years 2005-2008 and the amount claimed under this assessment totaled NIS 32 million. This amount is based on the Income Tax Authority stand on the issues under dispute, as well as National Insurance assessments that are based on the Income Tax Authority assessments above, which require additional payments of NIS 27.5 million for the years the 2001-2004. The Company is negotiating with the Income Tax Authority and the National Insurance in order to settle the dispute. In the opinion of the Company and its advisors, the provisions included in the Company's financial statements are sufficient to cover the potential liabilities.

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. In February 2009, the Company filed an appeal with the District Court, and as of the date of this Annual Report, the Company is negotiating with the Israeli Tax Authority in order to settle the dispute. In the opinion of the Company and its advisors, the provisions included in the Company's 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, there have been 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.

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.

We may be subject to tax exposure in connection with a number of our activities and asset transfers.

We have been involved in a number of asset transfers and transactions for which we received pre-rulings from the Israeli Tax Authority in connection with the tax consequences of such transactions. Those transactions included:

Transfer of assets between Mega and BSRE in 2009;

Transfer of retail activities between Alon Holdings and Mega in 2009 and merger of Hyper Hyper and Shefa Shuk into Mega in 2009;

Organization and restructuring of Bee Group in the years 2006 to 2008;

Splitting of gas activity from Dor Alon;

Purchase by Alon Holdings of shares in Dor Alon; and

If we do not comply with one or more of the conditions imposed on us in the aforementioned tax rulings, we may be obligated to pay Israeli income taxes as a result of these transactions linked to the Israeli consumer price index, plus interest and penalties.

For more information, see “Item 4. Business Overview – Commercial and Fueling Sites – Government Regulation – Tax Pre-rulings” and “Item 4. Information on The Company - B. Business Overview – Real Estate - Tax Authority Approval of Transfer by Alon Holdings to BSRE.”

In March, 2011, our indirect subsidiary in which we currently hold 70.1%, received a mobile virtual network operator license (MVNO license) from the Israeli Ministry of Communications. We may be required to invest resources in order to develop the business. We cannot guarantee that the cellular services business will be profitable.

In March 2011, Alon Cellular Ltd., our indirect subsidiary in which we hold 70.1% ("Alon Cellular"), received a mobile virtual network operator license (MVNO license) from the Israeli Ministry of Communications. The MVNO license will enable Alon Cellular to enter the Israeli communication market and add cellular services to the services that the Company offers to its customers. In December 2011, Alon Cellular have entered into an agreement with Partner Communications Ltd. for launching cellular services in an MVNO model, which will enable Alon Cellular to offer cellular services. For additional information, see "Item 4. Information on the Company - A. History and Development of Alon Holdings".

Our expansion into the cellular business will require us to enter a new business in which we have limited experience and where competitors are experienced and have stronger market positions. We may not be able to successfully compete against our more experienced competitors in the cellular services market, particularly given the high penetration of the Israeli mobile telephone market.

In addition, the telecommunications market in Israel is complex and is highly regulated. We may be required to devote substantial management attention and resources to develop the new business. Current and future regulations will limit the manner in which we may conduct our business and may increase our costs. We cannot guarantee if or when our cellular services business will be profitable.

We are exposed to, and currently are engaged in, a variety of legal proceedings, including class action lawsuits.

We sell goods to millions of consumers on a daily basis. As a result of the scope and magnitude of our operations we are subject to the risk of a large number of lawsuits, including class action suits by consumers and consumer organizations. These actions are costly to defend and could result in significant judgments against us. Recent years have been characterized by a substantial increase in the number of requests for certification of class actions filed and approved in Israel, including against us, and this trend is expected to continue. Currently, we are engaged in various material legal proceedings, many of which are for substantial amounts. Should these requests to certify lawsuits against us as class actions be approved and succeed, this may have a material adverse affect on our financial results. For a summary of legal proceedings against us, see "Item 8 - Financial Information - A. Consolidated Statements and Other Financial Information - Legal Proceedings".

Risks Related To Our Acquisition of Dor Alon Shares

The Acquisition may not result in the benefits that Alon Holdings currently anticipates and may subject Alon Holdings to certain limitations in its efforts to realize operational synergies between the operations of Alon Holdings and Dor Alon.

Achieving the expected benefits of our acquisition from Alon of its approximately 80% interest in Dor Alon (the “Acquisition”) depends, among other things, on the ability to realize the operational synergies envisaged in the acquisition by combining 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 Alon Holdings expects to use for pursuing new opportunities and other purposes. If Alon Holdings is unable to realize the operational synergies envisaged in the Acquisition by combining 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, Alon Holdings' operating results may be adversely affected and its share price may decline.

Moreover, some transactions between Alon Holdings 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, Alon Holdings may be limited in its ability to fully realize the synergies and other benefits of the Acquisition.

ITEM 4.

INFORMATION ON THE COMPANY

History and Development of Alon Holdings.

Alon Holdings Blue Square Israel - Ltd. was incorporated in June 1988 as a company under the laws of the State of Israel. Alon Holdings' 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, Alon Holdings completed its initial public offering and its ADSs were listed for trading on the New York Stock Exchange. In November 2000, Alon Holdings' ordinary shares were listed for trading on the Tel Aviv Stock Exchange.

In 2008 and 2009, the Company reorganized its supermarket retail and real estate activities pursuant to which the Company’s supermarket retail activities are now centralized in Alon Holdings' subsidiary, Mega Retail, and the Company’s real estate activities are now centralized in Alon Holdings’ subsidiary, BSRE.

The name of the Company was changed to "Alon Holdings Blue Square – Israel Ltd." on July 17, 2010.

On October 4, 2010, Alon Holdings completed its acquisition of all the shares of Dor Alon Energy in Israel (1988) Ltd. (“Dor Alon”), a publicly traded company listed on the Tel Aviv Stock Exchange (“TASE”), that were held by Alon Israel Oil Co. Ltd. (“Alon”). The shares acquired represented approximately 80% of the outstanding shares of Dor Alon, and in exchange, Alon Holdings issued 20,327,710 ordinary shares to Alon (the “Acquisition”). Dor Alon is one of the four largest fuel companies in Israel based on number of fueling stations and is a leader in the convenience stores sector. Under the terms of the Acquisition, in exchange for each share in Dor Alon, Alon Holdings issued to Alon 1.8 ordinary shares of Alon Holdings. Immediately following the Acquisition, Alon's direct and indirect ownership interest in Alon Holdings increased to approximately 78.35% of the outstanding share capital of Alon Holdings, from approximately 68.62% of the outstanding share capital of Alon Holdings. For further information on the Acquisition, see “Item 7. Major Shareholders and Related Party Transactions Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD."

On March 13, 2011, we announced that Alon Cellular Ltd., our indirect subsidiary in which we hold 70.1% ("Alon Cellular"), was informed by the Israeli Ministry of Communications that it had received a mobile virtual network operator license (MVNO license). The MVNO license will enable Alon Cellular to enter the Israeli communication market and add cellular services to the services that the Company offers to its customers. In connection with the Company’s plans to enter the cellular communications market by becoming an MVNO, In December 2011, Alon Cellular entered into an agreement with Partner Communications Ltd. ("Partner") for launching cellular services in an MVNO model, which will enable Alon Cellular to offer cellular services and become a major player in Israel’s communications market. The launch date of such services is to be coordinated between Alon Cellular and Partner. Pursuant to the agreement, the payments by Alon Cellular to Partner (except for certain immaterial payments) are to be in accordance with the actual usage of traffic by Alon Cellular’s end users, as elaborated in the agreement. The term of the agreement is for three years, with an option to extend the term by Alon Cellular in one additional year. In addition, Alon Cellular has the option to terminate the agreement, at any time, against payment to Partner of an immaterial amount. Launching the services under the agreement and the scope of the services provided are at the full discretion of Alon Cellular and will depend, among other things, on future market conditions.

Other Recent Developments

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 and expansion of “Mega In Town”, a discount supermarket brand designed to combine discount prices and convenience for neighborhood shoppers. As of December 31, 2011, we had 119 “Mega In Town” stores; this initiative has included the conversion of over 103 existing stores to the new brand;

The launch and expansion of "Mega Bool", a hard discount store format. As of December 31, 2011, this initiative included the conversion of 58 existing "Mega in Town", and "Shefa-Shuk" stores of various sizes to the new brand and the opening of an additional seven new "Mega Bool" stores;

Continuation of implementation 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 17 stores as of December 31, 2011, consisting of 11 independent branches and six Eden branches in Mega under the concept of a "store within a store.";

The launch and expansion of our private label called "Mega" that was expanded throughout our "Mega Bool" and "Mega in Town". As of March 31, 2012, the products that we sold under the "Mega" private label constituted approximately 13.5% of our supermarket sales";

The completion of the centralization of all of the financial activity, import and information systems of the Bee Group subsidiaries under a single modern logistics center during the second quarter of 2010;

The execution on June 3, 2010, by 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), of 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 launch of a new internet sale site, now known as "Mega@Internet", in October 2009;

The establishment of a joint loyalty plan (the "You Plan" or the “Loyalty 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 December 31, 2011, the number of credit cards held by YOU customers was approximately 149,000 and the total number of loyalty club households was approximately 1,161,000 (see “Item 4. Information on The Company - B. Business Overview -Related Businesses”); and

The execution, on February 8, 2012, of an agreement between a corporation 55% controlled by Dor Alon (the "Corporation") and Sugat Sugar Refineries Ltd., pursuant to which the Corporation is to establish a power plant on its premises with total capacity of up to 124 megawatt. For additional information, see "Item 4. Information on the Company - B. Business Overview - Fueling Stations and Convenience Stores - Establishment of a Power Plant".

Capital Expenditures

In 2011, we invested approximately NIS 356.5 million, or $93.3 million, in property and equipment, intangible assets and investment property, a 9.6% increase from our 2010 investment of NIS 325.2 million. Of our investment in property, and equipment and investment property in 2011, we invested NIS 193.4 million, or $50.6 million, in land and buildings, including land that we lease and investment property, as compared with NIS 164.1 million in 2010.

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

We operate in four reporting segments. In our Supermarkets segment, we are the second largest food retailer in the State of Israel. In our"Commercial and Fueling Sites" segment, we operate a chain of fueling stations and convenience stores in different formats in 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 and projects.

As of December 31, 2011, we had 211 supermarkets with brands including "Mega Bool", "Mega In Town", "Zol BeShefa", "Eden Teva". In addition, as of December 31, 2011, we had 248 Non-Food retail outlets (mostly through franchisees) under the control of our subsidiaries, Bee Group Retail Ltd. ("Bee Group") and Mega Retail, under the brand names Naaman, Vardinon, Sheshet, Kfar Hasha’ashuim, Dr. Baby and All for a Dollar.

Through our supermarkets, we offer a wide range of food and beverage products and “Non-Food” items, such as houseware, toys, small electrical appliances, computers and computer accessories, entertainment and leisure products and textile products, and “Near-Food” products, such as health and beauty aids, products for babies, cosmetics and hygiene products. We also operate several 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 products.

Our activities are carried out via our consolidated subsidiaries, including Mega Retail, which has supermarket retail activities, Dor Alon, which operates a chain of fueling stations and convenience stores, Bee Group and Mega Retail, which conducts non-food retail activities, and BSRE, which owns and invests in yield-generating commercial real estate and projects. As of March 31, 2012, Alon Holdings owned 100% of the outstanding shares of Mega Retail, 78.38% of the outstanding shares of Dor Alon, 100% of the outstanding shares of Bee Group, and 78.22% of the outstanding shares of BSRE. The balance of BSRE shares and Dor Alon shares is publicly held and traded on the Tel Aviv Stock Exchange.

As of December 31, 2011, Mega Retail and its direct subsidiaries were the owners of all 211 of our supermarkets. As of December 31, 2011, the consolidated assets of Mega Retail and its subsidiaries aggregated approximately NIS 1.8 billion, or $471 million. Mega Retail’s assets constitute approximately 20% of our total consolidated assets at that date.

As of December 31, 2011, Dor Alon also operated 198 convenience stores, including 149 convenience stores branded “Alonit” and “Super Alonit” (we refer to these stores as Alonit convenience stores), and 49 convenience stores operated by the AM:PM chain of stores. Two convenience stores were operated by third parties. As of December 31, 2011, the total consolidated assets of Dor Alon and its subsidiaries aggregated approximately NIS 3 billion, or $785 million. Dor Alon's assets constitute approximately 33% of our total consolidated assets at that date.

As of December 31, 2011, we were the owners, through our subsidiaries, of 101 of our Non-Food retail stores, while the remaining 147 of our Non-Food retail stores were owned and operated by franchisees. As of December 31, 2011, the consolidated assets of our non-food segment (excluding the stores owned and operated by franchisees) aggregated approximately NIS 400 million, or $105 million. Our non-food retail segment's assets constituted approximately 5% of our total consolidated asset at that date.

BSRE is the owner of all of our real estate properties, and its revenues are primarily derived from real estate lease payments received from Mega Retail and third parties. As of December 31, 2011, the consolidated assets of BSRE aggregated approximately NIS 2.7 billion, or $707 million. BSRE's assets constituted approximately 28% of our total consolidated assets at that date.

Our Strategies

Our strategy is: (i) to take advantage of our position as a leading retailer in Israel, by expanding our market presence 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 our market share by opening new stores, renovating and improving of existing stores, adjusting the format of our stores according to the needs of our customers, and, if necessary, closing stores with low performances;

expansion of the geographic spreading of the chain's stores in order to create accessibility to all the consumers in Israel, particularly in the northern part of Israel, in Jerusalem and in centers of neighborhoods and cities;

increasing our market share of “Non-Food” and “Near-Food” products and capitalizing on potential operating synergies between the food and Non-Food segments of the Company and the other subsidiaries of the Company, including increase of the sale of products of "Naaman", "Vardinon" and "Sheshet" in Mega Retail's supermarkets;

strengthening and increasing of our market share in the organic products market and the health food in order to become a leading company in the organic and health food market in Israel;

expansion of our "Mega" private label to include additional categories of products and increasing of the sales of the private label;

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

focusing on improvement of the availability of our products in the stores and reducing events of shortage of products "on the shelves";

expanding and improving our You loyalty plan, by multiplying the number of credit card customers;

addition of new logistic centers and making appropriate preparations for the self arrangements of shelves in our stores;

launching in the coming year a mobile virtual network operator (MVNO), by exploiting our large selling's platform to market cellular products to our various customers. For additional information, see “Item 4. Information on the Company - A. History and Development of Alon Holdings“.

developing and expanding of the real estate segment by developing and improving of the existing real estate properties, maximizing of leasings, increasing building rights, and purchasing additional commercial real estate in Israel and abroad; and

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

Supermarkets

General

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, 2007	185	342,705
As of December 31, 2008	194	354,500
As of December 31, 2009	203	365,000
As of December 31, 2010	206	366,000
As of December 31, 2011	211	377,650

The following table sets forth the selected operating data of our supermarket stores as of the date indicated:

	For the year ended December 31,
	2009			2010			2011			2011$
Selected Operating Data:	NIS (in thousands)									U.S. Dollars in thousands
Number of supermarket stores (at year end)		203			206			211			-

Increase (decrease) in same store sales(1)		(3.9	%)		(0.8	%)		(2.7	%)		-

Total square meters (at year end)(2)		365,000			366,000			377,650			-
Supermarket sales per square meter (in NIS)		19,023			18,692			18,090			4,734
Supermarket sales per employee (in thousands)		997			1000			965			252

(1)

The percentage change 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 expanded during the period. Store resizing is considered significant if it exceeds 5% or more of the store’s original size.

(2)

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

We have four supermarket store formats - Mega Bool, Mega In Town, Zol BeShefa and Eden Teva. Our "Mega Bool" chain stores are hard discount stores designed to provide customers with name brand quality at everyday affordable prices. The “Mega In Town” chain stores, located primarily in local neighborhoods and city centers, combine discount prices with convenience for neighborhood shoppers. Our “Zol BeShefa” 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, 2011, we operated a total of 211 stores consisting of approximately 377,650 square meters space.

We launched our “Mega In Town” supermarket format in August 2007 in order to bring discount shopping to the neighborhood and city centers. The initiative included the conversion of over 103 of our existing 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 that were previously carried by our stores 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 December 31, 2011 operated 17 (including six Eden Stores within Mega) 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 received the right to appoint a majority of the board of directors and a majority of the executive committee of Eden Teva, (iii) the other shareholders received various minority protection rights, and (iv) we agreed 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 have since been repaid, and the payment of a bonus to Eden Teva’s CEO. Eden Teva's CEO was granted a bonus in the amount of $2.5 million for 2011. In addition, during 2010, we launched 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". As of March 31, 2012, Eden Teva operated 20 (including seven Eden Stores within Mega) supermarket stores. During 2012, the Company intends to improve the operating results of the Eden Teva stores.

We launched our "Mega Bool" hard discount store format in December 2008 in order 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. The initiative included the conversion of 57 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.

In parallel, we also announced the launch of our new "Mega" line of private label goods that are sold in our "Mega Bool" 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. As of December 31, 2011 and March 31, 2012, the products that we sold under the "Mega" private label constituted approximately 14.9% and 13.5% of our supermarket sales, respectively.

Industry Overview

We estimate that retail sales of food, beverages and tobacco in Israel were approximately NIS 62.1 billion, or $15.5 billion, in 2011. 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 2010 (2011 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 2011 (3.7%).

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 data published by the Israeli Central Bureau of Statistics of the retail sales of food, drinks and tobacco in Israel, we estimate that approximately 33.7% of the total retail sales of food, beverages and tobacco in Israel in 2011 was made by the two large chains and approximately 42% of the estimated retail sales made by supermarkets, groceries and mini-markets in Israel in 2011 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.

Competition

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.

Our market share in 2011 was 12.8% of the total retail market of food, beverages and tobacco. The market share of our competitor, Shufersal, based on its financial reports was approximately 20.9% in 2011. This market share is based on company revenue as a percent of the retail market for food, beverages and tobacco in accordance with the definition of the Central Bureau of Statistics for 2010 and the company's estimate for market growth of approximately 3.7% for 2011.

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 recent years 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, which based on its financial reports held approximately 20.9% of the total Israeli retail market of food, beverages and tobacco in 2011 compared to our market share of 12.8%, has taken numerous initiatives in the last few years to improve its competitive position. During 2011, Shufersal significantly expanded its hard discount store format, "Shufersal Deal", and generated sales of NIS 11.5 billion (U.S. $3 billion) in the supermarket segment as opposed to our sales of NIS 6.7 billion (U.S. $1.7 billion). In addition, during 2012, Shufersal intends to significantly expand its commercial space and its health stores. The difference in market share may give Shufersal a greater competitive advantage in its dealings with customers, suppliers and other third parties. The competitive position of Shufersal, together with the expansion of smaller supermarket chains in recent years, has contributed to the intensifiedcompetition we experiencedin 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, 2012. The Fourth Chain combines a number of smaller supermarket chains (the “Members”) which operate on a 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, at a later stage, to negotiate prices and commercial conditions with suppliers; to operate a central joint warehouse; and to sell products to retailers 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 nationally-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.

Supermarkets Operations

Our supermarket operations are conducted under the Mega Bool, Mega In Town, Zol BeShefa and Eden Teva store formats, which are among the most 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 houseware departments within most of our large stores. Our private label, called "Mega," is offered throughout our "Mega Bool" and "Mega in Town" store formats. All of our supermarket stores operations are owned by Mega Retail and its subsidiaries, and Mega Retail leases the real estate underlying the stores that it operates from BSRE and third parties.

“Mega Bool” is our hard discount stores designed to provide customers with name brand quality at everyday affordable prices. “Mega in Town” is comprised of medium and small sized 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. “Zol BeShefa” is a format comprised of low-priced supermarkets with a selection of products designed to compete with local competition and also oriented to ultra-orthodox Jewish population. “Eden Teva” is comprised of supermarkets that specialize in organic, natural and health food products, operated by Eden Teva, which is 51% held by Mega Retail.

The following table provides certain information regarding our supermarket stores as of December 31, 2011:

Properties		Number	Square meters
Stores(*)	Leased from BSRE	93	160,000
	Leased	118	217,000
		211	377,000
Stores In Development	Leased	27	52,070
Offices	Leased from BSRE	2	9,800
Warehouses	Leased from BSRE	4	35,000
	Leased	1	2,500
Car park	Leased from BSRE		3,595
Total		245	477,465

(*) Includes two Eden stores within Mega.

Purchasing and Distribution

We purchase products for our supermarkets through a central purchasing office that selects products for all of our supermarkets (including Alonit/SuperAlonit and AM:PM, and not including Eden Teva) and negotiates prices, promotions and terms of payment with individual suppliers on a company-wide basis. We believe that the large volume of our 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 site of approximately 40,000 square meters. At this site, we operate approximately 20,000 square meters as warehouse space. We conduct the administration of the warehouse and distribution by means of a computerized system that consolidates orders from all the branches and other stores while giving consideration to inventory levels, store requests and company planning. In addition, the Company signed a development agreement to build an additional logistics and distribution center by the end of 2013, for which a building permit has been received. This new distribution center will have approximately 41,500 square meters. For more information, see "Item 4. Information of the Company – B. Business Overview – Real Estate – Description of Real Estate Properties - Kibbutz Eyal."

We purchase products for our supermarkets from approximately 1,000 suppliers, including manufacturers, importers and distributors. In 2011, approximately 82.9% of our grocery items and 92.9% of our meat and fish were delivered directly by suppliers to our stores. For certain other items, including 87.3% (in 2011) of fruits and vegetables, we provide distribution to our supermarkets through our distribution center. For the year ended December 31, 2011, approximately 22.4% of our supermarket purchases were of products distributed from our distribution center.

We actively seek to diversify our suppliers. However, we still 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 2011, Tnuva’s products accounted for approximately 14.5% 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 approximately9.1% of all products sold at our supermarkets in 2011, and the Osem group accounted for approximately 8% of all products sold at our supermarkets in 2011. Because of our status as a leading food retailer in Israel as a result of which we are able to offer wide exposure 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 purchases. The ten largest suppliers for our supermarkets accounted for approximately 58.4% of our product purchases in 2011. We have not experienced any material problems in obtaining products of the quantity and type required.

Marketing

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@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 call center) or by fax. The service was provided in most of Israel as of December 31, 2011.

We aim 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 the customer clubs of Zol BeShefa and Eden Teva.

The goal of our Loyalty Plan, which we established together with Dor Alon and which offers to our customers credit cards (Diners and Mastercard) bearing the name "You", or a 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 providing discounts and benefits at other businesses that joined the Loyalty Plan. In addition, through the Loyalty Plan the Company may provide other services such as 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.

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 Mega Retailsupermarkets,AM:PMconvenience stores andDor Alon fueling stations.

As of July 2009, a joint company established by Mega Retail Ltd., Dor Alon Operating Service Station Ltd., a subsidiary of Dor Alon, and a third party began publishing and distributing a free daily newspaper called “Israel Post”, which is also distributed in Mega Retail stores, as well as in Dor Alon’s fueling stations and convenience stores and third parties. A majority of the revenue from this newspaper comes from selling advertisement space. Mega Retail believes that the partnership in this newspaper provides it with a marketing platform for Mega Retails’s network.

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, certain bread, salt, eggs, milk and milk products and butter, 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 pursuant to the Law of Deposits for Drink Containers-1999. In February 2010, the Knesset passed an amendment to the Law, that determined, among other things: (i) the expansion of the law to apply to additional drink containers, obligating all businesses that sell drink containers to accept empty containers and to repay the deposit for them (there is no obligation to accept more than 50 drink containers from a person in a single day), (ii) an increase in the deposit amount from 25 agorot to 30 agorot per drink container, and (iii) an increase in the obligations of manufacturers and importers of drinks to recycle and collect drink containers. We have also incurred expenses for personnel and equipment dedicated for returning of deposits, including equipment in some of our stores that enable consumers to automatically receive their deposits when bringing back the empty containers without the need for store personnel.

Arrangements between Major Supermarkets Chains and Large Suppliers

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.

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 food suppliers. The consent decree is directed at the food suppliers listed therein and stipulates various prohibitions, conditions and restrictions that apply to these suppliers with regard to certain practices. The consent decree addresses the following arrangements:

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’ quantities, 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 it has dominance; (ii) an arrangement the purpose of which 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 into 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, as long as such arrangements satisfy certain conditions. In February 2009, the above period was extended by 36 months, until February 2012. The Commissioner has indicated that it will no longer permit such practices. In February 2012, the Company submitted a request for an exemption from restricted agreement for 21 months (until September 2013) in order to make the appropriate preparations for self arrangements of shelves in the chains’ stores, although the Company believes that such arrangements are not restrictive arrangements. As of the date of this Annual Report, the Commissioner is reviewing the request and agreed not to take enforcement measures with regard to such arrangements until his decision on the request. We don't know if he will grant this request.

Discounts and rebates in exchange for meeting sales targets. A dominant supplier may not be party to an agreement whose objective or effectis the grant of benefits to the retail chain in connection with meeting sales targets for 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.

For additional information regarding government regulations relating to our Supermarket segment, please see “General Government Regulation for our Supermarket and Non-Food Retail Segments” below.

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, 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. 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.

Supermarkets Strategies

Our strategy in our retail activities is to take advantage of our position as a leading food retailer in Israel, by expanding our market presence in existing retail food markets. 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;

solidifying and expanding our market share in the organic/health food market with the goal of establishing Alon Holdings 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; and

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

Fueling Stations and Convenience Stores

General

We operate retail outlets and convenience stores and market petroleum products in Israel through Dor Alon, our direct subsidiary in which we held 78.38% as of March 31, 2012. Dor Alon’s activity includes three primary fields of operation:

Retail Outlets and Convenience Stores - Dor Alon supplies motor fuels, motor oil and other petroleum products to a network of public retail outlets operating under the “Dor Alon” brand. Dor Alon’s public retail outlets consist of four formats: stand-alone gasoline service stations, Alonit convenience stores (with gasoline service stations), travel centers (commercial centers that include a gasoline service station) and “AM:PM” stores, a leading convenience store brand in the Tel Aviv metropolitan region offering merchandise and food products, most of which operate 24 hours a day and seven days a week. Dor Alon also supplies motor fuels and other petroleum products to internal fueling stations in Israel located primarily on kibbutzim and moshavim (cooperative communities).

Direct Marketing - Dor Alon supplies fuel oil and other petroleum products, including Liquefied Petroleum Gas(“LPG”), directly to residential and commercial customers as well as governmental entities and is the exclusive Israeli supplier of petroleum products to the Palestinian Authority in the Gaza Strip.

Marketing of Jet Fuel - Dor Alon supplies jet fuel to commercial airlines.

Retail Outlets and Convenience Stores

As of December 31, 2011, Dor Alon operated 198 convenience stores, including 149 convenience stores branded “Alonit” and “Super Alonit” (we refer to these stores as Alonit convenience stores), and 49 convenience stores operated by the AM:PM chain of stores. 195 convenience stores are operated by the Alon Group, and three convenience stores are operated by third parties. All the stand alone convenience stores are leased for different periods.

The Dor Alon Retail Outlets and Convenience Stores network is divided into complexes owned by Dor Alon, complexes in which Dor Alon has a long term lease (most of which are jointly owned or leased in equal shares with third parties) and complexes owned by third parties. As of December 31, 2011, Dor Alon (either solely or through joint companies or partnerships) owned or held under lease and operating agreements 160 commercial and fueling sites. The other 36 Retail Outlets and Convenience Stores are operated by third parties, under the Dor Alon brand who have entered into supply agreements with Dor Alon for petroleum products. The Retail Outlets and Convenience Stores include four travel centers along the Cross-Israel Highway (Israel’s first toll road) that Dor Alon has the exclusive rights to operate for a 30-year period beginning in June 1999.

The Retail Outlets and Convenience Stores sector demands substantial capital investment (the cost of establishing a refueling and commercial complex is estimated at NIS 4-5 million, not including the cost of land) and competition is fierce. Most of the competition relates to the acquisition of rights to establish new commercial refueling complexes and around obtaining commitmets from existing fueling stations. In the last few years, there have been a number of developments in this sector, including:

intensified competition in marketing products to end users;

an increase in the investments necessary to build a new fueling station due to a number of regulatory developments;

the prevailing trend of developing and implementing a business strategy for converting fueling stations into refueling and commercial complexes in all the large fuel companies;

relief in regulatory requirements regarding planning and authorizing new fueling stations; and

the ratification of amendment 4 to the National Land Planning Program for Refueling Stations – NLP 18.

Dor Alon adds retail outlets to its network by either developing a new commercial and fueling sites or, less frequently, entering into an agreement with the owner of an existing commercial and fueling sites whose supply contract with another fuel company has expired. Developing new commercial and fueling sites often takes several years and requires compliance with numerous laws and regulations.

Dor Alon anticipates opening and operating an additional 14-18 commercial and fueling sites during 2012 and 2013. Dor Alon has plans and agreements to plan, establish and operate additional fueling stations, and these stations are currently in different stages of authorization and establishment.

Dor Alon has a cooperation agreement with a third party to establish through a joint company a nationwide chain of SegaFredo “espresso-bars” to be located in Dor Alon’s retail outlets. As of December 31, 2011, Dor Alon’s retail outlets included 16 SegaFredo cafes that were operated by a joint company. In addition, most of the Alonit convenience stores include a small coffee bar.

Customers of Dor Alon’s Retail Outlets and Convenience Stores consist of the public at-large and, to a lesser degree, drivers of fleet vehicles (referred to as fleet customers). Fleet customers use electronic fueling cards or vehicle mounted devices to refuel their vehicles, with payment for the fuel products to be made at a later date, on a consolidated basis. The electronic fueling cards are also offered to private customers. Customers utilizing electronic fueling cards enjoy preferential fuel prices and terms of payment, which Dor Alon believes leads to concentrated buying by fleet customers from Dor Alon.

Internal Fueling Stations (fleet stations)

As of December 31, 2011, Dor Alon supplied motor fuels to 170 internal fueling stations operating under the Dor Alon brand. Internal fueling stations are stations in Israel located on the premises of kibbutzim and moshavim, as well as some DFCs that are not integrated with retail outlets. Fuel products sold in internal fueling stations are designated for a defined group of customers, such as inhabitants of the kibbutzim and moshavim, who receive preferential fuel prices and payment terms.

Dor Alon also holds 50% of a joint company together with a certain third party (50%) which operates internal stations located in moshavim. Dor Alon supplies this jointly held company with motor fuels and other petroleum products. As of December 31, 2011, this joint company operated and supplied motor fuels and other petroleum products to 83 internal fueling stations operating in moshavim.

Industry Overview

Recent Developments in the Israeli Fuel Market

The Recommendations of the Trachtenburg Committee

Control on the Reducing of the Gasoline's Marketing Margin

On August 31, 2011, Dor Alon received from the Israeli Ministry of Energy and Water an order pursuant to which the Ministers of Treasury and National Infrastructure decided to reduce the marketing margin in connection with the sale of full service gasoline. For additional information on this matter, see "Risks Related To Fueling Stations and Convenience Stores – Dor Alon is exposed to risks associated with changes in regulatory arrangements which may influence the financial results of Dor Alon".

Management Services Agreement with Alon

In March 2005, Alon and Dor Alon entered into a management services agreement ("Management Services Agreement"), effective retroactively from January 1, 2005, by which Alon provides the following services and rights to Dor Alon (the "Services"): (i) various management services, including those related to the chairman of the board and president of Dor Alon, day to day management of Dor Alon, strategy and business development, supplementary legal counsel, corporate secretary services provided by Alon's in-house counsel, and (ii) the right to use the "Alon" and "Alonit" brand names.

As consideration for the Services, since 2006, the quarterly management fees paid by Dor Alon to Alon equal the aggregate of 3% of Dor Alon's EBITDA profits according to Dor Alon's quarterly consolidated financial statements, but not more than NIS 1,250 thousand on a quarterly basis, linked to the consumer price index as of December 2004. In 2010, Alon received approximately NIS 5.7 million for the Services, and in 2011, Alon received approximately NIS 5.9 million for the Services.

In December 2010, a new management services agreement was approved by the general shareholders of Dor Alon after receiving the approval of the audit committee, which replaced the previous one. The new agreement will terminate in December 2015, subject to the required approvals pursuant to the Companies Law. The terms of the new management services agreement are substantively similar to those set forth in the original agreement.

Competition

Competition in the Israeli energy industry is intense. Dor Alon’s major competitors are the other large fuel companies in Israel: Paz, Delek and Sonol. The principal competitive factors affecting the retail fuel marketing business arelocation of retail outlets, brand identity, product price, the variety of related services offered to customers, the level of service, financial strength allowing the establishment of new retail outlets, procurement of petroleum products at competitive prices and the terms of agreement offered to fleet customers, real estate owners and/or owners of retail outlets. With respect to its direct marketing operations, Dor Alon expects to face competition from Paz, Delek and Sonol,the gas companies Pazgas, Amisragas and Supergas, and small fuel marketing companies as well as other LPG marketing companies, consisting mainly of subsidiaries of Paz, Delek and Sonol. The principal competitive factors in the direct marketing business are product price, credit terms and levels of service. Moreover, a portion of the customers in the direct marketing sector require professional support in installation of equipment and continuous maintenance. These direct marketing customers view the significance in the quality of the petroleum distillate. Increases in competition may adversely affect the earnings and profitability of Dor Alon. In addition, Dor Alon may face competition from ORL as a result of its privatization and increased competition from Paz, which now owns one of the two oil refineries in Israel.

Purchasing and Distribution

Motor Fuel and Other Petroleum Products

Dor Alon, like the other fuel companies in Israel, is dependent on ORA and ORL for the supply of refined petroleum products. Dor Alon believes that most of the petroleum products manufactured by ORA are supplied to Paz, while ORL constitutes the main source of supply for Dor Alon and other fuel companies in Israel. If the oil refineries failed to supply refined petroleum products or supply them at noncompetitive prices, Dor Alon would have to increase the amount of refined petroleum products it imports.

Dor Alon purchases most of the motor oils marketed by it from ARAL Lubricants GmbH and from SA Texaco N.V. Since 1990, Dor Alon has been the exclusive representative of ARAL Lubricants GmbH in Israel under an oral agreement. In addition, others oils are purchased and marketed under the private label brand name “Dor Oil.”

Convenience Store Products

Dor Alon purchases most of the food and non-food products sold in its convenience stores from our subsidiaries. Pursuant to an agreement with one of our subsidiaries, a subsidiary of Dor Alon pays that subsidiary the price of the products plus a 2% margin for the direct supply of products by the suppliers to the convenience stores, and a 2.75% margin for the supply of products from that subsidiary’s central warehouse. The agreement also provides that if Alon Holdings' income from the agreed margin, less additional expenses incurred by it as a result of the performance of the agreement, falls below a minimum amount of NIS 1 million a year, Dor Alon’s subsidiary will pay our subsidiary the difference up to NIS 1 million. The agreement has an initial term which ends in January 2013 and will automatically renew for additional one-year terms thereafter unless terminated by either party upon 90 days notice prior to the end of the term. The convenience stores that are not operated directly by Dor Alon have also joined this agreement and they pay our subsidiary an additional profit margin. For further information on this agreement, see “Item 7. Major Shareholders and Related Party Transactions – Procurement Agreement with Dor Alon Management."

When Alon acquired Alon Holdings, the Anti-trust Commissioner prescribed that he may direct Dor Alon and Alon Holdings to fully separate the purchasing activities of Dor Alon from those of Alon Holdings if he deems that current market conditions, the purchasing power of Alon Holdings, or the state of competition so require.

Marketing

Direct Marketing

Dor Alon and Dorgas (a wholly owned subsidiary of Dor Alon) distribute petroleum products, including fuel oil, diesel, LPG, kerosene, naphtha and bitumen directly to commercial, industrial, institutional and residential customers as well as governmental entities. They also supply, install and maintain customer end-user equipment, such as fuel tanks and LPG balloons, related to the petroleum products they supply. The direct marketing of LPG is coordinated solely by Dorgas.

Dor Alon and Dorgas’ marketing and sales personnel or its distributors are responsible for entering into agreements with customers in this field of operations. Products are transported directly to the customer’s facilities. Dor Alon has a marketing, service and support apparatus for customers of this field of operations.

Most engagements with industrial and commercial customers include installation of end equipment at the customer’s site. The engagement period is affected,inter alia, by the volume of investment in equipment provided to the customer. Commercial customers include the Palestinian Authority (as described below), and customers in the fields of industry, transportation, earthwork, agriculture, infrastructure and marine works, among others. Institutional customers include municipalities and cooperatives for public transportation. The majority of Dor Alon’s communications with institutional clients are commenced following a public bidding process, are for a defined period and are based on terms of exclusivity.

Private sector clients are mostly domestic customers and small businesses that use refined oil for heating and cooking, private homes, apartment buildings and small businesses. As of December 31, 2011, Dor Alon had approximately 102,000 domestic customers. Agreements with domestic customers are for fixed periods, with the agreement renewing automatically at the end of each period, with no need for any further notice.

Dor Alon is the exclusive Israeli supplier of certain petroleum products to Gaza Strip. In 2008 and 2009, sales to the Palestinian Authority sharply decreased as a result of operation "Cast Lead." In 2010,sales to the Palestinian Authority decreasedas a result of reduction of supplies pursuant to instructions issued by Israel’s Ministry of Defense. During 2011, Dor Alon provided relatively small quantities of LPG and other petroleum products, some of which was ordered by the Palestinian Authority and some of which was ordered by donor countries

Marketing of Jet Fuel

Dor Alon’s jet fuel marketing operations include the marketing of jet fuel to civilian airlines, which, since 1997, are conducted through a joint venture with Chevron to market and supply jet fuel to commercial airlines at Ben Gurion International Airport. Each party refers customers to the joint venture, with Chevron referring its customers, foreign airlines, with whom it operates abroad. All fuel companies marketing jet fuel are obligated to purchase refueling services for aircrafts at Ben Gurion International Airport from two companies - Paz Aviation Services Ltd. and Mercury Aviation (Israel) Ltd., a company in which Dor Alon holds 31.25% of its issued and outstanding ordinary shares. Mercury Aviation (Israel) Ltd. provides the customer refueling services to the joint venture of Dor Alon and Chevron. As of the date of this Annual Report, Paz Aviation Assets Ltd. is the only company that provides jet fuel storage services, though this company’s activities are regulated and it is obligated to provide storage services at regulated prices.

Marketing and Distribution

In the retail outlets and convenience stores sector, Dor Alon markets and promotes its products using the following methods:

increasing the attractiveness of the refueling and commercial compounds by diversifying its products and services;

operating most of the stations as self service stations;

conducting sales and promotions in the refueling and commercial compounds;

improving Dor Alon’s brand name recognition and image through public relations; and

marketing of fuel products to fleet customers along with discounts on fuel prices and preferential payment terms via electronic fueling cards or vehicle mounted devices.

In November 2005, Dor Alon and Alon Holdings established the “YOU” Loyalty Plan in order to promote customer loyalty to Dor Alon and Alon Holdings by, among other things, granting exclusive benefits to the Loyalty Plan members and providing discounts and benefits at other businesses that would join the Loyalty Plan. Mega Retail is also part of the YOU” Loyalty Plan. For more information on the Loyalty Plan, see “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Transactions with Dor Alon in Connection with Establishment of a Joint Loyalty Plan.”

In the direct marketing sector, Dor Alon markets its oil distillates using Dor Alon sales personnel and independent distributors. The marketing of some of the LPG (for use in private residences and small businesses) is performed by independent distributors. The distribution agreements with distributors are on a mutually exclusive basis for marketing LPG to private residences and retail customers and are for an unlimited time. The distributors are responsible for marketing the LPG, collecting payments and maintaining the LPG equipment as required by law. Consumers who purchase LPG from the distributors are customers of Dorgas.

Marketing and distribution in the jet fuel sector is done through the joint venture with Chevron (as mentioned above).

Other Activities

Establishment of a Power Plant

In February 2012, Dor Alon Energy Centers, a limited partnership under the control of a subsidiary of Dor Alon (55%) and a third party (45%) (the "Partnership"), entered into an agreement with Sugat Sugar Refineries Ltd. ("Sugat"), according to which, the Partnership will plan, finance, establish, maintain and operate a power plant in Sugat's industrial area, consisting of an energy output of up to 124 megawatts. In the first stage, the energy output of the plant shall be between 55 to 62 megawatts.

Through the use of the power plant, the Partnership is to provide Sugat's energy requirements until January 2037, pursuant to the terms of the aforementioned agreement. Sugat has the option to extend the term of the agreement following the first stage of the agreement.

The Partnership will be authorized to sell electricity and steam manufactured at the facility also to third parties. It was also determined that the prior to the first stage, the Partnership is to connect Sugat's plant to Israel's main natural gas pipeline, convert the plant into a dual function system which will enable Sugat to use both oil and natural gas and operate and maintain the facility, in accordance with the terms of the agreement.

On March 1, 2012, the Partnership entered into an agreement with Israel Natural Gas Ltd. (INGL) for the purpose of connecting Sugat's facility to Israel's main natural gas pipeline and providing for transportation of natural gas using INGL's services (the "INGL Agreement").

In the framework of the INGL Agreement, INGL will establish the necessary foundations, including building the structures enabling streaming of natural gas to Sugat's plant (during the stage of conversion of Sugat's existing energy facility into a dual function system which allows operation both by oil and natural gas), and installing the necessary foundations which provide natural gas to the plant that the Partnership is planning to establish in Sugat's industrial area.

The agreement is in effect until July 31, 2029 with an option to extend for an additional five years.

In the framework of the INGL Agreement, the Partnership will bear the costs of the connection to the main pipeline which is estimated to be approximately NIS 15 million. Additionally, the Partnership undertook to pay annual payments to INGL which are not considered material for the main pipeline services until the termination of the agreement, whether the Partnership chooses to use main pipeline services or not.

Government Regulation

Environmental regulation

In its retail outlets and convenience stores business, Dor Alon is subject to various laws and regulations aimed at preventing damage to the environment (mainly air, water and soil contamination), including the following laws and regulations:

The Water Law, 5719-1959, or the Water Law, provides for the protection of all water resources in Israel and imposes liability on those who, by action or lack thereof have caused and/or may cause contamination of water sources. The Water Regulations (Prevention of Contamination) (Fueling Stations), 5757-1997, promulgated under the Water Law, or the Water Regulations, which provides regulations for the construction of fueling stations, and directives issued by the Commissioner (as defined under the Water Regulations) concerning the planning, construction and operation of fueling stations, including the insulation and protection of fuel tanks.

The Environmental Protection Regulation, 5768-2008, which increases the penalties determined in other environmental laws.

The Clean Air for Israel Law, 5768-2008, effective as of January 2011, will constitute the framework for regulation of the quality of the air and emission of pollution caused mainly by large industrial plants. This law provides for restrictions and prohibitions regarding the sources of emission and contains provisions related to the prevention and reduction of air pollution.

The Dangerous Goods Law, 5753-1993, which imposes an obligation to obtain a permit to handle dangerous substances.

Business Permits. In order to obtain permits to operate fueling stations, Dor Alon must install devices at some of its stations to prevent over-filling of underground fuel tanks as well as devices to prevent spillage during unloading of fuel tanks. At several of its fueling stations, Dor Alon is required to perform soil surveys in order to identify soil and groundwater contamination. The cost of treatment of soil or groundwater contamination at a retail site typically does not exceed a few million shekels, depending on the extent of the contamination.

Dor Alon is aware of environmental law proposals including,inter alia, proposals to encourage the use of more environmentally friendly vehicles, restricting the approval of building plans in contaminated areas and reducing gas emissions. One of these proposals is theBill for Preventing Land Contamination and Treatment of Contaminated Lands, 5771-2011which, among others, defines the term "Contaminated Land", prohibits contamination of lands and disposal of contaminate materials, establishes a fund for rehabilitation of contaminate lands, authorizes a commissioner and defines its governance enforcement authority, including monetary sanctions, and establishes a criminal offense for breaching the law. These law proposals may influence Dor Alon’s financial results if the laws are approved. At this stage, Dor Alon cannot estimate which of the bills will be approved or rejected.

Dor Alon invested approximately NIS 3 million in 2011 in order to satisfy the environmental laws and regulations. This amount does not include the amounts invested in the planning and construction of new fueling stations, which are also required by such statutory provisions. Some of the actions performed by Dor Alon were also implemented in the wake of demands by the Israeli Ministry of Environmental Protection and the Israeli Water Commission. Dor Alon expects to invest an additional NIS 6 million in each of the next two years in the implementation of the laws and regulations related to the operation of Dor Alon’s fueling stations.

From time to time, Dor Alon does incur costs resulting from spills of petroleum products at its retail outlets. Although Dor Alon is not aware of any contaminated sites as to which material outstanding claims or obligations exist, the discovery of additional contaminants or the imposition of additional cleanup obligations at these or other sites could result in significant unexpected costs in the future.

Dor Alon reached an arrangement with the Israeli Ministry of Environmental Protection regarding the execution of an eight year plan for identifying and treating contaminations at 54 fueling stations operated by Dor Alon built before 1997. In addition, Dor Alon reached an understanding with the Ministry of Environmental Protection concerning a vapor recovery system (referred to as Stage 2) in fuel stations located in residential areas. Pursuant to the understanding, over a period of four years,

Stage 2 will be installed in fuel stations located within 40 meters of residential areas and will cost approximately $70,000 per fuel station.

Additionally, and without derogating from Dor Alon’s obligations above, in September 2011 and in January 2012, the Ministry of Environmental Protection issued directives pursuant to which Dor Alon would be required to install vapor recovery systems in each of its fuel stations located within 80 meters of residential areas; and in all other fuel stations by the end of 2015. Pursuant to the aforementioned directives, Dor Alon is required to install the steam recycling system in 36 fueling stations by the end of 2013; and in additional 82 fueling stations by the end of 2015. This initiative will cost approximately $70,000 per station.

In its direct marketing business, Dor Alon is also subject to various laws and regulations, including laws and regulations that:

Impose duties of licensing and of obtaining various permits, such as permits to operate as a gas supplier and licenses to operate and deal with LPG. In addition the law imposes various requirements, including that a person who deals with LPG be qualified and licensed, that the gas supplier satisfies all applicable safety requirements and to maintain specific types and levels of insurance in order to cover damages;

Impose duties of licensing and obtaining permits for Dorgas LPG’s storage facilities;

Impose restrictions and duties related to the provision of gas to the private sector, such as a prohibition to act to preserve customers who have previously delivered written notices of their intention to replace their gas supplier, the duty to serve new customers in a fair manner providing the same conditions as provided to similar customers and the duty to perform periodic tests to the gas systems;

Impose provisions related to safety in connection with the marketing and supplying of gas; and

Impose provisions related to the marketing of LPG, such as standards for gas containers, gas systems and installation of central gas systems.

In its jet fuel business, Dor Alon is subject also to other laws and regulations. Dor Alon’s activity as a provider of infrastructure services for jet fueling and jet fueling services for jets at Ben Gurion International Airport are subject to regulation.

Other Government Regulation

Dor Alon, as a fuel company, is subject to various other laws and regulations, including laws and regulations that:

The Planning and Building Law, 5725-1965, or the Planning and Building Law, which provides that any use of property must be done in accordance with the designated purpose of the property. Often, the permit for establishing fueling stations involves changing the designated purpose of the property. Under the National Land Planning Program for Refueling Stations NLP 18 – 1986, promulgated under the Planning and Building Law, or NLP 18, the issuance of permits for fueling stations are subject to different conditions and criteria such as,inter alia, the prevention of safety, environmental and transport hazards, minimal distance between fueling stations and minimal distance between gas containers and pumps and residential buildings.

impose duties of licensing and obligations to obtain various permits from various governmental authorities, including the police, the Ministry of Environmental Protection, the Ministry of Industry, Trade and Labor, the fire department and the relevant zoning committees. As of the date of this Annual Report, there are a few indictments or sentences pending against Dor Alon and its subsidiaries regarding the operation of fueling stations and/or convenience stores without permits. A number of indictments are pending against Dor Alon and its subsidiaries with respect to fueling stations and convenience stores concerning the operation of fueling station and convenience stores without permits. With respect to five fueling stations and with respect to three convenience stores closure orders have been issued. These closure orders have been suspended for a short period of time in order to obtain the appropriate permits;

establish the duty of fuel companies to maintain an inventory of fuels for emergency purposes, the expenses of which are paid by the Israeli Fuel Administration, and to maintain, at their own expense, a supply of diesel fuel that is not an emergency supply;

impose an excise tax on the supply of fuel from ORL and on the release of fuel from customs;

prescribe a maximum consumer price for 95 octane gasoline;

impose restrictions on operations of fuel companies aimed at promoting competition in the fuel market, including restrictions with respect to the terms of exclusivity agreements between fuel companies and the unrelated owners of fueling stations and restrictions on the location of new fueling stations;

impose restrictions on the planning and establishing fueling stations and retail stores;

impose anti-trust prohibitions under the Antitrust Law, including with respect to price setting and exclusive long term (over three years) supply agreements between gas supply companies, such as Dor Alon, and fueling stations (which are not owned by such companies);

regulate the storage of fuel;

prohibit fuel companies from selling fuel products to illegal fueling stations;

impose restrictions on the establishment of internal fueling stations located primarily on kibbutzim and moshavim;

impose restrictions on the operation of fueling stations and convenience stores on the Jewish Sabbath (Saturday) and regarding a permit to employ Jewish workers on Saturday. Dor Alon does not possess such a permit. Most of Dor Alon’s fueling stations and convenience stores are open during the Jewish Sabbath. Under Israeli law, employment of workers in violation of the law is subject to a fine or imprisonment of up to a month, or both. The convenience stores in the AM:PM chain of stores also operate during the night and on Saturdays. On the basis of information obtained from Dor Alon, in the cities in which AM:PM operates there are municipal regulations restricting their activity during the night and on Saturdays. Most of the AM:PM stores have obtained permits to operate at night; and

set provisions pertaining to safety in the marketing and supply of fuel and LPG.

In January 2011, a draft proposed law entitled the "Fuel Industry Law-2011" was circulated. The proposed law stipulates, among other things: prohibition on the possession of more than one refinement license by one company or its controlling shareholders; restriction on the possession of refinement licenses together with marketing licenses under the same license; restriction on the number of fueling stations owned by a single gas company in one geographic area; prohibition on a licensee holding a refinement licenses to engage in the marketing activity of LPG; and restrictions on maintaining different types of licenses at the same time.

Tax Pre-rulings

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 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 activities 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 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 to Alon Natural Gas Exploration Ltd. through the Split, will not be sold by any of those companies and will be used as customary in 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. 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; and (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 becomeobligated 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, Alon has agreed to compensate and indemnify Alon Holdings 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.

In addition, Alon and Alon Holdings have received a pre-ruling from the Israeli Tax Authority that provides that the Acquisition will 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 (the “Required Term”), Alon Holdings 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 Alon Holdings in the framework of the Acquisition and most of the assets held by Alon Holdings 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 Alon Holdings (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 Alon Holdings immediately following the Acquisition, subject to Sections 103c(a)(9), (9a) in the Israeli Tax Ordinance.

Alon has clarified to the Company that, in connection with the payment of tax at the time of any future sale by the Company 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).

These conditions restrict the manner in which Alon Holdings may conduct its business in the future.

For additional information regarding government regulations relating to our Retail Outlets and Convenience Storessegment, please see “General Government Regulation for our Supermarket and Non-Food Retail Segments” below.

Fueling Stations and Convenience Stores Strategies

Our strategies in our fueling station and convenience stores segment is to continuously expand our fueling station coverage in Israel and expand our convenience stores, both as part of our fueling stations and on a stand alone basis. To achieve this goal, we intend to pursue a number of operation and growth strategies, which include:

expanding our national presence of fueling stations and commercial retail centers, while giving preference to developing fueling complexes and public fueling stations in urban areas (including small stations);

strengthening and expanding the various services and products offered to customers in the fueling and commerce complexes, as well as improve the quality of those services and observing environmental regulations;

increasing sales in the convenience store sector in order to increase its relative market share in this sector by expanding convenience store chain in the existing fueling and commerce complexes, in new complexes, and through independent convenience stores (under the brands AM:PM, Alonit in kibbutzim, and Alonit in moshavim);

expanding the "Sega Fredo" coffee shop chain and launching new services such as: ATM machines, bill payment kiosks, cellular charging kiosks, and more. Moreover, "Alonit" launched stands under the "Alonit" brand for selling fast food in its branches in cooperation with a certain food company;

initialy operating a few of our convenience stores by franchises, and if such action will succeed, to operate additional convenience stores by franchises;

entering into city centers in which the number of fueling stations of Dor Alon is relatively small;

combining parallel activity of building and operating convenience stores in three segments (urban, village, and roadside complexes) in order to provide Dor Alon the basis for a national chain in the fueling and commerce segment;

preserving Dor Alon’s status as a leader in the computerized fueling sector for drivers of heavy vehicles, by various road services which are given to these customers in the fueling and commerce complexes, such as resting areas, showers, and more;

In the direct marketing sector, maintaining Dor Alon’s growth in the scope of sales, subject to maintaining profitability and proper diversification of its types of customers;

broadening Dor Alon’s presence and activities of the "YOU" club in its fueling stations and commercial retail centers;

diversifying Dor Alon’s fuel supply sources, including the importation of fuels;

expanding the marketing of Dor Alon’s private brand in the lubricant oil sector – "Doroil", while at the same time leveraging its international brands ("Texaco", "Chevron" and "Aral") in order to increase its market share in the oils marketing sector;

continuing to take part in tenders for the supply of petroleum distillates, which are mostly published by institutional bodies, subject to specific economic examination of each tender;

expanding Dor Alon’s fuel distribution suppliers in additional terminals;

entering into the sector of marketing natural gas for industry, which is subject to establishment of distribution systems by local franchises;

maintaining the joint operation with the international company Chevron-Texaco in the jet fuel sector;

in the power plants sector, maintaining operation in the private electricity sector and examining development of additional projects; and

continuing to invest in human resources while encouraging innovation, devotion, teamwork and improvement of administrative abilities.

The following table provides certain information regarding our fueling and convenience stores in the "Commercial and Fueling Sites" segment as of December 31, 2011:

Fueling stations	Owned (including leases exceeding 25 years)	34
	Leased (leases of up to 25 years)	126
	Supply agreements	36
		196
	Sites In Development (1)	69

	Internal stations (2)	170

Convenience Stores (3)	Owned	195
	Franchised	3
		198

Total		633

(1)	There is no certainty that permits will be granted for all sites.

(2)	Typically, our stations are in kibbutzim and Moshavim which are used by defined populations.

(3)	Convenience Stores: 149 Alonit stores are adjacent to fueling stations, and 49 AM:PM stand alone stores.

Non-Food Retail

General

As of December 31, 2011, we operated, through our subsidiaries and franchisees, a total of 248 non-food retail stores, 147 of which were 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. ("Bee Group"), and by October 2010 we had increased our holdings in Bee Group to 100%. See "Item 10. Additional Information – C. Material Contracts – Purchase of Additional Shares in the Bee Group." Our non-food retail segment is concentrated 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. In 2010, we completed the centralization of all of the financial activity, import, and information systems of our non-food retail segment.

Our non-food retail segment holds and operates through subsidiaries large retail chains in Israel of houseware and home textile, toys, leisureand baby and young children stores, with 248 stores, located throughout Israel, owned and operated mostly by franchisees as of December 31, 2011. 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) 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 houseware departments within most of our large supermarket stores.

As of December 31, 2011, Bee Group owned approximately 77.03% of the outstanding shares of Naaman Porcelain ("Naaman"), a company traded on the Tel Aviv Stock Exchange. 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 December 31, 2011, Naaman had its own chain of 36 houseware stores, 8 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 November 22, 2011, Bee Group made a full tender offer to purchase 4,821,800 ordinary shares of Naaman that were not held by the group. The last date for accepting the tender offer was on November 22, 2011, and up to the date of this Annual Report, an acceptance notice of 1.48 million shares (10.18%) was received in return for NIS 9.7 million.

As of March 31, 2012, Naaman owned 100% of the share capital of Vardinon Textile Ltd. ("Vardinon"). 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 (41 stores as of December 31, 2011) and by wholesale to customers that include other wholesalers, retail chains, employee committees and catalogues. Vardinon and Mega Retail are parties to a services agreement. See “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions” for more information.

On February 1, 2011, Naaman made a tender offer to purchase 2,577,747 ordinary shares of Vardinon, par value NIS 1 per share, at a price per share of NIS 3.07 per share, in cash. Naaman's obligation to purchase the shares was conditioned upon the acceptance of the tender offer by over 95% of the holders of Vardinon's issued shares (excluding dormant shares). On March 7, 2011, Naaman publicized the acceptance of the tender offer by the required majority of Vardinon's shareholders and on March 15, 2011 the shares of the shareholders that had refused the complete tender offer were forcefully acquired, in accordance with Section 337(a) of the Israeli Companies Law. As a result of the completion of the complete tender offer, Vardinon's shares were delisted from the Tel Aviv Stock Exchange and it became a privately owned company.

As of March 31, 2012, Naaman also owned 100% of the outstanding shares in Sheshet. The Sheshet chain sells houseware and small electrical appliances. As of December 31, 2011, Sheshet had its own chain of 43 houseware stores, 35 of which are operated by franchisees, and points of sale in approximately 195 supermarkets of Mega Retail.

In May 2011, the shares of Dr. Baby Marketing Ltd., a fully owned subsidiary of "Dr. Baby", were sold to Mega Retail; consequently, the Company has 100% control and ownership on the operations of Dr. Baby. Bee Group has the right to repurchase its former holdings in "Dr. Baby" from the Company.

On December 22, 2011, Mr. Ronen Levi, one of the chain's founders, was appointed by the board of directors of Kfar Hashashuim as the CEO of Kfar Hashashuim, and he was granted 10% of the issued and outstanding shares of Kfar Hashashuim and an option to purchase additional 10% of its issued and outstanding shares.

Industry Overview

The Non-Food retail sales of houseware in Israel include 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 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.

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 include 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.

Competition

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 controlling interests of “Non-Food” chains, 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 our sales. Increased competition may adversely affect our sales and our profitability.

In addition, the barriers of entry are low in some of the markets in which our non-food retail segment 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.

The merchandise we sell in our non-food retail business 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.

Non-Food Operations

As of December 31, 2011, we held and operated, through our subsidiaries, large retail chains with 248 stores, some of which are owned and operated by the subsidiaries and some 147 of which are owned and operated by franchisees as of December 31, 2011. 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) 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. Since 2009, Bee Group, our wholly owned subsidiary, has established five specialized stores for household products that sell Naaman, Sheshet and Vardinon products under one roof.

The relationship with the franchisees is generally governed by franchise agreements between the relevant 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 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 Alon Holdings and its subsidiaries.

As of December, 31, 2011, our non-food retail segment had 147 material franchisee that operated, both on its own and with other third parties, 8 "Naaman" stores, 78 "Kfar Hasha’ashuim" stores, 25 "All for a Dollar" stores, 35 "Sheshet" stores, and 1 "Dr. Baby" store.

The following table provides certain information regarding our non-food retail stores as of December 31, 2011:

Non-Food Properties		Number	Square meters
Stores	Leased	76	16,000
	Franchise operated	23
	Franchises	147
		246	16,000
Stores In Development	Leased	2	300
Offices	Leased from BSRE	1	3,500
Warehouses	Leased from BSRE	1	24,000
	Leased	2	1,800
Total		252	45,600

Purchasing and Distribution

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.

As of March 31, 2011, we completed construction of our distribution and logistics center in Beer Tuvia, which is 100% held by BSRE, and which is used for storage and distribution of Non-Food and Near-Food products for our Non-Food chains and our supermarket stores. The distribution center is operated on an approximately 24,000 square meter site and is currently leased to Bee Group by BSRE. Including the initial expense of NIS 19.0 million to purchase the property, BSRE invested a total of approximately NIS 112 million in building the distribution center. In the year 2010, the distribution center only served Vardinon and Kfar Hasha’ashuim, and during the second half of 2011, this distribution center began to be fully used and also served Naaman, "Dr. Baby" and Mega Retail.

Marketing

Our main marketing channels for our Non-Food products are (i) the non-food retail stores operating under 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.

Since 2009 Bee Group has established five specialized stores for household products that sell Naaman, Sheshet and Vardinon products under one roof.

For additional information regarding our marketing strategies in the Non-Food segment, please see “Supermarkets - Marketing” above.

Government Regulation

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 theLiability 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 theConsumer Protection Law, 1981, which is described below under " – General Government Regulation for our Supermarket and Non-Food Retail Segments". We are also subject to theSupervision 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 non-food retail stores do not have permits according to the requirements of theBusiness 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 March 31, 2012, none of the landlords has made use of this right.

For additional information regarding government regulations relating to our Non-Food Retail segment, please see “General Government Regulation for our Supermarket and Non-Food Retail Segments” below.

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 "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.

Non-Food Strategies

Please see the sections entitled "Business Overview- Our Strategies" and “Supermarkets – Supermarkets Strategies” above for a description of our strategies in our Non-Food segment.

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"). The final agreements were signed on June 3, 2010 and received the approval of the Minister of the Interior. 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. 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".

Sale by BSRE of Half its Rights in Kiryat Hasharon Property

On July 4, 2011, BSRE and Harel Insurance Company Ltd. ("Harel") signed an agreement whereby Harel acquired half of the BSRE's rights in an investment property located in KiryatHasharon-Netanya (on which a commercial center is currently being erected) in consideration for approximately NIS 50.6 million. In 2011, BSRE recorded a gain from changes in fair value of the said investment property in the amount of NIS 20.5 million to its income statement.

Other Recent Activities in the Real Estate Sector

In July 2010, Gindi was awarded a tender to Build Operate and Transfer ("BOT") a parking lot in Tel Aviv ("Givon Parking") for approximately 1,000 parking spaces adjacent to the wholesale market project for a period of 23 years. In August 2010, BSRE joined Gindi in this project as a 50% joint venture partner. On October 11, 2011, BSRE received a notice from Tel Aviv municipality that all of the conditions to approve the BOT agreement of "Givon Parking" in Tel Aviv had been satisfied. In return for constructing the parking lot, BSRE and its partners will be entitled to operate and collect rental fees for parking for a period of 23 years from delivering the authority for use of property. On November 13, 2011 BSRE received the right to use the property for constructions work. BSRE estimates that construction will be completed during 2014. The total cost for establishing the parking lot, including related costs, is estimated at NIS 144 million ($38.8 million), and the share of BSRE is approximately NIS 72 million ($19.4 million). On December 12, 2011, BSRE and its partners signed an agreement with the bank for the funding of approximately 80% of the parking lot construction's costs, and the credit lines provided for financing the project were in the aggregate amount of NIS 60 million (approximately US $15.7 milllion). BSRE and its partners determined material issues regarding the construction and the management of the parking lot in which an unanimously decision is required, and principles regarding dilution of each of the parties' rights in the event that one of the parties will not invest the amounts that such party obligated to invest.

During 2011, BSRE invested a total amount of NIS 93 million, including investments in rental offices and land in areas used for commercial and industrial development. From this amount, BSRE invested approximately NIS 55 million in properties leased to third parties.

As of September 30, 2010, we had completed construction of our second distribution and logistics center, which, as of March 31, 2012, was held by a subsidiary wholly-owned by BSRE, and which is used for storage and distribution of Non-Food and Near-Food products for our Non Food chains and our supermarket stores. The distribution center is operated on an approximately 24,000 square meter site and is currently leased to Bee Group. Including the initial expense of NIS 19.0 million to purchase the property, BSRE invested a total of approximately NIS 112 million in building the distribution center. In addition, the Company intends to build a third logistics and distribution center within 24 months of receiving its building permit, which will be operated on an approximately 25,000 square meter site. Once the third distribution center is completed, our distribution centers will be operated on approximately 75,000 square meters. A request for a building permit for this third logistics and distribution center has been filed.

On September 11, 2008, BSRE acquired a 19 dunam property designated for a shopping center in Netanya with rights for 42,000 square meters of commercial spaces and offices. The cost of this property was approximately NIS 27 million. For additional information, see below "Commercial areas, including supermarkets brancheses – Property for a shopping center in Netanya".

Transfer of Real Estate Assets from Mega Retail to BSRE

In September 2009, Alon Holdings reorganized its real estate activities pursuant to which Mega Retail transferred all of the real estate held by it to BSRE. The transfer was completed on September 13, 2009, and, pursuant to the approval of the Israeli Tax Authority, the transfer was effective as of March 31, 2009.

As part of the 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 owned 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 Alon Holdings for properties 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 after the September 2009 transfer contain terms similar to the other lease agreements between BSRE and Mega Retail, 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 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 a 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 March 31, 2012, BSRE met these covenants. In addition, BSRE has pledged 13 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 (if 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 acceptance 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 acceptance 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 to 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, most of our real estate is owned by our 78.22% subsidiary, BSRE, and includes commercial areas which are mainly designated for the use of our supermarket branches and for the operation of our non-food 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, 2011, the total square meters of developed property that we owned was approximately 267,000 square meters, the total square meters of property in development that we owned was approximately 28,100 and the total square meters of unutilized building rights that we owned was approximately 182,000 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, 2011:

	Number of properties for use or rent		Area in square meter for leasing (property space)			Occupancy rate
Commercial areas, including supermarket branches		111		184,400	*		99.2	%

Warehouses and Logistics Centers		5		65,700			100	%

Offices		4		16,900			87.7	%

Total Developed property		120		267,000			N/A

Total property in development-commercial areas		3		28,100

Total unutilized building rights				182,000

Wholesale market project				97,460	**

*Not including an area of 14,000 square meters which has been evacuated by its tenants for the purpose of renovation and the addition of two floors.

** BSRE’s share is 50%.

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 industrial, residential or commercial areas. Some of the properties have parking lots and operational areas that are not included in the square meters calculated for lease. The majority of the supermarkets properties are leased to Mega Retail. Below are two additional commercial areas not designated for supermarkets that BSRE owns:

Hadar Shopping Mall -BSRE owns 50% of the property, which is located in the 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 square meters of commercial space, including 780 parking places. The space is leased to third parties, including 4,700 square meters to Mega. As of March 31, 2012, 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 square meters, additional upper level parking and 6% additional building rights for commercial purposes and additional floors (the "Expansion Project"). On January 1, 2011, BSRE and the third party received a permit to build above the existing floors an additional commercial floor of approximately 12,000 square meters, additional service areas, and three upper level parking areas of approximately 22,000 square meters. During the first quarter of 2012,the building of the additional commercial floor and the parking areas has began and BSRE estimates that the construction will be completed by the second quarter of 2013. The estimated budget for the construction is approximately NIS 165 million (approximately US$ 43 million), including renovation of the current building.

Property designated for a shopping center in Netanya- a 19 dunam property with rights for 42,000 square meters of commercial spaces and offices. The cost of this property was approximately NIS 27 million. In the third quarter of 2010, BSRE began to construct a shopping mall of approximately 13,500 square meters on the first and second floors with an underground parking garage of approximately 12,000 square meters, as a first stage of development of the property. The property includes approximately 28,000 square meters of unutilized building rights which BSRE plans to use for protected tenancy or students dorms, subject to change in zoning of the property. BSRE estimates that the cost of this first stage of development will be approximately NIS 100 million and estimates that construction period will be 24 months. BSRE has begun marketing the areas of the project for lease. In July 2011, Harel Insurance Company Ltd., Dikla Insurance Company Ltd. and I.M.R - Ezer, Insurance and Mortage Company Ltd. (together "Harel") purchased 50% of BSRE's rights is the property, in consideration for approximately NIS 50.6 million (approximately US$ 13 million).

In addition, BSRE holds 50% of the share capital of Center Investments 1108 Ltd., an investment company that holds the rights in a commercial property of 7,200 square meters in Beer Sheva on which a commercial center is built.

Offices

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

Afek Industrial Park, Rosh Ha'ayin - BSRE owns an office building in Afek Industrial Park which is built on a 13,770 square meter plot and includes two floors of offices with a total area of 12,700 square meters, which are leased to the Company and serve as the Company's and its subsidiaries' executive offices. The ground floor of the buildings also includes a supermarket, a taxi cab station and a small fueling station operated by Mega Retail. The property also includes parking areas for the offices and the supermarket. During 2011, BSRE applied for building permit for approximately 7,900 square meters of unutilized building rights, which are designated for light industrial and commercial use, as well as service areas which BSRE considers developing in order to broaden the offices and the parking lots subject to the receipt of building permits.

Logistics Areas

Below is a short description of the logistics 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 square 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 (the "ILA"), and shortly thereafter submitted a request to the ILA to allow Kibbutz Einat to transfer the lease to Einat Ltd. and the ILA did not respond to this request. On October 10, 2011, Einat Ltd. and Kibbutz Einat served a petition against the ILA to the High Court of Justice to obligate the ILA to explain why it did not respond to and did not approve the request, and on October 11, 2011, the court determined that the ILA should provide its preliminary response. Einat Ltd. and Kibbutz Einat are negotiating with the ILA in order to complete the transfer of the lease. Without derogating the aforementioned, Kibbutz Einat provided BSRE guaranties to assure the transfer of the lease. 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 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 square meters of commercial areas and office buildings. Logistic Center entered into an agreement with the Bee Group pursuant to which the parties completed building a distribution center used for storage and distribution of Non-Food and Near-Food products for our Non Food chains and our supermarket stores. The lease is for a period of 12 years from the 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 is operated on a 24,000 square meter site and is currently leased to Bee Group. Including the initial expense of NIS 19.0 million to acquire the property, BSRE invested a total of approximately NIS 112 million in building the distribution center. This entire logistics and distribution center is currently being occupied by the Bee Group.

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 are to jointly hold in equal parts a new company to which Kibbutz Eyal will transfer the property. In addition, pursuant to this agreement BSRE is to 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. In February 2011, following the fulfillment of various closing conditions, including the approval of the Israel Land Administration, the transaction was completed. Upon closing, the parties entered into a statement of work for the development project, pursuant to which, among other things, BSRE was issued 200 shares in the new company, which, as of March 31, 2012, represented 50% of the issued and outstanding shares of the new company. As of March 31, 2012, the joint new company has begun to prepare a request for building rights. The Israel Land Administration has approved the allocation of only 41.5 dunam for the new company. In addition, a construction work permit was received and the contractors' bidding process is in its final stages.

On July 11, 2011, following the approval of the audit committee of BSRE and board of directors, BSRE's shareholders approved entering into a lease agreement with Mega Retail, pursuant to which BSRE will construct the logistics center in Kibbutz Eyal to be leased by Mega Retail. The lease is for a period of 15 years from the 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 8.7% to 9% of the total investment made by the joint new company in acquiring and building the logistic center, according to the calculation mechanism and orders provided for in the lease agreement. Due to the recent amendment to the Companies Law, the audit committee of BSRE determined that the period of the lease agreement, which exceeds three years, is reasonable under circumstances and in light of the nature of the transaction.

As of the date of this report, BSRE estimates that the cost of this project will be approximately NIS 120 million.

Rishon Letzion- Mega Retail's logistics center is located in the western industrial area of Rishon Letzion. Part of the property is an open area used by Alon Holdings for container storage and as a loading area and includes unutilized building rights of approximately 15,000 square meters that may be used for industrial, commercial and storage purposes.

Properties with development potential

As of December 31, 2011, BSRE had rights to build a total of 182,000 square meters (170,000 square meters mainly for commercial purposes and 12,000 square meters for residential purposes). Because the utilization of building rights is dependent on economic feasibility, satisfaction of various conditions, payment of costs and other factors, it is not clear if and when BSRE will 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 building complex and a shopping mall from the municipality of Tel Aviv and the Wholesale Market Company Ltd. The final agreements were signed on June 3, 2010 and received the approval of the Minister of the Interior on July 11, 2010. 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 controlling shareholder, Alon Israel Oil Co. Ltd. ("Alon"). For additional information, 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 ".

Industry Overview

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 and warehouse use. The yield-generating real estate market is affected by the 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.

In recent years 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. The year 2010 was marked by a shift from an economic slowdown in Israel in the first half of the year to the beginning of a recovery of the Israeli economy toward the end of the year, and such recovery continued during 2011. However, signs of an economic slowdown and the resulting consequences have not yet completely subsided and the debt crises generated in Europe may have a future adverse affect on the economic conditions in Israel. During 2011 and the beginning of 2012, it was still difficult to receive financing from the banks and other sources in Israel and abroad, which has adversely affected the yield-generating real estate market. In addition, the public protest which began in July 2011 with regard to high housing costs in Israel led to a slowdown in the Israeli yield-generating real estate market which was evidenced by a decline in the demand for real estate during the second half of 2011 due to the sharp increase in real estate prices and the public's anticipation that such prices will decrease due to the public protest. 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. Although in 2010 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. Moreover, since 2010, we entered the field of promotion and planning of residential real estate. There are different risks in this sector including: exposure to changes in the demand for residential properties as a result of changes in the economy, especially as a result of a recession or a significant deterioration in the economy; the speed at which local planning authorities and cities approve the building projects; changes in and increases to the stringency of building and planning laws and regulations, which may require the Company to incur additional expenses; lack of human resources in the building sector, as a result of the government's policy for employing foreign workers, or 'closures' for security reasons as well as delays or continuing lack of raw materials, for example as a result of the closure of Israel's ports, that may affect the Company's ability to meet the original timetables as well as its originally contemplated costs; and changes in the government's policies for the granting of mortgages, which affect the level of demand for residential properties.

Competition

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. During 2011, there were two opposite trends, difficulties in funding projects, which may decrease the supply of office spaces on the one hand, and the increase in available properties, which may increase the supply of office spaces on the other hand. Such opposite trends of supply and demand make it difficult to predict the future prices and spaces. BSRE's portion in the office space rental market is small, and we are therefore only slightly affected by the trends and changes in the competition of this specific field. In the commercial centers sector, there was a consistent increase in rental fees during the last three years. In addition, many mergers and acquisitions occurred in the sector of shopping malls sector in recent years, creating centralization and control by a limited number of companies, redacting the competition in the yield-generating real estate market, and affecting rental and management fees.

Government Regulation

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

ThePlanning 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 thePlanning and Construction Law, the owner of real estate may be held criminally liable for an offense committed by a lessee on such property.

In addition, the field of residential construction and selling of residential units is subject to theSale (Apartments) Law,5733-1973 and to theSale (Apartments)(Assurance ofInvestments of Persons Acquiring Apartments) Law, 5735-1974, and the regulations promulgated thereunder. In June 2008, these laws were respectively amended to obligate a seller, among other things, to keep a dedicated project bank account for each project, as well as providing a guarantee to the buyer for payments already received by the seller for the residential unit (without which a buyer will not be obligated to pay any amount above 7% of the price for the unit). In March 2011, these laws were additionally amended to broaden the sellers' responsibilities toward the buyers, among others, regarding the examination period and its terms, compensation in the event of late delivering of the occupancy on the apartment, and obligations to register a house as condominium.

BSRE's Strategies

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;

maximizing the leasing of existing properties to commercial users;

increasing and developing unused building rights in our existing properties; and

acquiring additional commercial real estate and yield-generating assets in Israel and continuing to examine acquisitions abroad in light of market conditions, while diversifying our real estate property base.

Additional Business Information Relating to Alon Holdings

Related Businesses

Diners Israel

In connection with our joint Loyalty Plan with Dor Alon, on November 29, 2005, we and Dor Alon purchased 49% (36.75% Alon Holdings and 12.25% Dor Alon) 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 Alon Holdings). The remaining 51% is owned by CAL, a credit card company in Israel which itself is a subsidiary of Israel Discount Bank Ltd. On May 25, 2011, the agreement was amended.

Under the original agreement with CAL, Alon Holdings and Dor Alon were 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, and a share of the net income of Diners Israel in connection with the activities of the credit cards not bearing the "You" name based on certain thresholds set in the original agreement. In addition, Diners signed an agreement with CAL pursuant to which Loyalty Plan members are to be issued Mastercard "You" credit cards, in addition to Diners “You” cards. On May 25, 2011, our management agreed to an amendment to the agreement of principles between CAL, Diners Israel, Alon Holdings, Dor Alon, and the Alon Holdings-Dor Alon Joint Loyalty Plan Partnership, and in July 2011, all suspending conditions set forth in the agreement were completed and the amendment to the agreement came into effect. Pursuant to the amendment, Alon Holdings and Dor Alon has the right to 49% of the profits of Diners Israel Ltd., both related to the "You" bearing credit cards, and to all other credit cards issued by Diners, effective as of January 1^st, 2011 (with the exception of certain activities the profits of which is allocated to the parties per their respective holdings from July 1^st, 2011). Alon Holdings and Dor Alon repaid the non-recourse loan granted to them by CAL for the purchase of the shares, in the amount of NIS 36 million (the amount includes accrued interest). Additionally, the amendment sets the terms as to the business relationship between the parties and extends the agreement until December 31, 2015, following which the agreement will be extended for additional three-year terms based on the terms and conditions set forth in the amendment to the agreement. The amendment also includes a calculation method for the purchase of the 49% of Diners owned by us and by Dor Alon in the event the agreement between Diners and the Loyalty club will not be extended. The Company and Dor Alon handled their financial statements by an agreement to buy Diners as option for purchasing stock options and recorded in the period income before taxes from revaluation of approximately NIS 102 million ($27.5 million). 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, Alon Holdings 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 Alon Holdings supermarkets, through its marketing and through the Nofesh Yashir Internet travel services portal and call center.

Alon Cellular receives MVNO License

In March 2011, Alon Cellular received a MVNO license from the Israeli Ministry of Communications. The MVNO license will enable Alon Cellular to enter the Israeli communication market and add cellular services to the services that the Company offers to its customers. In December 2011, Alon Cellular entered into an agreement with Partner Communications Ltd. for launching cellular services in an MVNO model. For additional information, see “Item 4. Information on the Company - A. History and Development of Alon Holdings”.

General Government Regulation

The Law for Increasing the Enforcement of Labor Law, 5771-2011

The law establishes a mechanism of enforcement and warning, both in the criminal and civil levels, imposes direct liability to execute legal requirements even on the Chief Executive Officer, and provides the Israel Industry, Trade and Employment Office the authority to impose sanctions towards companies which receive services from contractors in three different industries: (i) security services; (ii) cleaning services; and (iii) food supply. The law will come into effect on June 19, 2012. The law may affect the manner of hiring employees and also may impose on the Company great liability towards independent contractors providing these services.

A Bill for Social Economic Modification (Law Amendments) Strengthening of Competition in Favor of the Consumer

The proposed law is intended to cancel the exemption from restrictive arrangement provided to mutual exclusive arrangements, and grants the authority to the the Israeli Antitrust Authority in connection with sales of assets by monopoly and centralized groups and authority to perform examinations regarding the level of competition in various fields in the Israeli economy, including the examination of failures in competition and obstructions to competition. The law, if approved, will become effective during the years 2013-2014 and may have an effect on the management of the Company.

General Government Regulation for our Supermarket and Non-Food Retail Segments

Consumer Protection Laws

We are obligated to label prices on our products on the basis of two main laws: TheConsumer Protection Law, 1981, and theCommodities and Services (Control) Law, 1957. Contravention of these laws constitutes a criminal offense. In 2009, new regulations under theConsumer Protection Lawbecame 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. Claims regarding violation of theConsumer Protection Law are filed against the Company from time to time. These claims are usually settled in plea bargain proceedings. In addition, the Company may be subject to criminal liability in connection with future claims under theConsumer Protection Law. These discrepancies are the result of human error by personnel responsible for labeling our products and 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 theConsumer Protection Lawwith 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 theConsumer 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 theConsumer 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. In addition, sellers must deliver to consumers a manufacturer warranty certificate with the delivery of the products.

On December 14, 2010, theRegulations of Consumer Protection (Abolition of Transaction),came into effect pursuant to which a consumer is allowed to cancel purchase agreements of certain goods and receive a full refund on condition that the consumer returns the goods unused and undamaged. These regulations apply to certain goods over the price of NIS 50.

TheClass 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.

In addition,A Bill for the Consumer Protection Law (Amendment no. 35) (Redeeming Gift Cards), 5772-2012 attempts to establish a mandatory validity period of a gift card for at least five years, and that the amount stated in the gift card will be uniform to all businesses subscribing to the gift card. In addition,this bill attempts to establish, via the economic committee, the authority to establish different provisions pertaining to the gift cards, including conditions which limit the ability to redeem the gift cards. The law, if approved, will have a significant effect on the Company's revenues.

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. Under certain circumstances, the Company may be responsible for damages as a result of defects in the products marketed and sold by the Company.

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.

Reducing the Use of Plastic Bags

To the best of the Company's knowledge, on July 28, 2008, the Reducing the Use of Plastic Bags - 2008 bill proposal was published. The purpose of the proposed law is to significantly reduce the use of plastic bags and to increase the use of biodegradable bags or multi-use bags among the general public, for the purpose of preventing environmental hazards caused by the use of plastic bags.

As a part of the general effort to reduce the use of plastic bags and the initiative of the Ministry of the Environment, a standard was approved pursuant to which certain guidelines and specifications will be set for multi-use bags. To the best of Company's knowledge, an application was submitted by the Minister of the Environment to the Minister of Industry, Trade and Labor to recognize this standard as an official standard.

Proposed Business License Regulation

By virtue ofThe 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 newBusinesses 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 newBusiness 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 (accommodations for accessibility in a public place which is an existing building)

On November 3, 2011, the Regulations for Equal Rights for Persons with Disabilities (accommodations for accessibility in a public place which is an existing building), 2011 was approved and published. The regulations 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

On January 18, 2011, the Knesset passed the Law for Regulation of Packaging Treatment in connection with the manufacturing process and treatment of waste resulting from packaging. The purpose of the law is to encourage the decrease in the amount of waste resulting from the packaging process and the encouragement of reusing packaging. In addition, the new law imposes additional obligations on manufacturers (including sellers of private label products) 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 of packaging waste based on the market share of such packaging waste. We estimate that this law will have a material adverse effect on our operations.

Organizational Structure

We operate our Commercial and Fueling Sites segment through our 78.38% subsidiary, Dor Alon, which is listed on the TASE. Dor Alon is one of the four largest fuel retail companies in Israel based on the number of fueling stations and a leader in the field of convenience stores. Dor Alon operates a chain of 196 fueling stations and 198 convenience stores in different formats in Israel.

We operate all of our supermarkets through our wholly-owned subsidiary, Mega Retail, and eleven supermarkets are owned and operated by our 51% subsidiary, Eden Teva. 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 wholly owned subsidiary Bee Group, which in turn held, as of March 31, 2012, approximately 77.03% of the outstanding shares of Naaman Porcelain Ltd., which held, as of March 31, 2012, all of the share capital in Vardinon Textile Ltd. The shares of Naaman are traded on the Tel Aviv Stock Exchange.

We operate our Real Estate segment through our TASE traded 78.22% subsidiary, BSRE, which owns, leases and develops yield generating commercial properties and projects.

Below is a chart indicating our holdings in our material subsidiaries as of March 31, 2012:

Mega Retail, Dor Alon, 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 of these companies. Although we appoint all or most of the board of directors of each of Mega Retail, Dor Alon, 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. Alon Holdings is obligated to deal with its partially owned subsidiaries at “arm’s-length.” Moreover, in the case of BSRE, Dor Alon, 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.

Alon Holdings owned all of the outstanding shares of Mega Retail as of March 31, 2012. Mega Retail, in turn, through a wholly owned subsidiary, is the owner of our interests in a number of its other subsidiaries and affiliates.

Alon Holdings owned 78.22% of the outstanding shares of BSRE as of March 31, 2012. The balance of BSRE’s outstanding shares are publicly held and traded on the Tel Aviv Stock Exchange. Alon Holdings receives fees from BSRE as payment for the management services it provides to BSRE for the 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.

Alon Holdings owned 78.38% of the outstanding shares of Dor Alon as of March 31, 2012.

See “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions” for a description of the agreements relating to the fees Alon Holdings receives from its subsidiaries. For information concerning the flow of funds between Alon Holdings 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 March 31, 2012. The companies marked with an asterisk (*) are not consolidated in our financial statements.

Company ⁽¹⁾	Operations	% Ownership Held by Alon Holdings

Mega Retail Ltd.	Supermarkets and baby and young children products	100	%(2)
Bee Group Retail Ltd.	Retail and wholesale of houseware and home textile, toys and leisure	100	%(3)
Dor Alon Energy in Israel (1988) Ltd.	Fueling stations and convenience stores	78.38	%
Blue Square Real Estate Ltd.	Real estate	78.22	%(4)
Diners Club Israel Ltd.*	Credit cards	49	%(5)

(1)

All companies are incorporated under Israeli law.

(2)

As of March 31, 2012, Mega Retail Ltd., held approximately 51% of the outstanding shares of Eden Briut Teva Market Ltd., and holds a 33% equity interest in Radio Non-Stop Ltd. and the remaining interests were 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).

(3)

In October 2010, we increased our holding in Bee Group Retail Ltd. to 100%. As of March 31, 2012, Bee Group Retail Ltd., held approximately 77.03% of the outstanding shares of Naaman Porcelain Ltd., which is traded on the Tel Aviv Stock Exchange.

(4)

The remaining shares of BSRE are held by the public and institutional investors and 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. 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.

Property, Plants and Equipment.

For details regarding the properties that we and our subsidiaries own and/or lease, see “Item 4. Information of the Company – B. Business Overview – Supermarkets – Our Operations,” “Item 4. Information of the Company – B. Business Overview – Commercial Sites and Fueling Stations – Our Strategies,” “Item 4. Information of the Company – B. Business Overview – Non-Food Retail – Non-Food Operations,” and “Item 4. Information of the Company – B. Business Overview – Real Estate.”

In 2011, Mega Retail opened approximately 5 additional supermarkets, totaling approximately 10,400 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.Through March 2012,we opened 4 supermarket stores.

During 2011, we have spent more than NIS 139 million (or $36.4 million at the exchange rate as of December 31, 2011) on the acquisition and development of new supermarkets and the remodeling of our existing supermarkets.

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

In 2012 and 2013, we plan to open approximately 14-18 additional fueling stations.

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

In 2011, the Commercial and Fueling Sites segment was fully included in our consolidated financial statements for the first time.

The first half of 2011 was characterized by the improvement of the Company's sales and profitability, while the second half of 2011 was characterized by an increase of competition, public protests, amendments to regulations regarding marketing margins in connection with the sale of 95 octane gasoline, and an increase in the corporate tax rate, which adversely affected the results of operations of the Company.

The Company is making arrangements for the launching of its cellular activity during the first half of 2012.

Supermarket Segment

The first half of 2011 was characterized by a growth of 3.5% in the gross domestic product. During the second half of 2011, social protests occurred which led to a decrease in the consumers' purchases and damage to the sales of the Company.

As part of our strategy to improve our competitive position, during 2011, we continued working to increase our sales of our "Mega" line of private label goods that are sold in our Mega chains. 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 2011, we operated 11 Eden Teva stores and we opened six Eden in Mega stores, with Alon Holdings the clear leader of Israel's emerging organic/health food sector.

In our large supermarkets, we are expanding our sale of baby products and homeware products, including home textile products, in order to expand the range of products that we offer in our supermarkets.

We currently operate our supermarket stores under four brands: Mega Bool, Mega In Town, Zol BeShefa 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.

In 2011, 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.

The Company is operating to gradually improve its operating profit. During March 2012, the Company completed the reduction of headcount of its headquarters by 15% in all levels of management.

We operate the Mega@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. The service was provided in most of Israel as of December 31, 2011.

Commercial and Fueling Sites Segment

In October 2010, we completed the acquisition from Alon of all of Alon's approximately 80% holding in Dor Alon. Dor Alon is one of the four largest fuel retail companies in Israel based on the number of fueling stations and is a leader in the convenience stores sector. Following the acquisition of Dor Alon, we combined our and Dor Alon's retail operations into one group, creating the largest retail group in Israel. In recent years, the Commercial and Fueling Sites segment has been characterized by fierce competition in direct marketing towards end consumers. This competition is reflected in price wars, improvement in credit terms, and improvement in the quality of services offered at fueling sites. In an effort to improve our competitive position in this segment, we anticipate opening and operating approximately 14-18 additional fueling stations during 2012 and 2013 as well as investing additional capital to renovate our existing fueling stations and convenience stores. In addition, we intend to expand the chain of convenience stores outside of our fueling sites, as well as the activities of our countryside stores. We also intend to strengthen our presence in city centers with the goal of closing the gap with our competitors in the same geographic location.

The price of gasoline 95 octane is subject to government-imposed price controls, and in September 2011, the Fuel Administration reduced the fuels market margin, which is subject to government-imposed price controls, in approximately NIS 0.11-0.18 for liter. In addition, on April 5 2012, Dor Alon received from the Israeli Ministry of Energy and Water a document with a reevaluation of the marketing margin in connection with the sale of 95 octane gasoline (the "Draft Reevaluation"). The Draft Reevaluation includes, among others, recommendations to reduce the marketing margin in the sale of self service 95 octane gasoline, from NIS 0.589 (including VAT) per liter to approximately NIS 0.575 (including VAT) per liter, as well as to reduce the full service charge from NIS 0.18 (including VAT) per liter to approximately 0.11 (including VAT) per liter. For additional information on this matter, see "Risks Related To Fueling Stations and Convenience Stores – Dor Alon is exposed to risks associated with changes in regulatory arrangements which may influence the financial results of Dor Alon".

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Non-Food Segment

We have also expanded our presence in “Non-Food” stand alone retail outlets in an effort to establish Alon Holdings as a major player in the non-food retail market. In October 2010, we increased our holdings in Bee Group Retail 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, to 100%. 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 March 31, 2012, through Bee Group, we held approximately 77.03% of the outstanding shares of Naaman, which as of such date held 100% of the share capital of Vardinon. We are working to capitalize on potential operating synergies between Bee Group and our other segments.

During 2011, Bee Group completed the transfer of all of Bee Group's activities to one new logistics center, the costs of which adversely affected the Company's performance. During 2011, activities of "Naaman", "Vardinon" and "Sheshet" were synergetic with our supermarkets. A strategic partner was added to the "Kfar Hashashuim" and "All for a Dollar" chain stores, and such strategic partner will also manage such chain stores. In 2012, we will consider to discontinuing our "Kfar Hashashuim" and "All for a Dollar" chain activities in our Supermarkets which have not been synergetic to date.

Real Estate Segment

Through our subsidiary BSRE, we are engaged in generating yield from commercial centers, logistics centers and offices, land for capital appreciation and deriving long-term yield as well as in the development of projects which include tens of thousands of square meters of construction rights in different stages of design and construction, such as the partnership for the residential project in the wholesale market complex in Tel Aviv (50% ownership), purchase of property in Point Wells, Washington, Hadar Shopping Mall (50% ownership)andproperty designated for a shopping center in Netanya (50% ownership).As of December 31, 2011, BSRE had rights to build a total of 182,000 square meters at different stages of construction (including the projects mentioned above).

We are currently in the process of acquiring 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.

Internal Reorganization

In order to increase the efficiency of our activities and compete more effectively in the markets in which we operate, during the years 2008 to 2011 we implemented a comprehensive internal reorganization, by concentrating all of our food retail activities under Mega Retail, our wholly owned subsidiary from November 2008, concentrating our non-food activities under the Bee Group, and concentrating all our real estate activities under our subsidiary, BSRE (78.22% owned by us as of March 31, 2012), with Alon Holdings as a holding company. In addition, in October 2010 we increased our holdings in Bee Group to 100%. We are upgrading the delivery chain of the Company with a third logistics center in addition to the two logistics centers operating today, which will allow the distribution of more than 60% of the food and non-food products of the Company.

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Since the end of 2011, we have been considering a merger of Bee Group into Mega Retail as an additional stage in the reorganization.

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,
	2009		2010		2011
	%		%		%
Sales		100.00		100.00		100.00
Gross profit		28.0		27.2		23.3
Selling, general and administrative expenses		24.7		24.3		21.1
Operating profit before other gains and losses and changes in fair value of investment property, net		3.3		2.8		2.2
Operating profit		3.2		2.9		2.4
Taxes on income		0.3		0.4		0.4
Net income for the year		1.3		0.7		0.7

Year Ended December 31, 2011 compared with year ended December 31, 2010

Gross revenues.Revenues (including government levies) amounted to NIS 15,296.2 million (U.S. $4,003.2 million) in 2011 as compared to revenues of NIS 9,227.5 million in 2010, an increase of 65.8%. The main reason for the increase in revenues was the inclusion of the results of Dor Alon in 2011. Dor Alon's revenues in 2011, including government levies of NIS 2,813.6 million (U.S. $736.3 million) amounted to NIS 8,151.6 million (U.S. $2,133.3 million).

Net revenues.Net revenues amounted to NIS 12,482.6 million (U.S. $3,266.8 million) compared to revenues of NIS 8,503.7 million in 2010, an increase of 46.8%.

Revenues of the Supermarkets segment – a decrease of 2.5% in revenues from NIS 6,895.0 million in 2010 to NIS 6,723.8 million (U.S. $1,759.7 million) in 2011. The main reason for the decrease was the public protest in Israel that commenced at the end of the second quarter this year which caused a decrease in selling prices to consumers, a decrease in demand and an acceleration of competition in the sector which impaired the sales in the Supermarkets segment. For more information, please see "Segment Information Analysis" below.

Revenues of the Commercial and Fueling sites segment – in 2011 amounted to NIS 5,301.9 million (U.S. $1,387.5 million) as compared to NIS 4,329.9 million in 2010, an increase of 22.4%. The main reason for the increase was the increase in the quantitative sales as a result of opening new fueling sites, an increase in sales in the convenience stores and an increase in the price of petrol between the periods

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Revenues of the non-food segment – a decrease in revenues by 2.9% from NIS 438.6 million in 2010 to NIS 425.8 million (U.S. $111.4 million) in 2011. The decrease in revenues was primarily due to a decrease in the sales to franchises in the home and leisure sectors due to increased competition in the sector and was partly offset by increase in sales of home textile.

Revenues of the real estate segment – an increase in rental income of 23% from NIS 25.2 million in 2010 to NIS 31.0 million (U.S. $8.1 million) in 2011. The increase was primarily due to an increase in leased space and from the effect of the increase of CPI.

Gross profit.Gross profit amounted to NIS 2,915.7 million (U.S. $763 million) (23.3% of revenues) in 2011 as compared to gross profit of NIS 2,311.4 million (27.2% of revenues) in 2010. The main reason for the increase in gross profit was the inclusion of the results of Dor Alon in the fourth quarter of 2010. The decrease in the gross profit rate derives from including Dor Alon's results fully in 2011 while in 2010 Dor Alon's results were included in the fourth quarter only; Dor Alon's financial results are characterized by a lower gross profit rate (approximately 16.4%) than the other operating segments. In the Supermarkets segment, gross profit amounted to NIS 1,850.7 million (U.S. $484.4 million), compared to NIS 1,889.7 million in 2010, a decrease of 2.1% resulting from decrease in sales. In the Non food segment, gross profit amounted to NIS 157.8 million (U.S. $41.3 million), compared to NIS 164.1 million in 2010) a decrease of 3.8% that was due to decrease in sales.

Selling, general and administrative expenses. Selling, general, and administrative expenses amounted to NIS 2,638.8 million (U.S. $690.6 million) (21.1% of revenues) in 2011, compared to expenses of NIS 2,070.0 million (24.3% of revenues) in 2010. The majority of the increase derived from including the results of Dor Alon as mentioned above.In the Supermarket segment, selling, general and administrative expenses amounted to NIS 1,693.4 million (U.S. $443.2 million), an increase of 2.6%, that resulted from opening six new branches, an increase in payroll from NIS 673.2 million in 2010 to NIS 689.6 million in 2011, and an increase in CPI linked expenses such as rent and municipality taxes from NIS 445.1 million in 2010 to NIS 472.2 million in 2011.

Operating profit (before other gains and losses and changes in fair value of investment property).Operating profit amounted to NIS 276.9 million (U.S. $72.4 million) (2.2% of revenues) in 2011 as compared to NIS 241.4 million (2.8% of revenues) in 2010, an increase of 18.8%. In the Supermarkets segment, operating profit decreased from NIS 241.9 million in 2010 to NIS 177.3 million (U.S. $46.4 million) due to a decrease in sales and an increase in expenses, as mentioned above. In the Commercial and fueling sites segment, operating profit increased from NIS 35.3 million in 2010 to NIS 173.6 million (U.S. $45.4 million) in 2011 due to the inclusion of Dor Alon's results in the fourth quarter of 2010. In the Non food segment, operating loss increased from NIS 7.2 million in 2010 to NIS 34.9 million (U.S. $9.1 million) in 2011 due to a decrease in sales to franchisees in the home and leisure sector as a result of an increase of competition in this segment and an increase in the provisions for doubtful accounts. In the real estate segment, the transition from operating loss of NIS 4.8 million in 2010 to operating profit of NIS 15.4 million (U.S. $4.0 million) in 2011 due to an increase in leased premises and a decrease in selling administrative and general expenses.

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Changes in fair value of investment property. In 2011, the Company recorded profit from the increase in the value of investment property in the amount of NIS 41.9 million (U.S. $10.9 million) in 2011 compared to NIS 32.9 million in 2010. The increase in the value was primarily due to the revaluation of property in Kiryat Hasharon, Netanya in the amount of NIS 18.4 million and from the revaluation of "Hadar mall" in Jerusalem in the amount of NIS 7.5 million.

Other gains and losses, net. The Company recorded other losses net of NIS 18.2 million (U.S. $4.8 million) in 2011 as compared to other losses, net of NIS 24.9 million in 2010. These expenses included costs relating to the relocation of part of the Bee Group companies to the new logistic center in Be'er Tuvia and disposal and impairment of property and equipment in the supermarket segment.

Operating profit before finance costs. Operating profit before finance costs amounted to NIS 300.6 million (U.S. $78.6 million) (2.4% of revenues) in 2011 as compared to operating profit of NIS 249.4 million (2.9% of revenues) in 2010. Without Dor Alon, the operating profit of the other three segments decreased by NIS 53.8 million (U.S. $14.1 million).

Net finance costs. Net finance costs amounted to NIS 176 million (U.S. $46.1 million) in 2011 as compared to net finance costs of NIS 150.0 million in 2010. Without Dor Alon, the finance expenses of the other three segments decreased by NIS 26.3 million (U.S. $6.9 million). The decrease was mainly a result of finance income from the revaluation of the option to purchase shares of Diners and capitalization of borrowing costs of projects under construction in the real estate segment that were partly offset by an increase in the Company's indebtedness following the purchase of Dor Alon and the increase of the Israeli CPI (the CPI increased in 2011 by 2.55% compared to increase of 2.28% in 2010).

Taxes on income. Taxes on income totaled NIS 46.6 million (U.S. $12.2 million) (an effective tax rate of 33.1% as compared to the statutory tax rate of 24%) in 2011 as compared to NIS 36.3 million (an effective tax rate of 37% as compared to the statutory rate of 25%) in 2010. The increase in tax expenses resulted mainly from an increase in the tax rates following the Trachtenberg Committee and from losses at the Company's subsidiaries in respect of which no deferred taxes were recorded and was partly offset by the recordation a liability for deferred taxes in the statements of income.

Net income. Net income amounted to NIS 83.7 million (U.S. $21.9 million) in 2011 as compared to net income of NIS 62.6 million in 2010. The increase in net income in this period compared to the corresponding period last year mainly derived from the inclusion Dor Alon's results, the impact of the option revaluation of Diners and tax benefit on exercising the option. The net profit in 2011 attributable to equity holders of the Company amounted to NIS 59.5 million (U.S. $15.6 million), or NIS 0.90 per share (U.S. $0.24), and the part attributable to the non-controlling interests amounted to NIS 24.2 million (U.S. $6.3 million).

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Segment Information Analysis

Segment Information Analysis for the year 2011

Supermarkets Segment

	For the year ended December 31									Convenience translation for the year ended December 31
	2011			2010			% Change			2011
	NIS in millions									U.S. $

Segment Revenues		6,724			6,895			(2.5	%)		1,760
Segment operating profit		170			233			(27.2	%)		44
Segment operating profit as a percentage of segment revenues		2.5	%		3.4	%

	For the year ended December 31						Convenience translation for the year ended December 31
	2011			2010			2011
	NIS			NIS			U.S. $
	(Unaudited)

Decrease in same store sales*		(2.7	%)		(0.8	%)

Number of stores at end of period		211			206
Stores opened during the period		6			7
Stores closed during the period		1			4

Total square meters at end of period		377,650			366,000

Square meters added during the period, net		9,660			1,200

Sales per square meter		18,090			18,692			4,754

Sales per employee (in thousands)		965			1,000			252

* Compared with the same period in the prior fiscal year.

105

Operating profit for the Supermarkets segment in the year 2011 decreased by 27.2% to NIS 170 million (U.S $44 million) (2.5% of segment revenues) compared to the segment operating profit of NIS 233 million (3.4% of segment revenues) in the corresponding period last year. The decrease in the segment operating profit was due to the effects of the public protest in Israel that commenced at the end of the second quarter this year which caused a decrease in selling prices to consumers, a decrease in demand and an acceleration of competition in the sector which impaired the sales

Commercial and Fueling Sites segment

	For the year ended December 31									Convenience translation for the year ended December 31
	2011			2010			% Change			2011
	NIS in millions									U.S. $
Segment Revenues		5,302			1,145			363	%		1,388
Segment operating profit		173.6			39.3			342	%		45.4
Segment operating profit (loss) as a percentage of segment revenues		3.3	%		3.4	%

The operating profit for the commercial and fueling sites segment in the year 2011 amounted to NIS 173.6 million (U.S $45.4 million) (3.3% of segment revenues) compared to the segment operating profit of NIS 39.3 million (3.4% of segment revenues) in the corresponding period in 2010. The increase in the segment operating profit derived mainly from the inclusion of Dor Alon's results in the fourth quarter of 2010.

Non Food Retail and Wholesale Segment

	For the year ended December 31									Convenience translation for the year ended December 31
	2011			2010			% Change			2011
	NIS in millions									U.S. $
Segment Revenues		426			439			(3	%)		111
Segment operating loss		(45	)		(20	)		125	%		(11.8	)
Segment loss as a percentage of segment revenues		(10.5	%)		(4.6	%)

The operating loss for the Non Food Retail and Wholesale segment in the year 2011 amounted to NIS 45 million (U.S $11.8 million) (10.5% of segment revenues) compared to the segment operating loss of NIS 20 million (4.6% of segment revenues) in the corresponding period in 2010. The increase in the segment operating loss was due to a decrease in sales to franchises in the home and leisure sectors resulting from increased competition and from the increase in the impairment of trade receivables in the amount of NIS 14,283 million. The increase in the impairment of trade receivables in 2011 includes NIS 10 million subsequent to the notice of Bee Group on April 18, 2012 that it had reached an agreement with a franchisee which had financial difficulties. According to the said agreement and the franchisee agreement, Bee Group will take over the majority of the stores and the inventory in exchange for the debt owed by such franchisee.

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Real Estate Segment

	For the year ended December 31									Convenience translation for the year ended December 31
	2011			2010			% Change			2011
	NIS in millions									U.S. $
Segment Revenues		31			25			24	%		8
Appreciation of Investment Property		42			33			27	%		11
Segment operating profit		57			28			104	%		15
Segment operating profit as a percentage of segment revenues		184	%		112	%

In the year 2011, the Real Estate segment recorded a gain from appreciation of investment property in theamount of NIS 41.9 million (U.S. $10.9 million) including NIS 18.4 million (U.S. $4.8 million) from revaluation of property in Kiryat Hasharon, Netanya, half of which was sold and NIS 7.5 million (U.S. $1.9 million) from revaluation of "Hadar Mall" in Jerusalem, compared to NIS 33 million in the corresponding period of the previous year.

Operating profit for the Real Estate segment in the year 2011 increased by 27% to NIS 57 million (U.S. $15 million) compared to the segment operating profit of NIS 28 million in the corresponding period. The increase in the segment operating profit was due to the increase in leased premises and a decrease in selling administrative and general expenses net of the gain from appreciation, as described above.

Year Ended December 31, 2010 compared with year ended December 31, 2009

Gross revenues.Revenues (including government levies) amounted to NIS 9,227.5 million (U.S. $2,600.0 million) as compared to revenues of NIS 7,349.1 million in 2009, an increase of 25.6%. The main increase in revenues was due to the inclusion of the results of Dor Alon for the first time from the fourth quarter of 2010. Dor Alon's sales, including government levies of NIS 723.7 million (U.S. $203.9 million), amounted to NIS 1,868.7 million (U.S. $526.5 million).

Net revenues.Net revenues amounted to NIS 8,503.7 million (U.S. $2,396.1 million) compared to revenues of NIS 7,349.1 million in 2009, an increase of 15.7%.

Revenues of the Supermarkets segment – an increase of 0.5% in revenues from NIS 6,863.0 million in 2009 to NIS 6,895.0 million (U.S. $1,942.8 million) in 2010. The increase in revenues was primarily due to the opening of net 14 stores, two of which are Eden within Mega stores (store in store), from the beginning of 2009, with a total area of 11,700 square meter, net of the reduction in Same Store Sales (SSS) by NIS 53.7 million (U.S. $15.1 million), or 0.8%. For more information, please see "Segment Information Analysis" below.

Revenues of the non-food segment – a reduction in revenues by 5.5% from NIS 464.3 million in 2009 to NIS 438.6 million (U.S. $130.8 million) in 2010. The decrease in revenues was primarily due to a decrease in the sales in the housewares sector.

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Revenues of the real estate segment – an increase in rental income of 15.6% from NIS 21.8 million in 2009 to NIS 25.2 million (U.S. $7.1 million) in 2010. The increase was primarily due to an increase in leased space.

Gross profit. In the year 2010, gross profit amounted to NIS 2,311.4 million (U.S. $651.3 million) (27.2% of revenues) as compared to gross profit of NIS 2,058.1 million (28% of revenues) in 2009. The reduction in the gross profit rate was due to the inclusion of Dor Alon's results for the first time. Dor Alon's financial results are characterized by a lower gross profit rate (approximately 20%) than the other operating segments.. The gross profit in the other three segments increased by NIS 21.0 million (an increase of 1%). The increase in the gross profit was due to the improvement in the gross profit and gross profit rate in the Supermarkets segment and was offset for the most part by the decrease in the gross profit and gross profit rate in the non-food segment mainly as a result of the transfer to the new logistics center in Beer Tuvia, which did not operate at full capacity in 2010.

Selling, general and administrative expenses. Selling, general, and administrative expenses amounted to NIS 2,070.0 million (U.S. $583.3 million) (24.3% of sales) in 2010, compared to expenses of NIS 1,817.1 million (24.7% of revenues) in 2009. The selling, general and administrative expenses of our Supermarkets, Non-Food and Real Estate segments increased by NIS 53.1 million (2.9%). The main increase was recorded in the real estate segment as a result of the concerted effort to sell apartments in the "Wholesale Market" site in Tel Aviv during the fourth quarter, which contributed approximately NIS 20.2 million to our expenses, and the increase in the same store selling expenses in the Supermarkets segment by NIS 3.0 million or 0.2% as a result of additional stores.

Operating profit (before other gains and losses and changes in fair value of investment property). In the year 2010, operating profit amounted to NIS 241.4 million (U.S. $67.9 million) (2.8% of revenues) as compared to NIS 241.0 million (3.3% of revenues) in 2009. The operating profit (before other gains and losses and changes in fair value of investment property) of the Supermarket, Non-Food and Real Estate Segments decreased by NIS 32.1 million (13.3%). The decrease in the operating profit was mainly due to the move of the non-food segment and the real estate segment from operating profit in 2009 to operating loss in 2010, which was partly offset by the improvement in the operating profit in the Supermarkets segment.

Changes in fair value of investment property. In 2010, the Company recorded profit from the increase in the value of investment property in the amount of NIS 32.9 million (U.S. $9.3 million) compared to NIS 20.8 million in 2009. The increase in the value was primarily due to the change in the cash flows from the Company's properties that are rented under contracts with rental fees linked to the Israeli CPI, new rental agreements signed in 2010 and reduction in the discount rate used to calculate the value of the properties.

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Other gains and losses, net. In 2010, the Company recorded other losses net of NIS 24.9 million (U.S. $7.0 million) as compared to other losses, net of NIS 28.1 million in 2009. The other losses net in 2010 in the Supermarket segment amounted to NIS 6.4 million (U.S. $ 1.8 million), which were primarily due to the discarding of fixed assets and the closing of branches, and in the non-food segment amounted to NIS 12.3 million (U.S. $3.5 million), which were primarily as a result of the costs of transfer of some of the companies in the non-food segment to the new logistics center in Beer Tuvia and the transaction costs for the acquisition of the Dor Alon shares in the amount of NIS 3.0 million (U.S. $0.8 million). The costs in 2009 in the Supermarkets segment totaled NIS 17.8 million and consisted mainly of a provision for impairment of property and equipment and intangible assets. In the Non-Food segment, the costs of NIS 8.2 million mainly related to the reorganization and capital losses net of capital gains from the changes in the ownership rates of subsidiaries.

Operating profit before finance costs. In 2010, operating profit before finance costs amounted to NIS 249.4 million (U.S. $70.3 million) (2.9% of revenues) as compared to operating profit of NIS 233.6 million (3.2% of revenues) in 2009. The operating profit before finance costs of the Supermarkets, Non-Food and Real Estate segments decreased by NIS 13.2 million (U.S. $3.7 million).

Net finance costs. In 2010, net finance costs amounted to NIS 150.0 million (U.S. $42.3 million) as compared to net finance costs of NIS 112.7 million in 2009. The finance expenses of the Supermarkets, Non-Food and Real Estate segments increased by NIS 24.7 million (U.S. $7.0 million) (21.9%). The increase in finance costs, net in 2010 was mainly due to the revaluation of the conversion component of the Company's convertible debentures as a result of the distribution of the dividend and the adjustment of the conversion component as well as the reduction in the revenue from revaluation of the forwards taken out on the NIS against the Israeli CPI. The increase was partly netted off by the finance income from the revaluation of the option to acquire shares in Diners and capitalization of borrowing costs.

Taxes on income. In 2010, taxes on income totaled NIS 36.3 million (U.S. $10.2 million) (an effective tax rate of 36.6% as compared to the statutory tax rate of 25%) as compared to NIS 23.1 million (an effective tax rate of 19.1% as compared to the statutory rate of 26%) in 2009. The increase in the effective tax rate this year over the statutory rate was mainly due to finance expenses from the revaluation of the conversion component of the Company's convertible debentures for which the Company did not record deferred taxes and losses in the non-food segment for which no deferred tax assets were recorded.

Net income. For the year 2010, net income amounted to NIS 62.6 million (U.S. $17.6 million) as compared to net income of NIS 97.8 million in 2009. The reduction in the net income in 2010 as compared to 2009 was mainly due to the increase in finance expenses and taxes as discussed above. The net profit in 2010 attributable to equity holders of the Company amounted to NIS 47.8 million (U.S. $13.5 million) or NIS 0.96 per share (U.S. $0.27) and the part attributable to the non-controlling interests amounted to NIS 14.8 million (U.S. $4.2 million).

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Segment Information Analysis

Segment Information Analysis for the year 2010

Supermarkets Segment

	For the year ended December 31									Convenience translation for the year ended December 31
	2010			2009			% Change			2010
	NIS in millions									U.S. $

Segment Revenues		6,895			6,863			0.5	%		1,943
Segment operating profit		233			191			22.0	%		65.7
Segment operating profit as a percentage of segment revenues		3.4	%		2.8	%

	2010			2009			2010
	NIS			NIS			U.S. $
	(Unaudited)

Decrease in same store sales*		(0.8	%)		(3.9	%)

Number of stores at end of period		206			203
Stores opened during the period		7			11
Stores closed during the period		4			2

Total square meters at end of period		366,000			365,000

Square meters added during the period, net		1,200			10,500

Sales per square meter		18,692			19,023			5,267

Sales per employee (in thousands)		1,000			997			282

* Compared with the same period in the prior fiscal year.

Profit for the Supermarkets segment in the year 2010 increased by 22% to NIS 233 million (U.S $ 65.6 million) (3.4% of segment revenues) compared to the segment operating profit of NIS 191 million (2.8% of segment revenues) in the corresponding period last year. The increase in the segment operating profit was due to the effects of the Company's strategic plan and the improvement in the macro-economic situation in Israel.

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Commercial and Fueling Sites segment

	For the year ended December 31						Convenience translation for the year ended December 31
	2010			2009	% Change		2010
	NIS in millions						U.S. $
Segment Revenues		1,145				N/A		323
Segment operating profit		39.3				N/A		11.1
Segment operating profit (loss) as a percentage of segment revenues		3.4	%

The net revenues in the commercial and fueling sites segment since the acquisition of the shares of Dor Alon amounted to NIS 1,145 million (U.S. $323 million). The segment operating profit amounted to NIS 39.3 million (U.S. $11.1 million) (3.4% of net revenues).

Non Food Retail and Wholesale Segment

	For the year ended December 31									Convenience translation for the year ended December 31
	2010			2009			% Change			2010
	NIS in millions									U.S. $

Segment Revenues		439			464			(5.4	%)		124
Segment operating profit		(20	)		23			N/A			(6	)
Segment operating profit (loss) as a percentage of segment revenues		(4.6	%)		5.0	%

The operating loss for the Non Food Retail and Wholesale segment in the year 2010 amounted to NIS 20 million (U.S $6 million) (4.6% of segment revenues) compared to the segment operating profit of NIS 23 million (5.0% of segment revenues) in the corresponding period in 2009. The decrease in the segment operating profit was due to a decrease in sales and one-off costs of NIS 7.2 million due to the transfer to the new Non-food segment group logistics center and the consolidation of the Bee group center and the move to a single consolidated new office.

Real Estate Segment

	For the year ended December 31									Convenience translation for the year ended December 31
	2010			2009			% Change			2010
	NIS in millions									U.S. dollars
Segment Revenues		25			22			13.6	%		7
Appreciation of Investment Property		33			21			57.1	%		9
Segment operating profit		28			33			(15.2	%)		8
Segment operating profit as a percentage of segment revenues		112	%		150	%

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In the year 2010, the Real Estate segment recorded a gain from appreciation of investment property as a result of the advancement in the planning and operation of the Company's developments as well as the increase in the rental rates achieved for new rental agreements, in the amount of NIS 33 million (U.S. $9 million) compared to NIS 21 million in the corresponding period of the previous year.

Profit for the Real Estate segment in the year 2010 decreased by 15.2% to NIS 28 million (U.S. $8 million) compared to the segment operating profit of NIS 33 million in the corresponding period. The decrease in the segment operating profit was due to the increase in selling expenses from the Wholesale Market site net of the gain from appreciation, as described 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. In our fueling stations, there is an increase in activity during vacations and holidays.

The following table sets forth certain quarterly information.

	Net revenues					Operating profit before other gains and losses and changes in fair value of investment property
	NIS		Percentage of Full Year			NIS		Percentage of Full Year
	(In thousands)					(In thousands)
2011		12,482,584		100	%		286,863		100	%
First quarter		3,007,119		24.1	%		91,746		32.0	%
Second quarter		3,208,464		25.7	%		106,034		37.0	%
Third quarter		3,227,582		25.9	%		71,940		25.0	%
Fourth quarter		3,039,419		24.3	%		17,143		6.0	%

2010		8,503,744		100	%		241,422		100	%
First quarter		1,830,824		21.5	%		72,584		30.1	%
Second quarter		1,768,663		20.8	%		62,486		25.9	%
Third quarter		1,920,789		22.6	%		57,110		23.6	%
Fourth quarter*		2,983,468		35.1	%		49,241		20.4	%

* The fourth quarter includes the consolidated revenues of Dor Alon for the first time.

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Exchange Rates

At December 31, 2011, the representative rate of exchange of the NIS to the dollar, as published by the Bank of Israel, was NIS 3.821= $1.00. At April 20, 2012, the representative rate of exchange of the NIS to the dollar, as published by the Bank of Israel, was NIS 3.76 = $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, 2007 through 2011:

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

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
2010	3.55⁽²⁾	3.73	3.89	3.55
2011	3.82⁽²⁾	3.58	3.82	3.36

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

(2) During 2007, 2008, 2009, 2010 and 2011 the US dollar depreciated in value vis-à-vis the NIS by 8.97%, 1.2%, 0.7%, 6% and 7.6% respectively.

The following table sets forth certain information concerning the representative exchange rate of the NIS to the dollar, as published for the months October 2011 through March 2012:

Month	Period End	Average Rate⁽¹⁾	High	Low
		(NIS per $1.00)
October	3.60	3.67	3.76	3.60
November	3.79	3.73	3.80	3.65
December	3.82	3.77	3.82	3.73
January	3.73	3.81	3.85	3.73
February	3.77	3.74	3.80	3.70
March	3.72	3.76	3.81	3.72
April (until April 20, 2012)	3.76	3.75	3.77	3.72

(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 – Risks Related to Our Business As a Whole - Impact of inflation may adversely affect our financial expenses and operating income," “-Related to Our Business As a Whole - Currency fluctuations might affect our operating results and translation of operating results," and “Risks Related to Dor Alon - Dor Alon is exposed to fluctuations in the foreign exchange rate, interest rates and the consumer price index, which could materially adversely affect its financial results.”

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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 affects 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 effect 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. Moreover, Dor Alon is exposed to fluctuations in the U.S. Dollar - New Israeli Shekel exchange rate due to credit that Dor Alon obtains from its suppliers (mostly from Oil Refineries Ltd., which is linked to the U.S. Dollar). Changes in interest rates, in the Israeli consumer price index and in the U.S. Dollar - New Israeli Shekel exchange rate could materially adversely affect Dor Alon’s financial results. In addition, Dor Alon has loans in New Israeli Shekels, some of which are subject to floating interest rates and some are linked to the Israeli consumer price index. Due to these loans and to the consumer price index linked debentures issued by Dor Alon, Dor Alon is exposed to changes in bank interest rates and in the Israeli consumer price index.

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 agreements 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. During the last decade, there has been a high level of violence between Israel and the Palastinians, including missile strikes by Hamas against Israel. 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. In addition, deterioration in the security situation causes a decrease in the consumption of petroleum products in Israel and airlines’ volume of activity and affects the trade relations between Dor Alon and the Palestinian Authority, which could adversely affect Dor Alon’s results of operations. We cannot predict the effect on our business if hostilities are renewed or the security situation deteriorates in any part of the country.

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The future of Israel’s relations with its Arab neighbors and the Palestinians is uncertain and several countries, companies and organizations continue to restrict business with Israel and with Israeli companies. We believe that in the past, these practices have not had a material adverse effect on us. However, we could be adversely affected by adverse developments in Israel’s relationships with its Arab neighbors and the Palestinians, or by restrictive laws, policies or practices directed towards Israel or Israeli businesses. In addition, ongoing violence between Israel and its Arab neighbors and Palastinians may have a material adverse effect on the Israeli economy, in general, and on our business, financial condition or results of operations. In particular, in recent conflicts, missile attacks have occurred on civilian areas, which could cause substantial damage to our infrastructure network, reducing our ability to continue serving our customers as well as our overall network capacity. In addition, in the event recent political unrest and instability in the Middle East, including changes in some of the governments in the region, causes investor concerns in a reduction in the value of the shekel, our expenses in non-shekel currencies may increase, with a material adverse affect on our financial results.

Most of Bee Group's imports during 2010 and 2011 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 2009 and 2010, Israel's Gross Domestic Product rose by 0.7% and 4.8%, respectively. Reports of the Israeli Central Bureau of Statistics indicate that during 2011 Israel's Gross Domestic Product rose by 4.7% as a result of an increase in exports. Initial reports indicate that gross domestic product increased by 3.0% (annualized) during the first quarter of 2012. We believe that, despite the economic growth in 2011 and beginning of 2012, our customers continue to be cautious in their buying patterns and continue to choose to make their purchases at low-price and hard discount stores, which have a lower profit margin. As a result, we have continued to expand our low-price and hard discount store formats.

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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 in 2010 and 2011 continued to recover, and there has been an improvement in the growth of private consumption. We cannot yet predict whether the global economic crisis has passed; in the event the crisis will return, it may have a negative impact on the Company.

In addition, the global economic crisis has also reduced the availability of credit, increased the costs of financing and the terms under which banks, in Israel and abroad, agree to provide financing. Such conditions are worsening during the beginning of 2012 in light of the Banks' Inspector Instructions which limit the availability of credit, specially in the real estate sector. 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 2012 (25% in 2010 and 24% in 2011). Prior to the enactment of the Law for Changing the Tax Burden in Israel (the "Tax Change Law"), the corporate tax rates were scheduled to be reduced to 23% in 2012 and ultimately to 18% by 2016. This scheduled gradual reduction in corporate tax rates was repealed. Instead, on December 5, 2011, the Israeli Knesset approved an amendment to the Law for Changing the Tax Burden in Israel (Legislation Amendments) (the "New Tax Change Law") as a result of the recommendations of the Trachtenburg Committee. Pursuant to the New Tax Change Law, the tax reduction determined in the Law for Economic Efficiency is cancelled, and the corporate tax rate will be increased to 25% as of 2012. Due to the New Tax Change Law, we recognized one-time income tax expenses for 2011 in the amount of NIS 34.4 million based on updating deferred taxes as of the date of the approval the New Tax Change Law.

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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 Parliament) 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 accurately and fairly report our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 4 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 statement of financial position date whether any events have occurred or changes in circumstances have taken place which might indicate that there has been an impairment of property 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, record 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.

We evaluate 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.

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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 8b to the Consolidated Financial Statements.

In 2011, we recorded impairment provisions resulting in the net amount of NIS 6.1 million. In 2010, we recorded impairment provisions resulting in the net amount of NIS 0.5 million. In 2009, we recorded impairment provisions resulting in the net amount of NIS 18.5 million. Impairment provisions or the reversal of such provisions are included in the income statement within Other gain or losses.

Referring to property and equipment, when the discount rate differs by 0.5% from the management estimate, the carrying value of property and equipment would not change. When growth rate differs by 0.5% from the management estimate, the carrying value of property and equipment will be NIS 1.3 million lower or 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 benefit from the business combination in which the goodwill arose.

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

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

	December 31
	2010		2011
	NIS in thousands
Supermarkets		162,420		160,993
Non - Food retail and wholesale:
Houseware		111,179		111,179
Leisure		23,506		23,506
Commercial and fueling sites		627,208		653,945
		924,313		949,623

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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 9b 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 3.9 million. 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 recoverable amount 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 7.75%-12% per annum (mainly 7.75-8.25%).

When the discount rate differs by 0.5% from the management estimate, the fair value of investment property will be NIS 22.7 million lower or NIS 25.7 million higher. When the discount rate differs by 1% from the management estimate, the fair value of investment property will be NIS 43.4 million lower or NIS 51.4 million higher.

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Retirement benefit obligations and Provision for unutilized sick leave

Retirement benefit obligations

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

We contribute to 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 statement of financial position is the present value of the defined benefit obligation at the statement of financial position 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 NIS 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 denominated in NIS 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 statement of income in the "Statement of Comprehensive Income" in the period in which they arise.

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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.

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 as is used for defined benefit retirement plans. Actuarial gains and losses are recognized outside of the Statement of Income in the Statement of Comprehensive income in the period in which they arise. Any changes in these assumptions will impact the carrying amount of the obligations.

For key management assumptions used in the annual actuarial calculation for retirement benefit obligations and provision for unutilized sick leave, see note 24 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 legal counsel) as to the likelihood that cash flows will be required to settle these liabilities and as to the discounted amounts of such cash flows.

Our assessments are based on the Company's history in these cases, on the stage of these claims and on the experience of the Company's legal advisers. The outcome of the legal cases in court could be different from our assessments.

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.

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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 are unable to generate sufficient future taxable income or actual results differ from our 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 results.

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 statement of financial position 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.

Provision for doubtful debts

The provision for doubtful debts is recognized according to management's judgment whenever there are objective indications that the Company will not be able to recover all amounts owing to it under the original terms of the debt, due to material financial difficulties of the customer, a reasonable expectation that the customer will become insolvent or will undergo a reorganization and will be unable to repay its debts, or a delay in the repayments.

Purchasing price allocation in business combination

The Company is required to allocate the purchase price of investments in newly consolidated subsidiaries to the assets and liabilities acquired, on the basis of an assessment of their fair values. These valuations require the use of material estimates and judgments by management.

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Recently issued accounting pronouncements

For information on recently issued accounting pronouncements, see note 2ad 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 Alon Holdings 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, Dor Alon, 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 627.6 million, or $164.3 million, in 2011, an increase of 205% compared with approximately NIS 205.8 million in 2010. The inclusion of a full year of Dor Alon's results in 2011 was a significant reason for the increase in the cash flow from operating activities in 2011, the amount of NIS 136.3 million. The increase in cash flows from operating activities is mainly due to a decrease in working capital in the Supermarket segment, from advancing receipts from credit card companies of NIS 203.4 million (U.S. $53.2 million), from an increase in advances from purchasers of apartments of NIS 102.6 million (U.S. $26.8 million) net of an increase in tax payments of NIS 85.1 million (U.S. $22.3 million).

In 2011, approximately 38% of our supermarket sales were paid for with cash, checks and gift certificates issued by the Company at the point-of-sale, approximately 62% of supermarket sales were paid for with credit cards.

During 2011, the average time period that we held inventory was 25 days and the average time period within which our accounts receivable were paid was 30 days. By contrast, as of such date the average time period for payment of our accounts payable was 67 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 2011, we received from banks long-term loans of NIS 213.6 million, or $55.9 million, and short-term borrowings, net, of NIS 582.5 million, or $152.4 million. For information regarding outstanding balances and repayment information, see "Long-Term Loans from Banks and other Financial Institutions" and " – Debentures."

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On May 20, 2009, the Israel Securities Authority approved the publication of a shelf prospectus filed by BSRE. The shelf prospectus was valid for a period of two years from publication In July 2010, pursuant to the shelf prospectus, BSRE issued NIS 110 million in principal amount of unsecured non-convertible Series D debentures and received net proceeds of approximately NIS 108.6 million, or $30.6 million (net of issuance expenses of NIS 1.45 million, or $0.41 million). The proceeds from the issuance of the debentures were used for financing BSRE's business activities. In October 2009, pursuant to the shelf prospectus, BSRE issued NIS 300 million in principal amount of unsecured non-convertible Series C debentures and 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). The proceeds from the issuance of the debentures were used for financing BSRE's business activities.

On May 30, 2011, BSRE published a shelf prospectus, according to which BSRE may issue in the future ordinary shares, debentures by way of expansion of the existing series, debentures, options exercisable into ordinary shares, and options exercisable into debentures.

In February 2010, we published a shelf prospectus that allows us to issue marketable securities in Israel during the next two years. In November 2010, pursuant to the shelf prospectus, we issued NIS 100 million in principal amount of unsecured non-convertible Series C debentures and received net proceeds of approximately NIS 96.5 million, or $26.7 million (net of issuance expenses of NIS 3.5 million, or $1.0 million). The proceeds from the issuance of the debentures were used for financing our business activities.

Prior issuances

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.

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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 2011, we issued a total of 27,399 ordinary shares as a result of the conversion of our convertible debentures in a principal amount of NIS 166,668 million. As of December 31, 2011, the convertible debentures (Series B) were repaid in full and the remaining principal balance (linked to the Israeli CPI) of the non-convertible debentures (Series A) was approximately NIS 229.1 million.

Uses.

During 2011, we repaid long-term loans in the amount of NIS 382.5 million, or $100.1 million, debentures in the amount of NIS 174.9 million, or $45.8 million, and interest in the amount of NIS 222.7 million, or $58.3 million, and we paid dividends to non-controlling interests in subsidiaries in the amount of NIS 30.7 million or $17.6 million.

In recent years, we funded our renovation, remodeling and expansion programs primarily mainly from cash generated by our operations and from long and short-term loans from banks. During 2011, we invested approximately NIS 365.5 million, or $93.3 million, in property and equipment, intangible assets, investment property and payments on account of real estate, a 9.6% increase from our 2010 investment of NIS 325.2 million. Of our investment in property and equipment, intangible assets and investment property in 2011, we invested NIS 193.4 million, or $50.6 million, in land and buildings, including land that we leased and investment property, as compared with NIS 164.1 million in 2010. During 2012, we have spent and currently plan to spend in excess of NIS 203 million, or $53.1 million (based on the representative rate of exchange on March 31, 2012) for the development or acquisition of new supermarkets, the renovation and remodeling of our existing supermarkets and related investments. In addition, during 2012 and 2013, we intend to open approximately 14-18 fueling stations at a cost of approximately NIS 3 million to NIS 4 million per fueling station. 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.

Business combinations

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%. Subsequently, in October 2010, we acquired the remaining 15% of the shares of Bee Group for the aggregate consideration of approximately NIS 24.5 million, or $6.8 million (at that time), increasing our holdings in Bee Group to 100%.

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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. In February 2011 Na'aman published an offer to purchase the balance of the shares (2.6 million shares) of Vardinon that it does not already own in consideration for NIS 7.9 million. On March 15, 2011, the acquisition was completed, and the Vardinon shares were delisted from the Tel Aviv stock exchange.

In November 2011, Bee group issued a full tender offer to purchase 4.8 million shares of Naaman that are not held by the group for NIS 6.53 ($1.8) per share. The last date for accepting the tender offer was on November 22, 2011, and up to the date of this Annual Report, an acceptance notice of 1.48 million shares (10.2%) was received in return for NIS 9.7 million ($2.6 million).

As of March 31, 2012, Bee Group held approximately 77.03% of the outstanding shares of Naaman, and Naaman held 100% 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:

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Date of payment	Amount per share	Total amount⁽¹⁾
December 29, 2011	NIS 1.13 ($0.30)	NIS 75 million (approximately $20.2 million)
October 18, 2010	NIS 12.31 ($3.39)	NIS 800 million (approximately $220.5 million)
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.

In connection with our issuance of NIS 400 million in aggregate principal amount of unsecured 5.9% convertible and nonconvertible debentures in August 2003, Alon Holdings' board of directors resolved that Alon Holdings would not distribute dividends in any quarter if the ratio of our net financial obligations (as defined then 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. Alon Holdings' board of directors also resolved that Alon Holdings would not distribute dividends in any quarter if the ratio of the unencumbered fixed assets (net of depreciation) and investment property as set forth in our financial statements to financial obligations (as defined then by S&P-Maalot) for any quarter is below 120%.

On January 14, 2010, Alon Holdings' board of directors decided that in view of the changes and development of Alon Holdings since 2003, including the transfer of Alon Holdings' 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 Alon Holdings' 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 Alon Holdings' debt which is related by the company to real estate that is not in use by Alon Holdings (which is equal to 75% of the investment property as recorded on the balance sheet). On December 31, 2011, the net financial obligations to EBITDA (calculated in accordance with the deduction described above) were 6 (taking into account Dor Alon’s financial obligations as of December 31, 2011). Due to the acquisition of Dor Alon, in October 2010, increase in the fuel prices which increase our capital needs, the Company's investment plan to open additional Mega Retail branches, the entrance of BSRE to additional new projects and the launching of Alon Cellular, our board of directors further resolved that Alon Holdings would not distribute dividends in any quarter if the ratio of the net financial obligations (calculated in accordance with the deduction described above) to EBITDA for any quarter exceeds 6.

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

In November 2008, BSRE's board of directors approved a decision to extend the BSRE's policy that existed for the years 2006-2008, according to which BSRE will distribute dividends in the amount of no less than 25% of the net profits of BSRE in each year, to 2008-2010. In March 2011, the Board of Directors approved a decision to adopt a policy for the years 2011 and 2012, according to which BSRE will distribute dividends in the amount of no less than 25% and not higher than 75% of the net profits of BSRE in each year, without taking into account revisions in the net fair value of real estate for investment. Such distributions are subject to the “profit test” under the Israeli Companies Law at the relevant dates and to other decisions of BSRE’s board of directors, including decisions designating a different use of BSRE's profits and/or a change in the BSRE dividend policy.

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

Date of payment	Amount per share	Total amount^(1) (2)
December 25, 2011	NIS 2.71 ($0.71)	NIS 34 million (approximately $ 9.0 million)
April 13, 2011	NIS 3.82 ($1.1)	NIS 47.8 million (approximately $14.0 million)
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⁾

Alon Holdings' share in the distribution of the dividends was approximately 80%.

Dividends paid by Dor Alon since the time Alon Holdings acquired Dor Alon and until the date of this Annual Report:

Date of payment	Amount per share	Total amount^(1) (2)
December 19, 2011	NIS 2.08 ($0.55)	Total amount NIS 30 million (approximately $7.9 million
April 14, 2011	NIS 1.73 ($0.5)	Total amount NIS 25.0 million (approximately $7.2 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⁾

Alon Holdings' 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:

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	December 31
	2010		2011
	NIS in thousands

Bank overdrafts		21,825		2,701

Bank loans		408,959		994,727

Commercial paper		39,500		39,500

Current maturities of long-term loans		297,771		311,642

		768,055		1,348,570

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
	2010		2011		(1)
	NIS in thousands				%
In Israeli currency:
Linked to the Israeli CPI bearing a fixed interest rate (2)		783,738		665,149		3.78
Linked to the Israeli CPI bearing a variable interest rate (3)		236,501		225,385		4.90
Unlinked and bearing a fixed interest rate (4)		179,846		120,806		6.60
Unlinked and bearing a variable interest rate (5)		496,845		540,789		4.63

Total		1,696,930		1,552,129

Less - current maturities		297,771		311,642
		1,399,159		1,240,487

⁽¹⁾Weighted average rate as of December 31, 2011.

⁽²⁾As of December 31, 2011, included approximately NIS 474.3 million at a weighted average interest rate of 3.6%, and approximately NIS 190.8 million at a weighted average interest rate of 5.2%.

⁽³⁾As of December 31, 2011, included approximately NIS 225.4 million at a weighted average interest rate of 4.9%.

⁽⁴⁾As of December 31, 2011, included NIS 71.5 million at an interest rate of 5.9%, and the balance of approximately NIS 49.3 million at a weighted average interest rate of 7.6%.

⁽⁵⁾As of December 31, 2011, included approximately NIS 347.6 million at a weighted average interest rate of 5.0%, approximately NIS 137.1 million at a weighted average interest rate of 5.2%, and the balance of approximately NIS 56.1 million at a weighted average interest rate of 3.1%.

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The loans described in the table above include loans undertaken by the Company in the aggregate amount of approximately NIS 244.8 million, loans undertaken by Mega Retail and its subsidiaries in the aggregate amount of approximately NIS 353.7 million, loans undertaken by BSRE in an aggregate amount of NIS 302.3 million, loans undertaken by Bee Group and its subsidiaries in an aggregate amount of approximately NIS 112.8 million, and loans undertaken by Dor Alon in an aggregate amount of NIS 538.5 million. These loan agreements contain undertakings by Bee Group and its subsidiaries, Dor Alon 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 March 31, 2012, Bee Group and its subsidiaries received a waiver in respect of the financial covenants contained in their loan agreements. As of December 31, 2011, Dor Alon met the financial covenants contained in its loan agreements.

Debentures

The following table summarizes (i) outstanding debentures in 2010 and 2011 of the Company, (ii) outstanding debentures in 2010 and 2011 of BSRE, of which we owned 78.22% of the shares as of March 31, 2012 and (iii) outstanding debentures in 2011 of Dor Alon, of which we owned 78.38% of the shares as of March 31, 2012:

	December 31
	2010		2011
	NIS in thousands
Convertible debentures:
Issued by the Company		10,292		-
Issued by BSRE		117,726		118,909
Issued by Dor Alon		61,638		-
		189,656		118,909

Less - current maturities		71,930		83
		117,726		118,826

Non-convertible debentures:
Issued by the Company		316,793		320,534
Issued by BSRE		1,259,160		1,274,216
Issued by Dor Alon		737,942		651,940
		2,313,895		2,246,690

Less - current maturities		130,802		212,643
		2,183,093		2,034,047

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In addition, Naaman, our subsidiary through Bee Group, has outstanding convertible debentures, which had principal balances of NIS 83,000 (of which NIS 83,000 were current maturities) and NIS 112,000 (of which NIS 37,000 were current maturities), as of December 31, 2011 and December 31, 2010, respectively.

Alon Holdings 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.

Alon Holdings 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 semi-annually. 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.

Alon Holdings Series B Debentures

The principal of the Series B Debentures were repayable in three equal annual installments on August 5 of each of the years 2007, 2009 and 2011, and the interest was payable semi-annually. The Series B Debentures were convertible into our ordinary shares at a conversion ratio that is subject to adjustment in the event of distribution of bonus shares and cash dividends and the issuance of rights. As of December 31, 2011, the Series B Debentures were fully converted or repaid.

Other terms of the Alon Holdings 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 Tel Aviv Stock Exchange, or 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.

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Alon Holdings Series C Debentures

In November 2010, we issued NIS 100 million in aggregate principal amount of Series C CPI linked debentures bearing annual fixed interest of 2.5% payable in two semi-annual payments on May 4 and November 4 in each of the years 2011 to 2022. The principal will be repaid in 12 equal payments on November 4 of each of the years 2011 to 2022 (inclusive). The debentures were issued at a discount of 3.2% and for a consideration of NIS 96.8 million. 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.

On April 11, 2012, we issued additional Series C debentures in the framework of a private placement in the aggregate amount of NIS 35 million for an aggregate amount of NIS 31.3 million.

Ratings of Alon Holdings Debentures

On January 25, 2012, Midroog decreasedthe rating of Series A and C Debentures from "A1" rating to "A2/Stable". In addition, Midroog applied the rating of "A2/Stable" for potential future issuances of up to NIS 200 million Series C Debentures by way of expansion of the current Series C 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. In July 2010, BSRE issued NIS 110 million par value of registered BSRE Series D debentures. On May 30, 2011, BSRE published a shelf prospectus, according to which BSRE may issue in the future ordinary shares, debentures by way of expansion of the existing series, debentures, options exercisable into ordinary shares, and options exercisable into debentures. On January 4, 2012, BSRE completed the issuance of an additional NIS 150 million in principal amount of Series D debentures to institutional investors in Israel, in consideration for 98.5% of its par value, reflecting proceeds of 5.8%. The terms of these debentures are identical to the terms of the Series D debentures issued by BSRE on May 20, 2009.

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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 semi-annually. 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 semi-annually.

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.

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 semi-annually on April 30 and October 31 of each of the years 2010 to 2018. On April 11, 2012, BSRE expanded its Series C debentures through a private offering of NIS 35,000 thousand par value of Series C debentures to institutional investors for 89.5% of their par value, reflecting a return of 5.7%.

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.

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BSRE Series D Debentures

The BSRE Series D Debentures are linked (principal and interest) to the Israeli CPI and bear fixed interest of 4.5%. The Debenture principal is to be redeemed in four equal annual payments, on June 30 in each of the years 2017 to 2020 (inclusive). The Debenture interest is payable in semi-annual payments on June 30 of each of the years 2011 to 2020 (inclusive) and December 31 of each of the years 2010 to 2019 (inclusive).

The terms of the debentures determine that in case Midroog Ltd. or another rating agency were to reduce the Company's rating to A3, the annual interest rate will increase by 0.35%. If the rating were to be reduced further, then the annual interest rate will increased by 0.35% multiplied by the number of notches that the Company's rating is reduced below A3.

On January 4, 2012, BSRE expanded its Series D Debentures through a private offering of NIS 150,000 thousand par value of Series D Debentures to institutional investors for 98.5% of their par value, reflecting a return of 5.8%.

Rating of BSRE Debentures

On August 10, 2011, Midroog reapproved the rating of BSRE's debentures (Series A, Series B and Series C) to "A1/Negative".

On January 4, 2012, BSRE's Board approved the issuance of additional Series D debentures in the framework of a private placement to institutional investors in the aggregate amount of NIS 150 million. On January 5, 2012, Midroog approved an "A1/Negative" rating to the additional Series D debentures. On January 12, 2012, the ISA approved the registration of the debentures for trading.

Dor Alon Debentures

In accordance with a prospectus published on May 29, 2005, Dor Alon issued approximately NIS 325 million principal amount of Series A convertible debentures and NIS 200 million principal amount of Series B debentures.

During 2006, Dor Alon issued an additional issuance of NIS 385 million principal amount of Series B debentures, which represented an increase of the Series B issue, and its terms are identical to the terms of the original Series B issue listed on the Tel Aviv stock exchange.

In September 2009, Dor Alon completed a public issuance of a principal amount of NIS 220 million (before issuance costs) of Series C and Series D debentures.

In October 2004 a subsidiary of Dor Alon, Dor Energy Debenture Issue 1 Ltd. (hereafter – Dor Debenture Issue), issued debentures with a principal amount of NIS 74 million to institutional investors at their par value.

In May 2005, Dorgas Batuchot Ltd. issued debentures with a par value of NIS 98 million.

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Dor Alon Series A Debentures

The Series A Convertible Debentures were repaid in full in May 2011. Such debentures were linked to the Israeli CPI (both principal and interest), bore an annual interest of 5%, and were convertible into registered shares of NIS 1 par value of Dor Alon.

Dor Alon Series B Debentures

The Dor Alon Series B Debentures are linked (principal and interest) to the Israeli CPI. The interest of 5% per annum is repayable in semi-annual installments on May 31 and November 30 until May 2015.

The difference between the consideration that was related to the liability component at the time of issue, after the reduction of issue costs and the principal amount of the issue, reflecting the discount, is amortized over the term of the debentures using the effective interest rate basis. The total issue costs for the debentures amounted to NIS 8,034 thousand. The effective interest rate of the debentures, taking the above issue costs into account, is an annual rate of 6.65%.

Dor Alon Series C Debentures

The Dor Alon Series C Debentures bear the interest rate of Israeli government bonds (No. 817) plus 2.25%. The interest is paid in quarterly installments up to December 2017. The principal is repayable in semi-annual installments on June 1 and December 1 over five years starting 2013, with NIS 16,200 payable each year.

Dor Alon Series D Debentures

Dor Alon Series D Debentures bear a fixed annual interest rate of 6.65%, payable in quarterly installments up to December 2016. The principal is repayable in equal semi-annual payments on June 1 and December 1 from 2013 to 2016, with NIS 34,750 thousand payable each year. In February 15, 2012, Dor Alon completed the issuance of an additional NIS 119,900 thousands in principal amount of Series D debentures to institutional investors in Israel, in consideration for 101.95% of its par value, reflecting proceeds of 6.9%.

Dorgas Batuchot Ltd. Debentures

These debentures are linked (principal and interest) to the Israeli CPI. The debentures bear a fixed annual interest rate of 4.95%.

Dor Debentures

Dor Debentures issued two series of debentures to institutional investors:

Series 1 in a total amount of NIS 13 million for a period of 12 years, with the principal repaid in semi-annual equal payments on April 20 and October 20 for each of the years 2005 to 2016 (inclusive). As of December 31, 2011, Dor Debentures did not meet the covenants relating to the series 1 debenture. As a result, a liability amounting to NIS 7.9 million was classified as current liabilities as of December 31, 2011.

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Series 2 in a total amount of NIS 62 million for a period of 15 years, of which NIS 27 million in principal amount is payable in 15 annual payments on April 20 of the years 2005 to 2019 (inclusive) and the balance of NIS 35 million in principal amount is payable in one payment on October 20, 2019. The interest on the principal amount of NIS 27 million is payable annually in the years 2005 to 2019 (inclusive) on April 20 and the interest on the principal amount of NIS 35 million is payable semi-annually on April 20 and October 20 for the years 2005 to 2019 (inclusive). The debentures are linked to the Israeli CPI and bear annual interest of 6.45%.

Rating of Dor Alon Debentures

As of December 31, 2011, Dor Alon's Series B Debentures were unrated and Series C and D Debentures were rated A2 with a negative outlook, Dorgas Batuchot Debentures were rated Aa2, and the Dor Debentures were rated A-.

For additional information on charges pertaining to the collateralized long-term loans, see note 21 to our consolidated financial statements.

Commitments for Capital Expenditures

As of December 31, 2011, we had entered into agreements for investments in fixtures, equipment and leasehold improvements in the total amount of approximately NIS 33.5 million, or $8.8 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 which were approved by the Israeli Minister of the Interior on July 11, 2010. 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.

On October 11, 2011, BSRE received a notice from Tel Aviv municipality that all of the conditions to approve the BOT agreement of "Givon Parking" in Tel Aviv had been satisfied, and on November 13, 2011 BSRE received the right to use the property for constructions work. BSRE estimates that construction will be completed during 2014. The total cost for establishing the parking lot, including related costs, is estimated at NIS 144 million ($38.8 million), and the share of BSRE is approximately NIS 72 million ($19.4 million).

Research and Development, Patents and Licenses.

Not applicable.

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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. We estimate that our market share of the total retail market of food, beverages and tobacco was 13.4% in 2011 compared to 14.1% in 2010. The market share of the other major competitor, Shufersal, based on its financial reports was approximately 20.9% of the total retail market of food, beverages, and tobacco in 2011, compared to 22.7% in 2010 (this calculation is based on the estimate of the Central Bureau of Statistics of the total retail market for food, beverages and tobacco, and our estimate for market growth of 3.7% in 2011). 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 2011, 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" and "Mega In Town" stores. We expect to continue to expand our low-price store formats and our sales of products under our "Mega" private label in 2012 in an effort to increase our market share.

In addition, during 2009, we launched a new membership card and a new "You" Diners Club and 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 June 2011, we celebrated the achievement of the millionth You loyalty club customer. During 2012 and 2013, the Company intends to increase the number of the You loyalty club customers.

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During 2011, there was an increase in the sales through "Mega@Internet" sale site, which was launched in October 2009. In addition, there was an increase in the number of shop in shop formats.

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 eleven stores. During 2010, we began implementing 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 August 2010, we launched our first “Eden in Mega” store as part of our new Eden Teva store format. As of December 31, 2011, Eden Teva operated 17 (including six Eden Stores within Mega) supermarket stores. During 2012, the Company intends to improve the operating results of the Eden Teva stores.

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 2011, we opened six new stores and closed one store to compete in selective areas in which we did not believe we had sufficient market presence, and we converted 1 Mega store into Mega In Town stores. We also converted 14 "Mega" and "Zol BeShefa" stores to “Mega Bool” and five stores to "Zol BeShefa". 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.

In 2012, we plan to open approximately 16 additional supermarkets, totaling approximately 15,000 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 2012, untilMarch 31, 2012, we opened four supermarket stores.

In 2012, 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 10 additional stores that are self-operating stores or operated by franchisees and to capitalize on potential synergies and an internal reorganization in order to improve our operating efficiency. Between 20 and 25 stores that had been operated by a franchisee became self-operating stores during 2012.

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In 2012, 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, which should begin working at the end of 2013.

Off-Balance Sheet Arrangements.

None.

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)
	2012		2013		2014		2015		2016		2017		2018 and thereafter		Total

Long term loans from banks (1)		311,642		258,775		169,417		141,099		113,302		92,222		409,576		1,496,033
Non Convertible Debentures issued by the Company (2) (3)		88,193		88,193		88,193		8,578		8,578		8,578		42,889		333,202
Non-Convertible Debentures issued by BSRE (4) (5)		23,645		246,409		246,409		246,409		246,409		115,434		172,905		1,297,620
Convertible Debentures issued by BSRE (5)		83		28,744		28,744		28,744		28,744		-		-		115,059
Non-Convertible Debentures issued by Dor Alon (6)		89,319		130,904		131,045		131,195		61,397		26,817		70,053		640,730
Loan from related party		-		55,000		-		-		-		-		1,096		56,096
Short term credit from banks (7)		997,428		-		-		-		-		-		-		997,428
Commercial paper (8)		39,500		-		-		-		-		-		-		39,500
Purchase Obligations		25,154		-		-		-		-		-		-		25,154
Purchase Obligations – BSRE		90,634														90,634
Non-cancelable Long term leases (9)		341,859		311,375		263,107		230,574		196,031		161,046		685,628		2,189,620
Total contractual cash obligations		2,007,411		1,174,437		926,952		786,599		639,433		404,097		1,342,173		7,281,102

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(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, 2011 (4.3% per annum), interest payments on the long-term loans (in thousands) would be NIS 40,128 in 2012, NIS 33,117 in 2013, NIS 27,245 in 2014, NIS 23,880 in 2015, NIS 20,464 in 2016, NIS 17,172 in 2017 and NIS 13,867 in 2018 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 14,092 in 2012, NIS 9,395 in 2013, and NIS 4,697 in 2014. Without taking into account any changes to the Israeli CPI, based on the principal amount of the Non Convertible Debentures as of March 31, 2012 and assuming no additional conversion of debentures, interest payments on the Non-Convertible Debentures (in thousands) would be NIS 91 in 2012. 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)

These debentures bear interest at an annual rate of 2.5% 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 2,359 in 2012, NIS 2,144 in 2013, NIS 1,930 in 2014, NIS 1,716 in 2015, NIS 1,501 in 2016, NIS 1,287 in 2017 and NIS 3,217 in 2018 and beyond. 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. The principal is repayable in twelve equal annual installments on November 4 of each of the years 2011 to 2022 (inclusive).

(4)

The principal is repayable in three equal annual installments on August 5 of each of the years 2012 to 2014.

(5)

The Non-Convertible Debentures and the Convertible Debentures (Series A, Series B Series C and D) bear interest at an annual rate of 6.25%, 4.7%, 4.2% and 4.5 %, 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 59,300 in 2012, NIS 58,307 in 2013, NIS 46,844 in 2014, NIS 35,381 in 2015, NIS 23,918 in 2016, NIS 12,455 in 2017 and NIS 10,169 in 2018 and beyond. Without taking into account any changes to the Israeli CPI, based on the principal amount of the Convertible Debentures as of December 31, 2011 and assuming no additional conversion of debentures, interest payments on the Convertible Debentures (in thousands) would be NIS 7,186 in 2012, NIS 7,186 in 2013, and NIS 5,389 in 2014, NIS 3,593 in 2015 and NIS 1,796 in 2016. The table above does not include payments of interest on our debentures because the actual interest payments on these debentures will depend on changes in the Israeli CPI, which cannot be predicted at the time of this report.

(6)

The Non-Convertible Debentures and the Convertible Debentures (Series B, Series C, Series D, DorGaz and Dor Bonds) bear interest at an annual rate of 5%, 4.98%, 6.65%, 4.95% and 6.45%, respectively, and Series B 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 and Series C bears interest of government bonds+2.25%. Without taking into account any changes to the Israeli CPI and interest of government bonds, interest payments on the Non-Convertible Debentures (in thousands) would be NIS 35,326 in 2012, NIS 30,720 in 2013, NIS 23,577 in 2014, NIS 16,424 in 2015, NIS 9,263 in 2016, NIS 5,588 in 2017 and NIS 4,214 in 2018 beyond.

(7)

The table above does not include interest on our short term credit from banks (2011: 3.9%- 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, 2011was 4.58%. 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.

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(9)

Includes mainly apartment lease arrangements.

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 9.4 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 Alon Holdings and three officers of our subsidiaries as of April 30, 2012.

Name	Age	Position

David Wiessman (1)	56	Executive Chairman of the Board of Directors and Chief Operating Decision Maker (CODM)
Yitzhak Bader	66	Director
Shlomo Even	55	Director
Diana Bogoslavsky	53	Director
David Alphandary (2) (3)	77	Director
Uzi Baram (1) (2) (3)	75	Director
Avraham Meron (2)	73	Director
Mordehay Ventura	57	Director
Zeev Vurembrand	61	Chief Executive Officer of Alon Holdings and of Mega Retail
Dror Moran	44	Vice President and Chief Financial Officer of Alon Holdings and General Manager of "You" Club
Ortal Klein	43	Corporate Secretary
Moshe Shatz	64	Head of Human Resources Division
Daniel Garabagi	48	Head of Information Technology Division
Zeév Stein	58	Chief Executive Officer of Blue Square Real Estate Ltd.
Shmuel Antzel	55	Chief Executive Officer of Bee Group
Israel Yaniv	65	Chief Executive Officer of Dor Alon

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

(3) External directors.

David Wiessman has served as our CODM since April 2011 and as our Executive Chairman of our board of directors since November 15, 2005. Mr. Wiessman is also the Chairman of the board of directors of Mega Retail since March 12, 2007 and the Chairman of the board of directors of BSRE since 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 directorsof Alon Retail, Executive Chairman of Alon U.S.A. Energy, Inc., Director of Alon Natural Gas Explorations Ltd and 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 Alon Holdings.

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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, Alon Natural Explorations Ltd., Dor Alon Retail Sites Management 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, Pri-Gat Ltd., Rimon Counseling and Management of Services Ltd., Meiram Water and Infrastructures Ltd., various entities under control of Granot, One Technologies Software (ASD) Ltd., Gat Givat Haim Cooperative Society for Preservation of Agricultural Products Ltd., and Tnuva Central Cooperative for the Marketing of Agriculture Produce in Israel 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., Dor Alon Retail Sites Management 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, Dor Alon Retail Sites Management Ltd. and Alon Natural Gas Explorations 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 Alon Holdings.

Uzi Baramhas served as our external director since March 2006. He served as a member of Israel’s parliament, the Knesset, from1977to 2001.He served asthe 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 Alon Holdings.

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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-financeof 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 Alon Holdings. Mr. Meron is a CPA and holds a degree in Accounting from the Hebrew University of Jerusalem.

Mordehay Ventura has served as our director since March 22, 2012. Mr. Ventura has served as Chief Executive Officer of the Mishkey Hadarom Aguda Haklait Shitufit Ltd. (Mishkey Hadarom) since 2004, and currently serves as a director in Oil Holdings (Founded by the Kibbutzim Organizations) Ltd., Alon Israel Oil Company Ltd., Dor Alon Energy in Israel (1988) Ltd., Dor Alon Retail Sites Management Ltd. Gan Smuel Mazon Ltd., Ganir (1992) Ltd., Hadarey Nitzanim Aguda Haklait Shitufit Ltd., Sivey Hadarom (S.D.) Ltd., Hanegev Aguda Haklait Shitufit Transport Company Ltd., Megadley Drom Yehuda Aguda Haklait Shitufit Ltd., Shkedey Drom Yehuda Aguda Haklait Shitufit Ltd., Zeitey Drom Yehuda Aguda Haklait Shitufit Ltd., Hazera (1939) Ltd., Megadley Zraim Ltd., the Egg and Poultry Board, Yoav Regional Council, Amal Darom Aguda Haklait Shitufit Ltd., Marbek Services and assets (2002) Ltd., Shovre Bar Import Feeding Stuff Ltd., Mishkey Dan Partnership, Dana Finance Services Ltd., Amber Machon Letaarovet Aguda Haklait Shitufit Merkazit Ltd., and Tnuva Holdings. Mr. Ventura holds a B.A. degree in Economics and Business Administration from the Rupin Academic Center in the Hefer Valley in Israel.

Zeev Vurembrandhas served as our Chief Executive Officer and as the Chief Executive Officer of Mega Retail 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 Alon Holdings between 1997 and 2005 and his last position with Alon Holdings 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.

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Ortal Klein, Adv.has served as our Corporate Secretary since March 2011.Ms. Klein has also served as the General Counsel and Corporate Secretary of Alon Israel Oil Company since May 1997 and the General Counsel and Corporate Secretary of Dor Alon and its subsidiaries since 2000. Ms. Klein holds a LLB from Tel Aviv University and a LLM in commercial Law from Bar Ilan University.

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.

Daniel Garabagihas served as our Vice President and head of the Information Technology Division since April 2012. Mr. Garabagi served as Vice President of Information Technology in Strauss Group, one of the largest food companies in Israel, from 2004 to 2012. Prior to that, he served as manager of Information Technology in Strauss Group from 2000 to 2004. Mr. Garabagi holds a B.A. in Mathematics and Computer Science from the Haifa University.

Zeév Steinhas served as the Chief Executive Officer of Blue Square Real Estate Ltd., since July 2006. Mr. Stein 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 Antzel has served as the Chief Executive Officer of Bee Group since September 2008. From 1995 to 2007, Mr. Antzel served as the Chief Executive Officer of Ten Petroleum Company Ltd. Between 1994 and 1995, Mr. Antzel served as the Chief Executive Officer of Prostiv Ltd.

Israel Yanivhas served as the Chief Executive Officer of Dor Alon since 2000. From 1997 until 2000 Mr. Yaniv served as Chief Executive Officer of SuperGaz Ltd. Mr. Yaniv holds a BSc and MSc in Chemical Engineering from the Technion in Haifa.

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Arrangements for the Election of Directors

As of March 31, 2012, Alon, directly and indirectly through Alon Retail, owned approximately 77.26% of our outstanding ordinary shares. So long as Alon continues to own beneficially more than 50% of our outstanding ordinary shares and voting power, it will be able to control the outcome of matters requiring shareholder approval that do not require a special majority, including the election of all Alon Holdings directors, other than Alon Holdings' two external directors. The election of the external directors requires that at least a majority of the votes of the shareholders who are not controlling shareholders and do not have a personal interest in the appointment (excluding a personal interest which did not result from the shareholder’s relationship with the controlling shareholder) who participate in the vote, vote for their nomination (without taking into account abstentions), or that the total number of shares voted against the proposal by shareholders who are not controlling shareholders and do not have a personal interest does not exceed two 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 Alon Holdings directors or senior management for services they rendered Alon Holdings and its subsidiaries, for the year ended December 31, 2011. The table also includes compensation to individuals who ceased to serve as directors or executive officers during the year.

	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	$4,378 (NIS 16,728)	$422 (NIS 1,613)

In addition, we recorded the sum of approximately NIS 1.5 million, or $0.4 million, in 2011 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 are 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 (therefore the currently monthly amount is NIS 49,000). No additional fees are 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. In February 2006, our audit committee, board of directors and shareholders meeting approved this arrangement and this arrangement was approved by our audit committee, board of directors and shareholders meeting for additional three years commencing onFebruary 2, 2012.

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BSRE paid to its CEO, Mr. Zeev Stein, for the year 2011 a total payment which cost BSRE approximately NIS 1,615,000 (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. 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.

Dor Alon paid to its CEO, Mr. Israel Yaniv, for the year 2011 a total payment which cost Dor Alon approximately NIS 2,318,000 (including an annual bonus). Under his employment agreement, Mr. Yaniv is entitled to an annual bonus equal to no more than eight monthly salaries, at the discretion of Dor Alon's board of directors. In the event of termination of Mr. Yaniv's employment with Dor Alon, he is entitled to a notice period of 10 months and to a severance package equal to one and a half months' salaries for every year of employment, other than in those situations where Dor Alon would not be required to pay severance under the law.

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 41.55 (unlinked) per share and in March 15, 2010, the Company granted 274,000 options to managers with an exercise price of NIS 41.55 (unlinked) per share. In March 2011, the Company granted 290,000 options to key management with an exercise price of NIS 36.51 (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. As of March 2012, 750,760 options out of the 2008 plan had been exercised.

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In January 2010, our 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 1.16% of our outstanding shares, as of March 31, 2012. 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 vests.

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 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 (s)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.

Under the Israeli Companies Law, the entering by a public company into a contract with a non-controlling director as to the terms of his office, including exculpation, indemnification or insurance, requires the approval of the audit committee, the board of directors and the shareholders of the Company.

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.

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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. The Minister of Justice has adopted regulations exempting companies, like Alon Holdings, 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 Lawprovides that a person may not be appointed as an external director if the person is a relative of the controlling shareholder or if the person or the person’s relative, partner, employer, someone to whom he is subordinated directly or indirectly 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, our controlling, any relative of our controlling shareholder, as of the date of the person’s appointment to serve as external director, or any entity in which, currently or within the two years preceding the appointment date, the controlling shareholder was the company or the company's controlling shareholder; and in a company without a controlling shareholder or without a shareholder holding 25% or more of the voting rights in the company – any affiliation to the chairman of the board of directors, to the general manager (Chief Executive Officer), to a shareholder holding 5% or more of the company's shares or voting rights, or to the chief officer in any field as of the date of the person’s appointment. The term “affiliation” includes:

an employment relationship;

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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.

Without derogating from the above, a person may not serve as an external director if the person or the person’s relative, partner, employer, someone to whom he is subordinated directly or indirectly or any entity under the person’s control has business or professional relationship with an entity which an affiliation with is prohibited as detailed above, even if such relationship are not on a regular basis (excluding negligible relationship). In addition, a person who received compensation other than the compensation permitted by the Israeli Companies Law, may not serve as an external director.

Regulations under the Israeli Companies Law, 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 positions or other businesses create, or may create, a conflict of interests with the person’s responsibilities as a director or may impair his or her ability to serve as a director. In addition, a person who is a director of a company may not be elected as an external director of another company if, at that time, a director of the other company is acting as an external director of the first company. Until the lapse of two years from termination of office, a company, its controlling shareholder, or a company controlled by him may not engage an external director, or his spouse, or his child to serve as an office holder in the company or in any entity controlled by the controlling shareholder and cannot employ or receive professional services for consideration from that person, and may not grant such person any benefit either directly or indirectly, including through a corporation controlled by that person. The same restrictions above apply to relatives other than a spouse or a child, but such limitations shall only apply for one year from the date such external director ceased to be engaged in such capacity. In addition, if at the time an external director is appointed all current members of the board of directors, who are neither controlling shareholders nor relatives of controlling shareholders, are of the same gender, then the external director to be appointed must be of the other gender.

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Under the Companies Law, a public company is required to appoint as an external director, a person who has "professional expertise" or a person who has "financial and accounting expertise," provided that at least one of the external directors must have "financial and accounting 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 expertise is a person who has an academic degree in either economics, business administration, accounting, law or public administration or other academic degree or has completed other higher education studies, all 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 one of the following or at least five years of aggregate experience in two or more of the following: 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 main 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 type, 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”.

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 a majority of the votes of the shareholders who are not controlling shareholders (as defined in the Israeli Companies Law) and do not have a personal interest in the appointment (excluding a personal interest which did not result from the shareholder’s relationship with the controlling shareholder), vote in favor of the election of the director without taking abstentions into account; or (2) the total number of shares of the abovementioned shareholders voted against the election of the external director does not exceed two percent of the aggregate voting rights in the company.

The initial term of an external director is three years and may be extended for two additional three-year terms under certain circumstances and conditions. Nevertheless, Regulations under the Israeli Companies Law provide that companies, like Alon Holdings (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 director 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, if they violate their duty of loyalty to us. Each committee authorized to exercise any of the powers 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.

An external director is entitled to compensation and reimbursement of expenses in accordance with regulations promulgated under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with serving as a director except for certain exculpation, indemnification and insurance provided by the company.

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David Alphandary and Uzi Baram currently serve as Alon Holdings 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.

The majority of the members of the audit committee, as well as the majority of members present at audit committee meetings, must be "independent" (as such term is defined below) and the chairman of the audit committee must be an external director. In addition, the following are disqualified from serving as members of the audit committee: the chairman of the board of directors, the controlling shareholder and his relatives, any director employed by the company or by its controlling shareholder or by an entity controlled by the controlling shareholder, a director who regularly provides services to the company or to its controlling shareholder or to an entity controlled by the controlling shareholder, and any director who derives most of its income from the controlling shareholder.

An “Independent Director” is defined as an external director or a director who meets the following conditions: (i) satisfies certain conditions for appointment as an external director (as described above) and the audit committee has determined that such conditions have been met and (ii) he or she has not served as a director of the company for more than nine consecutive years, with any interruption of up to two years in his or her service not being deemed a disruption in the continuity of such service.

The role of the audit committee is to examine flaws in our business management, in consultation with the internal auditor or 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 related party transactions.

Additional functions to be performed by the audit committee include, among others, the following: determination whether certain related party actions and transactions are "material" or "extraordinary" for purposes of the requisite approval procedures; to assess the scope of work and compensation of the company's independent accountant; to assess the company's internal audit system and the performance of its internal auditor and if the necessary resources have been made available to the internal auditor considering the company's needs and size; and to determine arrangements for handling complaints of employees in relation to flaws in the business management of the company and the protection for such employees.

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New York Stock Exchange Requirements

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

The independence requirements of Rule 10A-3 of the Securities Exchange Act of 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 Alon Holdings.

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, among others, to examine whether our actions comply with the law and orderly business procedure. Under the Israeli Companies Law, the internal auditor may not be an interested party, an office holder, 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.

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

Fiduciary Duties of Office Holders

The Israeli Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company, including directors and executive officers. The duty of care requires an office holder to act with the level of care, according to 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 requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:

refrain from any action involving 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's business;

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 and, in any event, not later than the first board meeting at which the transaction is discussed, disclose any personal interest that he may have and all related material fact or document known to him, in connection with any existing or proposed transaction by the company. A personal interest of an office holder includes a personal interest of his relative, of a company in which the office holder or his relative is, a shareholder which holds 5% or more of company's share capital or its voting rights, a director or a general manager, or in which he or she has the right to appoint at least one director or the general manager. A personal interest also includes a personal interest of a person who votes according to a proxy of another person, even if the other person has no personal interest, and a personal interest of a person who gave a proxy to another person to vote on his behalf – all whether the discretion how to vote lies with the person voting or not. 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.

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Under Israeli law, an extraordinary transaction is a transaction:

other than in the ordinary course of business;

other than on market terms; or

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

Under the Israeli Companies Law, once an office holder complies with the above disclosure requirement, the board of directors may approve an ordinary 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. Subject to certain exceptions, the audit committee and the board of directors must approve the conditions and term of office of an office holder (which is not a director).

If the transaction is an extraordinary transaction, both the audit committee and the board of directors, in that order, must approve the transaction. Under specific circumstances, shareholders approval may also be required. Whoever 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. However, if the chairman of the board of directors or the chairman of the audit committee has determined that the presence of such person is required to present a matter to the meeting, such officer holder may be present at the meeting. Notwithstanding the foregoing, 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 person who has the ability to direct the activities of a company, other than if this power derives solely from his/her position on the board of directors or any other position with the company. In addition, for such purposes 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 engagement of the company, directly or indirectly, with a controlling shareholder or his or her relative (including through a corporation controlled by a controlling shareholder), regarding the company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office holder of the company or an employee, regarding his or her terms of office and employment, require the approval of the audit committee, the board of directors and the shareholders of the company, in that order. The shareholders approval must include either:

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a majority 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 (votes abstaining shall not be taken into account); or

the total number of shares voted against the proposal by shareholders without a personal interest does not exceed two percent (2%) of the aggregate voting rights in the Company.

In addition, any such transaction whose term is more than three years, requires the abovementioned approval every three years, unless (with respect to transactions not involving receiving of services or compensation) the audit committee approves that a longer term is reasonable under the circumstances.

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.

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.”

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.

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 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 special tender offer rules would apply to a company whose shares are publicly traded in the United States.

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The Israeli Companies Law further provides that a shareholder has a duty to act in good faith towards the company and other shareholders when exercising his rights and duties and shall refrain from oppressing other shareholders, including in connection with the voting at a shareholders’ meeting on: (i) any amendment to the articles of association; (ii) an increase in the company’s authorized share capital; (iii) a merger; or (iv) approval of certain transactions with control persons and other related parties, which require shareholder approval. 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.

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 prohibited 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 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.

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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 for any act performed by him in his capacity as an Office Holder with respect to any of the following:

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; or

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

Pursuant to resolutions adopted by our shareholders, we participate in a directors’ and officers’ liability insurance policy acquired by Alon. The insurance policy is for a period beginning on January 1, 2012, and ending on December 31, 2012 covering the Company and affiliated entities, including Dor Alon and its subsidiaries, BSRE and its subsidiaries, and Alon and its subsidiaries (collectively, the “Group”). Such policy would cover a total liability of US $50 million (for each claim and in the aggregate) for the Company, including legal fees, and US $30 million (for each claim and in the aggregate), including legal fees, for each of the other members of the Group, excluding the Company, provided that in any event the maximum aggregate coverage of liability for the entire Group would be US $50 million. Our audit committee, board of directors and shareholders have also approved any renewal of the insurance policy or the participation by the Company in future directors’ and officers’ liability insurance policies covering the Company and all or some members of the Group, under substantially the same terms and conditions as the original insurance, upon its expiration, for a period of up to an additional four years from the end of the term of the original insurance policy. The participation in any future insurance policies would be subject to the following conditions: (i) the determination by the audit committee and board of directors that there will be no substantive changes between the original insurance policy and the future insurance policies; a change to the scope of coverage under the future insurance policies will not be deemed to be substantive so long as the premium paid by the Group for such future insurance policies will be as described in section (ii) below; and (ii) the premium paid for the future insurance policies will not increase by more than the greater of (A) 25% over the cost of the premium paid for the insurance policy of the previous year; or (B) 25% over the cost of the premium paid for the original insurance policy (in each case plus the rate of depreciation of the NIS in relation to the U.S. dollar, to the extent such a depreciation occurred).

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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 or in connection with a monetary sanction; and

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.

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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, except for insurance and indemnification where 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 (except 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, civil fine, monetary sanctions, or forfeit imposed on the Office Holder.

In addition, under the Israeli Companies Law, exemption of, 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.

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 specified issues.

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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;

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

An act in connection with voting rights in investee companies;

An act in connection with the management of market risks.

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

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

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

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

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

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

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

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

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

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, has the powers as described above. 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.”

Employees.

As of December 31, 2011, Mega employed 6,630 employees (including employees of Eden Teva), counting multiple employees sharing a single position as a single employee, including 3,104 temporary employees. 740 of our employees were employed in central management and administration and in our logistics center and 5,890 in our stores.

As of December 31, 2011, Dor Alon employed 2,518 employees, counting multiple employees sharing a single position as a single employee, 111 of Dor Alon’s employees were employed in central management and administration and in Dor Alon’s logistics center and 2,407 in Dor Alon’s direct marketing sector and fueling stations and convenience stores.

As of December 31, 2011, our non-food retail segment employed 736 employees, counting multiple employees sharing a single position as a single employee, 403 of our non-food retail segment’s employees were employed in central management and administration and in its logistics center and 333 in our non-food retail’s stores.

As of December 31, 2011, BSRE employed nine employees.

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As of December 31, 2010, Mega employed 6,809 employees (including employees of Eden Teva), counting multiple employees sharing a single position as a single employee, including 2,617 temporary employees. 759 of our employees were employed in central management and administration and in our logistics center and 6,050 in our stores.

As of December 31, 2010, Dor Alon employed 2,359 employees, counting multiple employees sharing a single position as a single employee, 94 of Dor Alon’s employees were employed in central management and administration and in Dor Alon’s logistics center and 2,265 in Dor Alon’s direct marketing sector and fueling stations and convenience stores.

As of December 31, 2010, our non-food retail segment employed 722 employees, counting multiple employees sharing a single position as a single employee, 357 of our non-food retail segment’s employees were employed in central management and administration and in its logistics center and 365 in our non-food retail segment’s stores.

As of December 31, 2010, BSRE employed seven employees.

We are subject to labor laws and regulations in Israel. Most of Mega Retail's 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, Alon Holdings, 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 Alon Holdings. The collective bargaining agreements in effect as of that date apply to Alon Holdings as if Alon Holdings and these employees were originally parties to these agreements. Alon Holdings 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. The above applies to Mega Retail employees. On January 1, 2011, substantially all of the employees of Alon Holdings were transferred to Mega Retail.

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.

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Share Ownership.

As of March 31, 2012, other than indirect ownership through Alon or 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 Alon Holdings and/or its subsidiaries and/or affiliated companies. As of December 31, 2011, the total number of shares available for issuance under the Plan was 704,663 shares (including options issuable to Alon Holdings' 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 December 31, 2011, an aggregate of 48,330 options and 233,000 options granted to employees under the Plan were outstanding, with exercise prices of NIS 26.85 per share and NIS 40.98 per share (adjusted for 50% of the dividends paid), respectively, and 113,333, 20,000 and 290,000 options granted to executive officers and managers under the Plan were outstanding with exercise prices of NIS 29.76, NIS 40.98 and NIS 35.94 per share (adjusted for 50% of the dividends paid), respectively.

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 expired in March 2011, and the Company is currently considering a new option plan. Since its expiration, no new options have been or may be granted. 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

Major Shareholders.

The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of March 31, 2012, 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.

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Name	Number of Ordinary Shares Beneficially Owned		Percentage of Outstanding Ordinary Shares⁽¹⁾
Alon Israel Oil Company Ltd.(2)(3)		50,955,267		77.26	%

Alon Retail Ltd.(3)		30,604,303		46.40	%

Menorah Mivtachim Holdings Ltd.(4)		5,780,397		8.76	%

(1)

The percentage of outstanding ordinary shares is based on 65,954,427 ordinary shares outstanding as of May 31, 2011 (excluding 207,433 ordinary shares held by Alon Holdings as treasury shares).

(2)

Alon Israel Oil Company Ltd. (“Alon”) was issued 20,327,710 ordinary shares of Alon Holdings in consideration for Alon Holdings' purchase of all the outstanding shares of Dor Alon from Alon. In addition, Alon may be deemed to beneficially own all of the shares held directly and indirectly by Alon Retail Ltd. due to the ownership structure of Alon Retail described in footnote (3); accordingly, the number of shares listed as owned by Alon includes all the shares that are listed as owned by Alon Retail Ltd.

(3)

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. 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 and Gara, Boaz and Iftah Biran, where all voting rights have been granted to Advocate Biran), holding 79.4% of the capital and voting rights of Bielsol Investments, D.B.W 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.

(4)

Includes shares held by the subsidiaries of Menora Mivtachim Holdings Ltd. ("Menora Holdings"), as follows: 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 Holdings is an Israeli public company. Approximately 61.9% of Menora Holdings outstanding shares are held by Neyden Establishment and Palamas Establishment, foreign corporations incorporated in Vaduz, Liechtenstein (these corporations are held in trust and Mr. Menachem Gurevitch is the sole and only beneficiary). The remaining of the outstanding shares are held by the public. Menora Mivtachim Insurance Ltd., Menora Mivtachim Pensions Ltd. and Menora Mivtachim Finance Ltd. are wholly owned subsidiaries of Menora Holdings. 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

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As of March 31, 2012, Alon Holdings had approximately 42 shareholders of record with a United States address. As of March 31, 2012, these United States record holders held approximately 1,986,087 ordinary shares in the form of ADSs, representing approximately 3% of our then outstanding share capital.

In October 2010, following the sale by Alon of its approximately 80% interest in Dor Alon, to Alon Holdings, Alon’s direct and indirect ownership in Alon Holdings increased to approximately 78.35% of the outstanding share capital of Alon Holdings from approximately 68.62% of the outstanding share capital of Alon Holdings.

Related Party Transactions.

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) (the "Purchasers") signed agreements with the Municipality of Tel Aviv and the Wholesale Market Company (collectively, the “Sellers”) to acquire rights to a long term lease of property in the wholesale market site in Tel Aviv (the "Property"). One of the Sellers was Tnuva, and to our knowledge, some of the collective acquisition entities of kibbutzim in Israel that hold shares of Alon, our controlling shareholder, hold 23% of the shares of Tnuva. In addition, our director, Yitzhak Bader, also serves as a director on the board of directors of Tnuva. On June 2, 2010, the shareholders of BSRE approved the signing of the final agreements. The agreements were approved by the Israeli Minister of the Interior in July 2010.

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. As of March 31, 2012, the Purchasers had exercised their right under the agreements to pay the first installment and had made a payment in the amount of approximately NIS 258.7 million to the Purchasers.

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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 84 to 102 million. 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.

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. In addition, they determined material issues regarding the construction and the management of the parking lot in which an unanimously decision is required, and principles regarding dilution of each of the parties' rights in the event that one of the parties will not invest the amounts that such party obligated to invest.

On February 21, 2011, Tel Aviv’s planning and building committee approved in principle an application by the Purchasers to change the architectural design plans of the Project. Within the framework of the approved changes (i) the Project will include 10 buildings in each building consisting of 14 floors each, (ii) the Project will include 718 residential units for sale and 54 units which will be leased in accordance with certain criteria determined by the Municipality of Tel Aviv and the Purchasers, and (iii) 3,420 square meters which was originally zoned as a “multi-purpose” lot was designated for commercial use.

On April 10, 2011, a construction works permit was received subject to certain obligations of the Purchasers and construction work has began. During March 2012, a basements permit was received.

As of March 13, 2012, 489 sale agreements had been signed and advance payments in the aggregate amount of NIS 244 million (including VAT) had been received from the purchasers.

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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").

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, for a consideration of approximately $440 thousand per quarter commencing July 1, 2010, 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 (the "License Period"). In the event BSRE sells the land, POW will have the right to participate in the consideration net of costs as defined in the agreement.

The present land use designation of the property was changed to urban center zoning from its original land use designation which was heavy industrial. On May 12, 2010, the local Snomish County Council (the "Local Council") adopted (a) an ordinance approving the new Urban Center Code and, (b) and ordinance to change the zoning designation of Point Wells to Urban Center. The Urban Center Code and new zoning designation became effective on May 29, 2010. In March 2011, BSRE, through BSRE Point Wells, LP, submitted a detailed plan to the Local Council, which included plans for the building of three residential areas and public areas as well as development plans (the "Plan"), and in November 2011, the court determined that building permit will be provided only after completion of all the required adjustments pursuant to the local law and the aforementioned ordinances. BSRE filed an appeal on the court determination, and in the opinion of BSRE’s local counsel, no substantial delays in the development or zoning actions are expected, however, BSRE can not estimate the accurate time required to receive the final approval to fulfill the new land use designation.

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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 for approving the construction of at least 2000 residential units on the property. All of the expenses connected with the 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.

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

Alon Holdings and Alon, Alon Holdings' controlling shareholder, entered into a Share Purchase Agreement, which was completed on October 3, 2010, that provided for the acquisition by Alon Holdings 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 the closing date of the acquisition.

Under the terms of the Share Purchase Agreement, in consideration for each share held by Alon in Dor Alon, Alon Holdings issued to Alon 1.8 ordinary shares of Alon Holdings, and in exchange for all the Transferred Shares, Alon Holdings issued to Alon 20,327,710 ordinary shares of Alon Holdings, or the Issued Shares. Immediately following the Acquisition, Alon beneficially owned in the aggregate, directly and indirectly, approximately 78.44% of the outstanding ordinary shares of Alon Holdings (as opposed to approximately 68.62% of the outstanding shares immediately prior to the Acquisition), and all other Alon Holdings shareholders owned approximately 21.56% of the outstanding ordinary shares of Alon Holdings (as opposed to approximately 31.38% of the outstanding ordinary shares immediately prior to the Acquisition). Upon completion of the Acquisition, Dor Alon became a majority-owned subsidiary of Alon Holdings and its shares have continued to trade on the TASE.

As a condition to the closing of the Share Purchase Agreement, Alon Holdings paid to its shareholders on October 18, 2010 an aggregate cash dividend of NIS 800 million, or approximately US $223.4 million (based on the representative rate of exchange on October 18, 2010), which represented a dividend of approximately NIS 12.31, or approximately US $3.44 (based on the representative rate of exchange on October 18, 2010), per Alon Holdings ordinary share (after taking into account the shares to be issued to Alon in the acquisition, or the Dividend Distribution. The Dividend Distribution was made following the issuance of Alon Holdings ordinary shares to Alon pursuant to the Share Purchase Agreement and was conditioned thereon. The Dividend Distribution was approved by the Israeli District Court.

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Alon agreed to compensate and indemnify Alon Holdings and/or Dor Alon for various damages and/or losses and/or expenses that may be caused to Alon Holdings 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 Alon Holdings 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 Alon Holdings 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 Alon Holdings 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 Alon Holdings 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 Alon Holdings that, in connection with the payment of tax at the time of any future sale by Alon Holdings 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).

Arrangements between Alon Holdings and various subsidiaries

Arrangements with Dor Alon

Management Services Agreement with Alon

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The management services agreement terminated on December 31, 2010; In December 2010, a new management services agreement was approved by the general shareholders of Dor Alon, after receiving the approval of the audit committee, which replaced the previous one. The new agreement will terminate in December 2015 subject to any required approvals by law. The terms of the new management services agreement are substantively similar to those set forth in the original agreement.

Dor Alon Deposit of Cash Balances Agreement

Pursuant to the agreement entered into in May 2005, and subsequently extended on January 6, 2011 until January 2016, Dor Alon may, from time to time, deposit funds with Alon and receive in return funds on ON CALL terms (on an on-demand basis). The amount of funds lent from each party to the other party may not exceed NIS 150 million at any time (linked to the prime rate less 1.25%). Against the deposits, the depositor is entitled to require the recipient party to provide her /or third parties bank guarantees or letters of credit. Each party is entitled to redeem or require redemption of the balance by giving notice of three banking business days. Either party may terminate the agreement by providing three-month prior written notice.

Procurement Agreement with Dor Alon Management

Dor Alon Retail Sites Management Ltd., a subsidiary of Dor-Alon (hereinafter: “Dor Alon Management”), 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 Mega Retail and Dor Alon Management, 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 Management has agreed to pay Mega Retail (i) for products sent directly from suppliers, an amount equal to the cost of such products to Mega Retail as determined under the Procurement Agreement plus 2%, and (ii) for products sent from Mega Retail distribution center, an amount equal to the cost of such products to Mega Retail as determined under Procurement Agreement plus 2.75%, in each case plus VAT. The cost of the products to Mega Retail will be audited by our independent public accountants. In the event that Mega Retail's revenues generated from the Procurement Agreement minus related expenses from the sale of products to Dor Alon Management is less than NIS 1 million linked to the Israeli consumer price index in any year without VAT, Dor Alon Management will pay Mega Retail additional amounts in order that Mega Retail's 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 Mega Retail with a floating lien or pledge, unlimited in amount, on all inventory in the convenience stores, subject to any legal prevention, and Dor-Alon and Alon Israel Oil Company Ltd, the controlling shareholders of Dor Alon Management, will guarantee all obligations of Dor Alon Management under the agreement.

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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.

In addition, with respect to convenience stores located in Dor Alon fuel service stations that are operated by third parties, Mega Retail have agreed that upon Dor Alon’s request, it 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 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, Alon Holdings entered into the following agreements with Dor-Alon:

(i) an agreement establishing a joint loyalty plan for the benefit of Alon Holdings’ and Dor Alon’s customers, formed as a partnership to be held 75% by Alon Holdings 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 Alon Holdings (one of whom serves as the chairman of the Board), and two (2) of whom are appointed by Dor Alon;

(ii) an agreement under which Alon Holdings and Dor Alon purchased 49% (36.75% Alon Holdings and 12.25% Dor Alon) 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 Alon Holdings). The consideration was funded through a non-recourse loan granted by CAL to Alon Holdings 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. On May 25, 2011, the agreement was amended.

Under the original agreement, the Company and Dor Alon were 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 its other credit card activities (i.e., those activities outside the Loyalty Plan) were to be allocated to Alon Holdings and Dor Alon 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 were not met, Alon Holdings and Dor Alon were give the right, 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"), to purchase the right to the net income of Diners Israel arising from such other activities through a one-time payment. 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.

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On May 25, 2011, we agreed to an amendment to the agreement of principles between CAL, Diners Israel, Alon Holdings, Dor Alon, and the Alon Holdings-Dor Alon Joint Loyalty Plan Partnership, and in July 2011, all suspending conditions set forth in the agreement were completed, the amendment to the agreement came into effect. Pursuant to the amendment, Alon Holdings and Dor Alon would have the right to 49% of the profits of Diners Israel Ltd., both related to the "You" bearing credit cards, and to all other credit cards issued by Diners, effective as of January 1^st, 2011 (with the exception of certain activities the profits of which is allocated to the parties per their respective holdings from July 1^st, 2011). Alon Holdings and Dor Alon repaid the non-recourse loan granted to them by CAL for the purchase of the shares, in the amount of NIS 36 million. Additionally, the amendment sets the terms as to the business relationship between the parties, including cancellation mechanism in the event the Loyalty Plan is cancelled by the purchasers and specific provisions regarding distribution of dividends, and extends the agreement until December 31, 2015, following which the agreement will be extended for additional three-year terms based on the terms and conditions set forth in the amendment to the agreement. The amendment also includes a calculation method for the purchase of the 49% of Diners owned by us and by Dor Alon in the event the agreement between Diners and the Loyalty club not be extended. The Company and Dor Alon handled their financial statements by an agreement to buy Diners as option for purchasing stock options and recorded in the period income before taxes from revaluation of approximately NIS 102 million ($27.5 million). See “Item 4. Information on The Company - B. Business Overview - Marketing”.

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.

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Supply Agreement with Bee Group

Mega Retail is a 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 purchases the Supplier's products, including, among others, toys, houseware, electrical appliances and market the products in Alon Holdings stores. The Supplier sells its products to Mega Retail at a discount to the list price of such products. Pursuant to the recent amendment to the Israeli Companies Law, on November 10, 2011, the audit committee of Naaman determined that the period of this agreement (ten years from January 3, 2005 to January 2, 2015) is reasonable under the specific circumstances.

Arrangements between Alon Holdings and BSRE

On March 23, 2011, the shareholders of BSRE approved the participation in the directors’ and officers’ liability insurance policy acquired by Alon for a period beginning on January 1, 2012, and ending on December 31, 2012, as described in "Item 6. Directors, Senior Management and Employees – C. Board Practiced – Office Holder Insurance".

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”, Alon Holdings 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.

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

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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.

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.

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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. Due to the recent amendment to the Companies Law, on November 16, 2011, the audit committee of BSRE determined that the period of the lease agreement, which exceeds three years, is reasonable under circumstances and in light of the nature of the transaction. See "Item 4. Information on the Company – D. Our Real Estate".

Agreements with Respect to Properties Operated by Mega Retail.

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 into with Mega Retail 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.

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.

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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. Due to the recent amendment to the Companies Law, on November 16, 2011, the audit committee of BSRE determined that the period of the Lease Agreement, which exceeds three years, is reasonable under the circumstances. See "Item 4. Information on the Company – D. Our Real Estate". Under the Lease Agreement, new lease agreements by Mega Retail 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 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 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 that 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 deducted from the lease payment paid by Mega Retail to BSRE under their lease agreement.

(ii) The rent paid for the transferred asset would be deducted (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.

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The lease agreements between BSRE and Mega Retail after the September 2009 transfer contain terms similar to the Lease Agreements between BSRE and Mega Retail, 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. Due to the recent amendment to the Companies Law, on November 16, 2011, the audit committee of BSRE determined that the period of the Lease Agreement, which exceeds three years, is reasonable under the circumstances.

Service Agreement

Pursuant to an agreement entered in August 2006, effective as of January 1, 2006, and extended on December 27, 2010, effective as of January 1, 2011, 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 will pay the Company an annual amount of NIS 4.2 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 3.6 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). 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") which are classified as yield-generating real estate in accordance with BSRE’s consolidated financial statements at the end of the preceding year and (y) the BSRE Asset Cost as of the end of the preceding year, linked to changes to the Israeli CPI plus VAT. In 2010, in consideration for the foregoing services, BSRE paid the Company an annual amount of NIS 4,106,000.

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. The agreement was extended for an additional five-year term, commencing January 1, 2011, after having been approved by the shareholders of BSRE. Pursuant to a recent amendment to the Israeli Companies Law, this agreement is subject to the approval of the audit committee, the board and the shareholders of the Company each three years.

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Agreement with respect to the Allocation of Various Insurance Expenses

Pursuant to an agreement entered into 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 Alon Holdings 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. Pursuant to a recent amendment to the Israeli Companies Law, on December 13, 2011, the audit committee of the Company determined that this agreement is not an extraordinary agreement and does not have a material influence on the Company's profitability, and therefore reapproved this agreement for additional three years.

Deposit of Cash Balances Agreement

Pursuant to the agreement entered in August 2006, and subsequently extended on February 8, 2011 until February 27, 2013, BSRE may, with the Company's consent from time to time, deposit funds with the Company and receive in return funds on 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.

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, Alon Holdings, or its subsidiaries, enter into agreements and engage 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 Alon Holdings.

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, Alon Holdings and certain of its affiliates have entered into other agreements and transactions.

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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.

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.

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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.

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:

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 are to jointly hold in equal parts a new company to which Kibbutz Eyal will transfer the property. In addition, pursuant to this agreement BSRE is to 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. On July 11, 2011, following the approval of BSRE’s audit committee and board of directors, BSRE'e shareholders approved entering into a lease agreement with Mega Retail, pursuant to which BSRE will construct the logistics center in Kibbutz Eyal to be leased by Mega Retail. For more information, see “Item 4. Information of the Company – B. Business Overview – Real Estate – Logistics Areas.”

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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 Alon Holdings 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 Letzion 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 will 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. Due to the recent amendment to the Companies Law, on November 16, 2011, the audit committee of BSRE determined that the period of the lease agreement, which exceeds three years, is reasonable under circumstances and in light of the nature of the transaction. 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.

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 Letzion.

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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 Letzion 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.

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.

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On December 31, 2010, a BSRE subsidiary had a loan in an amount of NIS 74.5 million to finance the establishment of a logistics center in Beer Tuvia. A first ranking lien on the property and the accompanying rights was registered in favor of the bank.

Arrangements between Mega Retail and Vardinon

In January 2008, Mega entered into a supply agreement with Vardinon pursuant to which Vardinon is to supply it with a variety of textile products manufactured by Vardinon under a new private label, which are to be designed by Mega 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 Mega Retail, pursuant to which Vardinon is to coordinate between Mega Retail and suppliers of both brand name and non brand name home textile products (the "Suppliers") so that Mega Retail may purchase these products directly from the suppliers. In addition, Vardinon is to provide certain related services to Mega Retail in connection with its agreements with these suppliers. In consideration for the services provided by Vardinon pursuant to the services agreement, Mega Retail agreed to pay Vardinon a services fee in the amount of 12.5% of the amount of the invoices issued to Mega Retail 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.

Arrangements between Bee Group, Naaman and Vardinon

On August 15, 2011, Naaman and Vardinon entered into a Supply and Consignment Agreement (the "Supply Agreement") with Bee Group, pursuant to which Naaman and Vardinon will supply to Bee Group several products (the "Products") to be sold on a future website to be established by Bee Group. Under the Supply Agreement, Bee Group will pay Vardinon and/or Naaman, as applicable, for the Products to be sold by Bee Group based on Naaman’s and/or Vardinon’s price list, as applicable, previously approved between the parties. The term of the Supply Agreement is for a period of three years, from until August 14, 2014. The Supply Agreement will be extended for additional three year periods, subject to the required approvals under applicable law. Each party may terminate the Supply Agreement by the delivery of a three months prior written notice to the other party.

Arrangements between Mega Retail and Eden Teva and Naaman

Mega has an unwritten arrangements with Eden Teva, according to which Eden Teva sells its products in certain Mega stores (store in store format), and Mega receives a certain percentage of the sales of Eden Teva products. Mega has a similar arrangement with Naaman.

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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 controlling shareholder, hold 23% of the shares of Tnuva. In addition, our director, Yitzhak Bader, also serves as a director on the board of directors of Tnuva. In 2011, Tnuva’s products accounted for approximately 14.5% 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".

Arrangements with David Wiessman, our Executive Chairman of the board of directors

See “Item 6. Directors, Senior Management and Employees - B. Compensation.”

Employment Agreement with Moran Wiessman

Beginning in January 2009, Ms. Moran Wiessman has been employed as a process engineer by our wholly-owned 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. As of December 31, 2011, Ms. Wiessman receives a monthly salary of NIS 13,000, 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 is 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 are 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.

Interests of Experts and Counsel.

Not applicable.

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ITEM 8.

FINANCIAL INFORMATION

Consolidated Statements and Other Financial Information.

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

Board Resolution on Dividend Distributions

In connection with our issuance of NIS 400 million in aggregate principal amount of unsecured 5.9% convertible and non-convertible debentures in August 2003, Alon Holdings' board of directors resolved that Alon Holdings would not distribute dividends in any quarter if the ratio of our net financial obligations (as then 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. Alon Holdings' board of directors also resolved that Alon Holdings would not distribute dividends in any quarter if the ratio of the unencumbered fixed assets (net of depreciation) and investment property as set forth in our financial statements to financial obligations (as then defined by S&P-Maalot) for any quarter is below 120%.

On January 14, 2010, Alon Holdings' board of directors decided that in view of the changes and development of Alon Holdings since 2003, including the transfer of Alon Holdings 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 Alon Holdings 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 Alon Holdings' debt which is related by the company to real estate that is not in use by Alon Holdings (which is equal to 75% of the investment property as recorded on the balance sheet). On December 31, 2011, the net financial obligations to EBITDA (calculated in accordance with the deduction described above) were 6 (taking into account Dor Alon’s financial obligations as of December 31, 2011). Due to the acquisition of Dor Alon in October 2010, the increase in fuel prices which increased our capital needs, the Company's investment plan to open additional Mega Retail branches, the entrance of BSRE to additional new projects and the launching of Alon Cellular, our board of directors further resolved that Alon Holdings 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 6.

Within the framework of the acquisition from Alon of all of Alon’s approximately 80% holdings in Dor Alon, the Company paid a cash dividend to its shareholders on October 18, 2010, of approximately NIS 800 million, or approximately US $223.4 million (based on the representative rate of exchange on October 18, 2010), which represents a dividend of approximately NIS 12.31, or approximately $3.44 (based on the representative rate of exchange on October 18, 2010), per ordinary share of Alon Holdings (after taking into account the shares to be issued to Alon in the acquisition). For further information regarding the acquisition see “Item 7. Major Shareholders and Related Party Transactions – Proposed Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD."

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Legal Proceedings

Governmental Proceedings

We are subject 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 amount of approximately NIS 44 million. The Company filed appeals with the District Court contesting these assessment orders which as of the date of this Annual Report are still pending. During 2011, the Company received deduction assessment for the years 2005-2008 andthe amount claimed under this assessment totaled NIS 32 million. This amount is based on the Income Tax Authority stand on the issues under dispute, as well as National Insurance assessments that are based on the Income Tax Authority assessments above, which require additional payments of NIS 27.5 million for the years the 2001-2004. The Company is negotiating with the Income Tax Authority and the National Insurance in order to settle the dispute. In the opinion of the Company and its advisors, the provisions included in the Company's financial statements are sufficient to cover the potential liabilities.

In July 2007, the Israeli Tax Authority issued to the Company Value Added Tax assessments 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, and as of the date of this Annual Report, the Company is negotiating with the Israeli Tax Authority in order to settle the dispute. In the opinion of the Company and its advisors, the provisions included in the Company's financial statements are sufficient to cover the potential liabilities.

A request for municipal taxes, including an increase of annual taxes, for approximately NIS 3.2 million and a retroactive request for NIS 12 million, together with linkage and interest differences, were issued relating to the logistics center in Rishon Letzion owned by Mega Retail. According to the Company's management, based on legal advisers, the chance that the above request will be accepted are below 50%, and therefore no provision was included in the financial statements for this matter.

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Dor Alon received claims for additional retroactive municipality taxes for four of its fueling stations by the Hof Hasharon district Council ("the Council"). For one of the stations, the claim was significantly reduced as a result of an agreement reached between Dor Alon and the Council. The other claims amounted to approximately NIS 17 million. Dor Alon appealed the Council's Municipal Tax claims. Based on information received from Dor Alon's management, the Company believes that the chances that the claim will be allowed are less than 50%, and therefore Dor Alon did not make a provision in its financial statements.

Restrictive Trade Practices Inquiry

On December 3, 2003, a claim was filed in the amount of NIS 450 against the gas companies (including a subsidiary of Dor Alon) alleging that the defendants were parties to a cartel, which they entered into beginning in 1994 (and even prior thereto) and up to 2003, in the course of which the Restrictive Practices Authority gave notice of a recommendation to file charges against the gas companies and their managers in connection with the existence of a cartel, as stated. The plaintiff contends that by means of the alleged cartel the gas companies collected unfair and unreasonable prices. A request for certification of the claim as a class action pursuant to the Restrictive Practices Law, the Consumer Protection Law and Rule 29 of the Rules of Civic Procedure (1984), was filed together with the claim. The amount of the class action was set by the requesting party at an amount of at least NIS 1 billion, along with punitive damages. The subsidiary of Dor Alon has submitted its response to the request for certification of the claim as a class action. The parties twice reached a compromise agreement that was submitted to Court's approval. However, the Court rejected the two compromise agreements and therefore the legal procedures continue. Based on information received from Dor Alon's management, the Company believes that the chances that the claim will be allowed are less than 50% and therefore Dor Alon did not make a provision in its financial statements.

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 Alon Holdings - B. Business Overview - Government Regulation”.

We are subject to legal proceedings in connection withbusiness licenses

As of December 31, 2011, a small number of our supermarkets and retail outlets have no valid business permits/license. As in previous years, we and some of our directors and managers were indicted in connection with business licenses and planning and building licenses regarding some of our supermarkets stores. As of December 31, 2011, there are provisional closure orders pending against a small number of our supermarkets and retail outlets, fueling stations, and convenience 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 a material adverse effect on our operations.

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Several bills of indictment and verdicts are pending against Dor Alon and its subsidiaries for operating filling stations or convenience stores without a business license and non-compliance with permits. In addition, closing orders have been issued regarding public filling stations and convenience stores that operated without a business license. The closing orders are pending and Dor Alon is making efforts to get the required business licenses. Bills of indictment have been filed against a subsidiary for operating convenience stores without a business license. In the opinion of Dor Alon, the closure of one or more of the filling stations and/or convenience stores for which closure orders were issued would not have a material effect on Dor Alon's results of operations.

Legal Proceedings Related to our Supermarkets

In December 2010, we were served with a claim and a request for approval as a class action (the "Claim"), in connection with the sale of various cheese and dairy products in our supermarket chains operated by Mega Retail Ltd. The plaintiff has alleged that we sell in our supermarkets various cheese and butter substitute products while presenting them as cheese products and butter and that the customers are mislead by our alleged representations regarding such products. The plaintiffs have requested to certify the claim as a class action representing all the customers who bought such products in the seven years prior to the filing of the claim. The plaintiff's personal claim is estimated to be approximately NIS 700, and if the claim is certified as a class action, the approximate claim against us is estimated by the plaintiff at approximately NIS 456 million. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial statements.

In November 2010, a claim and a request to recognize it as a class action was filed against YOU, claiming that discounts for filling the car with diesel at Dor Alon petrol stations, which the club supposedly promised as well as wrongly advertised were not given in reality. If the claim were to be accepted as a class action, the claimant assesses his claim at NIS 54 million. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%; Accordingly, the Company did not make any provision for this claim in its financial statements.

In December 2010, a claim and a request to recognize it as a class action was filed against the YOU customer club, claiming that discounts for filling the car with petrol at Dor Alon petrol stations, which the club supposedly promised were not given. If the claim were to be accepted as a class action, the claimant assesses his claim at NIS 894 million. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial statements.

In August 2010, the Company and some of its subsidiaries were served with a claim in which they are being sued by a former supplier of fruits and vegetables claiming that the company breached the agreements between the parties regarding the supply of fruits and vegetables, a breach that allegedly resulted in damages assessed by the plaintiff at approximately NIS 178 million. As mentioned in the claim, due to court fees, it was filed for the sum of NIS 100 million. The Company has denied all the above allegations. The Company believes it acted according to all binding agreements and is not liable to any damages claimed. The Company further denies that any damages were at all caused to the plaintiff. However, at this time, given this matter is preliminary in nature, our financial statements currently do not provide for any amount.

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In September 2011, a lawsuit was filed against Mega Retail along with a request to be approved as a class action in regard to the sale of products which, as argued by the claimant, are subject to the Product and Service Price Regulation Order (Maximum Prices for Milk and Milk Products) (the "Order") . The law suit claims that since the products carry special kosher certifications they are offered at prices higher than the maximum prices allowed according to the Order. The claim was also filed against Tnuva and two competing supermarket chains. The damages sought from Mega Retail are NIS 6 million. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial statements.

In September 2011, a lawsuit was filed against Mega Retail and Shufersal along with a request to be approved as a class action in relation to the issuance and sale of purchase vouchers. The action consists of two claims: 1. The designation of an expiration date to the vouchers constitutes a "depriving condition" in a standard contract and is therefore invalid; and 2. The voucher provision that a consumer who uses vouchers to pay for his purchase can be given change only in vouchers redeemable in the same store constitutes a "depriving condition" and is therefore invalid. The claimant asked for declaratory relief that these provisions are invalid, as well as for damages calculated by the court, taking into account all holders of vouchers and/or shoppers who have used the vouchers over the past 7 years. The Company is currently reviewing the claim and denies all the aforementioned allegations. However, at this time, given that this matter is preliminary in nature, our financial statements currently do not indicate any amount in this regard. We will continue to assess this matter as it develops.

In July 2011, a letter of claim and a motion for approval of action as class action was filed against Mega Retail, claiming that Mega Retail misleads its consumers to think that the 500 gram and 750 gram white cheese packages manufactured by Strauss and Tnuva which are labeled as "Economy Packs" are sold at a discount compared to 250-gram packages. The appellant argues that the damage incurred by all members of the class totals approximately NIS 28 million. It has also requested to issue an affirmative order to instruct Mega Retail to provide its clients, who buy the larger packages, a significant discount of at least 20% compared to the price per unit of the product in the smaller package. In the opinion of the Company, should it be obligated to pay any amount with regard to this matter, it is not expected to be a material sum. In the opinion of the Company and its advisors, the provisions included in the Company's financial statements are sufficient to cover the potential liabilities.

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In July 2011, a letter of claim and a motion for approval of action as class action was filed against Mega Retail, claiming that Mega Retail has unjustly enriched itself at the expense of the consumers by selling large packages of goods which are labeled as "economy packs", but has not lowered the price of the larger package, thus forcing the consumers to buy a more expensive product instead of sufficing for an ordinary package. The appellant argues that the financial damage incurred by all class members is NIS 15 million. The appellant further argues that the class suffered a non-monetary damage which it did not quantify. The court was also asked to issue an affirmative order to instruct the respondent to price its products according to the labeling as an "economy package". In the opinion of the Company, should it be obligated to pay any amount with regard to this matter, it is not expected to be a material sum. In the opinion of the Company and its advisors, the provisions included in the Company's financial statements are sufficient to cover the potential liabilities.

In July 2011, a letter of claim and a motion for approval of action as class action was filed against Mega Retail, claiming that Mega Retail charged higher prices than it should have charged on packs that contain two boxes of "Ski" soft white cheese produced by Strauss and sold in cardboard packs, and contrary to its promise that the discount would account to 20% of the price of "Ski" boxes of 500 grams, granted an actual discount of only 3%, causing the consumers to pay NIS 3.73 more than they should for each pack. The appellant claims that as a result of not being given the discount by Mega Retail the damage incurred by the class members is approximately NIS 19 million per month. The court was also asked to issue an affirmative order to instruct the respondent to grant to the consumers who buy the larger packages a significant discount of at least 20% relative to the price per unit of the product in the smaller package. In the opinion of the Company, should it be obligated to pay any amount with regard to this matter, it is not expected to be a material sum. In the opinion of the Company and its advisors, the provisions included in the Company's financial statements are sufficient to cover the potential liabilities.

In October 2011, a letter of claim and a motion for approval of action as a class action was filed against the Company, alleging that the Company does not deduct the weight of the package in which it sells different products, such as various meat and poultry products, fruit and vegetables. If the claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately NIS 181 million. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial statements.

In November 2011, a letter of claim and a motion for approval of action as a class action was filed against Mega Retail, alleging that Mega Retail is misleading its "YOU" card holder customers, by charging prices higher than advertised for products offered within its customers' loyalty plan. If the claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately NIS 10 million. In the opinion of the Company, should it be obligated to pay any amount with regard to this matter, it is not expected to be a material sum. In the opinion of the Company and its advisors, the provisions included in the Company's financial statements are sufficient to cover the potential liabilities.

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In December 2011, a letter of claim and a motion for approval of action as a class action was filed against the Company's 51% subsidiary, Eden Briut Teva Market Ltd. ("Eden") and additional food supplier, alleging that Eden and the additional food supplier are violating the Public Health (Food) Order [new version], 5643-1983 and its regulations, according to which certain products must be marked with a choking hazard warning. If the claim is approved as a class action, the plaintiff claims it should apply to all Eden customers that purchased products which should be marked as aforementioned, including any customer who had bought such products by way of bulk. If the claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately NIS 10 million. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial statements.

In March 2012, a letter of claim and a motion for approval of action as a class action was filed against the Company, alleging that it misleads its customers in special sales it holds regarding food products that are sliced or cut to the customers request, and are priced per weight. The plaintiff claims that the Company does not provide full and correct details regarding the terms of the special sales, violating requirements of the law in connection with products marking and price display. The plaintiff claims, among other, that customers choosing to buy such products under special sales with accordance to the Company's advertisements are required to purchase not willingly an extra weight of the product, for the full price. If the Claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately NIS 72 million. The plaintiff further requests the court to issue a decree ordering the Company to fulfill the requirements of the law. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial statements.

In January 2012, a letter of claim and a motion for approval of action as a class action was filed against Eden Teva, regarding the alleged violation of the Consumer Protection Law and its regulations, by not marking the price per weight unit of certain products which are packed by Eden Teva. If the Claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately NIS 5 million. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial statements

Legal proceedings which ended prior to the date of this annual report

On February 9, 2011, a claim was filed against Mega, together with a request to recognize the claim as a class action, relating to the omission to grant discounts on certain products, which only applied to members of the YOU customer club, in contravention with the promotion price which was shown on the signage next to those products. If the claim were to be accepted as a class action, the claim was assessed by the claimant at approximately NIS 2.5 million. The Company and the claimant settled the claim as a result of which the Company will pay an immaterial amount to the claimant. The settlement has been approved by court.

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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 and the claimant settled the claim as a result of which the Company paid an immaterial amount to the claimant. The settlement has been approved by court.

In 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 and which has been our subsidiary since October 3, 2010) regarding the grant of discounts to "YOU" card holders in certain stores of the "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 the 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 parties have reached an agreement which has not yet received the approval of the Court. The Company and the claimant settled the claim as a result of which the Company paid an immaterial amount to the claimant. The settlement has been approved by court.

In November 2010, a claim including a request to recognize it as a class action was filed against the Company, claiming that the Company did not grant discounts as part of the YOU promotion for customers paying with the "Rav Card" or "Praxel" cards and/ or the impossibility of paying with a Praxel card in the loyalty club promotion. If the claim were to be accepted as a class action the claim amount would be estimated by the claimant at NIS 7 million. In June 2011, further to the crediting by the Company of customers that did not receive discounts, the court accepted the plaintiff's request to withdraw the claim, and approved settlement sums agreed upon between the parties, in an amount immaterial to the Company, as lawyer's fees and compensation to the plaintiff, to be paid to the plaintiff by the Company.

In August 2010, the Company was served with a claim and a request for approval as a class action, in which it is being sued, together with the YOU Customer Club, regarding the alleged omission of a way to notify the request not to receive commercial cellular messages (SMS) as required by law, and the failure to remove the plaintiff from a distribution list of SMS numbers of "YOU" card holders. The plaintiff's personal claim is estimated by him at NIS 1,250, and if the claim is certified as a class action, the approximate claim is estimated by the plaintiff at NIS 390 million. The Company and the claimant settled the claim as a result of which the Company paid an immaterial amount to the claimant. The settlement has been approved by court.

194

In May 2011, the Company's 51% subsidiary, Eden Briut Teva Market Ltd. ("Eden"), was served with a claim and a request to recognize it as a class action in which Eden is sued together with a cheese supplier regarding the sale of certain cheese products. The plaintiff claims that Eden sells in its supermarkets certain cheese substitute products while presenting them as cheese products, and that customers are misled by Eden's alleged representations regarding such products. The plaintiff filed for the claim to be approved as a class action representing all customers who bought such products in the seven years prior to the filing of the claim. The plaintiff's personal claim is estimated by her at approximately NIS 200, and if the claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately NIS 84 million. In April 2012, the court accepted a withdrawal arrangement between Eden and the plaintiff.

In July 2010, a claim was filed against Mega Retail Ltd. including a request for it to be approved as a class action, alleging that Mega Retail is misleading the customer when it sells certain products in closed packaging, for an amount per item rather than by weight, even though there are differences in weight between the packages, and without an indication of the weight of each package. The plaintiff's personal claim is estimated by him at NIS 14, and if the claim is certified as a class action, the approximate claim is estimated by the plaintiff at NIS 6 million. In April 2012, the court accepted the plaintiff's request to withdraw the claim.

In September 2011, a lawsuit was filed against Mega Retail along with a request to be approved as a class action for NIS 58 million. The action referred to the offering of Huggies Pure Wet Wipes and Materna Premium in packages designated as "economy packs" while in practice, as argued by the claimant, the price per unit did not reflect any saving compared with the ordinary packages of these products. The action relied on a previous indictment filed against Mega Retail, which had been settled with a plea bargain. The lawsuit also demands that the court order Mega Retail to provide information on the products' sales scope. In April 2012, the court accepted a withdrawal arrangement between Mega Retail and the plaintiff.

Legal Proceedings related to our Fueling Stations and Convenience Stores

A class action was lodged against Dor Alon and other fuel companies in December 2007. The total amount of the claim is NIS 132 million (the subsidiary's share in this amount is NIS 8.8 million). The claimant asserts that the defendants charged each customer NIS 2 for fueling on Saturdays and on holidays. Based on the opinion of its legal advisers, the subsidiary's management believes that the chances of the claimant would prevail in the claim are lower than 50%, and therefore did not include a provision in its accounts for this matter.

195

In October 2009, Dor Alon received a statement of claim and an application for approval of the claim as a class action; the claim was lodged against Dor Alon and other fuel companies. The claimant claims payment of damages of NIS 124 million (Dor Alon's share in the said claim amount as per the statement of claim is NIS 21.9 million). According to the claimant, the defendants overcharged him for fuel when filling up his car. According to the claimant, after passing his debit card but before starting to fill up, the payment meter started operating without the provision of fuel. The overcharge has allegedly amounted at times to several Agorot and at times to several NIS. The parties have reached a compromise that was rejected by court, and the court asked the parties to file their pleadings before the compromise agreement is filed. In the event the parties will not reach a compromise agreement, the Company believes that the chances that the claim will be allowed are less than 50%, and therefore Dor Alon did not make a provision in its financial statements.

On November 3, 2010, a claim and a request to approve the claim as a class action was issued against a subsidiary of Dor Alon and other gas companies (the share of Dor Alon's subsidiary was estimated at NIS 4 million). The issue in the claim is the alleged cooperation between the gas companies and apartment builders which requires tenants to enter into contracts with a certain gas supplier in a way the tenant allegedly overpays the gas company. The subsidiary of Dor Alon filed its response to court. Based on information received from Dor Alon's management, the Company believes that the chances that the claim will be allowed are less than 50%, and therefore Dor Alon did not make a provision in its financial statements.

In December 2010, a claim and an application for approval of the claim as a class action was filed with the District Court in Tel Aviv against Dor Alon, a subsidiary of Dor Alon and the three largest fuel companies in the total amount of approximately NIS 200 million. The claim was filed arguing that liquid oil in the pipes and petrol tanks caused the contamination of ground water. According to the claimants the fuel companies did not adhere to the guidelines of the Environment Ministry and did not check the fueling installations were waterproof. Dor Alon filed its response to court. Based on information received from Dor Alon's management, the Company believes that the chances that the claim will be allowed are less than 50%, and therefore Dor Alon did not make a provision in its financial statements.

In December 2010 a claim was issued in the local court in Tel Aviv against Dor Alon, a subsidiary of Dor Alon, two officers of Dor Alon and an employee a claim by the Environment Ministry claiming they did not perform checks of the leakage of fuel tanks and pipes in a number of Dor Alon's fueling stations and claiming that they did not pass the results of their waterproofness checks to the person in charge of the prevention of water contamination by fuels in the Environment Ministry, claiming omission of reporting of an oil leak, non-treatment of a facility that was not waterproof and the non-installation of a piezometer, in accordance with 1959 Water Law and the 1977 (prevention of water contamination regulations)(fueling stations) Regulations. The relevant period for performing the waterproofing checks in the statement of claim was between 2000 and 2004. Based on information received from Dor Alon's management, the Company believes that the chances that the claim will be allowed are less than 50%, and therefore Dor Alon did not make a provision in its financial statements.

196

In December 2010, a claim and an application for approval of the claim as a class action was filed with the District Court in Tel Aviv against Dor Alon, and other fuel companies in the total amount of approximately NIS 197 million. The issue in the claim is differences in temperature of the petrol between the moment it is acquired by the fuel companies and the moment it is sold to the customers, in a way that misstates the amount of energy sold to the customers and this way, according to the claimant, the fuel companies profit millions of NIS per annum. Based on information received from Dor Alon's management, the Company believes that the chances that the claim will be allowed are less than 50%, and therefore Dor Alon did not make a provision in its financial statements.

In March 2011 a claim and an application for approval of the claim as a class action was filed against Dor Alon, and other fuel companies. The issue in the claim is differences between the temperature of the LPG and the energy it provides as a result of burning. Based on information received from Dor Alon's management, the Company believes that, the chances that the claim will be certified as a class action are less than 50%, and therefore Dor Alon did not make a provision in its financial statements.

In the ordinary course of Dor Alon and its subsidiaries business of the construction and operation of fueling stations, additional claims were filed. Dor Alon's management believes, based on the opinion of its legal advisers that it has good defenses and therefore the amounts that Dor Alon might be required to pay in respect of those legal procedures (if any) would not have a material effect on its results. Dor Alon has provided for the said liabilities in its financial statements based on its estimates. Also, certain claims have been filed against subsidiaries concerning employee-employer relations. The amounts of those claims are immaterial for those subsidiaries. Dor Alon has provided in its financial statements for the said liabilities based on its estimates.

On March 22, 2009, a class action was filed against a subsidiary of Dor Alon and other gas companies; the amount of the claim is NIS 821 million (Dor Alon's subsidiary's share in the said amount is NIS 32 million). In the statement of claim it is asserted that when the defendants replace a gas container to the consumer the container still contains a certain volume of gas, which is later used by the defendants. According to the claimants, the defendants fully charge the claimants for the gas in the container but the consumers do not use all of the gas they pay for, since some of the gas is taken back by the defendants. Dor Alon filed a statement of defense and an application for striking it out in limine. Based on information received from Dor Alon's management, the Company believes that the chances that the claim will be allowed are less than 50%, and therefore Dor Alon did not make a provision in its financial statements.

On July 21, 2010, a statement of claim against a subsidiary of Dor Alon, and a request to approve the claim as a class action were received in Dor Alon's offices; the amount claimed is NIS 100 million. According to the statement of claim, under Section 8(8) of the Prices Stabilization in Commodities and Services Order (Temporary Provision) Maximal Prices of Oil Products), 1996, the amount specified in the gas bill paid through the bank also includes the bank's commission in respect of the payment of the bill. The plaintiff claims that she paid her gas bills through the bank and thereby was charged for the bank commission for such payments. The plaintiff notified that she intends to submit a request to strike off the claim as the issue was discussed in court and decided upon. In July 2011, the plaintiff informed the court that is withdrawing the claim.

197

On June 27, 2010, a statement of claim and a request to approve the claim as a class action and as a derivative claim was filed against Dor Alon, members of the Board of Directors of Dor Alon and Alon. The claim was lodged by holders of Series A debentures of Dor Alon that wish to represent the holders of Series A Dor Alon debentures as of February 7, 2010, who did not convert the debentures into Dor Alon shares. In their claim, the plaintiffs claim that the distribution (on February 9, 2010) of the shares of Alon Natural Gas Exploration Ltd. to Dor Alon's shareholders was an unlawful distribution. The plaintiffs also claim that Dor Alon should have adjusted the Series A debentures' conversion rate following the distribution of shares as above. The plaintiffs request that the Court would oblige Alon and the members of Dor Alon's Board of Directors to return to Dor Alon the shares that were distributed as above; alternatively, the plaintiffs request that Dor Alon will be required to adjust the conversion rate of the debentures to the "Ex rate" subsequent to the distribution; alternatively, the plaintiffs seek damages for non adjustment of the conversion rate. In November 2010, the defendants filed their responses to court, and as of the date of this Annual Report, the claim is in the conclusions stage. Based on information received from Dor Alon's management, the Company believes that the chances that the claim will be allowed are less than 50% and therefore Dor Alon did not make a provision in its financial statements.

On August 10, 2011, Dor Alon received a letter of claim and a motion for approval of action as class action against a subsidiary of Dor Alon and its subsidiary for a total amount of NIS 2.5 million. The letter of claim argued that pursuant to the Consumer Protection Law, 1981, the defendants are obligated to provide their customers free phone services for a call in connection with complaints about products or services provided by the defendants. Dor Alon has not yet filed a statement of defense. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%; accordingly, the Company has not made any provision for this claim in its financial statements.

On August 11, 2011, Dor Alon received a letter of claim and a motion for approval of action as class action against Dor Alon, a subsidiary of Dor Alon and others for a total amount of NIS 33 million. The letter of claim argued that the defendants violated the provisions of the law which prohibits selling tobacco products to minors by placing automatic cigarette vending machines in the fueling stations operated by the defendants even though the automatic vending machines are not owned and/or operated by Dor Alon or its subsidiary. Dor Alon has not yet filed a statement of defense. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%; accordingly, the Company has not made any provision for this claim in its financial statements.

198

On August 22, 2011, Dor Alon received a letter of claim and a motion for approval of action as class action against Dor Alon and the three other gasoline companies for a total of NIS 1 billion (of which Dor Alon's share is NIS 167 million). The claimants argue that the gasoline companies inflated the "marketing expense item" which is incorporated into the calculation of the maximum price of gasoline 95 octane by adding expenses unrelated to the sale of gasoline, thus misleading the regulator and enabling themselves to sell gasoline 95 octane at a higher price than the price that should be charged. The claimants assert that this is violation of legislated provisions in the Supervision Order on Goods and Services (Maximum Prices in Gasoline Stations) – 2002; the Consumer Protection Law – 1981; and the Damage Ordinance (new version) – 1968. Dor Alon has not yet filed a statement of defense. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%; accordingly, the Company has not made any provision for this claim in its financial statements.

On October 23, 2011, Dor Alon received a letter of claim and a motion for approval of action as class action against Dor Alon and a subsidiary of Dor Alon for a total amount of NIS 6 million. The letter of claim argued that pursuant to the Consumer Protection Regulation (Price per unit of measure), 2008, the subsidiary is obligated to label the products in Alonit stores with a price per unit of measure in addition to the total price. Dor Alon has not yet filed a statement of defense. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%; accordingly, the Company has not made any provision for this claim in its financial statements.

On April 15, 2012, Dor Alon received a letter of claim and a motion for approval of action as class action against a subsidiary of Dor Alon and third parties for a total amount of approximately NIS 4.4 million. The letter of claim argued that the defendants violated the provisions of the Parking for Disabled People Law, 1993-5753 and the Equality for People with Disabilities Law, 1998-5758, by not providing free parking to disabled people in the parking lot of "City Windows" in Haifa. The plaintiff argued that pursuant to the Law, the defendants are obligated to provide free parking in public parking lots and in public places that the only access to them is through parking in such public places. The subsidiary is learning the claim and has not yet filed a statement of defense.

Legal proceedings which ended prior the date of this annual report

An administrative petition has been filed against the Tel Aviv municipality (and against a subsidiary of Dor Alon and others being nominal parties). The purpose of this petition is to oblige the Tel Aviv municipality to enforce the by-laws on the business of the subsidiary operating during the night, on Saturdays and holidays in Tel Aviv. The subsidiary of Dor Alon filed a response in which it presented its preliminary claims asserting that the petition should be rejected immediately. At this stage, the subsidiary of Dor Alon is only a formal party in the procedure. In February 2012, the court rejected the claim.

In April 2011, a class action was filed in the amount of NIS 30 million, against Dor Alon's subsidiary. In the statement of claim it is asserted that accordant toCustomer Protection Regulations (Price Per Unit) the defendants must mark its products, which are being sold at the AM:PM supermarket chain, by unit of measure and not only by pricing the product as a whole. According to the plaintiff, refraining from such way of marking, does not allow comparison between products which are sold in containers of different size or volume. After Dor Alon filed its response in December 2011, the court approved the plaintiff's withdrawal from the claim.

199

Legal Proceedings related to our Non-Food Segment

In May 2011, a claim and a request to recognize the claim as a class action was filed against the Company regarding special sales held at "Kfar Hasha'ashuim" brand toy stores operated by the Company's 100% wholly owned subsidiary, Bee Group Retail Ltd. According to the claimant, the toy stores misled their customers by not presenting the prices charged for products prior to the special sales, as required by law, in addition to the special sales prices. The claimant estimates the damage to the group of claimants for the purposes of the claim at NIS 30 million. We will continue to assess this matter as the request for the class action develops.

On July 21, 2011, a financial claim against the Company regarding the logistic center leased in Ramla was filed to the District Court of Tel Aviv, according to which Naaman was required to pay approximately NIS 4,049 thousand (approximately US $1,060 thousand) due to the fact that Naaman did not leave the logistic center during the stipulated period. Naaman evacuated the logistic center in Ramla on June 29, 2011. On October 5, 2011, Naaman filed to the court a request to defend oneself, which was scheduled for January 2012 and on February 2, the request was partially accepted by the court. On February 21, 2012, the parties reached a compromise agreement that was approved by the court on February 25, 2012, according to which Naaman will pay the plaintiff NIS 220 thousand (approximately US $58 thousand). On November 15, the audit committee and board of directors of Naaman approved receipt of full indemnification from Bee Group in connection with the financial claim, and after paying the compromise payment, Naaman intends to demand such payment from the Bee Group.

In May 2011, a letter of claim and a motion for approval of action as a class action was filed against the Company and "Kfar Hashashuim" regarding an alleged violation of the Consumer Protection Law, by selling products at discount without advertising the original price of the products before the discount, and by that causing damage to the customers who did not know the original price of the products, which was less expensive in other chains. If the Claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately NIS 30,000. The plaintiff further requested the court to issue a decree ordering the Company to fulfill the requirements of the law and advertise the price of the products before the discount. The Company and "Kfar Hashashuim" have not yet filed a statement of defense. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company has not made any provision for this claim in its financial statements

200

In January 2012, a letter of claim and a motion for approval of action as a class action was filed against the Company regarding the sale of toy and other products by its "Kfar Hashashuim" chain of stores. The Claim alleges that the company fails to mark in Hebrew required details such as identifying details of the importer of the products, the manufacturer, supplier, country of manufacturing, as well as the range of ages the product is designated for, and certain warnings required by law. If the Claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately NIS 8 million. The plaintiff further requested the court to issue a decree ordering the Company to fulfill the requirements of the law and mark its products accordingly. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company has not made any provision for this claim in its financial statements.

General

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 February 2, 2012, Alon Holdings' shareholders approved the reappointment of Kesselman & Kesselman as our auditors for the year ending December 31, 2011. Kesselman & Kesselman has no relationship with us or with any affiliate of us, except as auditors.

Significant Changes.

Except as otherwise disclosed in this Annual Report, no significant change has occurred since December 31, 2011.

ITEM 9.

THE OFFER AND LISTING

Offer and Listing Details.

ADSs

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

Year	High	Low

2007	$20.0	$11.6
2008	$14.4	$5.6
2009	$11.2	$5.3
2010	$14.9	$8.1
2011	$10.6	$4.0

201

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

Year	High	Low

2010
First quarter	$13.3	$10.2
Second quarter	$13.6	$10.2
Third quarter	$14.9	$9.8
Fourth quarter	$10.4	$8.1

2011
First quarter	$10.6	$8.5
Second quarter	$10.5	$7.7
Third quarter	$8.5	$4.6
Fourth quarter	$6.1	$4.0

2012
First quarter	$4.3	$3.3
Second quarter (until April 20)	$3.9	$3.6

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

2011	High		Low

October	$6.1		$5.0
November	$5.9		$4.6
December	$5.1		$4.0

2012		High		Low

January	$4.3		$3.8
February	$4.2		$3.5
March	$4.0		$3.3
April (until April 20, 2012)	$3.9		$3.6

Ordinary Shares

The following table sets forth the annual high and low closing prices for Alon Holdings' ordinary shares for the years 2007 to 2011 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.

202

Year	High		Low
	NIS	$	NIS	$

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
2010	50.1	14.1	29.8	8.4
2011	36.5	9.6	15.5	4.1

The following table sets forth the quarterly high and low closing price for Alon Holdings' 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.

	High		Low
	NIS	$	NIS	$
2010
First Quarter	50.1	13.5	38.1	10.3
Second Quarter	49.4	13.0	40.8	10.5
Third Quarter	49.0	13.4	38.4	10.5
Fourth Quarter	49.0	13.8	29.8	8.4

2011
First Quarter	36.5	10.5	31.3	9.0
Second Quarter	35.1	10.3	26.3	7.7
Third Quarter	28.9	7.8	17.8	4.8
Fourth Quarter	22.2	5.8	15.5	4.1

2012
First Quarter	16.2	4.4	12.7	3.4
April (until April 20, 2012)	14.6	3.9	13.7	3.7

The following table sets forth the monthly high and low closing prices for Alon Holdings 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.

2011	High		Low
	NIS	$	NIS	$

October	22.1	6.1	18.6	5.1
November	22.2	5.8	17.6	4.6
December	19.7	5.2	15.5	4.1

2012	High		Low
January	16.2	4.3	14.8	4.0
February	15.2	4.0	13.5	3.6
March	14.9	4.0	12.7	3.4
April (until April 20, 2012)	14.6	3.9	13.7	3.7

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

203

Plan of Distribution.

Not applicable.

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 Alon Holdings entered into with The Bank of New York.

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

Selling Shareholders.

Not applicable.

Expenses of the Issue.

Not applicable.

ITEM 10.

ADDITIONAL INFORMATION

Share Capital.

Not applicable.

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.

204

Private Placements

Under Alon Holdings' Articles of Association, resolutions of the board of directors regarding a private placement of Alon Holdings' shares constituting, or securities convertible into, more than ten percent of our outstanding share capital require the approval of Alon Holdings' 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.

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 a 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 Alon Holdings' 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. The majority of members of the audit committee should be independent directors, and the chairman of the audit committee should be an external director.

205

The Israeli Companies Law requires that a member of the board of directors or senior management of the company promptly and, in any event, not later than the first board meeting at which the transaction is discussed, 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) as well as 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, siblings and parents, and the spouses of any of the foregoing.

Once the member of the board of directors or senior management complies with the above disclosure requirement, a company may approve the transaction in accordance with the provisions of its articles of association. Further, under Alon Holdings' Articles of Association, subject to the provisions of the Companies Law, (i) a transaction between us and an 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, whoever 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 chairman of the board of directors or the chairman of the audit committee has determined that the presence of an office holder with a personal interest is required for the presentation of a matter, such officer holder may be present at the meeting. Notwithstanding the foregoing, if the majority of the directors have a personal interest in a matter, they shall be allowed to participate and vote on this matter, but an approval of the transaction by the shareholders in the general meeting shall be required.

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Alon Holdings' 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 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.”

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 a shareholders’ meeting. However, under regulations promulgated under the Israeli Companies Law, 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 Alon Holdings, 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.

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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.

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 initial election requires, in addition to the vote of a majority of shareholders, that a majority of the votes of the shareholders who are not controlling shareholders and do not have a personal interest in the appointment (excluding a personal interest which did not result from the shareholder’s relationship with the controlling shareholder) who participate in the vote, vote for their nomination (without taking into account abstentions), or that less than two percent of the disinterested 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 Alon Holdings' 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 constitutes 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.

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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 company's 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 Alon Holdings' Articles of Association, unless otherwise provided, the rights attached to any class may be varied after a resolution is passed by general meetings of the shareholders of each class of shares separately or after obtaining the written consent of the holders of all the classes of shares.

Allotment of Shares. Alon Holdings' 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 Remaining 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 October 2010, we exercised a call option to purchase the Remaining Shares from the Sellers for consideration in the amount of NIS 24.5 million, or $6.8 million (at that time), increasing our holdings in Bee Group to 100%.

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 – Supermarkets,” “Item 4. Information on The Company - B. Business Overview – Fueling Stations and Convenience Stores,” “Item 4. Information on The Company - B. Business Overview – Non-Food Retail,” “Item 4. Information on The Company - B. Business Overview – Real Estate,” “Item 4. Information on The Company - B. Business Overview - Related Businesses”, “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.

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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.

Taxation

Israeli Tax Considerations

General

The following is a summary of the current tax regime of the State of Israel, which applies to us and to persons who hold our ordinary shares or ADSs (the "Shares").

This discussion does not purport to constitute a complete analysis of all potential tax consequences applicable to investors upon purchasing, owning or disposing of our Shares. In particular, this discussion does not take into account the specific circumstances of any particular investor (such as tax-exempt entities, Financial Institutions, certain financial companies, broker-dealers, investors that own, directly or indirectly, 10% or more of our outstanding voting rights, or foreign companies, Israeli residents holding 25% or more of their shares or having the right to 25% or more of their income or profit, all of whom are subject to special tax regimes not covered under this discussion). To the extent that issues discussed herein are based on legislation which has yet to be subject to judicial or administrative interpretation, there can be no assurance that the views expressed herein will accord with any such interpretation in the future. This discussion is not intended and should not be construed as legal or professional tax advice and does not cover all possible tax considerations.

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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.

General Corporate Tax Structure in Israel

The Israeli corporate tax rate applicable to Israeli resident companies in 2012 is 25% (24% in 2011). Prior to the enactment of the Tax Change Law, the corporate tax rates were scheduled to be reduced to 23% in 2012 and ultimately to 18% by 2016. This scheduled gradual reduction in corporate tax rates was repealed. Instead, the Tax Change Law provides that the corporate tax rate will be increased to 25% in 2012.

TAXATION OF SHAREHOLDERS

Capital Gains

Capital gains 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 Income 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.

As of January 1, 2012, the real capital gain accrued by individuals on the sale of the Shares will be taxed at the rate of 25%. 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 30%. In addition, capital gains generated by an individual claiming deduction of financing expenses in respect of such gain will be taxed at the rate of 30%.

Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (25% in 2012 for corporations and a marginal tax rate of up to 48% in 2012 for individuals). Notwithstanding the foregoing,capital gains generated from the sale of our Shares by a non-Israeli shareholder may be exempt from Israeli tax under the Israeli Income Tax Ordinance provided that 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 generated capital gain is attributed, and (iii) if the seller is a corporation, less than 25% of its means of control or the rights to its profit or income are held by or attributed to Israeli resident shareholders. In addition, the sale of the Shares may be exempt from Israeli capital gains tax under the provisions of an applicable double tax treaty. For example, 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 that: (i) the U.S. resident owned, directly or indirectly, less than 10% of the voting power of the company 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.

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Either the purchaser, the Israeli stockbroker or the financial institution through which the Shares are held are obligated, subject to the above mentioned exemptions, to withhold tax upon the sale of Shares at a 25% tax rate for corporations and/or for individuals (the withholding tax rate applicable to individuals in this respect had been 20% in 2011).

Upon the sale of traded securities, a detailed return, including a computation of the tax due, must be filed and an advanced payment must be paid to the Israeli Tax Aouthority 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 must not be filed and no advance payment must be paid. A capital gain is also reportable on the annual income tax return.

Dividends

As of January 1, 2012, dividends distributed by the Company to a shareholder who is Israeli resident individual will be generally subject to income tax at a rate of 25%. However, a 30% 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 generally exempt from Israeli income tax provided that the income from which such dividend had been distributed, derived or accrued within Israel.

As of January 1, 2012, dividends distributed by an Israeli resident company to a non-Israeli resident (either individual or corporation) is generally subject to tax on the receipt of such dividend at the rate of 25% (30% if the dividend recipient is a Controlling Shareholder at the time of distribution or at any time during the preceding 12 month period). These rates may be reduced under the provisions of an applicable double tax treaty. Thus, under the U.S.-Israel Double Tax Treaty, the following tax rates will apply in respect of dividends distributed by an Israeli resident company to a U.S. resident: (i) 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 the outstanding shares of the voting stock of the Israeli resident paying corporation and not more than 25% of the gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain types of interest or dividends the tax rate is 12.5%; (ii) if both the conditions mentioned in section (i) above are met and the dividend is paid from an Israeli resident company's income, which was entitled to a reduced tax rate applicable to an Approved Enterprise/Benefited Enterprise/Preferred Enterprise – the tax rate is 15%; (iii) in all other cases, the tax rate is 25%. The aforementioned rates under the U.S.-Israel Double Tax Treaty will not apply if the dividend income is attributed to a permanent establishment of the U.S. resident in Israel.

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The Company is obligated to withhold tax upon the distribution of dividends at the following withholding tax rates: (a) for securities registered and held by a clearing corporation: (i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25%, and (iii) non-Israeli residents - 25%, unless reduced by applying the provisions of an applicable double tax treaty; (b) in all other cases: (i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25%/30% (the 30% tax rate shall apply if the dividend recipient is a "controlling shareholder" (as defined above) at the time of the distribution or at any time during the preceding 12 months period)), and (iii) non-Israeli residents - 25%/30% as referred to above with respect to Israeli resident individuals, unless reduced by applying the provisions of an applicable double tax treaty.

Foreign Exchange Regulations

Non-residents of Israel who hold our Shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is generally required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of currency exchange control has not been eliminated, and may be restored at any time by administrative action. 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 Alon Holdings' 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 (the "Code"), 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 Alon Holdings' Shares.

This summary does not address tax considerations applicable to a holder of a Alon Holdings 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;

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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

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.

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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 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.

Under the Code, certain dividends received by non-corporate U.S. Holders 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, 2012, unless further extended by Congress.

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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 a 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).

Sale or Other Disposition of Shares

If a U.S. holder sells or otherwise disposes of its Shares, a 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 a capital gain or loss and will be a 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 taxable years beginning on or before December 31, 2012) 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, a gain or loss will be recognized as described above and in addition, a 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.

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A U.S. Holder who holds Shares through an Israeli stockbroker or other Israeli intermediary may be subject to 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 or claim any allowable refunds or reductions. U.S. Holders are advised that any Israeli tax paid under circumstances in which an exemption from (or a refund of or a reduction in) 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 or reduction.

Medicare Tax on Unearned Income

For taxable years beginning after December 31, 2012, certain U.S. Holders that are individuals, estates or trusts will be required to pay an additional 3.8% tax on, among other things, dividends on, and capital gains from the sale or other disposition of Shares.

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 gains 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.

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 (discussed below). 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 below. Given our current business plans, however, we do not expect that we will be classified as a PFIC in future years.

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,

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· 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 gains realized with respect to the 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 Alon Holdings 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.

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.

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 (backup withholding), currently at the rate of 28%, 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. 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.

218

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.

Dividends and Paying Agents

Not applicable.

Statement by Experts

Not applicable.

Documents on Display

Alon Holdings 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 Alon Holdings 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 Alon Holdings with the SEC can also be accessed at the SEC’s web site, www.sec.gov.

As a foreign private issuer, Alon Holdings 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, Alon Holdings 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 Alon Holdings' principal executive offices.

219

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 2,426.3 million and marketable securities in the amount of approximately NIS 231.3 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 a change in the CPI or the prime interest rate will affect future cash flow and interest expenses.

The table below provides information about our financial instruments as of December 31, 2011:

220

	December 31, 2011 Expected maturity (NIS in thousands)

	2012		2013		2014		2015		2016		2017		2018 and thereafter		Total
Long term loan from banks - linked:

Linked to the Israeli CPI - 3.58% (weighted average rate as of December 31, 2011)		70,059		66,543		66,625		66,710		61,718		61,718		306,346		699,719
Linked to the Israeli CPI – 5.18% (weighted average rate as of December 31, 2011)		69,029		20,552		13,920		14,076		14,168		12,534		46,536		190,815

Long term loans from bank - unlinked:

Fixed annual interest rate of 6.6%		49,705		38,047		7,441		7,595		7,761		7,940		2,317		120,806
Variable interest (average annual rate as of December 31, 2011 of 5.03%)		95,257		111,854		73,775		44,434		19,633		2,686		-		347,639
Variable interest (average annual rate as of December 31, 2011 of 5.17%)		27,592		21,779		7,656		8,284		10,022		7,344		54,376		137,053
Long term loans from controlling share holdres - unlinked:
Variable interest (average annual rate as of December 31, 2011 of 3.0%)		-		55,000		-		-		-		-		1,096		56,096
		311,642		313,775		169,417		141,099		113,302		92,222		410,671		1,552,128

Non- Convertible debentures - Linked to the Israeli CPI:
Issued by the Company - fixed rate 5.9% (1)		79,615		79,615		79,615		-		-		-		-		238,845
Issued by the Company - fixed rate 2.5%		8,578		8,578		8,578		8,578		8,578		8,578		42,889		94,357
Issued by BSRE - fixed rate 4.7%		-		222,763		222,763		222,763		222,763		-		-		891,052
Issued by BSRE - fixed rate 4.2%		23,645		23,645		23,645		23,645		23,645		86,699		86,699		291,623
Issued by BSRE - fixed rate 4.5%		-		-		-		-		-		28,735		86,206		114,941
Issued by Dor Alon - fixed rate 5%		69,958		69,958		69,958		69,958		-		-		-		279,832
Issued by Dor Alon - fixed rate 4.95%		9,372		7,810		7,810		7,810		7,810		7,810		20,307		68,729
Issued by Dor Alon - fixed rate 6.45% (weighted average rate as of December 31, 2011)		9,989		2,186		2,327		2,477		2,637		2,807		49,746		72,169
Non- Convertible debentures – unlinked:
Issued by Dor Alon –variable interest(average annual rate as of December 31, 2011 of 4.29%)		-		16,200		16,200		16,200		16,200		16,200		-		81,000
Issued by Dor Alon - fixed rate 6.65%		-		34,750		34,750		34,750		34,750		-		-		139,000
Convertible Debentures Linked to the Israeli CPI:
Issued by BSRE - fixed rate 6.25%		-		28,744		28,744		28,744		28,744		-		-		114,976
		201,157		494,249		494,390		414,925		345,127		150,829		285,847		2,386,524

Marketable Securities - Linked to the Israeli CPI		85,118		-		-		-		-		-		-		85,118

Marketable Securities – unlinked in NIS		146,179		-		-		-		-		-		-		146,179

221

(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 28.2 million decrease (increase) in net income for the next year.

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 in our financial statements, leading to lower reported earnings and shareholders equity. The extent of this effect on our financial statements 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

2009	3.9%	3.8%
2010	2.7%	2.3%
2011	2.2%	2.6%

The table below provides an analysis of monetary assets and liabilities by currency and linkage as of December 31, 2011:

	December 31, 2011
	NIS linked to CPI		NIS unlinked		US Dollar		Other currencies		Other		Total
	NIS in thousands
Assets:
Cash and cash equivalents		-		69,838		6,328		285		-		76,451
Short term bank deposit		111		36,825		67,006		-		-		103,942
Investment in securities		125,018		139,012		-		-		36,023		300,053
Trade receivables		-		1,549,644		26,506		-		-		1,576,150
Other accounts receivables		1,951		258,030		1,084		-		-		261,065
Income taxes receivable		125,789		-		-		-		-		125,789
Loan Receivable		85,003		53,719		54,976		-		-		193,698
Derivative financial instruments		-		-		3,439		-		-		3,439
Investment in equity securities		-		-		-		-		33,159		33,159
Other long-term receivables		-		119,266		-		-		-		119,266
Total assets		337,872		2,226,334		159,339		285		69,182		2,793,012

Liabilities:
Credit and loans from banks and others		-		998,718		38,210		-		-		1,036,928
Trade payables		-		887,882		356,032		-		-		1,243,914
Other accounts payable and accrued expenses		35,343		451,378		11,416		-		-		498,137
Customer's deposits		27,733		-		-		-		-		27,733
Income tax payables		6,311		-		-		-		-		6,311
Provisions		41,765		36,501		-		-		-		78,266
Loans		871,142		680,987		-		-		-		1,552,129
Debentures		2,011,357		235,333		-		-		-		2,246,690
Convertible debentures		118,909		-		-		-		-		118,909
Other long-term liabilities		10,735		1,606		-		-		-		12,341
Derivative financial instruments		10,440		-		2,012		7,063		-		19,515
Total liabilities		3,133,735		3,292,405		407,670		7,063		-		6,840,873

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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.

223

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 Alon Holdings 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 controls 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.

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, 2011 based onthe 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, 2011.

224

(c) The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has been audited by Kesselman & Kesselman an independent registered public accounting firm in Israel and a member of PricewaterhouseCoopers International Limited (“PWC”), 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 controls over financial reporting. There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2011 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 Alon Holdings.

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, 2010 and 2011, 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 2010 and 2011.

	2011	2010
	(NIS in thousands)	(NIS in thousands)
Audit Fees (1)	6,037	3,778
Audit-Related fees (2)	309	426
Tax Fees (3)	20	155
All Other Fees (4)	300	819
TOTAL	6,666	5,178

225

(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 Alon Holdings 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 ordinary shares by the Company and by entities controlling, controlled by and under common control with the Company during calendar year 2011:

226

Period

Total Number
of Shares
Purchased

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, 2011

115,243

34.30

N/A

April, 2011

2,302

35.17

N/A

August 10, 2011

1,411

24.80

N/A

August 11, 2011

5,380

24.57

N/A

August 11, 2011

16,463

24.14

N/A

(1)

The Company purchased ordinary shares of the Company from certain employees of the Company, which shares were acquired by the employees 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 approximately NIS 4 million and the price per share was NIS 34.32.

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.

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.

227

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.

228

PART IIIPart III

ITEM 17.

FINANCIAL STATEMENTS

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

ITEM 18.

FINANCIAL STATEMENTS

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

ITEM 19.

EXHIBITS

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

Exhibit No.		Description

1.1		Memorandum of Association of the Registrant (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form F-1 (File No. 333-05024)).

1.2		Articles of Association of the Registrant (incorporated by reference to Exhibit 1.2 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2009).

2.1		Form of Amended and Restated Deposit Agreement among Alon Holdings 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)).

229

Exhibit No.		Description

4.7		Letter, dated July 1, 1996, by Co-Op Blue Square Consumers Cooperative Society Ltd. indemnifying the Registrant against certain real estate tax liabilities (incorporated by reference to Exhibit 10.17 to the Registration Statement on Form F-1 (File No. 333-05024)).

4.8		Letter, dated May 21, 1993 and March 18, 1993, by Co-Op Blue Square Consumers Cooperative Society Ltd. indemnifying Blue Square Chain Investments & Properties Ltd. against certain real estate tax liabilities (incorporated by reference to Exhibit 10.18 to the Registration Statement on Form F-1 (File No. 333-05024)).

4.9		Form of Letter of Exemption and Indemnity adopted in February 2001 (incorporated by reference to Exhibit 4.13 to Alon Holdings' 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 Alon Holdings' 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 Alon Holdings' 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 Alon Holdings and The New Federation of Labor in Israel. The Federation of Clerical, Administrative and Services Employees / the Commercial Section Employees and the committee of Alon Holdings employees. (English summary accompanied by the Hebrew original) (incorporated by reference to Exhibit 4.16 to Alon Holdings' 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 Alon Holdings 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 Alon Holdings 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 Alon Holdings Blue Square -Israel Ltd (English translation) (incorporated by reference to Exhibit 4.16 to Alon Holdings Annual Report on Form 20-F for the year ended December 31, 2003).

4.16		Special Collective Bargaining Agreement made on the 21^stday of January 2005 among Alon Holdings, the Histadrut and the National Committee of Alon Holdings Blue Square -Israel. (English translation) (incorporated by reference to Exhibit 4.15 to Alon Holdings' 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 Alon Holdings, the MAOF Histadrut and Blue Square -Israel Employees' Union (English translation) (incorporated by reference to Exhibit 4.16 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2006).

230

Exhibit No.		Description

4.18		Special Collective Bargaining Agreement made on May 29, 2006 among Alon Holdings, the MAOF Histadrut and Blue Square -Israel Employees' Union (English translation) (incorporated by reference to Exhibit 4.17 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2006).

4.19		Special Collective Bargaining Agreement made on July 16, 2007 among Alon Holdings, the MAOF Histadrut and Blue Square -Israel Employees' Union (English translation) (incorporated by reference to Exhibit 4.19 to Alon Holdings' 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 Alon Holdings, 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 Alon Holdings' 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 Alon Holdings 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 Alon Holdings' 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 Alon Holdings' 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 Alon Holdings' 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 Alon Holdings' 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 Alon Holdings, Blue Square Chain Investments & Properties Ltd. and Blue Square Chain (Hyper Hyper) Ltd., as amended (incorporated by reference to Exhibit 4.21 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2005).

4.26		Transfer Agreement, dated June 21, 2006, between Alon Holdings and Blue Square Real Estate Ltd. (English translation) (incorporated by reference to Exhibit 4.23 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2006).

4.27		Split Agreement, dated April 2, 2006, between Alon Holdings and Blue Square Real Estate Ltd. (English translation) (incorporated by reference to Exhibit 4.24 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2006).

4.28		Lease Agreement, dated August 13, 2006, between Alon Holdings and Blue Square Real Estate Ltd. (English translation) (incorporated by reference to Exhibit 4.25 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2006).

4.29		Lease Agreement, dated June 23, 2006, between Alon Holdings 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 Alon Holdings’ Annual Report on Form 20-F for the year ended December 31, 2006).

231

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) (incorporated by reference to Exhibit 4.30 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2009).

4.31		Service Agreement, dated August 13, 2006, between Alon Holdings and Blue Square Real Estate Ltd. (English translation) (incorporated by reference to Exhibit 4.27 to Alon Holdings' 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 Alon Holdings' 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 Alon Holdings' 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 Alon Holdings' 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 Alon Holdings' 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 Alon Holdings' 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) (incorporated by reference to Exhibit 4.37 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2009).

4.38		Deed of Trust (for Series C to G Debentures and Series H to J Debentures) dated February 18, 2010, between Alon Holdings 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) (incorporated by reference to Exhibit 4.38 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2009).

4.39		Document of Principles of Transaction, dated July 26, 2007, among Alon Holdings 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 Alon Holdings' 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 Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2007).

232

Exhibit No.		Description

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 Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2008).

4.42		Protocol, dated April 11, 2010, between TelAviv Wholesale Agricultural Produce Market Company Ltd., Tel Aviv Municipality, Lev Tel Aviv Towers Ltd. and Tel Aviv City Mall Ltd. (English translation) (incorporated by reference to Exhibit 4.42 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2009).

4.43		Agreement, dated June 3, 2010, between TelAviv 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) (incorporated by reference to Exhibit 4.43 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2009).

4.44		Agreement, dated June 3, 2010, between TelAviv Municipality, Lev Tel Aviv Towers Ltd., and Tel Aviv City Mall Ltd., together with Deed of Undertaking by the Interested Parties (English translation) (incorporated by reference to Exhibit 4.44 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2009).

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) (incorporated by reference to Exhibit 4.45 to Alon Holdings' Annual Report on Form 20-F for the year ended December 31, 2009).

4.46		Share Purchase Agreement, dated May 17, 2010, between Alon Israel Oil Company Ltd. and Alon Holdings Blue Square Israel Ltd. (English translation) (incorporated by reference to Annex A to Alon Holdings' report on Form 6-K, filed on May 27, 2010).

8.1		List of Subsidiaries.

12.(a).1		Certification by CODM 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 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).3		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 CODM, 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.) dated April 30, 2012.

14.(a).2		Consent of an Expert dated April 29, 2012.

14.(a).3		Consent of an Expert dated April 29, 2012.

233

Exhibit No.		Description

14.(a).4		Consent of an Expert dated April 29, 2012.

234

ALON HOLDINGS BLUE SQUARE - ISRAEL LTD.

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2011

TABLE OF CONTENTS

	Page

REPORT OF INDEPENDENT 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	12-141

APPENDIX - DETAILS OF PRINCIPAL SUBSIDIARIES, PROPORTIONATELY CONSOLIDATED COMPANIES AND ASSOCIATED COMPANIES	142

F-1

Report of Independent Registered Public Accounting Firm

To the shareholders of

ALON HOLDINGS BLUE SQUARE - ISRAEL LTD.

We have completed integrated audits of Alon Holdings Blue Square – Israel Ltd. and its subsidiaries and proportionately consolidated companies (collectively - the "Company" or "Blue square") consolidated financial statements and of its internal control over financial reporting as of December 31, 2011, 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, 2011 and 2010 and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2011. 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, 2011 and 2010 and the results of its operations, changes in equity and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

Kesselman & Kesselman, 1 Nathanson Street, Haifa 33034, Israel, P.O Box 33984, Haifa 31339

Telephone: +972 -4- 8605000, Fax:+972 -4- 8605001, www.pwc.co.il

F-2

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, 2011, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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	Kesselman & Kesselman
April 30, 2012	Certified Public Accountants (lsr.)
	A member firm of PricewaterhouseCoopers International Limited

F-3

ALON HOLDINGS BLUE SQUARE – ISRAEL LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

				December 31				Convenience translation (note 1b) December 31,
				2010		2011		2011
	Note			NIS				U.S. dollars
				In thousands

Assets

CURRENT ASSETS:
Cash and cash equivalents		15	a		125,956		76,451		20,008
Investment in securities		12			310,237		300,053		78,527
Short-term deposits		15	b		98,084		103,942		27,203
Trade receivables		14	a		1,731,747		1,576,150		412,497
Other accounts receivable		14	b		162,599		295,400		77,310
Derivative financial instruments		13			-		2,543		666
Income taxes receivable					64,094		125,789		32,920
Inventories		14	c		680,296		676,590		177,071
					3,173,013		3,156,918		826,202

NON-CURRENT ASSETS:

Investments in associates		10	b		6,012		202,653		53,037
Derivative financial instruments		13			56,078		896		234
Real estate inventories		14	d		83,337		100,035		26,180
Payments on account of real estate		11			164,132		191,600		50,144
Investment in securities		12			30,327		33,159		8,678
Loans receivable, net of current maturities		16			176,043		182,654		47,803
Property and equipment, net		7			2,928,515		2,942,487		770,083
Investment property		8			546,870		576,093		150,770
Intangible assets, net		9			1,486,744		1,461,070		382,379
Other long-term receivables		17			47,098		142,331		37,250
Deferred taxes		23			66,018		104,321		27,302
					5,591,174		5,937,299		1,553,860
Total assets					8,764,187		9,094,217		2,380,062

April 30, 2012

Date of approval of the

David Wiessman

Zeev Vurembrand

Dror Moran

financial statements

Executive Chairman of the Board of Directors and Chief Operating Decision Maker

Chief Executive Officer

Vice President and

Chief Financial Officer

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

F-4

ALON HOLDINGS BLUE SQUARE – ISRAEL LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

				December 31						Convenience translation (note 1b) December 31,
				2010			2011			2011
		Note		NIS						U.S. dollars
				In thousands
Liabilities and equity
CURRENT LIABILITIES:
Credit and loans from banks and others			21		470,284			1,036,928			271,376
Current maturities of debentures and convertible debentures			21		202,769			212,726			55,673
Current maturities of long-term loans from banks			21		297,771			311,642			81,560
Trade payables					1,342,763			1,243,914			325,547
Other accounts payable and accrued expenses			20		686,447			730,985			191,307
Customers' deposits					30,405			27,733			7,258
Derivative financial instruments			13		7,700			2,814			736
Income taxes payable					7,431			6,311			1,652
Provisions			25		71,870			78,266			20,483
					3,117,440			3,651,319			955,592
NON CURRENT LIABILITIES:
Long-term loans from banks and others, net of current maturities			21		1,399,159			1,240,487			324,650
Convertible debentures, net of current maturities			21		117,801			118,826			31,098
Debentures, net of current maturities	��		21		2,183,093			2,034,047			532,334
Other liabilities			22		199,983			264,597			69,248
Derivative financial instruments			13		9,151			16,701			4,371
Liabilities in respect of employee benefits, net of amounts funded			24		51,492			62,245			16,290
Deferred taxes			23		103,929			162,795			42,605
					4,064,608			3,899,698			1,020,596
Total liabilities					7,182,048			7,551,017			1,976,188

EQUITY:
Equity attributed to equity holders of the Company:
Ordinary shares of NIS 1 par value			18		79,712			79,881			20,906
Additional paid-in capital			18		1,218,409			1,219,279			319,100
Other reserves			19		(12,539	)		(9,672	)		(2,531	)
Accumulated deficit					(85,760	)		(108,801	)		(28,475	)
					1,199,822			1,180,687			309,000
Non-controlling interests					382,317			362,513			94,874
Total equity					1,582,139			1,543,200			403,874
Total liabilities and equity					8,764,187			9,094,217			2,380,062

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

F-5

ALON HOLDINGS BLUE SQUARE – ISRAEL LTD.

CONSOLIDATED STATEMENTS OF INCOME

												Convenience
												translation (note 1b)
												for the year
			Year ended December 31									ended December 31,
			2009			2010			2011			2011
	Note		NIS									U.S. dollars
			In thousands (except per share data)
Revenues				7,349,076			9,227,453			15,296,255			4,003,207
Less – government levies				-			723,709			2,813,671			736,370
Net revenues				7,349,076			8,503,744			12,482,584			3,266,837
Cost of sales				5,291,012			6,192,352			9,566,876			2,503,762
Gross profit				2,058,064			2,311,392			2,915,708			763,075
Selling, general and administrative expenses				1,817,099			2,069,970			2,638,845			690,616
Operating profit before other gains and losses and changes in fair value of investment property				240,965			241,422			276,863			72,459
Other gains		26		4,699			3,258			1,358			355
Other losses		26		(32,803	)		(28,188	)		(19,577	)		(5,124	)
Changes in fair value of investment property, net				20,775			32,917			41,913			10,969
Operating profit				233,636			249,409			300,557			78,659
Finance income		29		64,780			85,852			156,837			41,046
Finance expenses		29		(177,454	)		(235,847	)		(332,839	)		(87,108	)
Finance expenses, net				112,674			149,995			176,002			46,062
Share of profit (losses) of associates				(37	)		(518	)		5,746			1,504
Income before taxes on income				120,925			98,896			130,301			34,101
Taxes on income		30		23,124			36,287			46,588			12,192

Net income for the year				97,801			62,609			83,713			21,909

Attributable to:
Equity holders of the Company				77,163			47,839			59,513			15,576
Non-controlling interests				20,638			14,770			24,200			6,333
				97,801			62,609			83,713			21,909
Earnings per ordinary share or ADS attributable to equity holders of the Company		31

Basic				1.77			0.96			0.90			0.24
Fully diluted				1.77			0.96			0.79			0.21

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

F-6

ALON HOLDINGS BLUE SQUARE – ISRAEL LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

			Year ended December 31									Convenience translation (note 1b) Year ended December 31
			2009			2010			2011			2011
	Note		NIS									U.S. dollars
			In thousands
Net income for the year				97,801			62,609			83,713			21,909

Other comprehensive income (losses) items, net of tax:
Available-for-sale financial assets:		12
Revaluation				11,485			1,821			53			14
Gain from sales transferred to income statement				(3,983	)		(9,925	)		(639	)		(167	)
Actuarial gain (loss) from post employment benefit obligations		24		1,016			(277	)		(7,692	)		(2,013	)
Currencytranslation differences				-			(6,406	)		6,238			1,630
Total – other comprehensive income (losses)				8,518			(14,787	)		(2,040	)		(536	)
Total comprehensive income for the year				106,319			47,822			81,673			21,373

Attributable to:
Equity holders of the Company				83,958			36,800			56,996			14,915
Non-controlling interests				22,361			11,022			24,677			6,458
				106,319			47,822			81,673			21,373

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

F-7

ALON HOLDINGS BLUE SQUARE – ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

	Equity attributable to equity holders of the Company
	Ordinary shares		Additional paid-in capital			Other reserves			Accumulated deficit			Total			Non- controlling interests			Total equity
	NIS in thousands

BALANCE AT JANUARY 1, 2009		57,094		1,018,405			(261	)		(150,804	)		924,434			176,462			1,100,896
CHANGES DURING 2009:
Comprehensive income for the year		-		-			5,937			78,021			83,958			22,361			106,319
Employee share-based payment		-		-			-			11,734			11,734			432			12,166
Transaction with non-controlling interests		-		-			-			-			-			7,283			7,283
Issuance of shares upon conversion of convertible debentures		344		11,854			-			-			12,198			-			12,198
Dividend to non-controlling interests of subsidiaries		-		-			-			-			-			(12,138	)		(12,138	)
BALANCE AT DECEMBER 31, 2009		57,438		1,030,259			5,676			(61,049	)		1,032,324			194,400			1,226,724
CHANGES DURING 2010:
Comprehensive income for the year		-		-			(11,272	)		48,072			36,800			11,022			47,822
Employee share-based payment		-		-			-			6,512			6,512			322			6,834
Movement in equity as result of business combination		20,328		945,442			-			-			965,770			170,054			1,135,824
Transactions with non-controlling interests		-		-			(6,943	)		-			(6,943	)		24,138			17,195
Exercise of options		759		-			-			-			759			-			759
Issuance of shares upon conversion of convertible debentures		1,187		42,708			-			-			43,895			-			43,895
Acquisition of treasury shares		-		-			-			(4,295	)		(4,295	)		-			(4,295	)
Dividend		-		(800,000	)		-			(75,000	)		(875,000	)		-			(875,000	)
Dividend to non-controllinginterests of subsidiaries		-		-			-			-			-			(17,619	)		(17,619	)
BALANCE AT DECEMBER 31, 2010		79,712		1,218,409			(12,539	)		(85,760	)		1,199,822			382,317			1,582,139

CHANGES DURING 2011:
Comprehensive income for the year		-		-			4,187			52,809			56,996			24,677			81,673
Employee share-based payment		-		-			-			3,185			3,185			85			3,270
Transactions with non-controlling interests		-		-			(1,320	)		-			(1,320	)		(13,897	)		(15,217	)
Exercise of options		143		-			-			-			143			-			143
Issuance of shares upon conversion of convertible debentures		26		870			-			-			896			-			896
Acquisition of treasury shares		-		-			-			(4,035	)		(4,035	)		-			(4,035	)
Dividends paid		-		-			-			(75,000	)		(75,000	)		-			(75,000	)
Dividend to non-controllinginterests of subsidiaries		-		-			-			-			-			(30,669	)		(30,669	)
BALANCE AT DECEMBER 31, 2011		79,881		1,219,279			(9,672	)		(108,801	)		1,180,687			362,513			1,543,200
		Convenience translation into U.S. dollars in thousands (note 1b)
BALANCE AT JANUARY 1, 2011		20,862		318,872			(3,282	)		(22,444	)		314,008			100,057			414,065
CHANGES DURING 2011:
Comprehensive income for the year		-		-			1,096			13,819			14,915			6,458			21,373
Employee share-based payment		-		-			-			834			834			22			856
Transaction with non-controlling interest		-		-			(345	)		-			(345	)		(3,637	)		(3,982	)
Exercise of options		37		-			-			-			37			-			37
Issuance of shares upon conversion of convertible debentures		7		228			-			-			235			-			235
Acquisition of treasury shares		-		-			-			(1,056	)		(1,056	)		-			(1,056	)
Dividends paid		-		-			-			(19,628	)		(19,628	)		-			(19,628	)
Dividend to non-controlling interest of subsidiaries		-		-			-			-			-			(8,026	)		(8,026	)
BALANCE AT DECEMBER 31, 2011		20,906		319,100			(2,531	)		(28,475	)		309,000			94,874			403,874

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

F-8

										Convenience
										translation
										(note 1b)
										Year ended
	Year ended December 31									December 31
	2009			2010			2011			2011
	NIS									U.S dollars
	In thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before taxes on income		120,925			98,896			130,301			34,101
Income tax (paid) received, net		(38,101	)		5,741			(79,368	)		(20,772	)
Adjustments to net cash provided by operating activities (a)		177,520			101,192			576,664			150,919
Net cash provided by operating activities		260,344			205,829			627,597			164,248

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(203,889	)		(193,474	)		(261,101	)		(68,333	)
Purchase of investment property		(9,435	)		(20,720	)		(55,524	)		(14,531	)
Purchase of intangible assets		(20,738	)		(34,133	)		(30,717	)		(8,039	)
Investment in restricted deposit		(470,000	)		-			(102,603	)		(26,853	)
Proceeds from collection of restricted deposit		470,000			-			-			-
Proceeds (investments) from collection of short-term deposits and other receivable, net		139			12,401			(5,858	)		(1,533	)
Proceeds from sale of property and equipment		2,581			1,306			12,864			3,367
Proceeds from sale of investment property		5,700			-			50,600			13,243
Proceeds from sale of marketable securities		101,867			373,040			118,957			31,132
Investment in marketable securities		(113,966	)		(365,091	)		(122,646	)		(32,099	)
Acquisition of subsidiaries (note 6)		(4,789	)		87,219			-			-
Acquisition of an associated company (note 10)		-			-			(36,415	)		(9,530	)
Grant of loans to jointly controlled companies		-			(31,442	)		(200	)		(52	)
Short term loans granted to controlling shareholder		-			-			(144,962	)		(37,938	)
Payments on account of real estate		-			(76,884	)		(9,187	)		(2,404	)
Collection of long-term loans receivable		-			1,565			22,885			5,989
Interest received		11,948			18,331			16,552			4,332
Net cash used in investing activities		(230,582	)		(227,882	)		(547,355	)		(143,249	)

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

F-9

										Convenience
										translation
										(note 1b)
										for the year
										Ended
	Year ended December 31,									December 31,
	2009			2010			2011			2011
	NIS									U.S dollars
	In thousands
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares		-			(4,295	)		(4,035	)		(1,056	)
Dividend paid to Company shareholders		-			(875,000	)		(75,000	)		(19,628	)
Dividend paid to non-controlling interests		(16,491	)		(17,619	)		(30,669	)		(8,026	)
Repayment of debentures		(13,297	)		(2,155	)		(174,955	)		(45,788	)
Acquisition of non-controlling interests in subsidiary		(8,020	)		-			-			-
Transactions with non-controlling interests		10,912			(7,362	)		(15,217	)		(3,982	)
Issuance of debentures		294,280			205,035			-			-
Receipt of long-term loans		387,700			470,600			213,648			55,914
Repayment of long-term loans		(139,060	)		(165,014	)		(382,557	)		(100,120	)
Repayment of long term credit from payables		(1,740	)		(1,740	)		(1,750	)		(458	)
Short-term credit from banks and others, net		76,144			(52,404	)		582,503			152,448
Receipt of loans from controlling shareholders		-			90,000			-			-
Proceeds from exercise of options in the Company and a subsidiary		2,306			759			143			37
Settlement of forward contracts		-			21,248			-			-
Interest paid		(93,900	)		(147,532	)		(222,771	)		(58,302	)
Net cash provided by (used in) financing activities		498,834			(485,479	)		(110,660	)		(28,961	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS		528,596			(507,532	)		(30,418	)		(7,961	)
Translation differences on cash and cash equivalents		-			(71	)		37			10
BALANCE OF CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS AT BEGINNING OF YEAR		83,138			611,734			104,131			27,252
BALANCE OF CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS AT END OF YEAR		611,734			104,131			73,750			19,301

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

F-10

											Convenience translation (note 1b) for the year ended
		Year ended December 31									December 31,
		2009			2010			2011			2011
		NIS									U.S dollars
		In thousands
(a)	Adjustments to net cash provided by operating activities:
	Adjustments for:
	Depreciation and amortization		165,248			206,945			273,746			71,643
	Increase in fair value of investment property, net		(20,775	)		(32,917	)		(41,913	)		(10,969	)
	Share in losses (profit) of associates, net of dividend		37			518			(5,309	)		(1,389	)
	Share based payment		12,166			6,834			3,270			856
	Loss from sale and disposal of property and equipment, net		3,299			5,962			2,448			641
	Provision for impairment of property and equipment, net		19,981			946			7,815			2,045
	Changes in fair value of derivative financial instruments, net		(21,250	)		(8,029	)		(107,553	)		(28,148	)
	Linkage differences on monetary assets, debentures, loans and other long term liabilities		52,347			57,626			71,465			18,703
	Capital (gain) loss from changes in holdings in subsidiaries		911			-			-			-
	Employee benefit liability, net		144			2,371			177			46
	Decrease (increase) in value of investment in securities, deposits and long-term receivables, net		(4,468	)		(15,013	)		1,190			311
	Interest paid, net		81,952			118,311			184,963			48,407
	Changes in operating assets and liabilities:
	Decrease (increase) in trade receivables and other accounts receivable		(65,468	)		(53,264	)		104,743			27,412
	Increase (decrease) in trade payables and other accounts payable		(29,380	)		19,468			(10,198	)		(2,669	)
	Changes in advance deposits from customers		-			-			102,603			26,852
	Decrease (increase) in inventories		(17,224	)		(49,910	)		3,706			970
	Investment in real estate inventories		-			(87,092	)		(5,637	)		(1,475	)
	Payments on account of real estate inventories		-			(71,564	)		(8,852	)		(2,317	)
	Total		177,520			101,192			576,664			150,919

(b)	Supplementary information on investing and financing activities not involving cash flows:
	Issuance of shares upon conversion of convertible debentures of the Company		12,198			43,895			896			234
	Conversion of convertible debentures of subsidiary		6,655			-			-			-
	Purchase of property and equipment and investment properties on credit		174			37,084			10,769			2,818
	Advances from customers deposited in restricted use deposit		-			22,428			-			-
	Issue of shares against acquisition of share in subsidiary		-			965,770			-			-
	Exercise of options to purchase shares in equity accounted investee (see note 10b)		-			-			154,433			40,417

F-11

NOTE 1 - GENERAL:

a.Information on the activities of Alon Holdings Blue Square - Israel Ltd and its subsidiaries

Alon Holdings Blue Square-Israel Ltd. (formerly Blue Square – Israel Ltd.) ("Blue Square") is an Israeli corporation, which, directly and through its subsidiaries (together - the Company) mainly operates in Israel. All references to the Company include, unless the context otherwise indicates, Blue-Square and its subsidiaries. Upon completion of the acquisition of Dor Alon in 2010, see note 6, the Company operates in four reportable segments: (1) Supermarkets, (2) Non-food Retail and Wholesale (3) Real Estate and (4) Commercial and fueling sites (see note 5).

Alon Holdings Blue Square –IsraelLtd. is a limited public company incorporated and domiciled in Israel, whose ADSs and shares are listed for trading on the New-York Stock Exchange (the "NYSE") and on the Tel-Aviv Stock Exchange (the "TASE").

The Company is controlled by Alon Israel Oil Company Ltd ("Alon"). The address of its registered office is 2 Amal St., Afek Industrial Zone, Rosh Ha’ayin, Israel. The consolidated financial statements of the Company for the year ended December 31, 2011 were authorized for issue in accordance with a resolution of the directors on April 30, 2012.

The consolidated results for the year 2010 include the results of the subsidiary Dor Alon, acquired in 2010, from October 3, 2010 to December 31, 2010. Dor Alon's shares are listed on the Tel Aviv stock exchange. See also note 6.

b. Convenience translation into U.S dollars (hereinafter-"dollars" or "$")

For the convenience of the reader, the reported New Israeli Shekel (NIS) amounts as of December 31, 2011 have been translated into dollars, at the representative rate of exchange on December 31, 2011 (U.S. $1 = NIS 3.821). The dollar amounts presented in these financial statements should not be construed as representing amounts that are receivable or payable in dollars or convertible into dollars, unless otherwise indicated.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented unless otherwise stated.

Basis of presentation

The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (hereafter – "IFRS") as issued by the International Accounting Standard Board (hereafter – "IASB").

F-12

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

The accounting policies adopted by the Company are consistent with those of the previous financial year.

The consolidated financial statements have been prepared under the historical cost convention, as modified by actuarial adjustments for defined benefit plan assets and liabilities and financial assets (including derivative instruments) and investment property measured at fair value. The cost of certain non-monetary assets, investments in associated companies and certain equity items as of the transition date have been determined on the basis of their deemed cost, or historical cost adjusted to inflation in Israel through December 31, 2003, as allowed by the IFRS transition guidance.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4. Actual results may differ materially from estimates and assumptions used by the Company's management.

Consolidated financial statements

Subsidiaries

Subsidiaries are all entities over which the Company has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is obtained by the Company. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Company.

For business combinations from January 1, 2010, the cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition costs incurred are expensed.

In accordance with IFRS 3R, upon the acquisition of Dor Alon, the Company valued the acquisition date fair value of the non-controlling interests in Dor Alon on the basis of the active market price of the equity shares of Dor Alon not held by the Company on the Tel Aviv Stock Exchange, where Dor Alon is listed.

When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.

F-13

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

If the business combination is achieved in stages, the acquisition fair value of the acquirer's previously held interest in the acquiree is remeasured to fair value as at the acquisition date through profit and loss.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognized in accordance with IAS 39 either in the statement of income or as change to other comprehensive income. If the contingent consideration is classified as equity, it shall not be remeasured until it is finally settled within equity.

Goodwill is initially measured at cost being the excess of the consideration transferred over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the statement of income.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purposes of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company's cash generating units that are expected to benefit from the combination.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.

For business combinations prior to December 31, 2009, the following differences applied:
Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest (formerly known as minority interest) was measured at the proportionate share of the acquiree's identifiable net assets.

Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognized goodwill.

Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.

Transactions with non-controlling interests

The Company treats transactions with non-controlling interests as transactions with equity owners of the Company. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains and losses on disposals to non-controlling interests without loss of control are also recorded in equity.

When the Company ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognized in the statement of income. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Company had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to the statement of income.

F-14

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Upon a decrease in ownership rate without loss of control the Company reallocates a portion of the goodwill arising to the controlling interests to the non-controlling interests.

Call option that is fixed in terms, provided with respect to the sale of non-controlling interests in a subsidiary (transaction subsequent to January 1, 2010), is accounted for as an equity component of NCI, with any differences recorded in equity; Call option granted to the Company for interests sold to NCI of the subsidiary, that has no attached performance conditions, is accounted for as a derivative instrument and its fair value adjustments are carried to financial income or expense, as appropriate.

Before January 1, 2010, disposals to non-controlling interests resulted in gains and losses for the Company and were recorded in the statement of income. Purchases from non-controlling interests resulted in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

Joint ventures

The Company’s interests in jointly controlled entities are accounted for by the proportionate consolidation method. The Company combines its share of the joint ventures’ individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Company’s financial statements. The Company recognizes that part of gains or losses arising from the sale of assets by the Company to a jointly controlled entity that is attributable to the other partners in the jointly controlled entity. The Company does not recognize its share of profits or losses from the jointly controlled entity that result from the Company's purchases of goods from the jointly controlled entity until it resells the goods to an independent party. However, a loss on the transaction is recognized immediately if such loss provides evidence of a reduction in the net realizable value of current assets, or an impairment loss.

The part of the loans granted attributable to the joint venture partner is classified as loans and receivables in accordance with IAS 39.

Associates

Associates are companies in which the Company has significant influence over the financial and operating policies without having control.

The investment in an associate is accounted for using the equity method. Under the equity method, the investment in the associate is presented in the statement of financial position at cost plus changes in the company's share of net assets including other comprehensive income of the associate. The equity method is applied until the loss of significant influence or classification as an asset held-for-sale.

F-15

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

The Company's share of post acquisition profit or loss is recognized in the statement of income, as "share in profits (losses) of associates" and its share of post acquisition movements in other comprehensive income is recognized as a separate line item in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. When the Company's share in losses of an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Company does not recognize further losses, unless it has incurred legal or constructive obligation or made payments on behalf of the associate.

Goodwill relating to the acquisition of an associate is initially measured as the difference between the acquisition cost and the company's share in the fair value of the associate's net identifiable assets, liabilities and contingent liabilities. After initial recognition, goodwill is measured at cost and is not systematically amortized.

After application of the equity method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the investment in associates. The Company determines at the end of each reporting period whether there is objective evidence that the carrying amount of the investment in the associate is impaired. The test of impairment is carried out with reference to the entire investment, including the goodwill attributed to the associate. If there is objective evidence, as above, the amount of the loss is calculated as the difference between the recoverable amount of the investment in the associate and its carrying amount. The recoverable amount is the higher of value in use and fair value less costs to sell based on the estimated net cash flows to be generated by the associate. Impairment loss, as above, is not allocated specifically to goodwill that forms part of the investment and, accordingly, any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases. The loss, or its reversal, is recognized in profit or loss in the line item, "share of profits (losses) of associates".

Profits and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate.

The financial statements of the Company and of associates are prepared as of the same dates and periods. The accounting policies applied in the preparation of the financial statements of associates conform with the policies applied in the preparation of the financial statements of the company (see also note 10b.).

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker is the function responsible for allocating resources and assessing performance of the operating segments. The chief operating decision maker does not include investments in equity-accounted associates and does not review information regarding segment assets and segment liabilities in his performance measurement.

Foreign currency transactions

Functional and presentation currency

Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in NIS, which is Blue Square's functional and presentation currency.

F-16

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Transactions and balances

Transactions in a currency which is different from the functional currency (foreign currency) are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statements of income.

Foreign exchange gains and losses are presented in the statement of income within finance income or expenses.

Translation differences on non-monetary financial assets, such as securities classified as available for sale, are included in other comprehensive income.

Group companies

The results and financial position of all the group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

Assets and liabilities for each statement of financial position presented are translated at the closing rate of that statement. However, where the exchange difference arises on an intragroup balance that, in substance, forms part of an entity's net investment in a foreign operation then the exchange difference is not recognized in the statement of income but is recognized in other comprehensive income and accumulated in a separate component of equity until the disposal of the foreign operation.

Income and expenses for each statement of income are translated at average exchange rates; (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions).

All resulting exchange differences are recognized in other comprehensive income.

Property and equipment

Property and equipment are initially recognized at acquisition or construction cost. Cost includes expenditure that is directly attributable to the acquisition, construction or installation of the items, capitalization of borrowing costs during the construction period of qualified assets and expected costs for dismantling and restoring the site on which it is located. Property and equipment included as part of the acquisition of a subsidiary is included at the fair value as at the date of acquisition. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. When part of an asset is replaced, its carrying amount is derecognized. All other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred.

F-17

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Purchased land is not depreciated. Depreciation of other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

	Years
Land and buildings	50-100
Leasehold improvements	12
Fueling stations equipment	10-25 (mainly 14)
Motor vehicles	5-7
Furniture, equipment and installations	3-16 (mainly 10)

Leased assets and leasehold improvements are depreciated using the straight-line method to allocate their cost over their estimated useful lives.

The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date.

An assets' carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (see h below).

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within "Other gains (losses)" in the statement of income.

Investment property

Investment property is held for long-term rental yields or value appreciation and is not occupied by the Company. Investment property is initially measured at cost, including transaction costs. Subsequent to initial recognition, investment property is stated at fair value, reflecting market conditions, determined at least annually by independent appraisers, "Haushner Civil Eng. & Real Estate Appraisal Ltd." and " Barak Friedman Cohen & Co. Economic & Real Estate Appraisal."

Fair value is based on current prices in an active market, adjusted, if necessary, for any differences in the nature, location or condition of the specific asset. If such information is not available, the Company uses alternative sources such as recent prices on less active markets or discounted cash flow projections.

Gains and losses arising from changes in fair value are recorded in the statement of income under "Changes in fair value of investment property, net" in the period in which they arise.

Land that is held under an operating lease with The Israeli Lands Administration or local authorities, is classified and accounted for as an investment property, provided that the conditions for such classification are met. In such cases, the lease rights are initially recognized as an asset and the lease obligation as a liability, in a manner similar to a finance lease.

Revenue from the sale of investment property, is recognized when the significant risks and rewards of ownership of the property have been transferred to the buyer; such revenue is not recognized where there are significant uncertainties as to the collection of the consideration of the transaction, the costs related thereto, or when the Company has significant continuing involvement in the property that was sold.

F-18

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Intangible assets:

Goodwill

Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the consideration transferred over the interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree. Also, commencing January 1, 2010, when the fair value option is used to recognize the non-controlling interest ("NCI") in subsidiaries – goodwill will also include any such excess relating to the respective NCI.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs, or group of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed.

Brand names, trademarks and customer relationships

The cost of brand names, trademarks and customer relationships acquired in a business combination is their fair value at the date of acquisition. Trade marks that have indefinite lives are not amortized, but are reviewed for impairment on an annual basis, or more frequently, if events or changes in circumstances indicate potential impairment. After initial recognition, those intangible assets, that have finite useful lives, are carried at cost less accumulated amortization and any accumulated impairment losses. Amortization is calculated using the straight-line method to allocate the cost over their estimated useful lives (brand names and trademarks -eight to fifteen years and customer relationships – seven to fifteen years).

Computer software

The costs of separately acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized over their estimated useful lives (mainly four years).

Costs associated with servicing or maintaining computer software are recognized as an expense as incurred. Costs that are directly associated with the development of identifiable and unique software products controlled by the Company, that will generate probable future economic benefits and that meet certain technical, financial and other criteria are recognized as intangible assets. Costs include directly attributable employee benefits and applicable consulting and development fees.

Computer software development costs recognized as assets are amortized over their estimated useful lives (not exceeding four years).

F-19

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

Evacuation fees

Premiums paid to assume existing operating lease agreements are presented at cost net of accumulated amortization and impairments. These costs are amortized over the remaining term of the lease.

Fees paid on the establishment of loan facilities

Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent that there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalized as a pre-payment for liquidity services and amortized over the period of the facility to which it relates.

Favorable and unfavorable operating lease contracts

The Company determines for each operating lease acquired whether the terms are favorable or unfavorable. The Company recognizes an intangible asset if the terms of an operating lease are favorable relative to market terms and a liability if the terms are unfavorable relative to market terms. The favorable and unfavorable lease contracts are amortized over their contractual terms.

Impairment of non-financial assets

Assets that have indefinite useful life, including goodwill and brands, are not subject to amortization and are tested annually for impairment (see also g. above). Assets that are subject to depreciation and amortization are reviewed for impairment at each statement of financial position date whenever any events have occurred or changes in circumstances have taken place, which might indicate that there has been impairment of the non-financial assets. When such indicators of impairment are present, the Company evaluates whether the carrying value of the asset can be recovered, and if necessary, records an impairment provision for the amount needed to write down the carrying amount to the recoverable amount.

The recoverable amount of an asset is the higher of the asset’s fair value less costs to sell and its value in use. Value in use is based on estimated future cash flows from the continued use of the asset, including those expected at the time of its future retirement and disposal discounted to their present value using a discount rate that reflects the time value of money and the risks specific to the asset. In determining the value in use of an asset, the Company uses best available estimates as to the conditions that will prevail during the remaining useful life of the asset and as to the current condition of the asset. In computing the fair value less costs to sell of real estate, including land and lease rights, the Company makes use of valuations prepared by appraisers.

In the Supermarkets segment, a cash generating unit ("CGU") can be a single store or a group of stores where the cash inflows of one CGU are largely interdependent on the cash inflows of another CGU in the same geographic area. The food retail activities are grouped into 73 CGUs.

F-20

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

In the commercial and fueling sites segment the Company evaluates the fueling stations and the convenience stores on its sites together, on one basis, due to common customer base and business dependence on gas stations revenues. The convenience stores that are not located in fueling sites are grouped into 14 separate CGUs based on their geographical locations in a manner similar to the food retail activities.

In the Non-Food segment each of the self-operated stores (76) is considered a separate CGU on the basis of their geographical location and customers.

An impairment loss is recognized in the statement of income under "other gain (losses)". Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

For a cash-generating unit to which goodwill has been allocated, any impairment loss relating to that unit is initially applied to the goodwill and the balance to the carrying amount of the other assets.

Non- current assets held for sale

Non- current assets (or disposal groups) are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell.

Borrowing costs

General and specific borrowing costs directly attributable to the acquisition or construction of any qualifying asset (including investment property and real estate inventories) are capitalized during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

Financial assets

Classification

The Company classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of financial assets at initial recognition.

Financial assets at fair value through profit or loss

This category includes financial assets held for trading and those designated at fair value through profit or loss; a financial asset is classified in this category if management has designated it as such, because it is managed and its performance is evaluated on a fair-value basis.

F-21

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Derivative financial instruments are also classified in this category since they are not designated for hedging purposes. Assets in this category are classified as current assets if expected to be settled within one year from the date of the statement of financial position; otherwise they are classified as non-current.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the statement of financial position date. These are classified as non-current assets. The Company’s loans and receivables comprise "trade and other receivables", "short-term bank deposits", "loans receivable", "loans to associates" and "cash and cash equivalents".

Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified to any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the statement of financial position date.

Recognition and measurement

Regular purchases and sales of financial assets are recognized on the settlement-date. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the statement of income. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest method.

Gains or losses arising from changes in the fair value of the "financial assets at fair value through profit or loss" category are presented in the statement of income within finance income or expenses in the period in which they arise.

Changes in the fair value of monetary and non-monetary available-for-sale securities are recognized in other comprehensive income (hereafter – OCI). Interest on securities that are available for sale calculated using the effective interest method is recognized in the statement of income as part of "finance income or expenses".

Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership.

When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in OCI are reclassified and included in the statement of income as part of "finance income or expenses".

F-22

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously.

(a)

Assets carried at amortized cost

The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is an objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as change in arrears or economic conditions that correlate with defaults.

For loans and receivables category, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the consolidated income statement. If a loan or a receivable has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract, as a practical expedient the company may measure impairment on the basis of an instrument's fair value using an observable market price.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor's credit rating) the reversal of the previously recognized impairments loss is recognized in the consolidated income statement.

Impairment

testing of trade receivables is described in note o below.

(b)

Assets classified as available for sale

The company assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. For debt securities, the company uses the criteria referred to in (a) above. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from equity and recognized in profit or loss. Impairment losses recognized in the consolidated income statement on equity instrument are not reversed through the consolidated income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the consolidated income statement.

F-23

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

l. Deposits received from customers

In the course of its operations, a subsidiary in the commercial and fueling sites segments receives deposits from its customers in respect of containers and other loaned equipment. The deposits are to be refunded at the current price of the deposit the company collects from its customers, linked to the Israeli CPI from the last time the price was updated. Under IAS 39 – "Financial Instruments – Recognition and Measurement" – the value of such a financial liability is the amount that can be demanded in return. Since the subsidiary does not have an unconditional right to defer the repayment beyond 12 months, the deposit liabilities are presented among current liabilities.

Derivative financial instruments

Derivative financial instruments are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value.

The Company's derivative financial instruments do not meet the criteria required for hedge accounting. Changes in the fair value of these derivative financial instruments are recognized on a current basis in the statement of income as part of "finance income or expenses."

Changes in fair value of separable embedded derivatives are recognized in the statement of income as part of finance income or expenses.

See note s. below for the conversion component of the convertible debentures.

Inventories

Inventories are stated at the lower of cost and net realizable value. Cost, except for real estate inventories, is determined mainly by the “first-in, first-out” (FIFO) method. Net realizable value is the estimated selling price in the ordinary course of business, less applicable selling expenses.

Cost of real estate inventories is specific and includes capitalization of borrowing costs for long term projects.

The Company evaluates inventory shrinkage throughout the year based on the results of periodic stock taking in its stores, and records allowances based on the results of these counts as of the statement of financial position date.

The Company reviews the need for a provision for slow moving inventories, if applicable, by comparing the value of the inventories with the level of sales, the period that passed since the start of distribution and the quality of the goods, on the basis of past experience.

F-24

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Real estate inventories are stated at the lower of cost and net realizable value. Cost includes the directly identifiable expenses of the acquisition of the inventories and capitalized borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less an estimated cost to complete and applicable selling expenses.

Trade receivables

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less allowance for doubtful accounts.

Management regularly monitors the balance of trade receivables, and the financial statements include a specific allowance computed for accounts, the collectability of which, in the view of management, is doubtful. Material financial difficulties of a customer, reasonable expectations that he will go into liquidation or will undergo a reorganization and inability to pay or delays in payment are indicators that the receivables are impaired. The carrying amount of the asset is reduced through the use of an allowance account to the present value of expected future cash flows and the amount of the loss is recognized in the statement of income within selling, general and administrative expenses. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against selling, general and administrative expenses in the statement of income.

Cash and cash equivalents

Cash and cash equivalents include cash in hand, short-term bank deposits and other short-term highly liquid investments with original maturities of three months or less.

Bank overdrafts are presented-within "credit and loans from banks and others" in current liabilities in the statement of financial position. For the purposes of the consolidated statement of cash flows, cash and cash equivalents are presented net of bank overdrafts.

q. Share capital

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from issuance proceeds.

Where the Company purchases the Company's equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the Company's equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company's equity holders.

F-25

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Trade payables and rebates

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

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

The Company expects to receive certain rebates upon meeting specified purchasing targets, such as the fulfillment of a minimum annual purchase quota (in quantitative or monetary amounts), or an increase in purchases in comparison with purchases made in previous periods. The related rebates are recognized in the financial statements as earned on a pro rata basis, based on a systematic calculation of the extent to which the Company has reached the target.

In some cases rebates due from suppliers for which the Company has no obligation to meet specified purchasing targets, are recorded in the financial statements on the basis of the purchases actually made.

Rebates from suppliers are presented as a reduction of inventories and cost of sales, as applicable.

Borrowings

Borrowings (including loans, debentures and convertible debentures) are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the maturity amount is recognized in the statement of income over the period of the borrowings using the effective interest method.

For convertible debentures, in which the conversion component constitutes an embedded derivative (and not equity) whose economic characteristics and risks are not closely related to the debentures, the debentures are initially recognized as the difference between the total proceeds from issuance and the fair value of the bifurcated embedded derivative at the date of issuance. Subsequent to initial recognition, the embedded derivative is measured at each statement of financial position date at fair value with changes recognized in financial income or expenses in the statement of income, while the debentures are measured at amortized cost.

Loans from banks, debentures and convertible debentures, are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the statement of financial position date.

Current and deferred income taxes

The tax expense for the period comprises current and deferred tax. Tax is recognized in the statement of income, except to the extent that it relates to items recognized in OCI or directly in equity. In this case the tax is also recognized in OCI or directly in equity, respectively.

F-26

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the statement of financial position date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax liabilities are not recognized, if they arise from initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither the accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the statement of financial position date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred income tax are not provided on temporary differences arising on investments in subsidiaries and associates, since the Company controls the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity.

Employee benefits

Retirement benefit obligations

The Company's pension liabilities are generally funded through payments to insurance companies or trustee-administered funds. The Company has both defined benefit and defined contribution plans.

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

The obligation of the Company 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, as discussed below.

F-27

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate and independent entity. The Company has no legal or constructive obligations to pay further contributions if the relevant fund does not hold sufficient assets to pay an employee the benefits relating to employee service in the current and prior periods. The contributions are recognized as employee benefit expense when they are paid.

The Company's defined benefit obligation is based on the amount of benefits that the relevant employees are entitled to receive upon retirement, which is based on the number of years of employment and the employee’s last monthly salary.

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 have terms to maturity approximating the terms of the related pension liability.

In accordance with IAS 19 "Employee benefits" the market yields the Company uses to discount expected future cash flows are based on the interest rates of Israeli Government bonds since the Company's management believes that Israel does not have a deep market for high-quality corporate bonds.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise.

Amounts funded for retirement benefits are measured at fair value. These funded amounts represent “plan assets”, as defined by IAS 19, and therefore are offset from the retirement benefit obligation for statement of financial position presentation.

The Company purchases insurance policies and regularly contributes to pension / retirement benefit funds to meet the pension / retirement obligations. For defined contribution plans in which the Company has no further payment obligations once the contributions have been paid, the contributions are recognized as employee benefit expenses when they are paid.

Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.

F-28

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

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 are accumulating 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 by the independent qualified actuary: In making such a computation, the actuary makes actuarial assumptions (rates of employee turnover, future salary levels etc). The cost of this benefit is recognized using the same method as is used for defined benefit retirement plans. Actuarial gains and losses are recognized in OCI in the period which they arise.

Jubilee grant

Pursuant to employee agreements, certain employees are entitled to receive a jubilee grant upon completion of service of 20, 30 and 35 years.

The statement of financial position includes a provision in respect of the jubilee grant based on an annual actuarial calculation, by the independent qualified actuary.

Vacation and recreation benefits

Every employee is legally entitled to vacation and recreation benefits, both computed on an annual basis. This entitlement is based on the terms of employment. The Company records a liability and expense for vacation and recreation pay, based on the benefits that have been accumulated for each employee.

Share-based payments

The Company operates an equity-settled, share-based compensation plan. Under this plan, the Company grants its employees stock options at its discretion. The fair value of the employee services received in exchange for the grant of the options is recognized as an expense in the statement of income with a corresponding credit to accumulated deficit in equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options on the date on which they are granted. At each statement of financial position date, the Company revises its estimates of the number of options that are expected to vest. It recognizes the impact of the revision of original estimates, if any, in the statement of income, with a corresponding adjustment to accumulated deficit in equity.

The consideration received upon exercise of share options, net of any directly attributable transaction costs are credited to share capital (nominal value) and additional paid in capital.

F-29

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Profit sharing and bonus plans

The Company recognizes a liability and an expense for bonuses and profit-sharing for employees, based on a formula that takes into consideration the profit attributable to the supermarket stores and employees after certain adjustments. The Company recognizes a provision where contractually obligated or where there is a past practice that has created a constructive obligation.

Termination benefits

Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits when it is demonstrably committed according to a detailed formal plan without possibility of withdrawal to either: terminating the employment of current employees; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.

Benefits falling due more than 12 months after the statement of financial position date are discounted to their present value.

Provisions

Provisions for environmental restoration and legal claims are recognized when the Company has a present legal or constructive obligation as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. Provisions are not recognized for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required for settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be low.

Provisions are measured at present value according to management's best estimate of the expenditure required to settle the obligation at the statement of financial position date.

Other comprehensive income

Comprehensive income is comprised of net income for the year and other income and expense items that are not taken into account in determining net income and which are considered components of other comprehensive income; The Company's other comprehensive income or loss items are in respect of fair value adjustments of available for sale financial assets, exchange differences on translation of foreign operations and actuarial adjustments of employee defined benefit plans.

F-30

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Company’s activities. Revenue is shown net of value added tax, returns, rebates and discounts and after eliminating sales within the Company.

When the Company acts as an agent or an intermediary without bearing the risks and rewards resulting from the transaction, revenues are presented on a net basis. However, when the Company bears the risks and rewards resulting from the transaction, revenues are presented on a gross basis, distinguishing the revenue from the related expenses.

The Company recognizes revenue when the amount of revenue can be reliably measured. It is probable that future economic benefits will flow to the Company and when specific criteria have been met for each of the Company’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Company bases its estimates on past experience, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Sales of goods – retail

Sales of goods are recognized when a product is sold to the customer. Retail sales are usually paid for by credit card, by checks or in cash.

Revenue from the sale of gift certificates is deferred and is recognized as income when the gift certificate is redeemed for the purchase of goods, or when the likelihood that the customer will redeem the certificate, based on the Company's experience, becomes remote.

Discounts, including those related to gift certificates are recognized as a reduction of sales upon recognition of the related sales.

Revenue from the provision of the sale of goods on the internet is recognized at the point that the risks and rewards of the inventory have passed to the customer, which is the point of dispatch. Transactions are settled by credit card.

Sales of oil products, lubricants and gas (excluding gas for domestic use) – the sales of fuel is recognized as revenue when supplied to the customer; at the fuel stations – at the time the fueling takes place.

Liquefied Petroleum Gas (hereafter – LPG) for domestic use – the sales of LPG are recognized as revenues in accordance with the quantities consumed in the reported periods.

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Sales of goods – wholesale

The Company sells a range of products (apparel, housewares, infant products and toys) in the wholesale market.

Sales of goods are recognized when the products are delivered to the wholesaler. The criteria for delivery are satisfied when the products have been shipped to the specified location, the risks of obsolescence and loss have been transferred to the wholesaler, and either the wholesaler has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Company has objective evidence that all criteria for acceptance have been satisfied.

Sales are recorded based on the price specified in the sales contract, net of estimated volume discounts returns at the time of sale. No element of financing is deemed present as the sales are made under normal credit terms, which are consistent with market conditions.

Sales of oil products, lubricants and gas are recognized at the date of supply to the customer.

Club member awards and loyalty programs

Club members participating in the Company's programs are entitled to earn benefits upon purchasing goods, which can be utilized over a specific term to receive certain free gifts or discounts on products or receive certain products sold by the Company free of charge.

The Company applies IFRIC 13: "Customer Loyalty Programs" and accordingly defers revenue from such sales representing the fair value of such benefits. The attributed fair value takes into account management estimates of awards that will expire unexercised. The deferred revenue is recognized in income (carried to sales) when the award is exercised by the customer.

Rental revenue

The Company’s lease agreements are “net” lease agreements, which require the tenants to pay all property related expenses. The rental revenue is recognized on a straight-line basis over the rent period.

Revenue from sales of residential apartments and real estate inventories

Revenue from the sale of residential apartment units and real estate inventories is measured at the fair value of the consideration received or receivable. The Company recognizes the revenue when the significant risks and rewards of ownership have passed to the buyer the receipt of the consideration is expected and can be reliably measured. Revenue from the sale of apartments is generally recognized when the apartments have been substantially constructed, accepted by the customer and the full amount resulting from the sale agreement was paid by the buyer.

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

Revenue from sales of real estate assets

Revenue from the sale of real estate assets are recognized when the significant risks and rewards of ownership have passed to the buyer. Revenue is not recognized if there are significant uncertainties with respect to the collection of the consideration from the transaction, or the costs associated with it, or if there is an on-going management involvement of the Company with respect to the sold land.

Finance income and expenses

Finance income comprises interest income on funds invested, dividend income, net gains from changes in the fair value of financial assets measured at fair value through profit or loss, net gains from marketable securities, foreign currency gains, and net gains from changes in the fair value of derivative instruments that are recognized in the statement of income. Interest income is recognized as it accrues, using the effective interest method. The net gain from changes in the fair value of financial assets measured at fair value through profit or loss includes interest deriving from such assets.

Finance expense comprises interest expense on loans received and debentures issued, changes in the value of a liability in respect of a put option to the non-controlling interests in a subsidiary, net losses from changes in the fair value of financial assets measured at fair value through profit or loss, foreign currency losses, financing expenses paid under finance leases and net losses from changes in the fair value of other derivative instruments. All borrowing costs are recognized in the statement of income using the effective interest method.

Advertising costs

Advertising costs are expensed as incurred. Reimbursements from suppliers in respect of specific joint advertising campaigns are recognized as a reduction of these costs, in accordance with the terms of specific agreement.

aa.

Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of income on a straight-line basis over the period of the lease.

Land held under an operating lease is classified and accounted for as investment property when the property would otherwise meet the definition of investment property. In such case, the operating lease is accounted for as if it were a finance lease.

Leases of property where the Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease's commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments.

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

ab.

Dividend distribution

A dividend distribution to the Company's shareholders is recognized as a liability in the Company’s financial statements in the period in which the dividends are approved by the Company’s Board of Directors.

ac.

Earnings per share

Basic earnings per share are calculated by dividing the net income attributable to equity holders of the Company by the weighted-average number of Ordinary shares outstanding during the period.

Diluted earnings per share are calculated by adjusting the net income attributable to equity holders of the Company and the weighted-average number of outstanding Ordinary shares for the effect of all potential Ordinary shares that are dilutive including share options granted to employees.

ad.

New and Amended IFRS and Interpretations

New International Financial Reporting Standards, Amendments to Standards and New interpretations

The following new standard and amendments to standards have been issued, but are not effective for the financial year beginning January 1, 2011 and have not been early adopted:

IFRS 9, "Financial Instruments". On October 28, 2010, the IASB reissued IFRS 9 as part of its project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces new requirements for classifying and measuring financial assets and financial liabilities that must be applied starting January 1, 2015, with early adoption permitted. The IASB intends to expand IFRS 9 to add new requirements for impairment and hedge accounting. IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications – those measured at amortised cost and those measured at fair value. Classification is made at the time the financial asset is initially recognised, namely when the entity becomes a party to the contractual provisions of the instrument. A debt instrument that meets the following two conditions can be measured at amortised cost (net of any write down for impairment): the objective of the entity's business model is to hold the financial asset to collect the contractual cash flows and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments must be measured at fair value through profit or loss.

Further, embedded derivatives that under IAS 39 would have been separately accounted for at fair value through profit and loss because they were not closely related to the financial host asset will no longer be separated. Instead, the contractual cash flows of the financial asset are assessed in their entirety, and the asset as a whole is measured at fair value through profit and loss if any of its cash flows do not represent payments of principal and interest. Also all equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position, with value changes recognised in the statement of income, except for those equity investments for which the entity has elected to report value changes in OCI. IFRS 9 maintains the existing amortised cost measurement for most liabilities, limiting change to those liabilities measured by the issuer at fair value.

F-34

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

The Company is currently assessing the potential effects of application of IFRS 9 on its financial statements.

Amendment to IAS 12 – Income taxes

IAS 12 requires an entity to measure deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. The amendment introduces the presumption, which can be broken, that recovery of the carrying amount of an investment property, whether acquired outright or in the framework of a business combination, will be through sale rather than through use. The amendment to IAS 12 will be applicable to annual periods starting on or after January 1, 2012. Early adoption is allowed. The Company intends to adopt the amendment starting January 1, 2012. The Company is currently assessing the potential effects of application of IAS 12 on its financial statements.

The following new standards and amendments to standards have been issued during 2011, and were not early adopted by the Company, are effective for annual periods beginning on or after January 1, 2013:

IFRS 10 – Consolidated financial statements

This standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements. The standard provides additional guidance to assist in determining control where this is difficult to assess. This standard applies retrospectively, and will require reassessment of control mainly in areas where rights, other than voting rights, are substantive, or where potential voting rights were taken into account in assessing control. No review and reassessment of the Company's holdings interest in entities has been done to date, however management is of the opinion that no significant investee will be retrospectively consolidated, or deconsolidated for this matter.

IFRS 11 – Joint arrangements

This standard provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form. There are two types of joint arrangements: joint operations and joint ventures. Joint operations arise where a joint operator has rights to the assets and obligations relating to the arrangement and hence accounts for its interest in assets, liabilities, revenue and expenses. Joint ventures arise where the joint operator has rights to the net assets of the arrangement and hence applies the equity accounting method for its interest. Following the adoption of the new standard, proportional consolidation of joint ventures will no longer be allowed. This standard will be applied retrospectively, as from the beginning of the earliest year included in the comparative figures. This will require that the company deconsolidate all proportionately consolidated joint venture arrangements and present them as a one line item under the equity method in the statements of position, the statements of profit or loss and cash flows. No review has been done to date with regards to the Company's joint arrangements and their classification according to the new standard; however, management assumes that most of its jointly controlled entities that are proportionately consolidated will have to be deconsolidated and presented under the equity method of accounting. As to condensed information of amounts included in the statements of position and the statements of comprehensive income relating to proportionately consolidated entities – see note 10.

F-35

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):

IFRS 12 – Disclosure of interest in other entities

This standard includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.

IAS 27 (revised) – Separate financial statements

This standard includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10.

IAS 28 (revised) – Investments in associates and joint ventures

This standard includes the requirements for joint ventures, as well as associates, to be equity accounted following the issue of IFRS 11.

IFRS 13 - Fair value measurement

This standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs. This standard will be applied prospectively.

IAS 19 – Employee benefits

The IASB has issued an amendment to IAS 19 – Employee Benefits – which makes changes to the recognition and measurement of defined benefit pension expense and termination benefits and to disclosures for all employee benefits.

Amendment to IAS 1 – Presentation of Financial Statements

This amendment makes a distinction between two categories of other comprehensive income (OCI) items, and requires to present them separately in the statement of comprehensive income: OCI items that will be recycled to the statement of income or loss, and OCI items that do not recycle. The amendment will become effective for the Company, as from January 1, 2013, on a retrospective basis.

The Company is currently assessing the potential effects of application of these new standards and the amendments to existing standards on its financial statements. If the standards / amendments to standards in items 1 to 5 (inclusive) are early adopted, they have to be adopted together, except for the disclosure requirements under IFRS 12, that can be early adopted separately.

F-36

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS:

Financial risk factors

The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company uses derivative financial instruments in order to partially hedge certain risk exposures.

The board of directors and senior management of the Company are responsible for determining and supervising the financial risk management fundamentals of each entity in accordance with each entitiy's business activities, financial structure and the relevant market conditions.

Risk management is carried out by the chief financial officer and treasury department of each entity based on policies approved by the board of directors. Treasury identifies evaluates and hedges financial risks in close cooperation with the Company’s operating units. The board of

directors provides principles for overall risk management, covering specific areas, such as interest rate risk, credit risk, foreign exchange risk, use of derivative financial instruments and non-derivative financial instruments, raising long- term debt and investment of excess liquidity.

(1)

Market risk

(a)

Price risk

The Company is exposed to price risk in respect of its investments in debt securities that are classified as available for sale or at fair value through profit or loss. To manage its price risk arising from investments in debt securities, the Company diversifies its portfolio in accordance with the pre-defined limits set by the Company.

The Company invests in Israeli Government debt securities and debt securities of entities that are publicly traded on the Tel Aviv stock exchange that have a minimum rating of A+ at the date of investment.

The table below summarizes the impact on the Company’s post-tax profit for the year and on Comprehensive income of an increase/decrease of 5% in the market price of the investments. The analysis is based on the assumption that all other variables are held constant.

	Year ended December 31
	2009		2010		2011		2009		2010		2011
	NIS in millions
	Impact on						Impact on
	post-tax profit						Comprehensive income
Government bonds		-		-		0.6		4.1		3.3		5.4
Corporate bonds		0.2		3.5		1.9		2.9		7.2		4.7
Equity securities		1.0		1.0		2.5		1.0		2.1		2.7
		1.2		4.5		5.0		8.0		12.6		12.8

F-37

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):

Post-tax profit for the year would increase/decrease as a result of gains/losses on debt or equity securities classified as at fair value through profit or loss. Comprehensive income would increase/decrease as a result of gains/losses on debt or equity securities classified as available for sale and securities classified as fair value through profit and loss (except that other than temporary decline in fair value will be recognized directly in income or loss).

(b)

Foreign currency risk

Most of the operating units comprising the Company are domiciled and operate in Israel. Some of those units import part of their inventories and raw materials. Those units are exposed to foreign currency risk arising primarily with respect to the US dollar. Some units use forward currency contracts in order to hedge part of the foreign currency risk. In addition, certain of Dor Alon's suppliers provide it with credit and hold related deposits which are linked to the exchange rate of the U.S. dollar.

If the NIS had strengthened / weakened by 5% against the U.S. dollar with all the other variables held constant, the post-tax profit would have been NIS 5.4 million higher / lower. As at December 31, 2011 Dor Alon had forward contracts for a notional amount of U.S. $102 million in order to partially hedge the foreign currency risk.

In 2009 and in the period from January 1, 2010 to October 3, 2010 the Company did not have any substantial financial instrument balances in foreign currencies and, therefore, the Company’s net exposure to foreign exchange risk was immaterial.

One of the Company's subsidiaries signed a rent agreement which is fixed in Swiss Franc (CHF). This agreement includes an embedded foreign currency derivative which is measured at each reporting date at fair value.

At December 31, 2011 if the currency had weakened/strengthened by 5% against the CHF with all other variables held constant, post-tax profit for the year would have been NIS 1.1 million higher / lower (2010: NIS 1.3 million, 2009: NIS 1.3 million).

(c)

CPI risk

As at December 31, 2011, the net excess of financial liabilities over financial assets linked to the CPI was NIS 2,796 million (2010: NIS 3,112 million). As at December 31, 2011 the Company had forward contracts for a notional amount of NIS 502 million in order to partially hedge the CPI risk. These forward contracts are not accounted for using hedge accounting.

At December 31, 2011 if the CPI had increased/decreased by 2% with all other variables held constant, post-tax profit for the year would have decreased/increased by NIS 42.5 million (2010: NIS 48.7 million, 2009: NIS 20.2 million).

In addition, BSRE has several commitments that are index linked: most of its rental agreements are linked to the Israeli CPI, and, following the engagement to acquire the Wholesale Market in Tel Aviv, see note 11, BSRE is committed to a future payment of NIS 345.5 million that is linked to the CPI (relating to the BSRE's share of 50%). As of December 31, 2011, the index adjusted principal amount is NIS 362 million. BSRE has also commitments that are linked to the Israeli Building Index, resulting from engagements with building contractors. Changes in the Building Index affect the costs of construction of investment properties and residential apartment units for sale; as of December 31, 2011, BSRE has NIS 46 million under construction agreements, that are linked to the Building Index. The Company mitigates its exposure to this risk, by linking the apartment purchasing agreements to the Building Index.

F-38

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):

As to BSRE's commitments for future minimum payments under non-cancelable operating leases for the years subsequent to the statement of position dates, see note 33a.

(d)

Cash flow and fair value interest rate risk

Borrowings issued at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest rate risk. At December 31, 2011 if interest rates on borrowings had been 2% (200 basis points) higher/lower with all other variables held constant, post-tax profit for the year would have been NIS 36.1 million (2010: NIS 24.1 million, 2009: NIS 0.1 million) lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings.

Most of the fixed interest assets and liabilities of the Company (such as deposits, loans and issued debentures) are not measured at fair value through profit or loss. Therefore, any change in the interest rate as at the reported date would not have a material effect on the statement of income.

The Company’s investments in debt securities earning fixed rates of interest and short-term deposits expose the Company to fair value interest rate risk. At December 31, 2011 if interest rates had been 5% higher/lower with all the other variables held constant other components of equity would have been NIS 7.4 million (2010: NIS 7.0 million, 2009: NIS 6.8 million) lower/higher mainly as result of the decrease/increase in the fair value of these debt securities classified as available for sale.

(2)

Credit risk

Credit risk is managed separately by each of the Company's operating units. Credit risk arises from cash and cash equivalents, securities, short term deposits with banks as well as credit exposure to retail and wholesale customers.

Cash and cash equivalents, deposits and securities are maintained with major banking institutions in Israel.

The Company's investments include Israeli Government debt securities and debt securities of entities that are publicly traded on the Tel Aviv Stock Exchange and that have a minimum rating of A+ at the date of investment. According to the Company's investment policy, there are no significant concentrations of credit risk in respect of investments in debt securities.

Sales to retail customers are collected principally through use of major credit cards, post-dated checks (partially guaranteed by credit insurance) or cash. Sales to wholesale and business customers are made on terms of credit of up to 120 days.

F-39

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):

Sales of gift certificates are made on terms of credit of up to 120 days to a large number of different entities.

Sales to wholesale customers are mainly made under accepted market credit terms. The credit quality of each wholesale customer is assessed. The Company's customers are diversified and the risk of credit concentration is immaterial. Individual risk limits are set based on internal ratings that take into consideration the customer’s financial position, credit history and other factors.

Dor Alon requests collateral from some of its customers and or the recipients of loans in accordance with management's credit risk assessment and does not anticipate difficulties in collecting the debts. Where relevant, a credit committee consisting among others the general manager and the finance director meets to discuss the credit risks to the Company.

The provision for doubtful debts is updated on a regular basis based on the advice of the credit committee, external legal advisers and the Company's policy.

In the commercial and fueling segment there is a large customer that made up 3.5% and 7% of total sales of Dor Alon during the years 2011 and 2010. Dor Alon assesses the debts of its main customers according to its history with those customers.

BSRE receives current collaterals for third party lease agreements of investment property, .

As for the apartment buildings project – the consideration for the sale of apartments is collected during the construction period, commencing with the signing of the purchase greement and up to the delivery of the apartment to the buyer. In any case, title is not transferred before the apartment is fully paid for.

Balances owned to BSRE by the residence company and the mall company (see note 11) amount to NIS 31,994 thousand and NIS 30,660 thousand, as of December 31 2011 and 2010, respectively; BSRE expects that profits from the wholesale market project will serve to repay this debt. In addition, the other 50% shareholders of these joint venture companies guarantee these loans, and therefore the credit risk of these loans is considered by BSRE as low.

(3)

Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Company's operating units maintain flexibility in funding by use of credit facilities.

Management monitors rolling forecasts of the Company’s liquidity reserve (comprised of borrowing facilities and cash and cash equivalents) on the basis of expected cash flows. This is generally carried out at corporate level. These reserves vary by location to take into account the liquidity of the market in which the Company operates. In addition, the Company’s liquidity management policy involves projecting cash flows and considering the necessary level of liquid assets, monitoring statement of financial position liquidity requirements, and maintaining debt financing plans.

F-40

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):

The table below analyses the Company’s financial liabilities into relevant maturity groupings based on the remaining period at the date of the statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Therefore, these amounts will not reconcile to the amounts disclosed in the statement of financial position except for balances due within 12 months which equal their carrying amounts as the impact of discounting is not material.

The table does not include the liabilities for operating leases, and the related embedded derivatives, contractual cash flows for operating leases are presented in note 33a. Cash flows relating to the conversion component of convertible debentures are included in the maturities of the debentures above.

The liability in respect of customers' deposits is presented in current liabilities at their full value. According to Company management, the repayment of these liabilities is not expected within the next five years. Balances of the above liabilities amount to NIS 27,733 thousand and NIS 30,405 thousand as of December 31 2011 and 2010, respectively.

Dor Alon signed an agreement with the controlling shareholder of Blue Square under which it can deposit / borrow monies on on-call terms of up to NIS 50 million at any one time on a basis linked to the Israeli CPI at interest rates of prime less 1.25%. The agreement is unlimited in duration and each party can cancel it by giving three months notice.

On January 6, 2011 the parties signed a new agreement for a period of five years for amounts of up to NIS 150 million with similar terms.

	December 31, 2011
	Less than 1 Year		Between 1 and 2 Years		Between 2 and 5 Years		Over 5 Years		Total
	NIS in thousands
Credit and loans from banks and others		1,044,611		-		-		-		1,044,611
Trade payables		1,243,914		-		-		-		1,243,914
Other payables		546,510		-		-		-		546,510
Bank loans and other		399,104		362,276		525,364		561,508		1,848,252
Debentures and convertible debentures		321,044		599,308		1,424,224		464,599		2,809,175
Other long-term payables		-		7,626		-		27,733		35,359

Total		3,555,183		969,210		1,949,588		1,053,840		7,527,821

F-41

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):

	December 31, 2010
	Less than 1 Year		Between 1 and 2 Years		Between 2 and 5 Years		Over 5 Years		Total
	NIS in thousands
Credit and loans from banks and others		475,596		-		-		-		475,596
Trade payables		1,342,763		-		-		-		1,342,763
Other payables		526,822		-		-		-		526,822
Bank and other loans		371,959		445,323		522,342		662,812		2,002,436
Debentures and convertible debentures		302,068		301,724		1,610,700		834,688		3,049,180
Other long-term payables		4,207		-		-		30,405		34,612
Total		3,023,415		747,047		2,133,042		1,527,905		7,431,409

Market risks that result from the changes in oil products prices

Dor Alon holds oil product inventories with selling prices that change in accordance with the changes of oil prices in the Mediterranean Sea area. Dor Alon has no influence on these prices or their fluctuations. Dor Alon management considers from time to time whether to enter into hedge transactions, in order to cover its possible exposure to any decline in oil prices, taking into account the inventory volumes that will be held during the next month, the trend of prices and the costs of such hedge transactions.

During the reporting period Dor Alon did not enter into any hedge transactions with respect to its oil products inventories. Increase/decrease in the oil products prices will increase/decrease the Company's gross profit in the following period.

b. Capital risk management

The Company’s objectives in managing capital are to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital and to meet its financial covenants.

In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Consistent with others in the industry, the Company monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt to EBITDA. Net debt is calculated as total borrowings (including ‘current and non-current borrowings’ as shown in the consolidated statement of financial position) less cash and cash equivalents and other liquid financial assets. This ratio is a non-GAAP figure not determined in IFRS and its definition and calculation may vary from one Company to another. The Company considers this ratio to be an important measure for investors, analysts and rating agencies.

F-42

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):

The dividend in 2010 was declared after the Board of Directors decided on January 14, 2010, in view of the changes and development of the Company since 2003 that the ratio of net financial obligations to EBITDA is to be calculated by deducting from the net financial obligations the Company's debt which is related by the Company to real estate that is not in use by the Company. The Board of Directors further resolved that the net debt to EBITDA ratio for dividend distribution will not exceed 4.5. Following the changes in the Company's activities and the growing needs for financing deriving from the acquisition of Dor Alon and its operations, the new projects in the real estate industry and entering the cellular (MVNO) market, the board of directors reconsidered on January 2, 2012 its former resolution and decided to update the above ratio so that it will not exceed 6. The Board of directors will continue to monitor this ratio and update it, if required, to suit the changes in the Company activities and its working capital requirements.

The debentures of Blue Square are rated A2 by Midroog, see note 21.

c. Fair value estimation

The table below analyzes financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).

Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

F-43

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):

The following tables present the Company’s assets and liabilities that are measured at fair value at December 31, 2011 and 2010:

	Level 1		Level 2		Level 3		Total balance
December 31, 2011	NIS in thousands
Assets:
Financial assets at fair value through profit or loss:
Government Bonds		16,902		-		-		16,902
Corporate bonds		49,684		-		-		49,684
Investment in equity securities		2,172		-		-		2,172
Forwards contracts over Israeli CPI		-		2,543		-		2,543
Embedded derivatives in rent agreements		-		896		-		896
Investment in equity securities – property company		-		-		30,600		30,600
Available-for-sale financial assets:		-		-		-
Government Bonds		135,324		-		-		135,324
Corporate bonds		59,947		-		-		59,947
Equity securities		5,423		-		-		5,423
Equity securities – gas exploration companies		4,990		28,169		-		33,159
Total assets		274,442		31,608		30,600		336,650
Liabilities:
Embedded derivatives:
Conversion component embedded in convertible debentures		-		169		-		169
Forwards contracts over Israeli CPI		-		10,440		-		10,440
Rent agreements		-		9,075		-		9,075
Total liabilities		-		19,684		-		19,684

	Level 1		Level 2		Level 3		Total balance
December 31, 2010	NIS in thousands
Assets:
Financial assets at fair value through profit or loss:
Corporate bonds		66,919		-		-		66,919
Goverment bonds		27,447		-		-		27,447
Diners option		-		-		53,367		53,367
Investment in equity securities - property company		-		-		29,000		29,000
Embedded derivatives		-		2,711		-		2,711
Available-for-sale financial assets:
Goverment bonds		111,934		-		-		111,934
Corporate bonds		74,937		-		-		74,937
Investment in equity securities - gas exploration companies		4,548		25,779		-		30,327
Total assets		285,785		28,490		82,367		396,642
Liabilities:
Embedded derivative and derivatives		-		9,151		-		9,151
Conversion component embedded in convertible debentures		-		9,011		-		9,011
Forward contracts over exchange rate		-		7,700		-		7,700
Total liabilities		-		25,862		-		25,862

F-44

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):

The fair value of financial instruments traded in active markets is based on quoted market prices at the statement of position date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Company is the closing market price. These instruments are included in level 1. Instruments included in level 1 comprise primarily investments in Israeli Government debt securities and debt and equity securities of entities that are publicly traded on the Tel Aviv Stock Exchange. These instruments are classified as available-for-sale or fair value through profit or loss. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.

If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.

Specific valuation techniques used to value financial instruments include:

Quoted market prices or dealer quotes for similar instruments.

The fair value of forward contracts over the Israeli CPI are calculated as the present value of the estimated future cash flows based on observable yield curves.

The fair value of forward foreign exchange contracts is determined using forward exchange rates at the statement of financial position date, with the resulting value discounted back to present value.

For the Diners option – the fair value for 2010 was determined based on a binominal valuation model, which takes into account Diners Israel's expected profits, earnings multiples of companies in Israel in this field of operations and costs of recruiting and maintaining credit card users. For 2011, following the amendment to the agreement and through the date of the exercise of the option (See also note 10b.(3)) discounted cash flows approach was used, based on dividends available for distribution and regulatory restrictions that apply to the associated company (as Diners Israel is a financial institution that is subject to regulatory requirements and supervision), with the following assumptions: discount rate of 11% and 3.5% growth, net of adjustments according to the agreement.

For the equity securities which includes an investment in a property company and an investment in gas exploration companies:

The valuation of the property company is based on the following:

1. Current transaction values of nearby residential and commercial properties;

2. The assumption for variables such as the discount rate, the liquidity spread, occupancy rates of shopping centers and inflation rates of apartment prices we used to value other real estate properties as adapted for the specific nature of this real estate property as well as an estimate of the related expected cash flows such as the selling value of the asset and the date the sale is expected to occur; and

3. The tax rates applicable to the income generated by the investee; and

4. After deducting the property company's recorded liabilities.

The valuation of the gas exploration companies is partly listed and is partly unlisted. The value of the unlisted shares, which makes up a small minority share in an entity that is involved in the exploration of gas in Israel is based on the share price of the majority holding of the entity that is listed on the Tel Aviv stock exchange.

F-45

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):

The following table presents the changes in level 3 instruments for the years ended December 31, 2011, 2010 and 2009:

	Investment in equity securities		Diners option			Total
Year ended December 31, 2011	NIS in thousands
Opening balance		29,000		53,367			82,367
Gains recognized in profit or loss		1,600		101,031			102,631
Realization of the option and transfer to investment in associate, see note 10b				(154,398	)		(154,398	)
Closing balance		30,600		-			30,600
Total gains for the year included in the statement of income		1,600		101,031			102,631

	Investment in equity securities		Diners option		Total
Year ended December 31, 2010	NIS in thousands
Opening balance		25,000		12,266		37,266
Acquisition of subsidiary consolidated for the first time		-		6,669		6,669
Gains recognized in the statement of income		4,000		34,432		38,432
Closing balance		29,000		53,367		82,367
Total gains for the year
included in the statement of income		*5,000		34,432		39,432

* Including dividends of NIS 1,000 thousand.

	Investment in		Diners
Year ended December 31, 2009	equity securities		option		Total
	NIS in thousands
Opening balance		15,000		4,700		19,700
Gains and losses recognized in profit or loss		10,000		7,566		17,566
Closing balance		25,000		12,266		37,266
Total gains for the year included in the statement of income		10,000		7,566		17,566

F-46

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):

d. Financial Instruments by category

	December 31, 2011
	Loans and Receivables		Assets at fair value through the profit or loss		Available for sale		Total
	NIS in thousands
Cash and cash equivalents		76,451		-		-		76,451
Short term bank deposits		103,942		-		-		103,942
Investment in securities		-		99,358		200,695		300,053
Trade receivables		1,576,150		-		-		1,576,150
Other receivables excluding prepayments and other		269,538		-		-		269,538
Derivative financial instruments (Forward Contracts)		-		2,543		-		2,543
Loans to associates		2,571		-		-		2,571
Investment in equity securities		-		-		33,159		33,159
Other long-term receivables		301,920		-		-		301,920
Non-current derivative financial instruments		-		896		-		896
Total		2,330,572		102,797		233,854		2,667,223

	December 31, 2011
	Other financial liabilities at amortized cost		Liabilities at fair value through the profit or loss		Total
	NIS in thousands

Credit and loans from banks and others		1,036,928		-		1,036,928
Trade payables		1,243,914		-		1,243,914
Other account payables and accrued expenses		610,447		-		610,447
Bank loans		1,552,129		-		1,552,129
Convertible debentures		118,740		-		118,740
Conversion component embedded in convertible debentures		-		169		169
Debentures		2,246,690		-		2,246,690
Non-current Derivatives financial instruments		-		19,515		19,515
Other liabilities		12,341		-		12,341
Total		6,821,189		19,684		6,840,873

F-47

NOTE 3 - FINANCIAL RISK MANAGEMENTAND FINANCIAL INSTRUMENTS (continued):

d. Financial Instruments by category (continued)

	December 31, 2010
	Loans and Receivables		Assets at fair value through profit or loss		Available for sale		Total
	NIS in thousands
Cash and cash equivalents		125,956		-		-		125,956
Short term bank deposits		98,084		-		-		98,084
Investment in securities		-		123,366		186,871		310,237
Trade receivables		1,731,747		-		-		1,731,747
Other receivables excluding prepayments and other		103,443		-		-		103,443
Loans receivable		186,741		-		-		186,741
Investment in equity securities		-		-		30,327		30,327
Other long-term receivables		24,522		-		-		24,522
Non-current derivative financial instruments		-		56,078		-		56,078
Total		2,270,493		179,444		217,198		2,667,135

	December 31, 2010
	Other financial liabilities at amortized cost		Liabilities at fair value through the profit or loss		Total
	NIS in thousands
Credit and loans from banks and others		470,284		-		470,284
Trade payables		1,342,763		-		1,342,763
Other account payables and accrued expenses		551,055		-		551,055
Customer's deposits		30,405		-		30,405
Bank and other loans		1,696,929		-		1,696,929
Convertible debentures		180,764		-		180,764
Conversion component embedded in convertible debentures		-		9,011		9,011
Debentures		2,313,887		-		2,313,887
Derivatives financial instruments		-		16,851		16,851
Other liabilities		8,141		-		8,141
Total		6,594,228		25,862		6,620,090

F-48

NOTE 3 - FINANCIAL RISK MANAGEMENTAND FINANCIAL INSTRUMENTS (continued):

e. Credit quality of financial assets

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to the internal composition based on historical information that has been accumulated in the Company's entities over the years, as follows:

	December 31
	2010		2011
	NIS in thousands
Trade receivables
Credit cards		749,679		529,666
Insured checks receivables*		46,837		38,947
Checks receivables		136,083		151,548
Open accounts		751,266		748,177
		1,683,865		1,468,338

The Company is engaged with credit check companies to fully receive payments of checks that have been approved by the credit check company, even if no cover is available at the indicated time of presentation.

Cash and cash equivalents and short term bank deposits

Most of the Company's Cash and cash equivalents and short term deposit at December 31, 2011 were deposited with major Israeli banks.

Available-for-sale debt securities

As described above, most of the Company's investments are publicly traded on the Tel-Aviv Stock Exchange and are independently rated with a minimum A+ at the date of investment.

The balances are presented at fair value; where applicable, as a result of impairments, balances were transferred from equity to the statements of income.

The maximum exposure to credit risk at the reporting date is the carrying value of the financial assets presented in the statement of financial position.

F-49

NOTE 3 - FINANCIAL RISK MANAGEMENTAND FINANCIAL INSTRUMENTS (continued):

f. Composition of financial instrument balances:

The currency exposure of the Company's monetary assets and liabilities and equity instruments and their fair values are as follows:

	December 31, 2011
	NIS linked to CPI		NIS unlinked		US Dollar		Other currencies		Other(*)		Total		Fair value
	NIS in thousands
Assets:
Cash and cash equivalents		-		69,838		6,328		285		-		76,451			**
Short term bank deposit		111		36,825		67,006		-		-		103,942			**
Investment in securities		125,018		139,012		-		-		36,023		300,053			**
Trade receivables		-		1,549,644		26,506		-		-		1,576,150			**
Other accounts receivables		1,951		258,030		1,084		-		-		261,065			**
Income taxes receivable		125,789		-		-		-		-		125,789			**
Loans receivable		85,003		53,719		54,976		-		-		193,698		185,531
Derivative financial instruments		-		-		3,439		-		-		3,439			**
Investment in equity securities		-		-		-		-		33,159		33,159			**
Other long-term receivables		-		119,266		-		-		-		119,266			**
Total assets		337,872		2,226,334		159,339		285		69,182		2,793,012

Liabilities:
Credit and loans from banks and others		-		998,718		38,210		-		-		1,036,928			**
Trade payables		-		887,882		356,032		-		-		1,243,914			**
Other accounts payable and accrued expenses		35,343		451,378		11,416		-		-		498,137			**
Customer's deposits		27,733		-		-		-		-		27,733			**
Income tax payables		6,311		-		-		-		-		6,311			**
Provisions		41,765		36,501		-		-		-		78,266			**
Loans		871,142		680,987		-		-		-		1,552,129		1,505,615
Debentures		2,011,357		235,333		-		-		-		2,246,690		2,262,270
Convertible debentures		118,909		-		-		-		-		118,909		122,083
Other long-term liabilities		10,735		1,606		-		-		-		12,341			**
Derivative financial instruments		10,440		-		2,012		7,063		-		19,515			**
Total liabilities		3,133,735		3,292,405		407,670		7,063		-		6,840,873

(*) Financial instrument that are not monetary assets

(**) The fair value of these monetary balances is usually identical or close to their carrying value.

F-50

NOTE 3 - FINANCIAL RISK MANAGEMENTAND FINANCIAL INSTRUMENTS (continued):

	December 31, 2010
	NIS linked to CPI		NIS unlinked		US Dollar		Other currencies		Other(*)		Total		Fair value
	NIS in thousands
Assets:
Cash and cash equivalents		-		120,820		4,843		293		-		125,956			**
Short term bank deposit		111		37,093		60,880		-		-		98,084			**
Investment in securities		146,902		132,502		1,780		-		59,380		340,564			**
Trade receivables		-		1,725,464		6,283		-		-		1,731,747			**
Other accounts receivables		2,133		100,719		591		-		-		103,443			**
Income taxes receivable		64,094		-		-		-		-		64,094			**
Loans receivable		81,076		52,587		53,078		-		-		186,741		179,287
Derivative financial instruments		-		-		2,711		-		53,367		56,078			**
Other long-term receivables		2,094		22,428		-		-		-		24,522			**
Total assets		296,410		2,191,613		130,166		293		112,747		2,731,229			**

Liabilities:
Credit and loans from banks and others		-		470,284		-		-		-		470,284			**
Trade payables		-		1,048,650		293,743		370		-		1,342,763			**
Other accounts payable and accrued expenses		31,386		513,140		6,529		-		-		551,055			**
Customer's deposits		30,405		-		-		-		-		30,405			**
Income tax payables		7,431		-		-		-		-		7,431			**
Provisions		37,800		23,914		-		-		-		61,714			**
Loans		1,020,239		676,691		-		-		-		1,696,930		1,690,893
Debentures		2,083,458		230,429		-		-		-		2,313,887		2,479,221
Convertible debentures		189,775		-		-		-		-		189,775		201,030
Other long-term liabilities		7,636		505		-		-		-		8,141			**
Derivative financial instruments		-		-		10,250		6,601		-		16,851			**
Total liabilities		3,408,130		2,963,613		310,522		6,971		-		6,689,236

(*) Financial instrument that are not monetary assets

(**) The fair value of these monetary balances is usually identical or close to their carrying value.

F-51

NOTE 3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):

Changes in the exchange rates of the US dollar and the Israeli CPI, in the reported periods are as follows:

Year	Exchange rate of the US dollar			Israel known CPI (1)		Israel actual CPI (2)
	%			%		%
2011		7.7			2.6		2.2
2010		(6.0	)		2.3		2.7
2009		(0.7	)		3.8		3.9

(1)

Calculated based on published CPI date (through November of end year)

(2)

Calculated based on actual CPI date (through December of end year)

NOTE 4 - CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS:

Estimates and judgments are continually evaluated, and are based on historical experience and other factors, including expectations of future events that are believed to be reasonably possible under the circumstances.

The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

Impairment of non financial assets

In accordance with the accounting policy stated in note 2, the Company reviews at each statement of financial position date whether any events have occurred or changes in circumstances have taken place, which might indicate that there has been an impairment of property and equipment and identifiable intangibles. When such indicators of impairment are present, the Company evaluates whether the carrying value of the asset in the Company's accounts can be recovered from the cash flows anticipated from that asset, and, if necessary, records an impairment provision to adjust the carrying amount to the recoverable amount.

The recoverable amount of an asset is the higher of an asset's fair value less cost to sell and its value in use. These calculations require the use of estimates.

Goodwill and indefinite life intangible assets:

In accordance with the accounting policy stated in note 2, the Company tests at least annually whether goodwill and indefinite life intangible assets have been impaired. The recoverable amount of the cash-generating unit (CGU) to which goodwill has been allocated is determined based on value-in-use calculations. These calculations require the use of estimates. See note 9 for details of key assumptions.

F-52

NOTE 4 – CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued):

Referring to goodwill allocated to Commercial and fueling sites CGU, the Company performed a sensitivity analysis for the key assumption used in its 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 the Commercial and fueling sites CGU falling below its carrying amount by an additional NIS 40 million and a decrease in the growth rate of 0.5% would result in the estimated recoverable amount of the Commercial and fueling sites CGU falling below its carrying amount by an additional NIS 10 million.

The recoverable amounts of the other CGUs are substantially higher than the carrying value.

Property and equipment:

Referring to property and equipment in the Supermarket segment, if the discount rate had been different by 0.5% from management's estimate the carrying value of property and equipment would not change.

If the growth rate had been different by 0.5% from management's estimate the carrying value of property and equipment would be NIS 1.3 million lower or higher.

Change in fair value of investment property

Investment property is presented at fair value based on assessments of external independent appraisers, who have the appropriate qualifications. In certain cases fair value is determined using discounted cash flows that are based on various assumptions; judgments and estimates are required for cash flows projections that are expected during the remaining economic life of the asset, in accordance with the lease terms during the lease period and, after such period, based on suitable rentals that are determined on the basis of market surveys for similar assets with similar location and terms, using adjustments and discount rates that reflect the current market assessments as to uncertainties prevailing with respect to cash flow amounts and timing.

In some cases, mainly building rights or assets under development, the residual value approach is used to determine fair value. The evaluation of the asset's fair value is based on the value of the completed asset, less estimated constructor's profit and construction costs to complete.

When the rate used for discounting cash flows is different by 0.5% from management estimate the fair value of investment property will be NIS 25 million lower or NIS 28 million higher. When the discount rate is different by 1% from management estimate the fair value of investment property will be NIS 48 million lower or NIS 57 million higher.

Retirement benefit obligations, provision for jubilee grant and for unutilized sick leave

The present value of the obligations and provisions 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 and the provisions for jubilee grant and unutilized sick leave include the discount rate. Other key assumptions such as future wage increases and retirement rates, are based in part on current market conditions and past experience. Any changes in these assumptions will impact the carrying amount of these obligations and provisions.

F-53

NOTE 4 – CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued):

The Company determines 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 benefit obligations and provisions. In determining the appropriate discount rate, the Company considers the interest rates of Israeli government bonds denominated in NIS that have terms to maturity approximating the terms of the related retirement benefit obligations and provisions.

Provisions for claims

The provisions for legal claims are recorded based on the estimates of the Company’s management (after consulting with legal counsel) as to the likelihood that cash flows will be required to settle these liabilities, and at the discounted amounts of such cash flows.

The Company's assessments are based on the Company's history in these cases, on the stage these claims are at and on the experience of the Company's legal advisers.

The outcome of the legal cases in court could be different from the Company's assessments.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Alon Blue Square Israel (BSIRY) Inactive 20-F2011 FY Annual report (foreign)

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