# UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

# FORM 10-Q

# (X) QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE                         SECURITIES EXCHANGE
ACT OF 1934

For the quarterly
period ended August 1, 2004

# OR

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

Commission File Number
0-20269

DUCKWALL-ALCO STORES,
    INC. (Exact name of registrant as specified in its charter) Kansas
        (State or other jurisdiction of
        incorporation or organization)
      
      48-0201080
        (I.R.S. Employer
        Identification No.)401 Cottage
        Street
        Abilene, Kansas
        (Address of principal executive offices)
      
      67410-2832
        (Zip Code)


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.
  Yes   X   No  ___

Indicate
  by check mark whether the registrant is an accelerated filer (as defined in
  Rule 12b-2 of the Act).
  Yes   ___   No   X

APPLICABLE ONLY TO
CORPORATE ISSUERS:

4,380,203
shares of common stock, $.0001 par value (the issuers only class of common stock), were
outstanding as of August 1, 2004.



| |  | 
| |  | 

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# PART I  FINANCIAL
INFORMATION

# ITEM 1.    FINANCIAL
  STATEMENTS

Duckwall-ALCO Stores,
    Inc.
    And Subsidiaries
    Consolidated Balance Sheets
    (Dollars in Thousands)  Assets


|                                        |  | August 1,
      2004 |  | February 1,
      2004 | 
|--------------------------------------- |  | -------------------- |  | ---------------------- | 
|                                        |  |                      |  |                        | 
|                                        |  | (Unaudited)          |  |                        | 
|Current assets:                         |  |                      |  |                        | 
|Cash and cash equivalents               |  | $    2,049           |  | $    1,084             | 
|Receivables                             |  | 1,865                |  | 1,521                  | 
|Refundable income tax                   |  | 295                  |  | 0                      | 
|Inventories                             |  | 133,069              |  | 131,661                | 
|Prepaid expenses                        |  | 2,754                |  | 2,188                  | 
|                                        |  |                      |  |                        | 
|Total
      current assets              |  | 140,032              |  | 136,454                | 
|                                        |  |                      |  |                        | 
|Property and equipment                  |  | 89,449               |  | 86,349                 | 
|Less accumulated
      depreciation     |  | 62,558               |  | 59,586                 | 
|                                        |  |                      |  |                        | 
|Net
      property and equipment        |  | 26,891               |  | 26,763                 | 
|                                        |  |                      |  |                        | 
|Property under capital leases           |  | 20,120               |  | 20,120                 | 
|Less accumulated
      amortization     |  | 17,308               |  | 17,041                 | 
|                                        |  |                      |  |                        | 
|Net
      property under capital leases |  | 2,812                |  | 3,079                  | 
|                                        |  |                      |  |                        | 
|Other non-current assets                |  | 127                  |  | 164                    | 
|Deferred income taxes                   |  | 1,033                |  | 1,033                  | 
|                                        |  |                      |  |                        | 
|Total
      assets                      |  | $170,895             |  | $167,493               | 
|                                        |  |                      |  |                        | 

See accompanying notes to unaudited
consolidated financial statements.



| | 2 | 
| | - | 

---





Duckwall-ALCO
  Stores, Inc.
  And Subsidiaries
  Consolidated Balance Sheets
  (Dollars in Thousands)


# Liabilities and
Stockholders Equity

|                                                          |  | August 1, 
      2004 |  | February 1,
      2004 | 
|--------------------------------------------------------- |  | --------------------- |  | ---------------------- | 
|                                                          |  |                       |  |                        | 
|Current liabilities:                                      |  | (Unaudited)           |  |                        | 
|Current maturities
      of:                              |  |                       |  |                        | 
|Long
      term debt                                      |  | $       271           |  | $       533            | 
|Capital
      lease obligations                           |  | 802                   |  | 802                    | 
|Accounts payable                                          |  | 27,352                |  | 27,799                 | 
|Income taxes payable                                      |  | 0                     |  | 1,944                  | 
|Accrued salaries
      and commissions                    |  | 4,185                 |  | 5,475                  | 
|Accrued taxes other
      than income                     |  | 5,099                 |  | 4,496                  | 
|Other current liabilities                                 |  | 4,890                 |  | 4,276                  | 
|Deferred income
      taxes                               |  | 1,667                 |  | 1,668                  | 
|                                                          |  |                       |  |                        | 
|                                                         
|Total
      current liabilities                           |  | 44,266                |  | 46,993                 | 
|Notes payable under revolving loan                        |  | 9,004                 |  | 4,958                  | 
|Capital lease obligations - less current
      maturities |  | 4,182                 |  | 4,583                  | 
|Other noncurrent liabilities                              |  | 1,296                 |  | 1,347                  | 
|Deferred revenue                                          |  | 210                   |  | 419                    | 
|                                                          |  |                       |  |                        | 
|Total
      liabilities                                   |  | 58,958                |  | 58,300                 | 
|                                                          |  |                       |  |                        | 
|Stockholders equity:                                     | 
|Common stock, $.0001 par
      value, authorized          | 
|20,000,000
      shares; issued and outstanding           | 
|4,380,203
      shares and 4,299,816 shares respectively  |  | 1                     |  | 1                      | 
|Additional paid-in
      capital                          |  | 50,199                |  | 49,329                 | 
|Retained earnings                                         |  | 61,737                |  | 59,863                 | 
|                                                          |  |                       |  |                        | 
|Total
      stockholders equity                          |  | 111,937               |  | 109,193                | 
|                                                          |  |                       |  |                        | 
|Total
      liabilities and stockholders equity          |  | $170,895              |  | $167,493               | 
|                                                          |  |                       |  |                        | 

See accompanying notes to unaudited
consolidated financial statements.



| | 3 | 
| | - | 

---



Duckwall-ALCO Stores,
    Inc. 
    And Subsidiaries
    Consolidated Statements of Operations
    (Dollars in Thousands Except Per Share Amounts) 
    (Unaudited)


|                                                                      |  | For the Thirteen WeekPeriods Ended |   | For the Twenty-Six WeekPeriods Ended | 
|--------------------------------------------------------------------- |  | ---------------------------------- | - | ------------------------------------ | 
|                                                                      |  |                                    |   |                                      | 
|                                                                      |  | August 1,
      2004               |   | August 3,
      2003                 | 
|                                                                      |  |                                    |   |                                      | 
|Net sales                                                             |  | $ 109,601                          |   | $108,719                             | 
|Cost of sales                                                         |  | 73,538                             |   | 73,188                               | 
|                                                                      |  |                                    |   |                                      | 
|Gross margin                                                          |  | 36,063                             |   | 35,531                               | 
|                                                                      |  |                                    |   |                                      | 
|Selling, general and administrative                                   |  | 32,120                             |   | 31,228                               | 
|Depreciation and amortization                                         |  | 1,673                              |   | 1,872                                | 
|                                                                      |  |                                    |   |                                      | 
|Total
      operating expenses                                        |  | 33,793                             |   | 33,100                               | 
|                                                                      |  |                                    |   |                                      | 
|Operating income from continuing operations                           |  | 2,270                              |   | 2,431                                | 
|Interest expense                                                      |  | 279                                |   | 328                                  | 
|                                                                      |  |                                    |   |                                      | 
|Earnings from continuing operations
      before income taxes         |  | 1,991                              |   | 2,103                                | 
|Income tax expense                                                    |  | 757                                |   | 762                                  | 
|                                                                      |  |                                    |   |                                      | 
|Earnings from continuing operations                                   |  | 1,234                              |   | 1,341                                | 
|(Loss) earnings from discontinued
      operations, net of income tax |  | (47                                | ) | 258                                  | 
|                                                                      |  |                                    |   |                                      | 
|Net earnings                                                          |  | $     1,187                        |   | $    1,599                           | 
|                                                                      |  |                                    |   |                                      | 
|Earnings per share                                                    | 
|Basic                                                                 | 
|Continuing
      operations                                           |  | $       0.28                       |   | $      0.32                          | 
|Discontinued
      operations                                         |  | ($ 0.01                            | ) | $      0.06                          | 
|                                                                      |  |                                    |   |                                      | 
|Net
      earnings                                                    |  | $       0.27                       |   | $      0.38                          | 
|                                                                      |  |                                    |   |                                      | 
|Diluted                                                               | 
|Continuing
      operations                                           |  | $       0.28                       |   | $      0.31                          | 
|Discontinued
      operations                                         |  | ($ 0.01                            | ) | $      0.06                          | 
|                                                                      |  |                                    |   |                                      | 
|Net
      earnings                                                    |  | $       0.27                       |   | $      0.37                          | 
|                                                                      |  |                                    |   |                                      | 

See accompanying notes to unaudited
consolidated financial statements.



| | 4 | 
| | - | 

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Duckwall-ALCO Stores,
    Inc.
    And Subsidiaries
    Consolidated Statements of Cash FlowsDollars in Thousands
    (Unaudited)


|                                                                 |  | For the Twenty-Six Week
      Periods Ended |  
|---------------------------------------------------------------- |  | ------------------------------------------- | -
|                                                                 |  |                                             |  
|                                                                 |  | August 1,
      2004                        |  
|Cash Flows From Operating Activities:                            |  |                                             |  
|Net earnings                                                     |  | $ 1,874                                     |  
|Adjustments to reconcile net earnings
      to net cash provided | 
|by (used in) operating
      activities                          | 
|Amortization
      of debt financing costs                       |  | 37                                          |  
|Depreciation
      and amortization                              |  | 3,419                                       |  
|Increase in
      inventories                                    |  | (1,408                                      | )
|(Decrease)
      increase in accounts payable                    |  | (447                                        | )
|Increase in
      receivables                                    |  | (344                                        | )
|Increase in
      prepaid expenses                               |  | (566                                        | )
|Increase in
      accrued taxes other than income                |  | 603                                         |  
|Decrease in
      accrued salaries and commissions               |  | (1,290                                      | )
|(Decrease)
      increase in income taxes payable                |  | (2,028                                      | )
|(Decrease)
      increase in deferred income taxes               |  | (1                                          | )
|Decrease in
      deferred revenue                               |  | (209                                        | )
|Increase (decrease)
      in other liabilities                   |  | 563                                         |  
|                                                                 |  |                                             |  
|Net cash provided by operating activities                        |  | 203                                         |  
|                                                                 |  |                                             |  
|Cash Flows From Investing Activities:                            | 
|Proceeds from
      sale of property                             |  | 0                                           |  
|Capital expenditures                                             |  | (3,280                                      | )
|                                                                 |  |                                             |  
|Net cash used in investing activities                            |  | (3,280                                      | )
|                                                                 |  |                                             |  
|Cash Flows From Financing Activities:                            | 
|Proceeds from
      exercise of stock options                    |  | 659                                         |  
|Repurchase
      of common stock                                 |  | 0                                           |  
|Increase in
      revolving loan                                 |  | 4,046                                       |  
|Principal
      payments on long term notes                      |  | (262                                        | )
|Principal
      payments on capital leases                       |  | (401                                        | )
|                                                                 |  |                                             |  
|Net cash provided by (used in) financing
      activities        |  | 4,042                                       |  
|                                                                 |  |                                             |  
|Net increase in cash and cash equivalents                        |  | 965                                         |  
|Cash and cash equivalents at beginning
      of period           |  | 1,084                                       |  
|                                                                 |  |                                             |  
|Cash and cash equivalents at end of
      period                 |  | $ 2,049                                     |  
|                                                                 |  |                                             |  
|Supplemental disclosure of non-cash
      activity:              | 
|Tax benefit
      related to stock options exercised             |  | $    211                                    |  

See accompanying notes to unaudited
consolidated financial statements



| | 5 | 
| | - | 

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# Duckwall-ALCO
Stores, Inc.                                 And Subsidiaries               Notes to
Unaudited Consolidated Financial Statements

|(1) | Basis of Presentation
|--- | ---------------------

The
accompanying unaudited consolidated financial statements are for interim periods and,
consequently, do not include all disclosures required by generally accepted accounting
principles for annual financial statements. It is suggested that the accompanying
unaudited consolidated financial statements be read in conjunction with the consolidated
financial statements included in the Companys fiscal 2004 Annual Report. In the opinion
of management of Duckwall-ALCO Stores, Inc., the accompanying unaudited consolidated
financial statements reflect all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Company and the results of its
operations and cash flows for the interim periods.

|(2) | Principles of Consolidation
|--- | ---------------------------

The
consolidated financial statements include the accounts of Duckwall-ALCO Stores, Inc. and
its wholly owned subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.

|(3) | Stock-based Compensation
|--- | ------------------------

The
Company applies the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations to account for its fixed-plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant date, net
earnings and net earnings per share would have been decreased to the pro forma amounts
indicated in the table below:

|                                |  | For The Thirteen Week
      Periods Ended |   | For The Twenty-Six Week
      Periods Ended
|------------------------------- |  | ----------------------------------------- | - | -------------------------------------------
|                                |  |                                           |   |                                            
|                                |  | August 1,
      2004                      |   | August 3,
      2003                       
|                                |  |                                           |   |                                            
|Net earnings as reported        |  | $      1,187                              |   |                                            
|Pro forma stock-based employee  | 
|compensation                    | 
|cost,
      net of tax          |  | (9                                        | ) |                                            
|                                |  |                                           |   |                                            
|Pro forma net earnings          |  | $      1,178                              |   |                                            
|                                |  |                                           |   |                                            
|                               
|Earnings per share as reported: | 
|Basic                           |  | $        0.27                             |   |                                            
|Diluted                         |  | $        0.27                             |   |                                            
|                                | 
|Earnings per share, pro forma:  | 
|Basic                           |  | $        0.27                             |   |                                            
|Diluted                         |  | $        0.26                             |   |                                            

|(4) | Earnings Per Share
|--- | ------------------

Basic
net earnings per share is computed by dividing net earnings by the weighted average
number of shares outstanding. Diluted net earnings per share reflects the potential
dilution that could occur if contracts to issue securities (such as stock options) were
exercised.



| | 6 | 
| | - | 

---

The
average number of shares used in computing earnings per share was as follows:

| | Thirteen Weeks Ended   |  | Basic     |  | Diluted   | 
| | ---------------------- |  | --------- |  | --------- | 
| |                        |  |           |  |           | 
| | August 1, 2004         |  | 4,367,122 |  | 4,464,746 | 
| | August 3, 2003         |  | 4,197,224 |  | 4,288,511 | 
| |                        | 
| | Twenty-Six Weeks Ended | 
| |                        |  |           |  |           | 
| | August 1, 2004         |  | 4,343,668 |  | 4,444,460 | 
| | August 3, 2003         |  | 4,228,129 |  | 4,302,994 | 

# ITEM 2.    MANAGEMENTS
  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

# OVERVIEW

Operations.
  The Company is a regional discount retailer operating in 21 states in the central
  United States, with two business segments, consisting of:

| |  | the ALCO Stores segment. The Company
      currently operates 185 ALCO Stores which offer a wide variety of general
      merchandise and a limited variety of food products and accounted for 92%
      of the Companys sales for the second quarter of fiscal 2005.                                                                             
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Duckwall Stores segment. The Company
      operates 80 Duckwall Stores which offer a more limited general merchandise
      selection, but serve the needs of a community that is not large enough to
      support a full-line retail discount store, and accounted for 8% of the Companys
      sales for the second quarter of fiscal 2005.

The
thirteen weeks ended August 1, 2004 and August 3, 2003 are referred to herein as the
second quarter of fiscal 2005 and 2004, respectively. For purposes of this managements
discussion and analysis of financial condition and results of operations, the financial
numbers are presented in thousands.

As
used below the term competitive market refers to any town in which both an ALCO or
Duckwall store and one or more national or regional full-line discount stores are
located. The term non-competitive market refers to any town served by the Company where
no national or regional full-line discount store is also located. The Company
nevertheless faces competition in such markets from a variety of sources, including
national and regional full-line discount stores located within a reasonable driving
distance.

The
non-competitive markets where the Company operates ALCO or Duckwall stores generally
consist of small towns where population growth is generally steady, but not dramatic. As
no direct competitor or national or regional full-line discount store is located in these
towns, they are generally considered under-served by full-line discount retailers except
for the presence of an ALCO or Duckwall store.

Strategy.
  The Companys business operates in a highly competitive industry. However,
  to reduce the competition and improve the Companys performance, the Companys
  overall business strategy involves identifying, and opening stores in towns
  that currently have no direct competition from another larger national or regional
  full-line discount retailer. The Company thus positions itself as providing
  the most convenient access to local retail shopping within those towns. A key
  aspect of this strategy includes placing the Companys stores in towns
  where the Company believes no such competition is likely to develop. This strategy
  does not eliminate the competition for the Companys stores as the Companys
  customers still shop at retail discount stores and other retailers located in
  regional trade centers. The Company also competes for retail sales with other
  entities, such as mail order companies, specialty retailers, mass merchandisers,
  dollar stores, manufacturers outlets, and the internet.



| | 7 | 
| | - | 

---

The
Company is constantly evaluating the appropriate mix of merchandise to improve sales and
gross margin performance. The Company uses centralized purchasing, merchandising, pricing
and warehousing to obtain volume discounts, improve efficiencies and achieve consistency
among stores and the best overall results. However, the Company utilizes information
obtained from its point-of-sale system and regular input from its store associates to
determine its merchandise offerings.

The
Company plans to upgrade its current point-of-sale systems over the next several years
and has a project team, guided by an outside advisor, currently evaluating and selecting
new software. The project teams goal is to have one store in pilot in January, 2005. A
required feature of this new point-of-sale system is perpetual inventory, which the
Company does not currently have in its stores. Perpetual inventory allows tracking of
on-hands at the item level, and enables automated replenishment. Once the Company has
on-hand information and the ability to automatically replenish items in the stores, the
benefits of these new systems can be significant. For example, the Company estimates it
can reduce its inventory levels by 5% to 10%, and potentially more, because the system
will have parameters set at the item level relating to how much inventory to order based
on criteria set centrally. A reduction in inventory will improve the Companys return on
assets ratio. In addition to lowering inventory, the new system will also improve
in-stock levels in the stores, thereby increasing same-store sales and profits. The new
system will also enable other technology improvements in the stores such as e-mail, which
is not currently available to the stores due to current technology limitations. Once
those limitations are removed, the Company expects to re-engineer the stores to take full
advantage of the new technology. As discussed below, the Company has decided to retain a
business advisory firm to assist it in enhancing its operational effectiveness which may
impact the schedule for testing and rolling out the new point-of-sale system.

The
Company, when appropriate, implements new merchandising and marketing initiatives in an
effort to increase customer traffic and same-store sales. To maintain performance levels
and upgrade stores with the latest merchandising concepts, the Company initiated a major
store remodeling program four years ago. The remodeled stores feature an improved
merchandise mix, with greater emphasis on consumables and everyday low values that are
highlighted through a new and more dominant sign program. A total of 100 ALCO stores have
been remodeled since the inception of the remodeling program. Since March, 2002, the
Company has also opened a net total of 19 new ALCO stores that incorporate these latest
merchandising concepts, bringing the total number of ALCO stores with the updated format
to 119 as of August 1, 2004. In June 2004, the Company converted its first ALCO store to
an ALCO Market Place store. This new format devotes approximately one fourth of its
floor space to a limited, but greatly expanded assortment of foods, including produce,
dry goods and products displayed in freezers and coolers. The significant enlargement of
the grocery department represents a natural progression in the Companys successful
expansion of its consumable product offering that has been rolled out through the
remodeling program. The Company converted a second store to the ALCO Market Place concept
in August 2004, and plans to convert one additional ALCO in the current fiscal year.
Company management is currently evaluating the results of this new concept to determine
rollout plans for the next fiscal year.

The
  Company is also proactive in looking for and implementing ways to improve the
  bottom line through expense reductions in selling, general and administrative
  expenses (SG&A). As examples, in fiscal year 2004, the Company
  improved throughput in its distribution center by 19% and, in the last 5 years
  alone, has reduced the number of labor hours required to operate a typical store
  by 10%. Other examples of proactive measures the Company has taken to control
  expenses include efforts to reduce rapidly escalating workers compensation expenses
  and medical insurance costs, as discussed under the heading Critical Accounting
  Policies.

The
Companys top priority is improving stockholder value and it has taken aggressive actions
over the years to achieve that objective, including the engagement of top advisers to
help identify opportunities to improve its performance. As noted above, the Company is in
the process of engaging another business advisory firm to do a strategic and operational
review of the Company. It will focus on improvements in both top-line and bottom-line
performance. The Companys management, the Board and other advisors will also examine
other means of enhancing stockholder value.

Key
  Items in Fiscal 2005. The Company measures itself against a number of financial
  metrics to assess its performance. Some of the important financial items during
  the second quarter of fiscal 2005 were:



| | 8 | 
| | - | 

---



| |  | Net sales increased 0.8% to $109.6
      million. Same store sales increased 0.1%.                                                                                                                                                                                     
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gross margin increased to 32.9% of
      sales, compared to 32.7% in the prior year second quarter.                                                                                                                                                                    
| |  | Two new ALCO stores and two new Duckwall
      stores were opened and eight ALCO stores were remodeled.                                                                                                                                                                
| |  | In June and August 2004, two ALCO stores
      were converted into ALCO Market Place stores, which include an expanded
      selection of grocery products. One additional store is expected to be converted
      to this new prototype by the end of the fiscal year.

Same store sales growth is a measure
  which may indicate whether existing stores are maintaining their market share.
  Other factors, such as the overall economy, may also affect same store sales.
  The Company defines same stores as those stores that were open as of the first
  day of the prior fiscal year. While the same store sales for all Company stores
  was only 0.1%, the prototype ALCO stores (Class 18 ALCO stores), which represent
  100 of the 186 ALCO stores as of the end of the second quarter, increased 0.4%
  during the second quarter of fiscal 2005. Sales in stores in non-competitive
  markets increased 0.9% during the second quarter of fiscal 2005.

Gross
margin percentage is a key measure of the Companys ability to   maximize profit on the
purchase and subsequent sale of merchandise, while   minimizing promotional and clearance
markdowns, shrinkage, damage, and   returns. Gross margin percentage is defined as sales
less cost of sales,   expressed as a percentage of sales. Gross margin percent increased
slightly to   32.9% of sales in the second quarter of fiscal 2005, compared to 32.7% in
  second quarter of fiscal 2004.

Earnings
per share (EPS) growth is an indicator of the returns   generated for the Companys
stockholders. EPS was reduced to $0.27 per diluted   share for the second quarter of
fiscal 2005, compared to $0.37 per diluted   share for the second quarter of the prior
fiscal year.

CAUTIONARY
 STATEMENT  CONCERNING  FORWARD-LOOKING  STATEMENTS  AND  FACTORS  THAT MAY  AFFECT
 FUTURE  RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS

Certain
statements contained in this Quarterly Report on Form 10-Q that are not statements of
historical fact may constitute forward-looking statements within the meaning of Section
21E of the Exchange Act. These statements are subject to risks and uncertainties, as
described below. Examples of forward-looking statements include, but are not limited to:
(i) projections of revenues, income or loss, earnings or loss per share, capital
expenditures, store openings, store closings, payment or non-payment of dividends,
capital structure and other financial items, (ii) statements of plans and objectives of
the Companys management or Board of Directors, including plans or objectives relating to
inventory, store development, marketing, competition, business strategy, store
environment, merchandising, purchasing, pricing, distribution, transportation, store
locations and information systems, (iii) statements of future economic performance, and
(iv) statements of assumptions underlying the statements described in (i), (ii) and
(iii). Forward-looking statements can often be identified by the use of forward-looking
terminology, such as believes, expects, may, will, should, could, intends,
plans, estimates, projects or anticipates, variations thereof or similar
expressions.

Forward-looking
statements are not guarantees of future performance or results. They involve risks,
uncertainties and assumptions. The Companys future results of operations, financial
condition and business operations may differ materially from the forward-looking
statements or the historical information stated in this Quarterly Report on Form 10-Q.
Stockholders and investors are cautioned not to put undue reliance on any forward-looking
statement.

There
are a number of factors and uncertainties that could cause actual results of operations,
financial condition or business contemplated by the forward-looking statements to differ
materially from those discussed in the forward-looking statements made herein or
elsewhere orally or in writing, by, or on behalf of, the Company, including those factors
described below. Other factors not identified herein could also have such an effect.
Factors that could cause actual results to differ materially from those discussed in the
forward-looking statements and from historical information include, but are not limited
to, those factors described below.

Critical Accounting
Policies

Inventory:
  As discussed in Note 1 (d) to the Consolidated Financial Statements, inventories
  are stated at the lower of cost or net realizable value with cost determined
  using the last-in, first-out (LIFO) method. The retail inventory method (RIM)
  used by the Company is an averaging method that has been widely used in the
  retail



| | 9 | 
| | - | 

---



industry. This method calculates a
cost to retail ratio that is applied to the retail value of inventory to calculate cost
inventory and the resulting gross margin. Use of the RIM method does not eliminate the
use of management judgments and estimates, including markdowns and shrinkage, which
significantly impact the ending inventory valuation at cost and the resulting gross
margins. The Company continually evaluates product categories to determine if markdown
action is appropriate, or if a markdown reserve should be established. The Company
recognizes that the use of the RIM will result in valuing inventories at lower of cost or
market if markdowns are currently taken as a reduction of the retail value of
inventories. As of August 1, 2004 and August 3, 2003, the Company had recorded markdowns
that had not been taken and which served to reduce inventories to lower of cost or market
by approximately $679 and $619, respectively. Management believes that the RIM provides
an inventory valuation which reasonably approximates cost and results in carrying
inventory at the lower of cost or market.

Property
  and Equipment: The Companys policy is to capitalize property and equipment
  if it has a useful life beyond one year. Major improvements are capitalized,
  while maintenance and repairs, which do not extend the useful life of the asset,
  are expensed as incurred. The nature and extent of the repair, as well as the
  relative dollar amount of the repair in relation to the cost of the asset determine
  whether the expenditure is capitalized or expensed.

Impairment
  of Long-Lived Assets:The Company considers determination of impairment
  of long-lived assets as a critical accounting policy because determination as
  to whether the long-lived assets of a store are impaired and, if impaired, the
  fair value of such assets requires the use of judgment, particularly as it relates
  to projecting whether the sum of expected undiscounted future cash flows for
  the store over an extended period of time will equal or exceed the carrying
  value of such assets. Management uses the best information available to make
  the determination; however, actual future cash flows for the store may vary
  significantly from the cash flows projected in conjunction with the impairment
  assessment. The potential impact on the financial statements of incorrect judgments
  regarding impairment of long-lived assets is that a provision for impairment
  could be needlessly recorded if projected future cash flows for a store are
  significantly under estimated or a provision for impairment could be deferred
  until later determined necessary in a future period if initial projected cash
  flows are over estimated. See Note 1(l) of Notes to Consolidated Financial Statements
  for a description of the Companys accounting policy for impairment of long-lived
  assets.

Insurance:
  The Company considers general insurance cost a critical accounting policy. As
  described below, the Company is essentially self insured for its workers compensation,
  medical insurance and general liability insurance. Due to the fact that it takes
  more than one year to determine the actual costs under these plans, these costs
  are estimated based on the Companys historical loss experience and estimates
  from the insurance carriers and consultants.

| | Workers
      Compensation. The Company is essentially self insured for workers compensation
      claims and has a $100 deductible. At the beginning of the initial plan year
      the Companys underwriter and actuaries retained by the Companys
      insurance brokers, provided the Company with a reasonable estimate for expense
      accruals. After the plan year ended on May 31, 2004, which was during the
      Companys second fiscal quarter in fiscal 2005, these advisors informed
      the Company that previous reserves were inadequate due to escalating costs
      per claim. As a result in the second quarter in fiscal 2005, the Company
      had to increase its workers compensation reserves significantly and recorded
      additional expense of $463. While the costs per claim have been higher than
      originally anticipated, the number of workers compensation claims have dropped
      over 15% for this past plan year. We attribute this to the actions we have
      taken to reduce our losses. Such actions include safety training initiatives
      for our managers, management training seminars, monthly safety videos and
      Loss Prevention Regional Inspection/Training programs.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Medical.
      The Company is also essentially self insured for medical insurance and covers
      all claims in a plan year related to an individual until they exceed $200.
      During the past two fiscal years, costs were below the estimates provided
      by the Companys insurance broker in each of those years. However,
      medical insurance expenses began to spike upwards in the first half of the
      current fiscal year. The Company has responded to this situation by taking
      steps to increase the premiums paid by its associates and by implementing
      other changes that are designed to control future medical insurance costs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | General
      Liability. Starting June 1, 2003, the deductible for general liability insurance
      increased from $5 to $50, thus, the Company is essentially self insured
      for general liability insurance.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Income
  Taxes:The Companys tax provision and establishment of reserves for potential
  tax liabilities involves the use of estimates and professional judgment. The
  Company has identified exposures for which they have established a reserve,
  such as differences in interpretation of tax laws at the federal, state, and
  local units of government.



| | 10 | 
| | -- | 

---

RESULTS
  OF OPERATIONS

# Thirteen and
Twenty-Six Weeks Ended August 1, 2004 Compared to Thirteen and Twenty-Six Weeks Ended
August 3, 2003

The
Company continues to execute its basic strategy of opening stores in towns in which no
national or regional full-line discount retailers are located. During the second quarter
of fiscal 2005, the Company opened two new ALCO stores, which were in new,
non-competitive markets, opened two new Duckwall stores, and converted one ALCO store
into an ALCO Market Place store. One ALCO store and two Duckwall stores were closed in
the current period, and the operations of such stores closed in the current and prior
year have been reflected as discontinued operations. As of August 1, 2004, 88% of the
Companys 266 stores are in non-competitive markets.

Net
Sales

Net
sales for the second quarter of fiscal 2005 increased $882 or 0.8% to $109,601 compared
to $108,719 for the second quarter of fiscal 2004. Same store sales increased $101 or
0.1%. Sales comparisons to the prior year quarter were unfavorably impacted by higher
gasoline prices that affected discretionary consumer spending, the absence of Federal tax
rebates distributed during the summer of last year, the shift in a Texas sales tax
holiday from July last year to August this year, generally much cooler weather patterns
that impacted sales of warm weather merchandise, and the timing of a back-to-school
advertising circular for the Duckwall division.

Net
sales for the twenty-six week period ending August 1, 2004 increased $4,420 or 2.1% to
$212,449 compared to $208,029 in the comparable twenty-six week period of the prior
fiscal year. Same store sales decreased $175, or 0.1%. The same store sales increase in
the second quarter of fiscal 2005 was more than offset by the decrease in the first
quarter of fiscal 2005, resulting in the 0.1% decrease for the twenty-six week period
ending August 1, 2004.

Gross
Margin

Gross
margin for the second quarter of fiscal 2005 increased $532 or 1.5% to $36,063 compared
to $35,531 in the second quarter of fiscal 2004. Gross margin as a percentage of sales
was 32.9% for the second quarter of fiscal 2005 compared to 32.7% for the second quarter
of fiscal 2004. The improvement in the gross margin percentage was primarily due to lower
shrinkage and merchandise acquisitions costs. The Company continues to take aggressive
action to maintain and reduce the levels of shrinkage. In addition, the Companys
logistics department was able to reduce freight expenses, as a percentage of sales,
despite significantly higher fuel prices and federal legislation that increased
transportation costs. While the Company continues to aggressively manage its freight
expense, it cannot predict whether it will be able to maintain these savings or whether
freight providers will be able to pass their increased costs on to the Company. Where
possible, the Company plans to pass any increased freight expenses it incurs on to its
customers.

Gross
margin for the twenty-six week period ended August 1, 2004 was $70,184, which was $1,556
or 2.3% higher than last years twenty-six week gross margin of $68,628. The increase was
due primarily to the new stores that have been opened over the course of the last twelve
months. As a percent of net sales, gross margin was 33.0% for the twenty-six week period
of both fiscal years.

SG&A

SG&A expense
increased $892 or 2.9% to $32,120 in the second quarter of fiscal 2005 compared to
$31,228 in the second quarter of fiscal 2004. As a percentage of net sales, selling,
general and administrative expenses in the second quarter of fiscal 2005 were 29.3%,
compared to 28.7% in the second quarter of fiscal 2004. A significant factor in this
increase was general insurance costs, which rose $625 (0.6% of sales), primarily due to
an adjustment in the Companys insurance reserves for workers compensation for the policy
year ended May 31, 2004, as a result of revised actuarial estimates. The Company also
experienced unusually high medical insurance costs and credit card processing fees rose
due to higher credit card usage by the Companys customers. These expenses were



| | 11 | 
| | -- | 

---

partially offset by lower
depreciation and store remodeling costs, along with another solid performance from the
Companys distribution center. Additionally, the Company recorded a $275 reduction in
expenses related to layaways, while there was no such adjustment in last years second
quarter. The Company is proactively managing the increased insurance costs by taking
steps to reduce the medical and workers compensations expenses. However, the full
results of the Companys actions may not be known for some time.

SG&A expense
increased $1,902 or 3.1% to $63,085 for the twenty-six week period ended August 1, 2004
compared to $61,183 for the comparable twenty-six week period of the prior fiscal year.
Selling, general and administrative expense as a percent of net sales was 29.7% for the
twenty-six week period ending August 1, 2004 compared to 29.4% for the twenty-six week
period of the prior fiscal year. The increase in the selling, general and administrative
expense percentage was due primarily to issues discussed above regarding the second
quarter 2005, which were partially offset by lower distribution center expenses due to
higher productivity, and lower store opening costs.

Depreciation
and Amortization

Depreciation
and amortization expense decreased $199 or 10.6% to $1,673 in the second quarter of
fiscal 2005 compared to $1,872 in the second quarter of fiscal 2004. Depreciation and
amortization expense decreased $251 or 6.9% to $3,412 for the twenty-six week period
ended August 1, 2004 compared to $3,663 in the comparable twenty-six week period of the
prior fiscal year. The decrease is primarily due to store fixtures and equipment becoming
fully depreciated in the current fiscal year on a large number of ALCO stores that were
opened in fiscal years 1996 and 1997.

Operating
Income

Operating
income from continuing operations decreased $161 or 6.6% to $2,270 in the second quarter
of fiscal 2005 compared to $2,431 in the second quarter of fiscal 2004. Operating income
from continuing operations as a percentage of net sales was 2.1% in the second quarter of
fiscal 2005 compared to 2.2% in the second quarter of fiscal 2004. Selling, general, and
administrative expenses had the largest impact on the reduced operating income. As
discussed above, the Company is taking aggressive action to manage all of its expenses.

Operating
income from continuing operations decreased $95 or 2.5% to $3,687 for the twenty-six week
period ended August 1, 2004 compared to $3,782 in the comparable twenty-six week period
of the prior fiscal year. The reasons for this decrease are primarily the same as those
described for the thirteen week period.

Interest
Expense

Interest
expense decreased $49 or 14.9% to $279 in the second quarter of fiscal 2005 compared to
$328 in the second quarter of fiscal 2004. Interest expense decreased $157 or 21.9% to
$561 for the twenty-six week period ended August 1, 2004 compared to $718 in the
comparable twenty-six week period of the prior fiscal year. The reduction in interest
expense was due primarily to lower borrowing levels for both the thirteen and twenty-six
week periods of fiscal 2005. Interest expense may increase if interest rates continue to
rise or if the Company expands its borrowing to fund capital expenditures or other
programs.

Income
Taxes

Income
taxes were $757 in the second quarter of fiscal 2005 compared to $762 in the second
quarter of fiscal 2005. The effective tax rate was 38.0% in the thirteen and twenty-six
week periods of fiscal 2005 compared to 36.3% in the thirteen and twenty-six week periods
of fiscal 2004. The increase in the percentage is primarily due to the loss of a work
opportunity tax credit that was available in fiscal 2004. This tax credit may be renewed
by Congress, but as of the end of the quarter, it had not been renewed. If legislation is
passed to reauthorize such tax credits, the Companys effective tax rate would be lowered
at that time.



| | 12 | 
| | -- | 

---

Earnings
from Continuing Operations

Earnings
from continuing operations for the second quarter of fiscal 2005 were $1,234, a decrease
of $107 or 8.0% from the earnings from continuing operations of $1,341 for the second
quarter of fiscal 2004. Earnings from continuing operations for the twenty-six week
period ended August 1, 2004 were $1,938, a decrease of $16 or 0.8% compared to $1,954 in
the comparable twenty-six week period of the prior fiscal year.

Loss
from Discontinued Operations

Loss
from discontinued operations, net of income tax, was $47 in the second quarter of fiscal
2005, compared to income of $258 in the second quarter of fiscal 2004. The operations of
closed stores have been reflected as discontinued operations in all periods presented.
The decrease in earnings from discontinued operations was a result of the gain on the
sale of a store building that increased earnings by $259 or $0.06 per diluted share in
the second quarter of fiscal 2004. Loss from discontinued operations, net of income tax,
was $64 for the twenty-six week period ended August 1, 2004, compared to income of $203
in the comparable twenty-six week period of the prior fiscal year. The reasons for this
decrease are primarily the same as those described for the thirteen-week period.

Net
Earnings

Net
earnings for the second quarter of fiscal 2005 were $1,187, a decrease of $412 or 25.8%
from the net earnings of $1,599 in the second quarter of fiscal 2004. Diluted net
earnings per share for the second quarter of fiscal 2005 were $0.27, a decrease of $0.10,
or 27.0% from the diluted net earnings per share of $0.37 in the second quarter of fiscal
2004. The primary reason for the decrease in net earnings was the increase in SG&A expense
and the Loss from Discontinued Operations as discussed previously. This decrease is also
partially attributable to an increase in the number of diluted shares as of the end of
second quarter of fiscal 2005, which was 4,464,746 shares compared to 4,288,511 shares as
of the end of the second quarter of fiscal 2004.

Net
earnings for the twenty-six week period ended August 1, 2004 were $1,874, a decrease of
$283 or 13.1% compared to $2,157 in the comparable twenty-six week period of the prior
fiscal year. Diluted net earnings per share for the twenty-six week period ended August
1, 2004 were $0.42, a decrease of $0.08 or 16.0% compared to $0.50 per share in the
comparable twenty-six week period or the prior fiscal year. The reasons for this decrease
are primarily the same as those described for the thirteen-week period.

LIQUIDITY
  AND CAPITAL RESOURCES

The
Companys primary sources of funds are cash flows from operations, borrowings under its
revolving loan credit facility, mortgage financing and vendor trade credit financing
(increases in accounts payable).

At
August 1, 2004, working capital (defined as current assets less current liabilities) was
$95,766 compared to $89,461 at the end of fiscal 2004.

The
Company has a loan agreement with its lenders that provides a revolving loan credit
facility of up to $70,000 of long-term financing. The amount advanced (through a note or
letters of credit) to the Company under the credit facility bears interest at (i) the
prime rate plus a margin, as defined, which varies based on the amount outstanding (Base
Loan) or (ii) based on the Euro dollar rate plus a margin, as defined, (Index Loan).
Based upon its projected financial requirements, the Company uses a combination of short
term Euro dollar contracts and borrowing at prime. The amount advanced is generally
limited to 70% of eligible inventory, as defined in the loan agreement. Advances are
secured by a security interest in the Companys inventory. The loan agreement contains
various restrictions that are applicable when outstanding borrowings reach certain
thresholds, including limitations on additional indebtedness, acquisitions of assets and
payment of dividends. The loan agreement expires on April 15, 2006. As of August 1, 2004,
the Company has borrowed $9,004 under this facility. The lender had also issued letters
of credit aggregating $3,848 at such date on behalf of the Company.



| | 13 | 
| | -- | 

---

Cash
provided by operating activities in the twenty six week period ending August 1, 2004 and
2003 was $203 and $6,437, respectively. The decrease in the amount of cash provided by
operating activities in the twenty-six week period of fiscal 2005 compared to the
twenty-six week period of fiscal 2004 was primarily due to a decrease in accounts payable
and a decrease in income taxes payable in fiscal 2005 compared to fiscal 2004.

The
Company generated (used) cash in financing activities in the twenty-six week period of
fiscal 2005 and 2004 of $4,042 and ($4,051), respectively. Cash was generated by
borrowing on the revolving loan in the twenty six week period of fiscal 2005, while in
the twenty-six week period of fiscal 2004, cash was used to pay down the revolving loan.
No Common Stock was repurchased during the twenty-six week period of fiscal 2005, and
cash of $658 was used to purchase and retire 69,300 shares of Common Stock during the
twenty-six week period of fiscal 2004. The Board of Directors of the Company has
authorized the Company to repurchase up to 1,411,000 shares, of which 1,079,600 shares
had been purchased as of August 1, 2004. The Company continues to evaluate the timing and
pricing of future share repurchases.

Total
anticipated cash payments for acquisition of property and equipment in fiscal 2005
principally for improvements, store buildings and store and warehouse fixtures and
equipment are approximately $8,000. Cash used in investing activities (including
acquisitions and remodeling) in the twenty six week period of fiscal 2005 and 2004
totaled $3,280 and $1,933, respectively, which were used primarily for those same
purposes.

BUSINESS
  OPERATIONS AND SEGMENT INFORMATION

The
Companys business activities include operation of ALCO discount stores in towns with
populations which are typically less than 5,000 not served by other regional or national
full-line discount chains and Duckwall variety stores that offer a more limited selection
of merchandise which are primarily located in communities of less than 2,500 residents.

For
financial reporting purposes, the Company has established two operating segments: ALCO
Discount Stores, and All Other, which includes the Duckwall variety stores and other
business activities, such as general office, warehouse and distribution activities.



| | 14 | 
| | -- | 

---



|Segment Information               |  | For The Thirteen
      Week
      Periods Ended |   | For The Twenty-Six
      Week
      Periods Ended |  
|--------------------------------- |  | ----------------------------------------------- | - | ------------------------------------------------- | -
|                                  |  |                                                 |   |                                                   |  
|                                  |  | August 1,
      2004                            |   | August 3,
      2003                              |  
|                                  |  |                                                 |   |                                                   |  
|Net Sales:                        |  |                                                 |   |                                                   |  
|ALCO Discount Stores              |  | $ 101,290                                       |   | $ 100,596                                         |  
|All Other                         | 
|External                          |  | 8,311                                           |   | 8,123                                             |  
|Intercompany                      |  | 50,668                                          |   | 51,169                                            |  
|                                  |  |                                                 |   |                                                   |  
|                                  |  | $ 160,269                                       |   | $ 159,888                                         |  
|                                  |  |                                                 |   |                                                   |  
|Depreciation and Amortization     | 
|ALCO Discount Stores              |  | $     1,033                                     |   | $     1,151                                       |  
|All Other                         |  | 640                                             |   | 721                                               |  
|                                  |  |                                                 |   |                                                   |  
|                                  |  | $     1,673                                     |   | $     1,872                                       |  
|                                  |  |                                                 |   |                                                   |  
|Income (expense) from Operations: | 
|ALCO Discount Stores              |  | $     8,911                                     |   | $     9,276                                       |  
|All Other                         |  | (6,573                                          | ) | (6,800                                            | )
|                                  |  |                                                 |   |                                                   |  
|                                  |  | $     2,338                                     |   | $     2,476                                       |  
|                                  |  |                                                 |   |                                                   |  
|Capital Expenditures:             | 
|ALCO Discount Stores              |  | $     1,580                                     |   | $     1,009                                       |  
|All Other                         |  | 638                                             |   | 162                                               |  
|                                  |  |                                                 |   |                                                   |  
|                                  |  | $     2,218                                     |   | $     1,171                                       |  
|                                  |  |                                                 |   |                                                   |  
|Identifiable Assets:              | 
|ALCO Discount Stores              |  | $ 131,578                                       |   | $ 131,944                                         |  
|All Other                         |  | 39,317                                          |   | 39,234                                            |  
|                                  |  |                                                 |   |                                                   |  
|                                  |  | $ 170,895                                       |   | $ 171,178                                         |  
|                                  |  |                                                 |   |                                                   |  

Income from operations as reflected
in the above segment information has been determined differently than income from
operations in the accompanying consolidated statements of operations as follows:

| | Intercompany
      Sales                                                                                                                 
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | Intercompany
      sales represent transfers of merchandise from the warehouse to ALCO discount
      stores and Duckwall variety stores.

| | Intercompany
      Expense Allocations                                                                                                                                                            
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SG&A expenses
      incurred at the general office have not been allocated to the ALCO Discount
      Stores for purposes of determining income from operations for the segment
      information.

| | Warehousing and
      distribution costs including freight applicable to merchandise purchases,
      have been allocated to the ALCO Discount Stores segment based on the Companys
      customary method of allocation for such costs (primarily as a stipulated
      percentage of merchandise purchases).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inventories                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Inventories
      are based on the FIFO method for segment information purposes and on the
      LIFO method for the consolidated statements of operations.



| | 15 | 
| | -- | 

---



| | Leases                                                                                                                                                                                                                                                                                                  
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All leases
      are accounted for as operating leases for purposes of determining income
      from operations and for purposes of determining the segment information
      for the ALCO Discount Stores. Capital leases are accounted for as such in
      the consolidated statements of operations.

| | Identifiable
      assets as reflected in the above segment information include cash and cash
      equivalents, receivables, inventory, property and equipment, and property
      under capital leases.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A reconciliation of the segment
  information to the amounts reported in the consolidated financial statements
  is presented below:



|                                              |  | For The Thirteen Week
      Periods Ended |   | For The Twenty-Six Week
      Periods Ended
|--------------------------------------------- |  | ----------------------------------------- | - | -------------------------------------------
|                                              |  |                                           |   |                                            
|                                              |  | August 1,
      2004                      |   | August 3,
      2003                       
|                                              |  |                                           |   |                                            
|Net sales per above segment information       |  | $ 160,269                                 |   |                                            
|Intercompany elimination                      |  | (50,668                                   | ) |                                            
|                                              |  |                                           |   |                                            
|Net sales per consolidated
      statements   | 
|of operations                                 |  | $ 109,601                                 |   |                                            
|                                              |  |                                           |   |                                            
|Income from operations per above segment      | 
|information                                   |  | $     2,338                               |   |                                            
|Leases                                        |  | 68                                        |   |                                            
|                                              |  |                                           |   |                                            
|Income from operations
      per consolidated | 
|statements
      of operations                |  | $     2,270                               |   |                                            
|                                              |  |                                           |   |                                            

# ITEM 3.    MARKET
  RISK DISCLOSURE

INSTRUMENTS
  ENTERED INTO OTHER THAN FOR TRADINGINTEREST RATE RISK

The
Company is exposed to various types of market risk in the normal course of its business,
including the impact of interest rate changes. The Company may enter into interest rate
swaps to manage its exposure to interest rate changes, and we may employ other risk
management strategies, including the use of foreign currency forward contracts. The
Company does not currently hold any derivative instruments and would enter into such
instruments solely for cash flow hedging purposes and not for trading purposes.

As
described under Managements Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources, the Company has a variable interest rate
debt facility that is subject to interest rate risk. The Company uses this facility to
meet the short-term needs of its capital improvements and inventory purchases. These
obligations expose the Company to variability in interest payments due to changes in
interest rates. If interest rates increase, interest expense increases. Conversely, if
interest rates decrease, interest expense also decreases. Based on amounts outstanding
under this facility as of August 1, 2004, the Company does not consider its exposure to
interest rate risk to be material.



| | 16 | 
| | -- | 

---

# ITEM 4.    CONTROLS
  AND PROCEDURES

As
of the end of the period covered by this report, an evaluation was carried out under the
supervision and with the participation of Company management, including the Companys
President and Chief Financial Officer, of the effectiveness of the design and operation
of the Companys disclosure controls and procedures. There are inherent limitations to
the effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can only
provide reasonable assurance of achieving their control objectives. Based upon and as of
the date of the evaluation, the Companys President and Chief Financial Officer concluded
that the design and operation of these disclosure controls and procedures were effective
in all material respects to provide reasonable assurance that information required to be
disclosed in the reports it files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.

There
were no changes in the Companys internal control over financial reporting that occurred
during the quarter ended August 1, 2004 that materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.

# PART II - OTHER
INFORMATION

| | Item 1. | Legal Proceedings
| | ------- | -----------------

| | The
Company is a party to routine litigation from                            time to time in
the ordinary course of business.
| | -----------------------------------------------------------------------------------------------------------------------------

| | Item 2. | Changes
      in Securities
| | ------- | ---------------------------

| | Not
applicable
| | --------------

| | Item 3. | Defaults
      Upon Senior Securities
| | ------- | -------------------------------------

| | Not
Applicable
| | --------------

| | Item 4. |  | Submission
of Matters to a Vote of Security Holders
| | ------- |  | ---------------------------------------------------

| | Not
Applicable
| | --------------

| | Item 5. | Other Information
| | ------- | -----------------

| | None
| | ----

| | Item 6. | Exhibits
      and Reports on Form 8-K
| | ------- | --------------------------------------

| | (a)    See
      the Exhibits listed on the Exhibit Index.
| | ----------------------------------------------------------

| | (b)    Current
      Report on Form 8-K (Items 2.02 and 9.01) dated August 23, 2004
| | -----------------------------------------------------------------------------------

| | (c)    Current
      Report on Form 8-K (Items 2.02, 7.01 and 9.01) dated August 23, 2004
| | -----------------------------------------------------------------------------------------



| | 17 | 
| | -- | 

---

# SIGNATURES

Pursuant
  to the requirements of the Securities Exchange Act of 1934 the registrant has
  duly caused this report to be signed on its behalf by the undersigned thereunto
  duly authorized.

| |                               | DUCKWALL-ALCO STORES, INC.
      (Registrant) Segment Information                                               
| | ----------------------------- | ----------------------------------------------------------------------------------------------------------------
| |                               |                                                                                                                 
| | Date, September 9,
      2004 | /s/ Richard A. Mansfield
      Richard A. Mansfield
      Vice President - Finance
      Chief Financial Officer
| |                               |                                                                                                                 
| |                               | Signing on behalf of the registrant and as
      principal financial officer                                    





| | 18 | 
| | -- | 

---

# EXHIBIT
  INDEX

|3.1 |  | Amended
and Restated Articles of Incorporation of Duckwall-ALCO Stores, Inc., amended as of
         June 13, 1994.
|--- |  | -------------------------------------------------------------------------------------------------------------------

|3.2 |  | Bylaws
of Duckwall-ALCO Stores, Inc.
|--- |  | ------------------------------------

|4.1 |  | Specimen
of Duckwall-ALCO Stores, Inc. Common Stock Certificate.
|--- |  | ----------------------------------------------------------------

|4.2 |  | Reference
is made to the Amended and Restated Articles of Incorporation          and Bylaws
described above under 3.1 above.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Employment
Agreement dated December 28, 2000 between the Company and          Glen L. Shank (filed
as Exhibit 10.11 to Companys Annual Report on          Form 10-K for the fiscal year
ended February 2, 2003, and incorporated          herein by reference).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Employment
Agreement dated December 28, 2000 between the Company and          James E. Schoenbeck
(filed as Exhibit 10.12 to Companys Annual Report          on Form 10-K for the fiscal
year ended February 2, 2003, and          incorporated herein by reference).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | Employment
Agreement dated December 28, 2000 between the Company and          James R. Fennema
(filed as Exhibit 10.13 to Companys Annual Report on          Form 10-K for the fiscal
year ended February 2, 2003, and incorporated          herein by reference).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Employment
 Agreement  dated  December  28, 2000 between the Company and Richard A.  Mansfield.
 (filed as          Exhibit  10.14 to Companys  Annual  Report on Form 10-K for the
fiscal year ended  February 2, 2003,  and          incorporated herein by reference.).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Employment
 Agreement  dated  December 28, 2000  between the Company and Tom L.  Canfield,  Jr.
 (filed as          Exhibit  10.15 to Companys  Annual  Report on Form 10-K for the
fiscal year ended  February 2, 2003,  and          incorporated herein by reference).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Loan
and Security Agreement, dated as of April 15, 2002, between the          Company and
Fleet Retail Finance Inc. (filed as Exhibit 10.16 to          Companys Annual Report on
Form 10-K for the fiscal year ended February          2, 2003, and incorporated herein by
reference).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | Joinder
Agreement and First Amendment to Loan and Security Agreement          dated September 9,
2002 among the Company, Fleet Retail Finance Inc.,          and DA Good Buys, Inc. (filed
as Exhibit 10.17 to Companys Annual          Report on Form 10-K for the fiscal year
ended February 2, 2003, and          incorporated herein by reference).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | 2003
Duckwall-ALCO Stores, Inc. Incentive Stock Option Plan.
|----- |  | ------------------------------------------------------------

|10.19 |  | Form
of Duckwall-ALCO Stores, Inc. Incentive Stock Option Agreement.
|----- |  | --------------------------------------------------------------------

|10.20 |  | Duckwall-ALCO
Stores, Inc. Profit Sharing Plan Amended and Restated as of December 31, 2002.
|----- |  | --------------------------------------------------------------------------------------------

|21.1 |  | Amended
and Restated List of Subsidiaries of the Company (filed as          Exhibit 21.1 to the
Companys Annual Report on Form 10-K for the fiscal          year ended February 2, 2003
and hereby incorporated by reference).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.1 |  | Certification
of Chief Executive Officer of Duckwall-ALCO Stores, Inc.          dated September 9,
2004, pursuant to Rule 13a-4(a) under the Securities          Exchange Act of 1934, as
adopted pursuant to Section 302 of the          Sarbanes-Oxley Act of 2002.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 19 | 
| | -- | 

---

|31.2 |  | Certification
of Chief Financial Officer of Duckwall-ALCO Stores, Inc.          dated September 9,
2004, pursuant to Rule 13a-4(a) under the Securities          Exchange Act of 1934, as
adopted pursuant to Section 302 of the          Sarbanes-Oxley Act of 2002.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.1 |  | Certification
of Chief Executive Officer of Duckwall-ALCO Stores, Inc,          dated September 9,
2004, pursuant to 18 U.S.C. Section 1350, as adopted          pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, which is          furnished with this Quarterly Report on
Form 10-Q for the quarter ended          August 1, 2004 and is not treated as filed in
reliance upon ss.          601(b)(32) of Regulations S-K.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 |  | Certification
of Chief Financial Officer of Duckwall-ALCO Stores, Inc.,          dated September 9,
2004, pursuant to 18 U.S.C. Section 1350, as adopted          pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, which is          furnished with this Quarterly Report on
Form 10-Q for the quarter ended          August 1, 2004 and is not treated as filed in
reliance upon ss.          601(b)(32) of Regulations S-K.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 20 | 
| | -- | 

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