SECURITIES AND EXCHANGE COMMISSION




Washington, D.C. 20549




FORM 10-K




FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended January 1, 2006
|--- |  | ------------------------------------------------------------------------------------------------------------------------------



OR


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



Commission File Number 0-24543




COST-U-LESS,
  INC. (Exact Name of Registrant as Specified in its Charter)










|**Washington**                                                                     | **** | **** | **** | **91-1615590**                                  
|---------------------------------------------------------------------------------- | ---- | ---- | ---- | ------------------------------------------------
|**(State
        or Other Jurisdiction
        of Incorporation or Organization)** | **** | **** | **** | **(I.R.S. Employer
        Identification No.)**



3633
  136th Place SE, Suite 110, Bellevue, Washington 98006 (Address of
  Principal Executive Offices): (Zip Code)




(425)
  945-0213 (Registrants
  Telephone Number, Including Area Code)




Securities registered pursuant to Section 12(b) of the Act:
    None
    Securities registered pursuant to Section 12(g) of the Act:
    Common Stock
    Preferred Stock Purchase Rights




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]




Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 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.  Yes [x] No [ ]




Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.  [ ]




Indicate by check mark
    whether the registrant is a large accelerated filer, an accelerated filer,
    or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Large
    accelerated filer  [ ]        Accelerated
    filer [ ]        Non-accelerated
    filer [X]




Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]




The aggregate market value of the
registrants common stock held by non-affiliates of the registrant as of June 24, 2005, was approximately $30,314,515, based upon the closing sale
price on the Nasdaq Capital Market reported for such date. Shares of the registrants common stock held by each officer and director and each
person who owns more than 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be
affiliates of the registrant.




The number of shares of the
registrants common stock outstanding at March 20, 2006, was 4,020,023.




DOCUMENTS INCORPORATED BY REFERENCE




The information required by Part
III of this report, to the extent not set forth herein, is incorporated herein by reference from the registrants definitive proxy statement
relating to the annual meeting of shareholders to be held on May 17, 2006.


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COST-U-LESS, INC. INDEX TO FORM
10-K







|           |  |    |  |          |  |                                                                                       |  | Page
|---------- |  | -- |  | -------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART
I:    |  |    |  |          |  |                                                                                       |  |     
|           |  |    |  | Item 1.  |  | Business                                                                              |  |     
|           |  |    |  | Item 1A. |  | Risk
Factors                                                                          |  |     
|           |  |    |  | Item 1B. |  | Unresolved Staff Comments                                                             |  |     
|           |  |    |  | Item 2.  |  | Properties                                                                            |  |     
|           |  |    |  | Item 3.  |  | Legal Proceedings                                                                     |  |     
|           |  |    |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |     
|PART
II:   |  |    |  |          |  |                                                                                       |  |     
|           |  |    |  | Item 5.  |  | Market for Companys Common Stock and Related Shareholder Matters                     |  |     
|           |  |    |  | Item 6.  |  | Selected Financial Data                                                               |  |     
|           |  |    |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |     
|           |  |    |  | Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |     
|           |  |    |  | Item 8.  |  | Financial Statements and Supplementary Data                                           |  |     
|           |  |    |  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |     
|           |  |    |  | Item 9A. |  | Controls and Procedures                                                               |  |     
|           |  |    |  | Item 9B. |  | Other Information                                                                     |  |     
|PART
III:  |  |    |  |          |  |                                                                                       |  |     
|           |  |    |  | Item 10. |  | Executive Officers and Directors of the Registrant                                    |  |     
|           |  |    |  | Item 11. |  | Executive Compensation                                                                |  |     
|           |  |    |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |     
|           |  |    |  | Item 13. |  | Certain Relationships and Related Transactions                                        |  |     
|           |  |    |  | Item 14. |  | Principal Accountant Fees and Services                                                |  |     
|PART
IV:   |  |    |  |          |  |                                                                                       |  |     
|           |  |    |  | Item 15. |  | Exhibits and Financial Statement Schedules                                            |  |     
|SIGNATURES |  | 51 | 



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PART I




This annual report on Form 10-K
contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include without limitation
statements regarding our expectations and beliefs about the market and industry; our goals, plans, and expectations regarding our business strategy,
attributes for successful stores, merchandising and distribution; our beliefs regarding the future success of our stores and our merchandising
strategy; our expectations and beliefs regarding competition, competitors, the basis of competition and our ability to compete; our beliefs regarding
our ability to hire and retain personnel and the labor costs associated with island wages; our beliefs regarding period to period results of
operations; our expectations regarding future growth and financial performance; our expectations regarding international sales and our revenues; our
expectations and beliefs regarding revenue and revenue growth; our expectations regarding our strategies; our expectations regarding fluctuations in
revenues, operating results and comparable store sales; our beliefs and expectations regarding our existing facilities and the availability of
additional space in the future; our intent to use all available funds for the expansion and the operation of our business and not to declare or pay any
cash dividends; our beliefs and expectations regarding our results of operation and financial position; our intentions and expectations regarding
utilization of tax benefits and credits; our beliefs and expectations regarding liquidity and capital resources and that amounts available under our
various credit facilities, existing cash available for working capital purposes and cash flow from operations will be sufficient to meet our cash
requirements; and our expectations regarding the impact of recent accounting pronouncements and revenue recognition matters. These statements are
subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated. These risks and
uncertainties include those identified below and in Item 1A of this annual report on Form 10-K. We undertake no obligation to update forward-looking
statements to reflect events or circumstances occurring after the date of this annual report on Form 10-K.




As used in this annual report on
Form 10-K, unless the context otherwise requires, the terms we, us, our, the Company, and
Cost-U-Less refer to Cost-U-Less, Inc., a Washington corporation, and its subsidiaries.


|Item 1. |  | Business
|------- |  | --------



Cost-U-Less operates mid-sized
warehouse club-style stores in the United States Territories, foreign island countries in the Pacific and the Caribbean, the Hawaiian Islands and
Sonora, California. Our primary strategy is to operate in island markets, offering predominately U.S. branded goods. We currently operate eleven retail
stores as follows: two stores in each of Hawaii and Guam, and one store in each of St. Thomas, St. Croix, American Samoa, Fiji, Curacao, St. Maarten
and Sonora, California.




Our management focus relative to
our core island store operations includes reviewing our merchandising strategies, both those that apply to all stores and those specific to each store,
in light of the different conditions in each market. We also continue to explore ways to maximize long-term value for our shareholders, including
focusing on means to increase earnings, responding to competition, and improving same store sales and gross margins. While we believe these actions can
improve profitability, there can be no assurance that these actions will be successful.




We are also currently evaluating
methods of implementing future growth, including expansion opportunities in selected markets and relocation opportunities for stores in existing
markets with leases expiring in the next few years, as we did with our St. Croix store in 2005. Additionally, we believe that although there are a
number of new island markets that have the attributes necessary to support a growth strategy for our business, licensing restrictions and political
resistance to foreign retailers, among other things, make it difficult for us to enter some of these markets.




In July 2005, the Cayman Islands
Trade and Business Licensing Board granted us approval to operate a retail and wholesale business in the Cayman Islands through a controlled
subsidiary. This is the first in a series of steps that we must take before we can open a store operating under the Cost-U-Less name in the Cayman
Islands. We do not have an approximate timing as to when a new store would open in the Cayman Islands, if at all, but expect that it will take at least
twelve to eighteen months once the permitting, governmental approval and lease process is complete. In the meantime, we are actively working with local
architects and engineers to more precisely define the type of building we could construct as a prelude to applying for construction permits. We
currently have no plans to open stores in new markets during fiscal 2006.




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Industry Overview




Traditional warehouse clubs such
as Costco Wholesale Corporation, BJs Wholesale Club, Inc. and Sams Club, a division of Wal-Mart Stores, Inc., focus on both retail and
small-business customers, with store formats averaging approximately 130,000 square feet. These retailers typically


| |  | offer a range of national brand and selected private label
products at low prices, often in case, carton or multiple-pack quantities;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------
| |  | provide no-frills, self-service warehouse facilities with
pallet-stacked product aisles; and                                         
| |  | charge annual membership fees.                                                                                                       



Although we employ many of the
retailing methods of the larger participants in the warehouse club industry, we operate smaller stores (averaging approximately 32,000 square feet), we
do not charge a membership fee, we typically locate our stores in smaller geographic areas with less concentrated population centers, and we rely to a
greater degree on long-haul water transportation than do other such companies.




While the typical U.S. warehouse
club customer has virtually unlimited access to popular U.S. brand-name products, we believe that these products are carried by relatively few local
retailers in a number of island markets. Moreover, island markets often demonstrate unique consumer preferences, which typically require retailers to
conduct local research and incorporate flexible merchandise purchasing policies in order to offer a diverse selection of local products, as well as
popular U.S. brand-name products.




Business Strategy




Our current business strategy is
to


| |  | enter small island markets familiar with the warehouse club
concept;                       
|- |  | -------------------------------------------------------------------------------------------
| |  | offer U.S. goods where availability of such goods is minimal and
significant demand exists;
| |  | leverage island-operations and long-haul logistics
expertise;                              
| |  | utilize modern systems and merchandising methods;                                          
| |  | offer competitive prices while maintaining favorable margins;
and                          



Expand to New
Markets.  The pace at which we will open new stores will be dictated by availability and ease of entry. We plan to refine our expansion
efforts to focus on markets we believe have a high U.S. brand awareness and demand, as well as other attributes that typify the markets in which our
most successful stores are located. Future development of our business will be directed to markets in which we believe we can compete effectively by
offering competitive prices while maintaining low costs of goods and services to consumers. We believe that there are a number of new island markets
with the attributes prescribed by our existing growth strategy, however, licensing restrictions and political resistance to foreign retailers make it
difficult for us to enter some of these markets. In July 2005 the Cayman Islands Trade and Business Licensing Board granted approval for us to operate
a retail and wholesale business in the Cayman Islands through a controlled subsidiary. This is the first in a series of steps that we must take before
we can open a store operating under the Cost-U-Less name in the Cayman Islands. We do not have an approximate timing as to when a new store would open
in the Cayman Islands, if at all, but expect that it will take at least twelve to eighteen months once the permitting, governmental approval and lease
process is complete. Additionally, we are currently in the process of renovating and expanding the size of our store in St. Thomas by approximately
6,400 square feet (an increase of approximately 18%) and remodeling our Kauai store to add retail enhancements such as fresh produce by the pound. In
addition to these projects, we continue to explore expansion opportunities in selected markets and additional relocation opportunities for stores in
existing markets. We currently have no plans to open stores in new markets during fiscal 2006.




Enter Markets Familiar With
Warehouse Concept.  We plan to seek markets that have some familiarity with the warehouse club concept. Residents of potential island markets
often gain familiarity with the warehouse club concept through travel to the U.S. and other markets where warehouse clubs are present. We believe that
the presence of this attribute has helped accelerate market acceptance of our stores in the past.




Offer U.S. Goods in Markets
with Minimal Supply and Significant Demand.  We believe that markets that have awareness and acceptance of U.S. goods but have limited access
to those goods offer substantial sales and profit




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potential. We believe that
procuring U.S. goods in large volumes and shipping them long distances to island stores are two of our core competencies.




Leverage Island-Operations and
Long-Haul Logistics Expertise.  Through our experience in opening and operating retail warehouse club-style stores in the U.S. Territories,
foreign island countries and the Hawaiian Islands, we believe that we have developed a depth of expertise in dealing with the inherent challenges of
island market operations. We have refined a mid-sized building prototype that is designed to endure most severe island weather conditions and that
incorporates low construction costs and easily replicated specifications. Through our long-standing relationships with steamship lines, we negotiate
what we believe to be competitive transportation rates while selecting efficient shipping routes and utilizing cost-effective freight handling
techniques, including the use of both Company-operated cross-dock depots and independently operated distribution facilities.




Utilize Modern Systems and
Merchandising Methods.  We believe that many merchants in our most promising target markets have not adopted modern retail operating
efficiencies and do not have access to vendor network and distribution channels equivalent to those we have developed. By utilizing the modern systems
and merchandising methods we have developed, we believe that we can achieve greater efficiencies and higher margins than other local island
retailers.




Emphasize Strong Margins While
Maintaining Everyday Low Prices.  In addition to providing a pleasant shopping atmosphere, we strive to sell products at prices that we
believe are lower than those offered by our local island competitors. By leveraging our retail operating efficiencies, access to volume-purchasing
discounts and distribution capabilities, we believe that we are able to acquire some products at a significantly lower cost than that paid by other
local island retailers.




Use Localized Product Sourcing
While Deriving Benefits of Centralized Purchasing.  We conduct market research through our vendors, store managers and resident employees to
ascertain the product preferences of each particular locale, including which U.S. brands are favored and which regional and ethnic items are desired.
To the extent possible, our buyers then procure these products through our centralized purchasing department, thus deriving the benefits of volume
purchase discounts, streamlined distribution and enhanced selection. The remaining products, including locally produced items that are available only
in a particular region, are generally purchased by store managers and our corporate buyers directly from suppliers located in the
region.




Market and Site Selection




We believe that there are certain
key attributes for successful stores, such as acceptance and demand for U.S. goods, familiarity with the warehouse concept, and absence of large
warehouse club competition. Once we identify a target location as a possible site for expansion and we are satisfied with the political and regulatory
environment in the target location, we compare the prices charged by local competitors to the prices we would need to charge in order to achieve an
acceptable return on our investment (after factoring in cost of the product, cost of freight, duties, port charges, transportation and taxes). If our
market research indicates that we would be able to charge an adequate price for our products, we then commence a formal search for a suitable store
site. Desirable attributes of suitable sites include a central location in a population center, sufficient space for our facility, including parking
and loading docks, access to utilities and acceptable geological conditions for successful construction.




We generally do not intend to own
the land or buildings for our stores. However, to the extent that we believe it to be advantageous to purchase land for our new store sites or to
construct new store buildings, we may use our cash resources or financing sources during the construction period and subsequently attempt to obtain
permanent financing after the stores are opened. Our ability or the ability of a potential landlord to secure financing for new stores is subject to
the availability of commercial real estate financing on acceptable terms. Failure to secure adequate financing on a timely basis would delay or
potentially prevent new store openings.




We opened our first retail
warehouse store in 1989 in Hawaii and now operate eleven stores throughout the U.S. Territories, foreign island countries in the Pacific and the
Caribbean, the Hawaiian Islands and Sonora, California. Our primary strategy is to operate in island markets, offering predominately U.S. branded
goods.




Our management focus relative to
our core island store operations includes reviewing our merchandising strategies, both those that apply to all stores and those specific to each store,
in light of the different conditions in each market. We also continue to explore ways to maximize long-term value for our shareholders,
including




5


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focusing on means to increase
earnings, responding to competition, and improving same store sales and gross margins.




We are currently evaluating
methods of implementing future growth, including expansion opportunities in selected markets and relocation opportunities for stores in existing
markets. Additionally, we are reviewing a number of new island markets that have the attributes necessary to support a growth strategy for our
business. However, licensing restrictions and political resistance to foreign retailers, among other things, make it difficult for us to enter some of
these markets. In July 2005, the Cayman Islands Trade and Business Licensing Board granted approval for us to operate a retail and wholesale business
in the Cayman Islands through a controlled subsidiary. This is the first in a series of steps that we must take before we can open a store operating
under the Cost-U-Less name in the Cayman Islands. We do not have an approximate timing as to when a new store would open in the Cayman Islands, if at
all, but expect that it will take at least twelve to eighteen months once the permitting, governmental approval and lease process is complete. In the
meantime, we are actively working with local architects and engineers to more precisely define the type of building we could construct as a prelude to
applying for construction permits. While we believe these actions can improve profitability, there can be no assurance that these actions will be
successful.




On May 26, 2005, we moved our St.
Croix store into a newly constructed building on a parcel of land located closer to the main trade area in the center of the island than our former
store. The size of the new store is 38,000 square feet, a 45% increase in square footage over the previous store. Additionally, we are currently in the
process of renovating and expanding the size of our store in St. Thomas by approximately 6,400 square feet (an increase of approximately 18%) and
remodeling our Kauai store to add retail enhancements such as fresh produce by the pound. In addition to these projects, we continue to explore
expansion opportunities in selected markets and additional relocation opportunities for stores in existing markets.




Store Layout




We have incorporated into our
prototype store many standard features found in domestic warehouse clubs that have not been previously used in many island markets. Store layout and
interior designs were planned and calculated using computer models, with the goal of maximizing the sales per square foot and providing uniformity
among the stores. Further, we believe that we are able to gain a competitive advantage over most of our competitors by utilizing:


| |  | loading docks;                                                                      
|- |  | ------------------------------------------------------------------------------------
| |  | comparatively large freezer and refrigeration space with
state-of-the-art equipment;
| |  | efficient shelving and display racks;                                               
| |  | computerized cash registers and inventory tracking
systems;                         
| |  | multiple checkout lanes;                                                            
| |  | fresh meat departments, including rotisserie meat items in
selected markets; and    
| |  | produce items for sale by the pound, in selected
markets.                           



Each of our stores is outfitted
with adjustable metal shelving that allows us to vary the display of our products based on each locations specific consumer needs. Each island
store has backup generators designed to protect perishables and the stores security system during disruption of electric service caused by severe
weather conditions that can occur in island markets.




We have used considerable care in
developing our store layout, which features a logical flow to encourage shopping of all departments. When ready for check out, the customer proceeds to
the check-out area in the front of the store, which usually features ten lanes. During a typical store visit, the average customer spent approximately
$53 in 2005. We accept various forms of payment in each store, including food stamps and debit and credit cards, and we selectively extend credit to
some local businesses and government agencies. Utilizing a no-frills approach, we display items in steel racking, usually on vendors
pallets or in open cases, to maximize warehouse space and minimize labor costs. We utilize in-store signage to reinforce our basic value image, and we
strive to generate customer excitement through the use of end-cap displays featuring new merchandise and special promotions, food demonstrators
offering product samples, and ongoing introduction of new items.




We have also attempted to design
our stores to minimize our costs. For example, we achieve lower construction and maintenance costs because we do not use expensive fixtures such as
floor tiles and false ceilings. In addition, our refrigeration supplier has designed specialized refrigeration units using modern equipment that allows
for cost-effective monitoring, maintenance and repair, and helps keep our energy costs to a minimum. We have also




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developed standardized
construction specifications and have negotiated competitive prices on building materials, such as metal exterior panels, building components, store
equipment and shelving, allowing us better control of material costs on a per-facility basis and helping us obtain more uniformity of materials
throughout our facilities.




Merchandising




We typically carry approximately
3,000 stock-keeping units, or SKUs, compared to the 4,000 to 5,000 SKUs industry sources estimate are carried by traditional warehouse clubs. Our
stores do not have certain departments found in most large-format warehouse clubs, such as automobile tire, bakery, photo finishing and prescription
drug departments. Our stores feature the following main product categories:




Food-Perishables. 
Meat, produce, deli, dairy and frozen items represent approximately 27% of a typical stores net sales. The reach-in freezers and
coolers are substantially larger than those found in the stores of most of our local island competitors. During fiscal 2003, we added rotisserie
chicken and ribs in Curacao, Samoa and our two Guam stores. We also began offering our produce for sale by the pound in our Guam stores during fiscal
2003, in our Sonora store during fiscal 2004 and in our St. Croix and Curacao stores in fiscal 2005.




Food-Non-perishables.  Dry grocery goods, including soda, wine, beer, liquor, candy and snacks, represent approximately 40% of a
typical stores net sales. Also included in this area are ethnic and specialty items catering to local consumer demands.




Nonfood.  Other
nonfood items comprise the remaining 33% of a typical stores net sales, and include tobacco, pet products, sundries, health and beauty aids,
office products, hardware, electronics, housewares, furniture and sporting goods.




Purchasing.  We
balance our product mix by providing popular U.S. brand name products together with local ethnic items found in each island region. Approximately 25%
of our items are produced locally or purchased through local suppliers in each market. We believe offering locally purchased merchandise enables us to
better serve our island customers and offer an innovative variation to the warehouse store format. Our store managers are able to purchase product that
may be available only on their particular islands. Our corporate buyers monitor sales and inventory levels on a daily basis from all of our stores. In
an effort to cater to retail customers who generally purchase products for home use, we carry products in various product sizes, including single
packages, bulk packages and mid-sized value-packs. We purchase merchandise from manufacturers and suppliers on a purchase order
basis.




Pricing.  We strive
to be the low price leader for the markets we serve. We do not charge our customers a membership fee, thereby allowing all consumers to
receive the benefits of our value-pricing philosophy. We believe that we provide everyday low prices that are often lower than regular prices offered
at most retailers, such as grocery stores, and are generally intended to be slightly lower than those offered by mass merchant discount retailers, such
as Wal-Mart and Kmart, that operate in some of our island markets. In our ongoing effort to achieve the lowest prices offered in a particular market,
we regularly compare prices and products being offered by our local competitors. Generally, given the economic efficiencies that we can bring to bear
with our ability to purchase product in large quantities as well as our efficient distribution system that allows us to take advantage of favorable
freight and transportation costs, we believe that we have a competitive advantage when pricing most of our products compared to local competition.
However, if the comparison of local competitors prices discloses that our prices exceed those of our local competition, then our store managers
have the authority to reduce prices to remain competitive. We believe this decentralization of pricing decisions allows us to respond quickly and
efficiently to competitive challenges in each of our island markets.




Distribution




We operate a distribution
facility in San Leandro, California, and we use third-party operated facilities in Port Everglades, Florida and Sacramento, California. To a lesser
extent, we use third-party facilities in Auckland, New Zealand and Sydney, Australia to serve our Fiji and Samoa markets. We have no written agreements
with the independently operated distribution facilities, but instead have month-to-month service relationships. At each distribution facility,
merchandise is received, consolidated and cross-docked, and ultimately shipped in fully loaded containers to our stores under the supervision of our
own Cost-U-Less trained employees. The depot has a lane designated for each store. When a full container load is queued into a specific
lane, goods are loaded by forklift into a cargo container, which, when filled, is then delivered to the closest port for shipment to the designated
store. Our management has significant experience and long-term relationships with steamship lines and, with our present




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volume, has negotiated what
we believe to be competitive transportation rates. We do not have a warehouse, but control inventory levels in our stores by maintaining sufficient
back stock in the stores combined with efficient cross-dock facilities. For perishable items, such as meats and frozen and chill goods, we use
independently operated refrigerated depots. Fruits and vegetables are purchased direct from established suppliers who ship the refrigerated containers
on a direct basis to each store.




Management Information Systems




We consider our management
information systems to be a key component of our business model. Each day we track inventory movement, sales and purchase orders by SKU number, vendor
number, store and date. We use electronic point-of-sale equipment in all our stores. During 2006, we plan to replace our current point-of-sale (POS)
system with a new and improved version that will cost approximately $0.7 to $1.0 million (most of which will be financed with a capital lease). Our
current POS system has been in place since 1993 and is nearing the end of its useful life. We believe our new POS system will allow us to transmit data
more reliably, remotely manage our store systems from our corporate office and will provide a foundation for future growth and operational enhancement
tools. We take pride in being a leader in technology in the island markets we serve and our new POS system will help preserve our position as a
leader.




All data and communications from
each location are sent via our company wide area network, to the computer system located at our headquarters in Washington State. Our company wide area
network provides communications capabilities that allow for quick responses to ever-changing customer needs and local retail opportunities. The ability
to quickly and consistently communicate between our headquarters and store locations is necessary since our stores are located in such remote
locations.




Employee Organization, Training and
Compensation




Management of each of our stores
generally consist of a store manager, one assistant manager and two to three department managers, depending on the store. The merchandising manager
oversees the training and day-to-day operations of the stockers and forklift operators. The receiving manager oversees the day-to-day receiving
operations and the receiving clerks. The administrative manager oversees the training and day-to-day operations of the vault clerks, cashiers and
security personnel, if applicable. In addition, we have both a Caribbean and a Pacific regional manager in our corporate office that supervise our
store managers.




Our goal is to hire most of our
employees from the island market in which the particular store resides, thus creating job opportunities for local residents. New store employees
initially receive one to two weeks of training, which typically includes working alongside individuals in comparable positions before working without
direct supervision. We have found that such on-the-job training, together with the use of detailed operating and training manuals, is an effective way
to introduce new employees and managers to our systems and procedures.




In total, we employ approximately
600 people worldwide. As of March 20, 2006, we had approximately 55 full-time equivalent employees at our corporate office and depots located in the
United States. None of our employees are currently covered by a collective bargaining agreement. However, several of our hourly employees in our St.
Maarten store have joined the local union.




We strive to attract and retain
highly motivated, performance-oriented employees and managers by offering competitive compensation, including bonus programs based on performance. Our
Store Manager Bonus Program provides for annual bonuses for store managers based on store and company performance. We also provide an incentive bonus
program for all store employees based on sales and inventory control targets.




Customer Service




We bring a commitment to customer
service that we believe gives us a competitive advantage in each of the local markets we serve. Our store layout is designed to maximize floor space
used for selling product as well as to give customers a spacious feel while shopping. We accept various forms of payment, including food stamps and
credit and debit cards, and we selectively extend credit to some local businesses and government agencies. For most items, we have a 30-day,
no-questions-asked return policy. Each of our stores has approximately ten checkout lanes, which allows for quick and efficient shopping. Each store
features a customer desk where customers can have questions answered, usually by a management team member. We also train our employees to help
customers locate store products.




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Marketing and Advertising




We generally rely on
word-of-mouth advertising in order to save on advertising and marketing costs and pass on the savings to our customers. We have historically spent less
than 0.2% of net sales on advertising; which consists of approximately fifteen advertisements per year in each market. However, in more competitive
markets we generally experience higher marketing and advertising costs.




To remain competitive in the St.
Thomas and Guam markets, among other things, we implemented a customer loyalty program for our customers. Our customers earn points based
on the dollar amount of items purchased in our stores, which affords them with the opportunity to receive gift certificates for merchandise in our
stores and other promotional items. We rolled out a similar customer loyalty program in Curacao during the second quarter of fiscal
2005.




Competition




The warehouse club and discount
retail businesses are highly competitive. We have historically faced significant competition from warehouse clubs and discount retailers such as
Wal-Mart, Kmart and Costco in Hawaii, from Kmart in the U.S. Virgin Islands and Guam, and from PriceSmart in St. Thomas and Guam. We believe that we
compete effectively with membership warehouse clubs and discount retailers in the markets in which our stores reside by offering a balanced product
mix, convenient shopping facilities, a high level of customer service and competitive pricing. Our competition also includes local, national and
international grocery store chains.




Some of our competitors have
substantially greater resources, buying power and name recognition than we have. The cost of doing business in island markets is typically higher than
on the U.S. mainland because of ocean freight and duty costs and higher facility costs. While we expect that the size of some of the markets in which
we operate or expect to enter will delay or deter entry by many of our larger competitors, there can be no assurance that our larger competitors will
not decide to enter these markets or that other competitors will not compete more effectively against us.




Our gross margin and operating
income are generally lower for those stores in markets where traditional warehouse clubs and discount retailers also operate stores, due to increased
price competition and reduced market share. If a traditional warehouse club or discount retailer were to enter one of our existing markets, our
operating results would likely suffer. To remain competitive in our markets, we may be required to reduce prices and take other actions. Historically,
we have remodeled stores and implemented customer loyalty programs for our customers in response to increased competition.




There is an indication that
Costco has acquired a parcel of land in Kauai, Hawaii, and that it may open a new store in 2006. Although we have historically faced competition from
Costco in Hawaii, our gross margin and operating income for our Kauai store will likely be lower in fiscal 2006 if Costco opens a store in Kauai due to
the increased competition and reduced market share and the actions we may be required to take to remain competitive in Kauai.




Intellectual Property




We obtain proprietary rights
protection for trademarks by filing applications for registrable marks with the U.S. Patent and Trademark Office. We have been granted federal
registration of the name and stylized logo Cost-U-Less. In addition, we rely on trade secret laws to protect our proprietary rights. While
we believe that our trademarks and other proprietary know-how have significant value, changing technology and the competitive marketplace make our
future success dependent principally upon our employees technical competence and our business strategy.




There can be no assurance that
third parties will not assert claims against us with respect to existing and future trademarks, trade names and sales techniques. In the event of
litigation to determine the validity of any third partys claims, such litigation could result in significant expense and divert the efforts of
our management, whether or not such litigation is determined in our favor.




Governmental Regulation




We are subject to various
applicable laws and regulations administered by federal, state and foreign regulatory authorities, including, but not limited to, laws and regulations
regarding tax, tariffs, currency repatriation, zoning, employment and licensing requirements. Additionally, should we pursue future expansion in
foreign countries, our




9


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operations would be subject
to additional foreign regulatory standards, laws and regulations, in addition to customs, duties and immigration laws and regulations. Changes in the
foregoing laws and regulations, or their interpretation by agencies and the courts, occur from time to time. While we believe that we presently comply
in all material respects with such laws and regulations, there can be no assurance that future compliance will not have a material adverse effect on
our business, financial condition and operating results.




Available Information




We file reports with the
Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from time to time. You may
read and copy any materials we file with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC maintains an
Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information filed electronically. Additional
information about Cost-U-Less, Inc. is available at www.costuless.com.




Item 1A. Risk Factors




You should carefully consider the
following factors that may affect future results and other information included in this annual report. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties not presently known to us or that are currently deemed immaterial also may impair our
business operations or could cause actual results to differ from historical results or those anticipated. If any of the following risks actually occur,
our business, financial condition and operating results could be materially adversely affected.




Because we have a small store
base, adverse store performance or increased expenses will have a more significant adverse impact on our operating and financial results than if we had
a larger store base.  We opened our first store in 1989 and opened a total of 21 stores through December 2005 and presently operate eleven
stores. Our closure of the ten other stores prior to March 2001 adversely affected our operating results. Should any existing store experience a
significant decline in profitability or any new store be unprofitable, the negative effect on our business would be more significant than would be the
case if we had a larger store base, and could have a material adverse effect on our business, financial condition and results of operations. In
addition, if our general and administrative expenses increase, the negative effect on our business and results of operations would be more significant
than if we had a larger store base. Although we intend to carefully plan for the implementation of additional stores, there can be no assurance that
such plans can be executed as envisioned or that the implementation of those plans will not have a material adverse effect on our business, financial
condition and results of operations. In addition, our ability to acquire products at a lower cost than competitors or obtain volume-based pricing can
be adversely affected because of our small store base.




Our ability to operate
profitably in existing markets and to expand into new markets may be adversely affected by competing warehouse clubs or discount retailers. 
The warehouse club and discount retail businesses are highly competitive. If we fail to successfully respond to competitive pressures in this industry,
or to effectively implement our strategies to respond to these pressures, our operating results may be negatively affected. Many of our competitors
have substantially greater resources, buying power and name recognition than we have. The cost of doing business in island markets is typically higher
than on the U.S. mainland because of ocean freight and duty costs and higher facility costs. In addition, our gross margin and operating income are
generally lower for stores in markets where traditional warehouse clubs and discount retailers also operate stores, due to increased price competition
and reduced market share. We may be required to implement price reductions and other actions in order to remain competitive in our markets. For
example, there is an indication that Costco may open a new store in Kauai in 2006, which would likely cause our gross margin and operating income for
our Kauai store to be lower in fiscal 2006 due to the increased competition and reduced market share and the actions we may be required to take to
remain competitive in Kauai. Furthermore, our ability to expand into and operate profitably in new markets may be adversely affected by the existence
or entry of competing warehouse clubs or discount retailers. These factors could result in reduced sales and margins or loss of market share, any of
which could negatively affect our results of operations.




One or more of our stores may
be damaged or destroyed by volatile weather conditions or natural disasters, which would severely harm our business and financial results. 
Our stores are primarily located on islands subject to volatile weather conditions and natural disasters, such as tsunamis, hurricanes, floods,
typhoons and earthquakes.




10


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If the islands on which any
of our stores is located experienced any of these or other severe weather conditions or natural disasters, one or more of our stores could be damaged
significantly or destroyed. For example, on December 8, 2002, our two stores on the island of Guam suffered damage from Supertyphoon Pongsona,
resulting in the immediate closure of both stores. Our Tamuning store lost its generator in the storm and our Dededo store had to be closed for
reconstruction. Additionally, we have four stores in the Caribbean, which has experienced increased activity from hurricanes and tropical storms in the
past few years. The damage or destruction of one or more of our stores would materially harm our business, operating results and financial condition.
We could also experience business interruptions, delays in shipping, delays in construction or loss of life as a result of severe weather conditions,
any of which could materially affect our business.




If we were to experience a
catastrophic loss as a result of severe weather conditions or otherwise, we may exceed our insurance policy limits and we may have difficulty obtaining
similar insurance coverage in the future.  We maintain property, casualty and business interruption insurance coverage in amounts we consider
customary in our industry for these types of events. However, insurance payments generally do not fully reimburse us for all of the damages and lost
profits caused by adverse weather events. If any insurance reimbursement we receive does not fully cover the losses and business interruption caused by
severe weather events or natural disasters, or if our insurance coverage is not adequate to cover such losses or we exceed our insurance policy limits,
we may be required to pay substantial amounts and our financial condition and liquidity would suffer.




Additionally, we utilize a
combination of insurance policies and self-insurance mechanisms to provide for the potential liabilities for property insurance, general liability,
director and officers liability, workers compensation and employee health care insurance. The costs related to obtaining our current
insurance coverage have been increasing. If the costs of maintaining this insurance coverage continue to increase significantly, we would experience an
associated increase in our store and administrative expenses that may negatively impact our results of operations. In addition, there is no assurance
as to how casualty insurance carriers may react to increasing weather related damages in areas where are stores are located. If we are unable to
maintain our current or similar insurance coverage, or if an event were to occur that was not covered by our current insurance policy coverage levels
(including acts of terrorism, war and actions such as government nationalizations), our business and results of operations could
suffer.




If energy costs and fuel
surcharges continue to rise, the profitability of our stores may decline and our business and financial condition could suffer.  We have
experienced increasing energy and fuel surcharge costs over the last few years and have largely been able to pass these additional costs on to our
customers with higher prices. For example, in fiscal 2005 our energy (utility) expenses were 17% higher than the same period in fiscal 2004. If these
costs continue to rise, we may not be able to continue the practice of passing on these additional costs to our customers. Our inability to effectively
pass on these costs to our customer could have a significant adverse effect on our business, results of operations and financial
condition.




If we fail to effectively
manage the logistical and local operating challenges we face because our business primarily consists of island and international operations, our
business and results of operations would suffer.  Our net sales from island operations represented approximately 94.5% of our total net sales
for fiscal 2005. We expect that our island and international operations together will continue to account for nearly all of our total net sales. The
distance, as well as the time-zone differences, involved with island locations impose significant challenges to our ability to manage our operations.
Logistical challenges are presented by operating individual store units in remote locations, whether in terms of information flow or transportation of
goods. In addition, island operations involve uncertainties arising from items such as:


| |  | Changes in local labor markets, including unionization and
inadequate labor pools;                                                                                                               
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Local business practices, language and cultural considerations,
including the capacity or willingness of local business and government officials to provide necessary services;                  
| |  | Ability to acquire, install and maintain modern capabilities
such as dependable and affordable electricity, telephone, computer, Internet and satellite connections often in undeveloped regions;
| |  | Political, military and trade tensions;                                                                                                                                                          
| |  | Currency exchange rate fluctuations and repatriation
restrictions;                                                                                                                               
| |  | Local economic conditions;                                                                                                                                                                       
| |  | Difficulty enforcing agreements or protecting intellectual
property;                                                                                                                             
| |  | Collection of debts and other obligations in foreign countries;
and                                                                                                                              



11


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| |  | Volatile island operating expenses, including
utilities.
|- |  | --------------------------------------------------------



Our inability to effectively
manage these logistical challenges and local uncertainties inherent in our island and international operations could have a significant adverse effect
on our business, results of operations and financial condition.




We do not have operating
experience in many of the markets in which we may consider opening new stores. If we are unable to adapt our operations to support any future expansion
plans or if any new stores we open are not profitable, our business and financial condition could suffer.  We have not opened stores in
foreign island markets at a rapid pace. Although we have no plans to open stores in new markets during 2006, we continue to explore expansion
opportunities in selected markets and additional relocation opportunities for stores in existing markets. For example, in May 2005 we moved our St.
Croix store into a newly constructed building on a parcel of land located closer to the main trade area in the center of the island than our former
store and in July 2005 the Cayman Islands Trade and Business Licensing Board granted approval for us to operate a retail and wholesale business in the
Cayman Islands through a controlled subsidiary. New markets such as the Cayman Islands and others we may enter may present operational, competitive,
regulatory and merchandising challenges that are different from those we currently encounter. We do not have operating experience in many of the
markets in which we may consider opening new stores. In fact, in June 2000, we closed the two stores that we had opened in New Zealand in 1999, as they
had performed below expectations, due in part to competitive and merchandising challenges that are different from our other stores. Additionally, in
February 2001, we closed one of our two Fiji stores, due primarily to the impact that political turmoil and the resulting economic downturn in Fiji
were having on the tourist industry. We have encountered, and may continue to encounter, substantial delays, increased expenses or loss of potential
store sites due to the complexities, cultural differences, and local political issues associated with the regulatory and permitting processes in the
island markets in which we may locate our stores. There can be no assurance that we will be able to adapt our operations to support our future
expansion plans or that any new stores will be profitable. Any failure on our part to manage our growth could have a material adverse effect on our
business, financial condition and results of operations.




A decline in the general
economic condition in the United States or in island markets in which we operate could have a significant impact on our financial
performance.  The success of our operations depends to a significant extent on a number of factors relating to discretionary consumer
spending, including employment rates, business conditions, interest rates, inflation, population and gross domestic product levels in each of our
island markets, taxation, consumer spending patterns and customer preferences. We cannot fully foresee the changes in business and economic conditions
that may result from domestic or foreign factors. There can be no assurance that consumer spending in our markets will not be adversely affected by
these factors, thereby affecting our growth, net sales and profitability. A downturn in tourism or a decline in the national or regional economies of
the United States and the U.S. Territories or any foreign countries in which we currently or will operate, could have a material adverse effect on our
business, financial condition and results of operations.




A prolonged decrease in
tourism and air travel could have an indirect but significant impact on our financial performance, operations and liquidity.  Because our
operations are primarily located in U.S. Territories and foreign island countries throughout the Pacific and Caribbean, the success of our operations
depends to a significant extent on tourism and the travel industry. Prolonged adverse occurrences affecting tourism or air travel, particularly to
non-U.S. destinations, including political instability, armed hostilities, terrorism, weather conditions, or other activity that involves or affects
air travel or the tourism industry generally, could have an indirect but adverse and significant impact on our financial performance, operations,
liquidity or capital resources.




The loss of key personnel or
our inability to successfully hire skilled store managers could harm our business and results of operations.  Our success depends in large
part on the abilities and continued service of our executive officers and other key employees. Additionally, we rely significantly on the skill and
expertise of our on-site store managers, particularly in island markets where language, education and cultural factors may impose additional
challenges. We do not carry key-man life insurance on any of our personnel. There can be no assurance that we will be able to hire, train and retain
skilled managers and personnel to support our existing business and any growth, or that we will be able to retain the services of our executive
officers and other key employees, the loss of any of whom could have a material adverse effect on our business, financial condition and results of
operations.




If our information systems are
disrupted or outgrown, our business and results of operations could suffer.  Our business is highly dependent on communications and
information systems, primarily systems provided by third-




12


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party vendors. Any failure or
interruption of our systems or systems provided by third-party vendors could cause delays or other problems in our operations, which could have a
material adverse effect on our business, financial condition and results of operations. In addition, our point of sale information and transaction
processing system may not be adequate for our business if we experience rapid expansion in the number of our stores. If our point of sale system is
outgrown, we would need to develop and install a new point of sale system in our stores, which could be expensive and time consuming and could cause
our results of operations to suffer.




If our store employees decided
to become unionized, we may experience increased operating costs or other operation problems.  None of our employees are currently covered by
a collective bargaining agreement. However, several of our hourly employees in our St. Maarten store have joined the local union. Unionization of any
of our stores could result in higher employee compensation and restrictive working condition demands that could increase our operating costs and have a
material adverse effect on our business, financial condition and results of operations.




We are subject to various
governmental regulations and licensing requirements, which may have an adverse effect on our business.  Governmental regulations and licensing
requirements in foreign countries where we plan to expand our operations might prevent or delay entry into the market or prevent or delay the
introduction, or require modification, of certain of our operations. For example, in July 2005 the Cayman Islands Trade and Business Licensing Board
granted approval for us to operate a retail and wholesale business in the Cayman Islands through a controlled subsidiary. However, this is the first in
a series of steps that we must take before we can open a store operating under the Cost-U-Less name in the Cayman Islands and we expect that it could
take at least twelve to eighteen months once the permitting, governmental approval and lease process is complete. Additionally, our ability to compete
may be adversely affected by foreign governmental regulations and licensing requirements that encourage or mandate the employment of citizens of, or
purchase of supplies from vendors, in a particular jurisdiction. We may also be subject to taxation in these foreign jurisdictions, and the final
determination of our tax liabilities may involve the interpretation of the statutes and requirements of the various domestic and foreign taxing
authorities. We may also be subject to currency repatriation restrictions. If governmental regulations or licensing requirements prevent or delay our
entry into market, require modification of our existing operations, or subject us to taxation or currency repatriation issues, our business, financial
condition and results of operations could suffer.




If we are unable to overcome
challenges resulting from the isolation of store operations from our corporate management and our increased dependence on local managers, we may
experience decreased productivity or other operational problems.  Our headquarters and administrative offices are located in Washington State;
however, ten of our eleven stores and a majority of our employees are located on islands. Although we invest resources to hire and train our on-site
managers, the inability of our executives to be physically present at our current and planned store sites on a regular basis may result in the
following:


| |  | Isolation of store operations from corporate management and an
increased dependence on store managers;          
|- |  | ----------------------------------------------------------------------------------------------------------------
| |  | Diminished ability to oversee employees, which may lead to
decreased productivity or other operational problems;
| |  | Construction delays or difficulties caused by inadequate
supervision of the construction process; and           
| |  | Communication challenges.                                                                                       



We may need to invest significant
resources to update and expand our communications systems and information networks and to devote a substantial amount of time, effort and expense to
national and international travel in order to overcome these challenges; failure to do so could have a material adverse effect on our business,
financial condition and results of operations.




We may encounter disruption in
the transportation of our products, which would significantly harm our business.  Our island locales require the transportation of products
over great distances on water, which results in the following:


| |  | Substantial lags between the procurement and delivery of
product, thus complicating merchandising and inventory control methods;
|- |  | --------------------------------------------------------------------------------------------------------------------------------
| |  | Possible loss of product due to potential damage to, or
destruction of, ships or containers delivering our goods;               
| |  | Tariff, customs and shipping regulation issues;                                                                                 
| |  | Substantial ocean freight and duty costs;                                                                                       



13


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| |  | Port and container security issues; and                                                   
|- |  | ------------------------------------------------------------------------------------------
| |  | Interruption in the delivery of product due to labor disruption
or weather related issues.



Moreover, only a limited number
of transportation companies service our regions, none of which has entered into a long-term contract with us. The inability or failure of one or more
key transportation companies to provide transportation services to us, changes in the regulations that govern shipping tariffs or any other disruption
in our ability to transport our merchandise could have a material adverse effect on our business, financial condition and results of
operations.




Our failure to adequately
address barriers and challenges associated with expansion outside of the United States or its territories could cause our business to suffer. 
Three of our stores are located outside the United States or its territories. Our future expansion plans may involve entry into additional foreign
countries, which may involve additional or heightened barriers and challenges that are different from those we currently encounter, including risks
associated with being further removed from the political and economic systems in the United States and anti-American sentiment as a result of political
or military action. We do not currently engage in currency hedging activities. The failure to adequately address the additional challenges involved
with international operations could have a material adverse effect on our business, financial condition and results of operations.




Certain provisions in our
charter documents and elsewhere may discourage third parties from attempting to acquire control of our Company, which may have an adverse effect on the
price of our stock.   Our board of directors has the authority, without obtaining shareholder approval, to issue up to 2,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions of such shares without any further vote or action by our shareholders.
Our articles of incorporation and bylaws also provide for a classified board and special advance notice provisions for proposed business at annual
meetings. In addition, Washington law contains certain provisions that may have the effect of delaying, deferring or preventing a hostile takeover of
our company. Further, we have a shareholder rights plan that is designed to cause substantial dilution to a person or group that attempts to acquire
our company without approval of our board of directors, and thereby make a hostile takeover attempt prohibitively expensive for a potential acquirer.
These provisions, among others, may have the effect of making it more difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of our company, even if shareholders may consider such a change in control to be in their best interests, which may
cause the price of our common stock to suffer.


|Item 1B. |  | Unresolved Staff Comments
|-------- |  | -------------------------



None.




14


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|Item 2. |  | Properties
|------- |  | ----------



We currently lease a majority of
our existing store locations. We also lease the land for our St. Thomas and St. Maarten stores, but own the store facilities. We own both the land and
building for our St. Croix store. The stores average approximately 32,000 square feet and range in size from approximately 22,000 square feet to
approximately 39,000 square feet. Traditional warehouse stores found in the United States average approximately 130,000 square feet. Our store leases
typically have a term of 10 years with options to lease for an additional 5 to 10 years and typically are net leases. With the exception of our Sonora
store, which opened in an existing facility, all of our stores have been built to our specifications.




We recently developed a new and
larger store footprint based on our re-built Guam store. This footprint averages 35,000 to 40,000 square feet. The larger and improved
footprint allows us to add retail enhancements such as fresh produce by the pound and rotisserie chicken, features we successfully added to our stores
in St. Croix , Curacao, California and both Guam stores.




We have developed a standard
lease that we use as a starting point for our lease negotiations with each potential landowner/developer. We routinely negotiate 10-year leases with at
least two five-year renewal options. The following is a summary of our store locations:







|Location                                       |  |  |  | Date Opened         |  | Approximate Store Square Footage |        | Current Lease Term |  | Current Expiration Date |  | Remaining Options to Extend
|---------------------------------------------- |  |  |  | ------------------- |  | -------------------------------- | ------ | ------------------ |  | ----------------------- |  | ---------------------------
|Dededo,
Guam                                   |  |  |  | May 1,
1992         |  |                                  | 38,800 |                    |  | 15
years                |  | May 31,
2017               
|Hilo,
Hawaii                                   |  |  |  | August 27,
1992     |  |                                  | 23,000 |                    |  | 15
years                |  | August 31,
2007            
|Kapaa,
Kauai                                   |  |  |  | March 18,
1993      |  |                                  | 22,000 |                    |  | 17
years                |  | April 22,
2010             
|St. Thomas,
USVI (Land Lease) (1)              |  |  |  | August 19,
1993 (2) |  |                                  | 36,000 |                    |  | 20
years                |  | September 30,
2017         
|Sonora,
CA                                     |  |  |  | January
27, 1994    |  |                                  | 23,150 |                    |  | 10
years                |  | April 30,
2009             
|St. Croix,
USVI (3)                            |  |  |  | November
3, 1994    |  |                                  | 38,000 |                    |  |                        |  | Own the Land
& Building    
|Tamuning,
Guam                                 |  |  |  | March 15,
1995      |  |                                  | 35,000 |                    |  | 15
years                |  | March 1,
2010              
|Pago Pago,
American Samoa                      |  |  |  | March 20,
1995      |  |                                  | 32,055 |                    |  | 10
years                |  | February 28,
2015          
|Suva,
Fiji                                     |  |  |  | November
12, 1998   |  |                                  | 30,000 |                    |  | 10
years                |  | November 1,
2008           
|Curacao,
Netherlands Antilles                  |  |  |  | March 2,
1999       |  |                                  | 38,711 |                    |  | 10
years                |  | February 1,
2009           
|St. Maarten,
Netherlands Antilles (Land Lease) |  |  |  | June 29,
2000       |  |                                  | 36,000 |                    |  | 25
years                |  | February 25,
2024          






|(1) |  | We are currently in the process of renovating and expanding the
size of our store in St. Thomas by approximately 6,400 square feet (an increase of approximately 18%). On November 29, 2005, we amended our St. Thomas
lease to provide for increased rent as a result of the increased size of our store. No other terms and conditions of the original lease were
amended.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | We relocated and reopened our St. Thomas store on June 25,
1998.                                                                                                                                                                                                                                                                                                            
|(3) |  | On May 26, 2005, we relocated our St. Croix store to a newly
constructed building on a parcel of land, which is located closer to the main trade area in the center of the island. This new building expanded the
size of our St. Croix store by about 45% to approximately 38,000 square feet.                                                                             



While we currently own the land
and building of our new St. Croix store, it is our intent to eventually refinance our St. Croix store, and any future relocations and new stores,
either through an operating lease, a sale-leaseback arrangement or long-term funding from a financial institution. We intend to continue leasing as
many of our store locations as feasible. In those instances where a lease is not available on acceptable terms, we intend to finance our stores
utilizing long-term funding from a financial institution (as we currently do for our St. Thomas and St. Maarten buildings).




Although we currently have no
plans to open stores in new markets during fiscal 2006, in July 2005 the Cayman Islands Trade and Business Licensing Board granted approval for us to
operate a retail and wholesale business in the Cayman Islands through a controlled subsidiary. This is the first in a series of steps that we must take
before we can open a store operating under the Cost-U-Less name in the Cayman Islands. We do not have an approximate timing as to when a new store
would open in the Cayman Islands, if at all, but expect that it will take at least twelve to eighteen months once the permitting, governmental approval
and lease process is complete. In the meantime, we are actively working with local architects and engineers to more precisely define the type of
building we could construct as a prelude to applying for construction permits.




15


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On April 5, 2004, we relocated
our principal offices to a new location approximately ten miles from our former offices. Our lease consists of approximately 9,000 square feet of
office space in Bellevue, Washington, and expires on March 31, 2009. In addition, we lease our San Leandro distribution facility. The facility is
approximately 56,000 square feet, and the lease expires on January 31, 2007. We also use third-party operated distribution facilities in Florida,
California, New Zealand and Australia.




16


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|Item 3. |  | Legal Proceedings
|------- |  | -----------------



We may be subject to legal
proceedings or claims, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of these potential claims cannot
be predicted with certainty, we do not believe that any pending legal matters will have a material adverse effect on us. However, any adverse outcome
to future lawsuits against us may result in a material adverse affect on our financial condition.


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



No matters were submitted to a
vote of our shareholders during the fourth quarter of the fiscal year ended January 1, 2006.




17


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PART II


|Item 5. |  | Market for Companys Common Stock and Related Shareholder
Matters
|------- |  | -----------------------------------------------------------------



Market Information




Our common stock is currently
traded on the Nasdaq Capital Market under the symbol CULS. The last sale price of our common stock on the Nasdaq Capital Market on March
20, 2006 was $8.05 per share. High and low sales prices for our common stock for the periods indicated are as follows. Such prices reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.







|                                      |  |  |  | Stock Price |      
|------------------------------------- |  |  |  | ----------- | -----
|
|Fiscal 2005
(ended January 1, 2006)   |  |  |  |             |      
|First
Quarter                         |  |  |  | $           | 10.96
|Second
Quarter                        |  |  |  |             | 11.94
|Third
Quarter                         |  |  |  |             | 9.05 
|Fourth
Quarter                        |  |  |  |             | 7.85 
|                                     
|Fiscal 2004
(ended December 26, 2004) |  |  |  |             |      
|First
Quarter                         |  |  |  | $           | 7.35 
|Second
Quarter                        |  |  |  |             | 7.23 
|Third
Quarter                         |  |  |  |             | 7.00 
|Fourth
Quarter                        |  |  |  |             | 6.52 



We have never declared nor paid
any cash dividends on our common stock. We currently anticipate that we will retain all future earnings for use in the expansion and operations of our
business and do not anticipate paying cash dividends in the foreseeable future.




Holders




As of March 20, 2006, there were
44 holders of record of our common stock. This figure does not include the number of shareholders whose shares are held of record by a broker or
clearing agency, but does include each such brokerage house or clearing agency as a single holder of record.




18


---



Item 6. Selected Financial Data




The following selected financial
data, excluding the selected operating data, is derived from our audited consolidated financial statements and accompanying notes. This selected
financial data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and the notes thereto included elsewhere in this report. Our fiscal year ends on the last
Sunday in December. All years presented represent 52-week fiscal years except fiscal 2005, which was a 53-week fiscal year.




Selected Consolidated Financial and Operating Data (in
thousands, except per share data, average sales per square foot, number of stores and percentage data)







|                                                         |  |  |  | Jan 01, 2006 |         | Dec.26, 2004 |  | Dec.28, 2003 |         | Dec.29, 2002 |  | Dec.30, 2001
|-------------------------------------------------------- |  |  |  | ------------ | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------
|Income
Statement Data:                                   |  |  |  |              |         |              |  |              |         |              |  |             
|Net
sales                                                |  |  |  | $            | 219,414 |              |  | $            | 209,390 |              |  | $           
|Gross
profit                                             |  |  |  |              | 40,801  |              |  |              | 38,524  |              |  |             
|Operating
Expenses:                                      |  |  |  |              |         |              |  |              |         |              |  |             
|Store                                                    |  |  |  |              | 28,567  |              |  |              | 26,408  |              |  |             
|General and
administrative                               |  |  |  |              | 6,828   |              |  |              | 7,103   |              |  |             
|Store
opening                                            |  |  |  |              | 335     |              |  |              | 188     |              |  |             
|Store
closing                                            |  |  |  |              | 81      |              |  |              | 0       |              |  |             
|Operating
income                                         |  |  |  |              | 4,990   |              |  |              | 4,825   |              |  |             
|Interest
expense, net                                    |  |  |  |              | (367    | )            |  |              | (437    | )            |  |             
|Other income
(expense)                                   |  |  |  |              | 42      |              |  |              | 80      |              |  |             
|Income before
income taxes                               |  |  |  |              | 4,665   |              |  |              | 4,468   |              |  |             
|Income tax
provision                                     |  |  |  |              | 1,650   |              |  |              | 1,780   |              |  |             
|Net
income                                               |  |  |  | $            | 3,015   |              |  | $            | 2,688   |              |  | $           
|Earnings per
common share:                               |  |  |  |              |         |              |  |              |         |              |  |             
|Basic                                                    |  |  |  | $            | 0.77    |              |  | $            | 0.72    |              |  | $           
|Diluted                                                  |  |  |  | $            | 0.72    |              |  | $            | 0.69    |              |  | $           
|Weighted
average common shares outstanding, basic        |  |  |  |              | 3,939   |              |  |              | 3,732   |              |  |             
|Weighted
average common shares outstanding, diluted      |  |  |  |              | 4,169   |              |  |              | 3,916   |              |  |             
|                                                        
|Selected
Operating Data:                                 |  |  |  |              |         |              |  |              |         |              |  |             
|Stores opened
(1)                                        |  |  |  |              | 0       |              |  |              | 0       |              |  |             
|Stores closed
(1)                                        |  |  |  |              | 0       |              |  |              | 0       |              |  |             
|Stores open
at end of period                             |  |  |  |              | 11      |              |  |              | 11      |              |  |             
|Average net
comparable store sales per square foot(2)(3) |  |  |  | $            | 605     |              |  | $            | 590     |              |  | $           
|Comparable-store net sales increase (decrease)(2)(3)     |  |  |  |              | 4.7     | %            |  |              | 13.6    | %            |  |             
|                                                        
|Consolidated Balance Sheet Data:                         |  |  |  |              |         |              |  |              |         |              |  |             
|Working
capital                                          |  |  |  | $            | 9,253   |              |  | $            | 8,614   |              |  | $           
|Total
assets                                             |  |  |  |              | 49,632  |              |  |              | 46,202  |              |  |             
|Line of
credit                                           |  |  |  |              | 80      |              |  |              | 0       |              |  |             
|Long-term
debt, less current portion                     |  |  |  |              | 2,011   |              |  |              | 2,277   |              |  |             
|Capital
lease, less current portion                      |  |  |  |              | 1,329   |              |  |              | 607     |              |  |             
|Total
shareholders equity                               |  |  |  |              | 24,043  |              |  |              | 19,933  |              |  |             






|(1) |  | On December 8, 2002, our two stores on the island of Guam
suffered damage from Supertyphoon Pongsona, resulting in the immediate closure of both stores. Our Tamuning store lost its generator in the storm but
reopened shortly thereafter on December 12, 2002. Our Dededo store, however, suffered more significant damage, and had to be closed for reconstruction.
The store was rebuilt and it reopened for business on October 3, 2003.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Fiscal 2005 was a 53-week year; all other fiscal years were
52-week years. Comparable store net sales and average sales per square foot for fiscal 2005 have been adjusted to reflect a 52-week year. Our fiscal
quarters are 13 weeks, except 4th quarter 2005, which was a 14 week quarter.                                                                                                                                                 
|(3) |  | A new store becomes comparable after it has been open for a full
13 months. Comparable-store net sales increases for fiscal 2002, fiscal 2003 and fiscal 2004 are calculated on stores excluding the Guam market as our
Dededo store was closed from December 8, 2002, until its reopening on October 3, 2003.                                                                                                                                



19


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|Item 7. |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations
|------- |  | -------------------------------------------------------------------------------------



This Managements Discussion
and Analysis contains forward-looking statements. All statements other than statements of historical fact made in this annual report are
forward-looking. Forward-looking statements reflect managements current expectations and are subject to risks and uncertainties discussed below
and those identified in Item 1A of this annual report on Form 10-K that could cause actual results to differ materially from historical results or
those anticipated.




Overview




We operate mid-sized warehouse
club-style stores in the United States Territories, foreign island countries in the Pacific and the Caribbean, the Hawaiian Islands and Sonora,
California. Our primary strategy is to operate in island markets, offering predominately U.S. branded goods. We currently operate eleven retail stores
as follows: two stores in each of Hawaii and Guam, and one store in each of St. Thomas, St. Croix, American Samoa, Fiji, Curacao, St. Maarten and
Sonora, California.




Our stores are patterned after
the warehouse club concept, although our stores


| |  | are smaller (averaging approximately 32,000 square feet vs.
large format warehouse clubs of approximately 130,000 square feet);                                          
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | generally target niche markets, mainly U.S. Territories, U.S.
island states and foreign island countries, where demographics do not support large format warehouse clubs;
| |  | carry a wide assortment of local and ethnic food items;
and                                                                                                              
| |  | do not charge a membership fee.                                                                                                                                          



Although we do not have large
seasonal fluctuations in sales, the fourth quarter is typically the highest sales quarter due to additional holiday sales.




During fiscal 2005, we built a
new St. Croix store on a parcel of land located closer to the main trade area in the center of the island than our existing store. This new building
expanded the size of our St. Croix store by about 45% to approximately 38,000 square feet. The new store opened on May 26, 2005. Until it opened, we
operated in our former location under a short-term lease with our former landlord.




On December 8, 2002, our two
stores on the island of Guam suffered damage from Supertyphoon Pongsona, resulting in the immediate closure of both stores. Our Tamuning store lost its
generator in the storm, but reopened shortly thereafter on December 12, 2002. Our Dededo store, however, suffered more significant damage, and had to
be closed for reconstruction. The store was rebuilt and it reopened for business on October 3, 2003.




During fiscal 2005 we experienced
a 4.7% increase in comparable store sales (as adjusted to reflect a 52-week year) as compared to a 13.6% increase in fiscal 2004. The increase in
comparable store sales for fiscal 2005 was due to several factors including general inflationary trends and ongoing merchandising initiatives.
Increasing energy prices have impacted our cost of doing business in the form of higher freight charges and store utility costs, however operating
margins were maintained due to improved merchandising and reduced expenses in other areas.




Store Economics




We generally report our results
based on a 52-week year; however, fiscal 2005 was a 53-week year. The following store economic information has been adjusted for comparability to a
52-week year, by excluding the 53rd week (the last week of December 2005) from the same store sales calculations in order to provide a normalized
comparison against the corresponding fiscal periods in 2004. During fiscal 2005, on a 52-week year basis, our eleven stores generated annual average
net sales of approximately $19.2 million, average net sales per square foot of approximately $605, average annual per store contribution of
approximately $1.1 million, and average annual per store contribution before depreciation of approximately $1.2 million. Store contribution is store
gross profit less direct store operating expenses.




20


---



Results of Operations




The following table sets forth,
for the periods indicated, the percentage of our net sales represented by certain consolidated income statement data.







|                           |  |  |  | Fiscal Year Ended |      
|-------------------------- |  |  |  | ----------------- | -----
|
|Net
sales                  |  |  |  |                   | 100.0
|Gross
margin               |  |  |  |                   | 18.6 
|Operating
Expenses:        |  |  |  |                   |      
|Store                      |  |  |  |                   | 13.0 
|General and
administrative |  |  |  |                   | 3.1  
|Store
opening              |  |  |  |                   | 0.2  
|Store
closing              |  |  |  |                   |     
|Operating
income           |  |  |  |                   | 2.3  
|Interest
expense, net      |  |  |  |                   | (0.2 
|Other income
(expense)     |  |  |  |                   |     
|Income before
income taxes |  |  |  |                   | 2.1  
|Income tax
provision       |  |  |  |                   | 0.7  
|Net
income                 |  |  |  |                   | 1.4  






|(1) |  | Fiscal 2005 was a 53-week year; all other fiscal years were
52-week years.
|--- |  | --------------------------------------------------------------------------



Fiscal 2005 Compared to Fiscal
2004




Net Sales.  Net sales
for the 53 weeks in fiscal 2005 were $219.4 million, an increase of 4.8%, as compared to net sales of $209.4 million for the 52 weeks in fiscal 2004.
Approximately 36% of the increase was due to the benefit of an additional week of sales in fiscal 2005 as compared to fiscal 2004. The balance of the
increase was due to comparable-store sales increases offset by a decline in business-to-business sales as compared to fiscal 2004. We expect the level
of business-to-business activity for fiscal 2006 to be similar or slightly less than the levels in 2005.




Comparable-store sales (stores
open for a full 13 months) increased 4.7% during fiscal 2005 (as adjusted to reflect a 52-week year) as compared to fiscal 2004. All but one of our
stores experienced increased sales as compared to the prior year, primarily due to general inflationary trends, improvements in our assortment of goods
and operating improvements including better in-stock inventory levels.




Gross Margin.  Gross
margin improved to $40.8 million, or 18.6% of sales, in fiscal 2005 from $38.5 million, or 18.4% of sales, in fiscal 2004. The increase in gross profit
as a percent of sales resulted primarily from a stronger mix of retail store sales, with typically higher margins, as compared to business-to-business
sales, which generally provide a lower gross margin but are executed at minimal direct expense.




Store Expenses. 
Store expenses increased to $28.6 million, or 13.0% of sales, for fiscal 2005 as compared to $26.4 million, or 12.6% of sales, for fiscal 2004.
Approximately 30% of the dollar increase in store expenses was attributable to increased payroll and related costs attributable to the higher volume of
sales in fiscal 2005. As a percent of store sales, payroll and related costs were 5.2% of store sales in both fiscal 2005 and fiscal 2004. Increased
energy (utility) expenses, which were 17% higher than the same period in the prior year, accounted for an additional 28% of the dollar increase in
store expenses. We expect energy costs to continue to increase for the foreseeable future. The remainder of the dollar increase was primarily
attributable to an increase of 10% in bankcard fees (primarily attributable to higher sales volume), an 8% increase in commercial insurance expense,
and increases in depreciation and advertising in fiscal 2005 as compared to fiscal 2004.




General and Administrative
Expenses.  General and administrative expenses decreased to $6.8 million, or 3.1% of sales, in fiscal 2005, as compared to $7.1 million, or
3.4% of sales, in fiscal 2004. The decrease in general and administrative expenses in fiscal 2005 was primarily due to lower compensation costs largely
resulting from decreased performance based awards pursuant to our incentive bonus program as compared to the same awards in the prior
year.




21


---



Store Opening
Expense.  Store opening expenses were $0.3 million in fiscal 2005, as compared to $0.2 million in fiscal 2004. The increase in store opening
expenses in fiscal 2005 primarily related to costs associated with the relocation of our St. Croix store, which opened on May 26, 2005. Expenses for
both years include costs associated with the evaluation of potential new store locations.




Store Closing
Expenses:  Store closing expenses of $0.1 million in fiscal 2005 are due to the costs incurred with closing our former St. Croix location
after we relocated our store on May 26, 2005.




Net Interest
Expense.  Interest expense, net, remained flat at $0.4 million for both fiscal 2005 and fiscal 2004, as increased interest costs associated
with rising interest rates in fiscal 2005 were offset by the capitalization of approximately $104,000 in interest related to the construction of our
St. Croix store, as compared to $12,000 capitalized in the prior year.




Other income
(expense):  Other income (expense) declined to $42,000 for fiscal 2005, as compared to $80,000 for the same period in the prior year. The
decrease in fiscal 2005 as compared to the prior year, was primarily due to losses exceeding gains on foreign currency transactions and translation of
intercompany balances for transactions that exceed the permanent investments in foreign countries in fiscal 2005, partially offset by the receipt of a
$100,000 non-recurring insurance reimbursement. The income and losses on foreign currency in both fiscal years was primarily attributable to
appreciation/depreciation in the Fijian dollar as compared to the U.S. dollar.




Income Tax
Provision.  We recorded a tax provision in fiscal 2005 of $1.7 million, or 35.4% of pre-tax income. The tax provision primarily represents
taxes associated with income generated in the U.S. and U.S. Territories. Additionally, during fiscal 2005, due to certain tax planning strategies, we
were able to offset a portion of our foreign subsidiary losses against foreign subsidiary income, which resulted in a decrease in our effective tax
rate as compared to prior years.




As of January 1, 2006, we have
foreign net operating loss carryforwards (NOLs) of approximately $7.5 million, some of which, if not utilized, will begin expiring in the year 2006.
The NOLs include approximately $3.9 million related to Curacao and St. Maarten which are not subject to expiration time limits. Our ability to utilize
the NOLs is dependent upon generating taxable income in these foreign jurisdictions. As a result, we have recorded a valuation allowance of $2.4
million attributable to the $2.6 million of tax benefits recorded for net operating loss carryforwards.




Net Income.  Our net
income was $3.0 million, or $0.72 per fully diluted share, in fiscal 2005, compared to net income of $2.7 million, or $0.69 per fully diluted share, in
fiscal 2004.




Fiscal 2004 Compared to Fiscal
2003




Net Sales.  Net sales
in fiscal 2004 of $209.4 million increased 18.3%, as compared to net sales of $177.1 million for the comparable period in the prior year. Approximately
50% of the increase was due to the reopening of our store in Dededo, Guam in October 2003. The balance of the increase was due to comparable-store
sales increases offset by a decline in business-to-business sales as compared to fiscal 2003.




Comparable-store sales (stores
open for a full 13 months) increased 13.6% during fiscal 2004 as compared to fiscal 2003. Comparable-store sales are calculated on stores excluding the
Guam market as our Dededo, Guam store was closed during the corresponding periods in the prior year and during those periods our Tamuning, Guam store
benefited from the temporary closure of our Dededo store. All of our other stores experienced increased sales as compared to the prior year, primarily
due to improvements in our assortment of food and general merchandise, operating improvements including better in-stock inventory levels and improved
economic conditions in some of our markets.




Gross Margin.  Gross
margin improved to $38.5 million, or 18.4% of sales, in fiscal 2004 from $31.5 million, or 17.8% of sales, in fiscal 2003. The increase in gross profit
as a percent of sales resulted primarily from better sourcing, pricing and merchandising of goods in our stores and a stronger mix of retail store
sales, with typically higher margins, as compared to business-to-business sales, which generally provide a lower gross margin but are executed at
minimal direct expense.




Store Expenses. 
Store expenses increased to $26.4 million for fiscal 2004 as compared to $22.3 million for fiscal 2003, but remained flat as a percent of sales at
12.6% of sales for both fiscal 2004 and fiscal 2003. Approximately 50% of the dollar increase in store expenses was attributable to increased expenses
associated with




22


---



operating eleven stores
during all of fiscal 2004 as compared to ten stores for ten of the twelve months in fiscal 2003. The remainder of the dollar increase was primarily
attributable to a 43% increase in commercial insurance expense, a 13% increase in energy (utility) expense and a 3% increase in rent expense,
accelerated depreciation related to the planned 2005 relocation of our St. Croix store, and higher volume-related expenses such as payroll and bankcard
fees. As a percent of store sales, payroll and related costs declined in 2004 to 5.2% as compared to 5.5% of store sales in 2003.




General and Administrative
Expense.  General and administrative expenses increased to $7.1 million in fiscal 2004, as compared to $6.9 million in fiscal 2003. The
increase was primarily due to a 34% increase in compensation costs largely resulting from increased performance based awards pursuant to our incentive
bonus program. Additionally, we had a 36% increase in commercial insurance costs, partially offset by non-recurring costs incurred in 2003 in
connection with a $0.5 million write-down of idle fixed assets from previously closed stores and the acceleration of depreciation of leasehold
improvements related to our corporate office move, as well as fiscal 2003 transaction costs incurred in connection with our discussions with ASSI, Inc.
regarding a potential strategic business combination that did not occur. General and administrative expenses as a percent of sales decreased to 3.4% in
fiscal 2004, as compared to 3.9% in the corresponding period in the prior year, primarily due to the leveraging of corporate expenses over increased
store sales.




Store Opening
Expense.  Store opening expenses were $188,000 in fiscal 2004, as compared to $287,000 in fiscal 2003. Store opening expense in fiscal 2004
related to costs associated with the evaluation of potential new store locations and current store relocations. Store opening expenses in fiscal 2003
primarily related to the reopening of our Dededo, Guam store.




Net Interest
Expense.  Interest expense, net, decreased to $0.4 million in fiscal 2004 as compared to $0.5 million in fiscal 2003, as borrowings on our
line of credit decreased compared to the prior year.




Other income
(expense):  Other income of $0.1 million in fiscal 2004 was primarily attributable to gains on foreign currency transactions and translation
of intercompany balances for transactions that exceeded the permanent investments in those countries. Other income of $0.7 million in fiscal 2003
included a gain of $0.4 million related to the receipt of insurance reimbursements for damage to inventory and equipment sustained from the
supertyphoon in Guam and gains of $0.3 million on foreign currency transactions and translation of intercompany balances for transactions that exceeded
the permanent investments in those countries. The income on foreign currency in both fiscal years was primarily attributable to appreciation in the
Fijian dollar as compared to the U.S. dollar.




Income Tax
Provision.  We recorded a tax provision in fiscal 2004 of $1.8 million, or 39.8% of pre-tax income. The tax provision represents taxes
associated with income generated in the U.S. and U.S. Territories. No taxes or tax benefits were provided on foreign pre-tax losses in fiscal 2004, as
we cannot predict whether we will be able to generate an adequate amount of taxable income in the future to utilize such benefits.




As of December 26, 2004, we had
foreign NOLs of approximately $8.2 million, some of which, if not utilized, begin expiring in the year 2006. The NOLs include approximately $4.5
million related to Curacao and St. Maarten which are not subject to expiration time limits. Our ability to utilize the NOLs is dependent upon
generating taxable income in the foreign jurisdictions. As a result, we recorded a valuation allowance of $2.4 million attributable to the $2.8 million
of tax benefits recorded for net operating loss carryforwards.




Net Income.  Our net
income was $2.7 million, or $0.69 per fully diluted share, in fiscal 2004, compared to net income of $1.4 million, or $0.38 per fully diluted share, in
fiscal 2003.




Liquidity and Capital Resources




We currently finance our
operations with proceeds from various credit facilities and internally generated funds. Although we utilized existing working capital to finance the
$5.6 million used to purchase the land and construct our new St. Croix store, we hope to re-finance our St. Croix store, and any future relocations and
new stores, either through an operating lease, a sale-leaseback arrangement or long-term funding from a financial institution. We intend to continue
leasing as many of our store locations as feasible. In those instances where a lease is not available on acceptable terms, we intend to finance our
stores utilizing long-term funding from a financial institution (as we currently do for our St. Thomas and St. Maarten buildings).




We generated $4.1 million, $5.7
million and $3.9 million of net cash from operations during fiscal 2005, fiscal 2004 and fiscal 2003, respectively. The $1.6 million decrease in net
cash provided by operations in 2005 as compared




23


---



to 2004, was primarily due to
a decrease in accounts payable and other accrued expenses of $5.2 million, partially offset by a decrease in cash used for inventory purchases of $3.7
million. The increase in net cash provided by operations in 2004 as compared to 2003, was primarily due to an increase in net income of $1.3 million
and an increase in accounts payable of $3.3 million, partially offset by an increase in cash used for inventory of $2.7 million.




Net cash used in investing
activities was $6.2 million, $2.5 million and $1.9 million, for fiscal years 2005, 2004 and 2003, respectively. The cash used in investing activities
during fiscal 2005, was primarily due to costs associated with the construction of the new building in St. Croix where we relocated our St. Croix store
on May 26, 2005. The cash used in investing activities in fiscal 2004 was primarily due to the purchase of land in St. Croix for approximately $0.9
million and costs associated with the construction of the building on this parcel of land. The relocated store is closer to the main trade area in the
center of the island than the existing store and has now been increased in size by about 45% to 38,000 square feet. The cash used in investing
activities in 2003 primarily related to the reopening of our Dededo, Guam store. The proceeds from insurance settlements received in fiscal 2004 and
2003 relate to insurance reimbursements received on fixed assets lost in the Supertyphoon in Guam.




Although we currently have no
plans to open stores in new markets during fiscal 2006, in July 2005 the Cayman Islands Trade and Business Licensing Board granted approval for us to
operate a retail and wholesale business in the Cayman Islands through a controlled subsidiary. This is the first in a series of steps that we must take
before we can open a store operating under the Cost-U-Less name in the Cayman Islands. We do not have an approximate timing as to when a new store
would open in the Cayman Islands, if at all, but expect that it will take at least twelve to eighteen months once the permitting, governmental approval
and lease process is complete. In the meantime, we are actively working with local architects and engineers to more precisely define the type of
building we could construct as a prelude to applying for construction permits. In addition, we are currently in the process of renovating and expanding
the size of our store in St. Thomas by approximately 6,400 square feet (an increase of approximately 18%). We anticipate that the cost associated with
building construction and updating equipment will be approximately $1.4 to $2.0 million. Additionally, we anticipate spending approximately $0.2
million to remodel our Kauai store in order to add retail enhancements such as fresh produce by the pound. During fiscal 2006, we also plan to replace
our current point of sale system with a new and improved version, which we anticipate will cost approximately $0.7 to $1.0 million, most of which will
be financed with a capital lease. In addition to these projects, we continue to explore expansion opportunities in selected markets and additional
relocation opportunities for stores in existing markets.




Net cash provided by financing
activities of $1.3 million in fiscal 2005 was primarily due to $1.0 million received on equipment purchased for our St. Croix store and $0.4 million
received from the exercise of common stock options. Net cash used by financing activities of $1.1 million in fiscal 2004 was primarily due to a $1.0
million reduction in the balance on our line of credit and a $0.8 million decrease in bank checks outstanding, partially offset by $0.8 million of
funds received on the sale-leaseback of equipment in Guam. In fiscal 2003, $1.4 million was used to reduce the balance on our line of credit, which was
offset by an increase of $1.5 million in bank checks outstanding.




Foreign currency translation
resulted in a gain of $15,000 in fiscal 2004 and losses of $24,000 and $235,000 in fiscal years 2005 and 2003, respectively. The foreign currency
translation gains and losses are a result of the translation of our subsidiaries operating results and balance sheets from local currencies to U.
S. dollars.




We have had a line of credit with
Wells Fargo Business Credit since April 9, 2003. On May 26, 2005, we amended the line of credit to extend the maturity date of the facility from April
9, 2006, to May 18, 2007. Additionally, the amendment


| |  | reduced the interest rate to an annual interest rate equal to
the prime rate;                                                   
|- |  | --------------------------------------------------------------------------------------------------------------------------------
| |  | reduced the minimum interest charge to not less than $25,000 per
calendar year;                                                 
| |  | increased the unused line fee to a rate of three-eighths of one
percent (0.375%) per annum on the average daily unused line; and
| |  | eliminated the one day interest charge on all payments received
on the line of credit.                                          



Borrowings continue to be limited
to the lesser of $6.0 million or the amount calculated under the borrowing base. The borrowing base is equal to the lesser of (a) $6.0 million or (b)
the sum of 70% of eligible inventory in the United States of America, plus 60% of eligible inventory in the U.S. Virgin Islands and Guam, less
specified reserves.




24


---



The line of credit consists of a
$6.0 million committed, secured revolving credit line with a sublimit for letters of credit and bankers acceptances in an amount up to $0.7 million. At
January 1, 2006, there was $0.1 million outstanding on the line of credit and $0.1 million in letters of credit outstanding. Borrowings under the
amended line of credit were charged interest at Wells Fargos prime rate plus 0.5% from the beginning of the most recent fiscal year through May
17, 2005, and at the prime rate from May 18, 2005, through January 1, 2006. At January 1, 2006, the rate charged by Wells Fargo was 7.25%. The line of
credit contains various covenants, including a requirement that we maintain minimum pre-tax income and tangible net worth, as well as limitations on
acquisitions, additional debt, changes in control and capital expenditures. We believe that we are currently in compliance with all such
covenants.




A significant portion of our cash
flow is generated by our operations. If our operating results deteriorate as a result of a decrease in customer demand, declining economic conditions
in the markets in which we have stores, or pricing pressures from our customers or our competitors, our ability to generate positive cash flow from
operations may be jeopardized. We believe that amounts available under our various credit facilities, existing cash available for working capital
purposes, and cash flow from operations will most likely be sufficient to fund our operations through the next twelve months. However, if such sources
of liquidity are unavailable or insufficient to satisfy our liquidity requirements, we may need to issue equity or debt securities, obtain additional
credit facilities or consider alternative financing arrangements. There can be no assurance that we will be able to obtain additional financing when
needed, or that any available financing will be on terms acceptable to us.




Contractual Obligations




As of January 1, 2006, our
commitments to make future payments under contractual obligations were as follows (in thousands):







|                 |  |  |  | Payments Due by Period |       
|---------------- |  |  |  | ---------------------- | ------
|
|Long-term
debt   |  |  |  | $                      | 2,278 
|Operating
leases |  |  |  |                        | 29,987
|Capital
leases   |  |  |  |                        | 1,885 
|Total            |  |  |  | $                      | 34,150



Critical Accounting Policies




We have chosen accounting
policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting
policies in a consistent manner. The significant accounting policies are summarized in Note 1 to the consolidated financial statements included in this
annual report on Form 10-K.




The preparation of financial
statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and other factors believed to be
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 could differ from those estimates.




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.




Inventories




Inventories are carried at the
lower of average cost or market. We provide for estimated inventory losses between physical inventory counts on the basis of a percentage of sales. The
provision is adjusted periodically to reflect the trend of actual physical inventory count results.




25


---



Long Lived Assets




When facts and circumstances
indicate that the carrying values of long-lived assets, including intangibles, may be impaired, we perform an evaluation of the recoverability by
comparing the carrying value of the assets to projected future cash flows. Upon indication that the carrying value of such assets may not be
recoverable, we recognize an impairment loss by a charge against current operations.




Foreign Currency Translation




The U.S. dollar is the functional
currency for all our locations, except for Fiji and Netherlands Antilles, where the local currency is the functional currency. Assets and liabilities
denominated in foreign currencies are translated at the applicable exchange rate on the balance sheet date. Net sales costs and expenses are translated
at the average rates of exchange prevailing during the period. Adjustments resulting from this process are reported, net of taxes, as Accumulated Other
Comprehensive Income (Loss), a component of Shareholders Equity. Realized and unrealized gains on foreign currency transactions are included in
Other Income (Expense). The cumulative translation adjustment resulting from a net investment in a country is recognized as income or expense in the
period we substantially liquidate operations in that country.




Income Taxes




Income tax expense includes U.S.
and foreign income taxes. We account for income taxes under the liability method. Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. We apply judgment in determining whether it is more likely than not that the
deferred tax assets will be realized, and valuation allowances are established when necessary. Our effective tax rate is currently higher than the
expected federal statutory rate because valuation allowances have been established against the tax benefits of foreign losses, as we have no assurance
that we will be able to generate an adequate amount of taxable income in the future to utilize such benefits. We are developing and implementing
certain tax planning strategies, which may affect our ability to recognize some of the deferred tax assets that are currently allowed for and may
ultimately change our estimate of the valuation allowance in future periods.




Accounting Pronouncements




In December 2004, the Financial
Accounting Standards Board (the FASB) issued Statement 123 (revised 2004), Share-Based Payment (FAS 123(R)). FAS 123(R) requires that the
compensation cost relating to share-based payment transactions be recognized in financial statements. The cost will be measured based on the fair value
of the instruments issued. FAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase plans. FAS 123(R) replaces FAS 123 and supersedes APB 25. As originally
issued in 1995, FAS 123 established as preferable the fair-value-based method of accounting for share-based payment transactions with employees.
However, that statement permitted entities the option of continuing to apply the guidance in APB 25, as long as the footnotes to the financial
statements disclosed what net income would have been had the preferable fair-value-based method been used. We are required to apply FAS 123(R) as of
the beginning of fiscal 2006. We expect to use the modified-prospective method effective with our first quarter of fiscal 2006. We believe that the
adoption of this new accounting standard will not have a significant impact on our results of operations or financial position, as we have a limited
amount of unvested options and options available for issuance in the future.




On November 24, 2004, the FASB
issued Statement No. 151 (FAS 151), Inventory Costs, an amendment of ARB No. 43, Chapter 4 which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material. FAS 151 requires that abnormal items be recognized as current-period
charges, as well as unallocated overheads recognized in the period in which they are incurred. The provisions of this statement are effective for
inventory costs incurred during fiscal periods beginning after June 15, 2005. Our adoption of FAS 151 in our first quarter of fiscal 2006 is not
expected to have a significant impact on our results of operations or financial position.




26


---

|Item 7A. |  | Quantitative and Qualitative Disclosures About Market
Risk
|-------- |  | ----------------------------------------------------------



We operate stores in foreign
countries and have market risks associated with foreign currencies. However, sales are primarily made in U.S. dollars or foreign currencies with
minimal trade credit extended and no borrowings exist in foreign currencies. Cash deposited from sales are remitted back to the U.S. bank account
routinely.




We record gains and losses on
foreign currency transactions, and translation of intercompany balances for transactions that exceed the permanent investments in those countries in
Other Income (Expense). Gains and losses are primarily attributable to appreciation and (depreciation) in the Fijian dollar as compared to the U.S.
dollar.




We operate in three foreign
countries that function under currencies other than the US dollar. Two of the these foreign countries operate under the Netherlands Antilles Guilder
that has historically had an exchange rate fixed to the U.S. dollar but there can be no assurance that this will continue. If the Netherlands Antilles
Guilder is allowed to float this would lead to an increase in foreign exchange volatility and risk which could have a materially adverse effect on our
business, financial condition and operating results. There is also the possibility these three foreign countries that function under currencies other
than the U.S. dollar could devalue their currency against the U.S. dollar at any time and if this was to occur there could be a materially adverse
effect on our business, financial condition and operating results.




We have also assessed our
vulnerability to interest rate risk associated with our financial instruments, including, cash and cash equivalents, lines of credit and long term
debt. Due to the nature of these financial instruments, we believe that the risk associated with interest rate fluctuations does not pose a material
risk. Our line of credit and long-term debt can be expected to vary in the future as a result of future business requirements, market conditions and
other factors.




We did not have any derivative
financial instruments as of January 1, 2006.




27


---



Item 8.  Financial Statements and Supplementary
Data




The following consolidated
financial statements and supplementary data are included beginning on page 29 of this Report:







|                                                        |  |  |  | Page
|------------------------------------------------------- |  |  |  | ----
|Report of
Independent Registered Public Accounting Firm |  |  |  |     
|Consolidated
Financial Statements:                      |  |  |  |     
|Consolidated
Statements of Operations                   |  |  |  |     
|Consolidated
Balance Sheets                             |  |  |  |     
|Consolidated
Statements of Shareholders Equity         |  |  |  |     
|Consolidated
Statements of Cash Flows                   |  |  |  |     
|Notes to
Consolidated Financial Statements              |  |  |  |     



28


---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM




To the Board of Directors and Shareholders Cost-U-Less, Inc.




We have audited the accompanying
consolidated balance sheets of Cost-U-Less, Inc. and subsidiaries as of January 1, 2006 and December 26, 2004, and the related consolidated statements
of operations, shareholders equity, and cash flows for each of the three fiscal years in the period ended January 1, 2006. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on
our audits.




We have 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 financial statements are free of material misstatement. The Company is not required to have, nor
were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.




In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cost-U-Less, Inc. and
subsidiaries as of January 1, 2006 and December 26, 2004 and the results of their operations and their consolidated cash flows for each of the three
fiscal years in the period ended January 1, 2006 in conformity with accounting principles generally accepted in the United States of
America.




Our audits were conducted for the
purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated financial statement schedule listed in
Item 15 for three fiscal years in period ended January 1, 2006 is presented for purposes of additional analysis and is not a required part of the basic
consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a
whole.




/s/ Grant Thornton LLP




Seattle, Washington March 6, 2006




29


---








COST-U-LESS, INC.




CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands,
except share data)







|                                                    |  |  |  | Fiscal Year Ended |          
|--------------------------------------------------- |  |  |  | ----------------- | ---------
|
|Net
sales                                           |  |  |  | $                 | 219,414  
|Merchandise
costs                                   |  |  |  |                   | 178,613  
|Gross
profit                                        |  |  |  |                   | 40,801   
|Operating
expenses:                                 |  |  |  |                   |          
|Store                                               |  |  |  |                   | 28,567   
|General and
administrative                          |  |  |  |                   | 6,828    
|Store
openings                                      |  |  |  |                   | 335      
|Store
closings                                      |  |  |  |                   | 81       
|Total
operating expenses                            |  |  |  |                   | 35,811   
|                                                   
|Operating
income                                    |  |  |  |                   | 4,990    
|Other income
(expenses):                            |  |  |  |                   |          
|Interest
expense, net                               |  |  |  |                   | (367     
|Other                                               |  |  |  |                   | 42       
|Income before
income taxes                          |  |  |  |                   | 4,665    
|Income tax
provision                                |  |  |  |                   | 1,650    
|Net
income                                          |  |  |  | $                 | 3,015    
|                                                   
|Earnings per
common share:                          |  |  |  |                   |          
|Basic                                               |  |  |  | $                 | 0.77     
|Diluted                                             |  |  |  | $                 | 0.72     
|                                                   
|Weighted
average common shares outstanding, basic   |  |  |  |                   | 3,939,190
|Weighted
average common shares outstanding, diluted |  |  |  |                   | 4,168,611



The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.




30


---



COST-U-LESS, INC.




CONSOLIDATED BALANCE SHEETS (in thousands, except
share data)







|                                                                                                                                                   |  |  |  | January 1, 2006 |        | December 26, 2004
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | --------------- | ------ | -----------------
|ASSETS                                                                                                                                             |  |  |  |                 |        |                  
|Current
assets:                                                                                                                                    |  |  |  |                 |        |                  
|Cash and cash
equivalents                                                                                                                          |  |  |  | $               | 5,304  |                  
|Accounts
receivable (net of allowance of $80 and $205 in 2005 and 2004, respectively)                                                              |  |  |  |                 | 843    |                  
|Inventories                                                                                                                                        |  |  |  |                 | 23,027 |                  
|Prepaid
expenses                                                                                                                                   |  |  |  |                 | 260    |                  
|Deferred
taxes, net                                                                                                                                |  |  |  |                 | 876    |                  
|Total current
assets                                                                                                                               |  |  |  |                 | 30,310 |                  
|Buildings and
equipment, net                                                                                                                       |  |  |  |                 | 18,550 |                  
|Deposits and
other assets                                                                                                                          |  |  |  |                 | 772    |                  
|Total
assets                                                                                                                                       |  |  |  | $               | 49,632 |                  
|                                                                                                                                                  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                               |  |  |  |                 |        |                  
|                                                                                                                                                  
|Current
liabilities:                                                                                                                               |  |  |  |                 |        |                  
|Accounts
payable                                                                                                                                   |  |  |  | $               | 15,062 |                  
|Accrued
expenses                                                                                                                                   |  |  |  |                 | 5,402  |                  
|Income taxes
payable                                                                                                                               |  |  |  |                 | 20     |                  
|Line of
credit                                                                                                                                     |  |  |  |                 | 80     |                  
|Current
portion of long-term debt                                                                                                                  |  |  |  |                 | 267    |                  
|Current
portion capital leases                                                                                                                     |  |  |  |                 | 226    |                  
|Total current
liabilities                                                                                                                          |  |  |  |                 | 21,057 |                  
|Deferred
rent                                                                                                                                      |  |  |  |                 | 527    |                  
|Deferred
taxes, net                                                                                                                                |  |  |  |                 | 665    |                  
|Long-term
debt, less current portion                                                                                                               |  |  |  |                 | 2,011  |                  
|Capital
lease, less current portion                                                                                                                |  |  |  |                 | 1,329  |                  
|Total
liabilities                                                                                                                                  |  |  |  |                 | 25,589 |                  
|                                                                                                                                                  
|Commitments
and Contingencies                                                                                                                      |  |  |  |                 |       |                  
|                                                                                                                                                  
|Shareholders equity:                                                                                                                              |  |  |  |                 |        |                  
|Preferred
stock$0.001 par value; Authorized shares2,000,000; Issued and outstanding sharesnone                                                  |  |  |  |                 |       |                  
|Common
stock$0.001 par value; Authorized shares25,000,000; Issued and outstanding shares, 3,990,171 and 3,751,306 in 2005 and 2004,
respectively |  |  |  |                 | 13,931 |                  
|Retained
earnings                                                                                                                                  |  |  |  |                 | 10,926 |                  
|Accumulated
other comprehensive loss                                                                                                               |  |  |  |                 | (814   | )                
|Total
shareholders equity                                                                                                                         |  |  |  |                 | 24,043 |                  
|Total
liabilities and shareholders equity                                                                                                         |  |  |  | $               | 49,632 |                  



The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.




31


---



COST-U-LESS, INC.




CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands, except share data)







|                                                              |  |  |  | Common Stock Shares |           | Common Stock Amount |  | Retained Earnings |        | Accumulated Other Comprehensive Loss |  | Total
|------------------------------------------------------------- |  |  |  | -------------------- | --------- | -------------------- |  | ----------------- | ------ | ------------------------------------ |  | -----
|Balance at
December 29, 2002                                  |  |  |  |                      | 3,606,376 |                      |  | $                 | 12,446 |                                      |  | $    
|Net
income                                                    |  |  |  |                      |          |                      |  |                   |       |                                      |  |      
|Foreign
currency translation adjustments                      |  |  |  |                      |          |                      |  |                   |       |                                      |  |      
|Comprehensive
income                                          |  |  |  |                      |           |                      |  |                   |        |                                      |  |      
|Exercise of
common stock options including income tax benefit |  |  |  |                      | 82,000    |                      |  |                   | 151    |                                      |  |      
|Balance at
December 28, 2003                                  |  |  |  |                      | 3,688,376 |                      |  |                   | 12,597 |                                      |  |      
|Net
income                                                    |  |  |  |                      |          |                      |  |                   |       |                                      |  |      
|Foreign
currency translation adjustments                      |  |  |  |                      |          |                      |  |                   |       |                                      |  |      
|Comprehensive
income                                          |  |  |  |                      |           |                      |  |                   |        |                                      |  |      
|Stock based
compensation                                      |  |  |  |                      |          |                      |  |                   | 9      |                                      |  |      
|Exercise of
common stock options including income tax benefit |  |  |  |                      | 62,930    |                      |  |                   | 189    |                                      |  |      
|Balance at
December 26, 2004                                  |  |  |  |                      | 3,751,306 |                      |  |                   | 12,795 |                                      |  |      
|Net
income                                                    |  |  |  |                      |          |                      |  |                   |       |                                      |  |      
|Foreign
currency translation adjustments                      |  |  |  |                      |          |                      |  |                   |       |                                      |  |      
|Comprehensive
income                                          |  |  |  |                      |           |                      |  |                   |        |                                      |  |      
|Stock based
compensation                                      |  |  |  |                      |          |                      |  |                   | 24     |                                      |  |      
|Exercise of
common stock options including income tax benefit |  |  |  |                      | 238,865   |                      |  |                   | 1,112  |                                      |  |      
|Balance at
January 1, 2006                                    |  |  |  |                      | 3,990,171 |                      |  | $                 | 13,931 |                                      |  | $    



The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.




32


---



COST-U-LESS, INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS (in
thousands)







|                                                                                             |  |  |  | January 1, 2006 |        | December 26, 2004 |  | December 28, 2003
|-------------------------------------------------------------------------------------------- |  |  |  | --------------- | ------ | ----------------- |  | -----------------
|OPERATING
ACTIVITIES:                                                                        |  |  |  |                 |        |                   |  |                  
|Net
income                                                                                   |  |  |  | $               | 3,015  |                   |  | $                
|Adjustments
to reconcile net income to net cash provided by (used for) operating activities: |  |  |  |                 |        |                   |  |                  
|Depreciation
and amortization                                                                |  |  |  |                 | 1,934  |                   |  |                  
|Gain on
property damaged by Supertyphoon Ponsonga                                            |  |  |  |                 |       |                   |  |                  
|(Gain) loss
on buildings and equipment                                                       |  |  |  |                 | 66     |                   |  |                  
|Deferred tax
(benefit) provision                                                             |  |  |  |                 | 84     |                   |  |                  
|Tax benefit
from exercise of stock options                                                   |  |  |  |                 | 684    |                   |  |                  
|Allowance for
doubtful accounts                                                              |  |  |  |                 | (125   | )                 |  |                  
|Stock option
expense                                                                         |  |  |  |                 | 24     |                   |  |                  
|Cash provided
by changes in operating assets and liabilities:                                |  |  |  |                 |        |                   |  |                  
|Insurance
receivable                                                                         |  |  |  |                 |       |                   |  |                  
|Accounts
receivable                                                                          |  |  |  |                 | 87     |                   |  |                  
|Income tax
receivable                                                                        |  |  |  |                 | (7     | )                 |  |                  
|Inventories                                                                                  |  |  |  |                 | 113    |                   |  |                  
|Prepaid
expenses                                                                             |  |  |  |                 | 105    |                   |  |                  
|Deposits and
other assets                                                                    |  |  |  |                 | 6      |                   |  |                  
|Accounts
payable                                                                             |  |  |  |                 | (1,310 | )                 |  |                  
|Accrued
expenses                                                                             |  |  |  |                 | (535   | )                 |  |                  
|Deferred
rent                                                                                |  |  |  |                 |       |                   |  |                  
|Net cash
provided by operating activities                                                    |  |  |  |                 | 4,141  |                   |  |                  
|                                                                                            
|INVESTING
ACTIVITY:                                                                          |  |  |  |                 |        |                   |  |                  
|Cash used to
purchase buildings and equipment                                                |  |  |  |                 | (6,293 | )                 |  |                  
|Proceeds from
sale of buildings and equipment                                                |  |  |  |                 | 71     |                   |  |                  
|Proceeds from
insurance settlement                                                           |  |  |  |                 |       |                   |  |                  
|Net cash used
by investing activities                                                        |  |  |  |                 | (6,222 | )                 |  |                  
|                                                                                            
|FINANCING
ACTIVITIES:                                                                        |  |  |  |                 |        |                   |  |                  
|Proceeds from
exercise of common stock options                                               |  |  |  |                 | 428    |                   |  |                  
|Proceeds
(payments) from (on) line of credit, net                                            |  |  |  |                 | 80     |                   |  |                  
|Increase
(decrease) in bank checks outstanding                                               |  |  |  |                 | 240    |                   |  |                  
|Proceeds from
capital lease obligations                                                      |  |  |  |                 | 1,000  |                   |  |                  
|Payments on
capital lease obligations                                                        |  |  |  |                 | (154   | )                 |  |                  
|Payments on
long-term debt                                                                   |  |  |  |                 | (266   | )                 |  |                  
|Net cash
provided (used) by financing activities                                             |  |  |  |                 | 1,328  |                   |  |                  
|Foreign
currency translation adjustments                                                     |  |  |  |                 | (24    | )                 |  |                  
|Net increase
(decrease) in cash and cash equivalents                                         |  |  |  |                 | (777   | )                 |  |                  
|Cash and cash
equivalents:                                                                   |  |  |  |                 |        |                   |  |                  
|Beginning of
period                                                                          |  |  |  |                 | 6,081  |                   |  |                  
|End of
period                                                                                |  |  |  | $               | 5,304  |                   |  | $                
|                                                                                            
|SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:                                            |  |  |  |                 |        |                   |  |                  
|Cash paid
during the period for:                                                             |  |  |  |                 |        |                   |  |                  
|Interest                                                                                     |  |  |  | $               | 454    |                   |  | $                
|Income
taxes                                                                                 |  |  |  |                 | 888    |                   |  |                  



The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.




33


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS












|1. |  | Nature of Business and Summary of Significant Accounting
Policies
|-- |  | -----------------------------------------------------------------



Nature of
Business




Cost-U-Less, Inc. (the
Company) operates mid-sized warehouse club-style stores in the United States Territories (U.S. Territories), foreign island
countries in the Pacific and the Caribbean, the Hawaiian Islands and Sonora, California. At January 1, 2006, the Company operated eleven retail stores
as follows: two stores in each of Hawaii and Guam, and one store in each of St. Thomas, St. Croix, American Samoa, Fiji, Curacao, St. Maarten and
Sonora, California. On December 8, 2002, the Companys two stores on the island of Guam suffered damage from Supertyphoon Pongsona, resulting in
the immediate closure of both stores. The Companys Tamuning store lost its generator in the storm, but reopened shortly thereafter on December
12, 2002. The Companys Dededo store, however, suffered more significant damage and had to be closed for reconstruction. The store was rebuilt and
it reopened for business on October 3, 2003.




Fiscal
Year




The Company reports on a
52/53-week fiscal year, consisting of four thirteen-week periods and ending on the Sunday nearest to the end of December. The years ended December 26,
2004 and December 28, 2003 were 52-week fiscal years. Fiscal 2005, ending on January 1, 2006, was a 53-week fiscal year with the extra week included in
the fourth quarter.




Principles of
Consolidation




The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries in the U.S. Virgin Islands, Netherlands Antilles, Guam, American
Samoa, Nevada, Fiji and New Zealand. All inter-company accounts and transactions have been eliminated in consolidation.




Foreign Currency Translations
and Comprehensive Income




The U.S. dollar is the functional
currency for all locations, except for Fiji and Netherlands Antilles, where the local currency is the functional currency. Assets and liabilities
denominated in foreign currencies are translated at the applicable exchange rate on the balance sheet date. Net sales, costs and expenses are
translated at the average rates of exchange prevailing during the period. Adjustments resulting from this process are reported, net of taxes, as
Accumulated Other Comprehensive Income (Loss), a component of Shareholders Equity. Realized and unrealized gains on foreign currency transactions
are included in Other Income (Expense). The cumulative translation adjustment resulting from a net investment in a country is recognized as income or
expense in the period the Company has substantially liquidated operations in that country.




Use of
Estimates




The preparation of financial
statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to:
allowance for doubtful accounts; depreciable lives of assets; reserves for store closure expenses; and tax valuation allowances. Future events and
their effects cannot be determined with certainty. Accordingly, the accounting estimates require the exercise of judgment. The accounting estimates
used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional
information is obtained and as the Companys operating environment changes. Actual results could differ from those estimates.




34


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(continued)




Cash
Equivalents




The Company considers all highly
liquid investments with an initial maturity three months or less to be cash equivalents.




Financial
Instruments




The carrying value of financial
instruments, including cash, cash equivalents, receivables, payables, and long-term debt, approximates market value at January 1, 2006 and December 26,
2004. The carrying value of cash, cash equivalents, receivables and payables approximates their fair value based on the liquidity of these financial
instruments or based on their short-term nature. The carrying value of long-term debt approximates fair value based on the variable interest rates
charged on the debt.




Inventories




Inventory consists of retail
merchandise inventory and is carried at the lower of average cost or market.




Accounts Receivable,
net




Accounts receivable consist
primarily of receivables from local businesses and government agencies, vendor rebates and promotional allowances and other miscellaneous amounts due
to the Company. Management determines the allowance for doubtful accounts based on known troubled accounts and historical experience applied to an
aging of accounts.




Buildings and
Equipment




Buildings and equipment are
stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method for financial
reporting purposes. Buildings are generally depreciated over thirty-five years; equipment and fixtures are depreciated over three to ten years; and
leasehold improvements are amortized over the lesser of the initial term of the lease or the assets estimated useful life. Equipment acquired
under capitalized leases is depreciated over the shorter of the assets estimated useful life or the life of the related lease.




Long Lived
Assets




When facts and circumstances
indicate that the carrying values of long-lived assets may be impaired, an evaluation of the recoverability is performed by comparing the carrying
value of the assets to projected future cash flows. Upon indication that the carrying value of such assets may not be recoverable, the Company
recognizes an impairment loss by a charge against current operations.




Accounts
Payable




The Companys major bank
accounts are replenished as checks are presented. Accordingly, included in accounts payable at January 1, 2006 and December 26, 2004 are $3.8 million
and $3.5 million, respectively, representing the excess of outstanding checks over cash on deposit in the accounts on which the checks were
drawn.




35


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(continued)




Insurance/Self Insurance
Liabilities




The Company uses a combination of
insurance and self-insurance mechanisms to provide for the potential liabilities for workers compensation, general liability, property insurance,
director and officers liability, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by
the Company are not discounted and are estimated, in part, by considering historical claims experience and outside expertise, demographic factors,
severity factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences
and claims differ from these assumptions and historical trends.




Revenue
Recognition




The Company recognizes revenue
from product sales when the customer purchases the products, generally at the point of sale.




Merchandise
Costs




Merchandise costs consist of the
purchase price of inventory sold, inbound shipping charges and all costs related to our depot operations, including freight from depots to selling
warehouses. Merchandise costs also include salaries and other related expenses incurred in certain fresh food departments.




Vendor
Allowances




Periodic payments from vendors in
the form of volume rebates or other allowances that are evidenced by signed agreements are reflected in the carrying value of the inventory when earned
or as the Company progresses towards earning the rebate and as a component of cost of sales as the merchandise is sold. Other consideration received
from vendors is generally recorded as a reduction of merchandise costs upon completion of the terms of the related agreement, or by other systematic
and rational approach. Vendor allowances received for advertising programs reduce the Companys expense for the related advertising
program.




Advertising
Costs




The cost of advertising is
expensed as incurred. Advertising expenses incurred during fiscal years 2005, 2004 and 2003 were not considered material to the Companys
operating results.




Store Opening
Costs




Pre-opening costs incurred in
connection with the startup and promotion of new stores are expensed as incurred.




Stock-Based
Compensation




The Company has elected to apply
the disclosure-only provisions of Financial Accounting Standards Board Statement No. 123 (FAS 123), Accounting for Stock-Based
Compensation. Accordingly, the Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations under APB No. 25 (APB 25), whereby compensation
cost for stock options is measured as the excess, if any, of the fair value of the Companys common stock at the date of grant over the stock
option exercise price. The Company usually grants stock options at exercise prices equal to fair market value on the date of grant; as a result,
compensation cost is generally not recognized.




36


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(continued)




Had stock option compensation
expense for the Companys stock option plans been recognized based on the estimated fair value on the grant date under the fair value methodology
allowed by FAS 123, as amended by FAS 148, the Companys net income and earnings per share amounts would have been as follows:







|                                                                                                                                              |  |  |  | 2005 |       | 2004  |  | 2003
|--------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ----- | ----- |  | ----
|
|Net income,
as reported                                                                                                                       |  |  |  | $    | 3,015 |       |  | $   
|Add:
Stock-based compensation, as reported                                                                                                    |  |  |  |      | 24    |       |  |     
|Less: Total
stock-based employee compensation expense determined under fair value method for all awards, net of tax                           |  |  |  |      | (51   | )     |  |     
|Net income
pro forma                                                                                                                          |  |  |  | $    | 2,988 |       |  | $   
|Earnings per
common share, basic as reported                                                                                                  |  |  |  | $    | 0.77  |       |  | $   
|Earnings per
common share, basic pro forma                                                                                                    |  |  |  | $    | 0.76  |       |  | $   
|Earnings per
common share, diluted as reported                                                                                                |  |  |  | $    | 0.72  |       |  | $   
|Earnings per
common share, diluted pro forma                                                                                                  |  |  |  | $    | 0.72  |       |  | $   
|                                                                                                                                             
|The fair value of each option is
estimated on the date of grant under the Black-Scholes option-pricing model using the following assumptions:
|
|Risk-free
interest rate                                                                                                                       |  |  |  |      | 3.65  | %     |  |     
|Expected
life                                                                                                                                 |  |  |  |      | 5     | years |  |     
|Expected
dividend yield                                                                                                                       |  |  |  |      | 0     | %     |  |     
|Volatility                                                                                                                                    |  |  |  |      | 74    | %     |  |     



The weighted average fair values
of options granted in 2005, 2004, and 2003 were $3.21, $1.61 and $0.78, respectively.




Income
Taxes




Income tax expense includes U.S.
and foreign income taxes. The Company accounts for income taxes under the liability method. Under the liability method, deferred tax assets and
liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts that more likely than not will be realized.




Segment
Reporting




The Company operates mid-sized
warehouse club-style stores in the United States (U.S.), U.S. Territories, and foreign island countries throughout the Pacific and the Caribbean. The
Companys retail operations are its only reportable segment. The financial information used by the Companys chief operating decision maker
in allocating resources and assessing performance is only provided for one reportable segment.




37


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(continued)




New Accounting
Pronouncements




In December 2004, the Financial
Accounting Standards Board (the FASB) issued Statement 123 (revised 2004), Share-Based Payment (FAS 123(R)). FAS 123(R) requires that the
compensation cost relating to share-based payment transactions be recognized in financial statements. The cost will be measured based on the fair value
of the instruments issued. FAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase plans. FAS 123(R) replaces FAS 123 and supersedes APB 25. As originally
issued in 1995, FAS 123 established as preferable the fair-value-based method of accounting for share-based payment transactions with employees.
However, that statement permitted entities the option of continuing to apply the guidance in APB 25, as long as the footnotes to the financial
statements disclosed what net income would have been had the preferable fair-value-based method been used. The Company will be required to apply FAS
123(R) as of the beginning of fiscal 2006. The Company expects to use the modified-prospective method effective with its first quarter of fiscal 2006.
The Company believes that the adoption of this new accounting standard will not have a significant impact on the Companys results of operations
or financial position, as the Company has a limited amount of unvested options and options available for issuance in the
future.




On November 24, 2004, the FASB
issued Statement No. 151 (FAS 151), Inventory Costs, an amendment of ARB No. 43, Chapter 4 which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material. FAS 151 requires that abnormal items be recognized as current-period
charges, as well as unallocated overheads recognized in the period in which they are incurred. The provisions of this statement are effective for
inventory costs incurred during fiscal periods beginning after June 15, 2005. The Companys adoption of FAS 151 in its first quarter of fiscal
2006 is not expected to have a significant impact on the Companys results of operations or financial position.




Reclassifications




Certain reclassifications of
prior years balances have been made for consistent presentation with the current year.


|3. |  | Buildings and Equipment
|-- |  | -----------------------



Buildings and equipment consist
of the following (in thousands) at:







|                                                     |  |  |  | January 1, 2006 |        | December 26, 2004
|---------------------------------------------------- |  |  |  | --------------- | ------ | -----------------
|Buildings                                            |  |  |  | $               | 10,783 |                  
|Equipment                                            |  |  |  |                 | 16,375 |                  
|Leasehold
improvements                               |  |  |  |                 | 1,095  |                  
|Land
improvements                                    |  |  |  |                 | 839    |                  
|Land                                                 |  |  |  |                 | 906    |                  
|Equipment
under capital lease                        |  |  |  |                 | 1,805  |                  
|Buildings,
equipment, land and improvements          |  |  |  |                 | 31,803 |                  
|Less
accumulated depreciation and amortization       |  |  |  |                 | 13,409 |                  
|Net book
value of depreciable assets                 |  |  |  |                 | 18,394 |                  
|Construction
in progress                             |  |  |  |                 | 72     |                  
|Computer
system and software development in progress |  |  |  |                 | 84     |                  
|Total
Buildings and Equipment                        |  |  |  | $               | 18,550 |                  



38


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(continued)


|4. |  | Line of Credit
|-- |  | --------------



The Company has had a line of
credit with Wells Fargo Business Credit since April 9, 2003. On May 26, 2005, the Company entered into the Fourth Amendment to the Credit and Security
Agreement (the Fourth Amendment) as it relates to its current line of credit. The Fourth Amendment provides for an extension of the maturity date of
the Companys line of credit from April 9, 2006, to May 18, 2007. Additionally, the Fourth Amendment (1) reduces the interest rate to an annual
interest rate equal to the prime rate as defined by Wells Fargo Bank National Association, (2) reduces the minimum interest charge to not
less than $25,000 per calendar year, (3) increases the unused line fee to a rate of three-eighths of one percent (0.375%) per annum on the average
daily unused line and (4) eliminates the one day interest charge on all payments received on the line of credit. Borrowings continue to be limited to
the lesser of $6.0 million or the amount calculated under the borrowing base. The borrowing base is equal to the lesser of (a) $6.0 million or (b) the
sum of 70% of eligible inventory in the United States of America, plus 60% of eligible inventory in the U.S. Virgin Islands and Guam, less specified
reserves.




The line of credit consists of a
$6.0 million committed, secured revolving credit line with a sublimit for letters of credit and bankers acceptances in an amount up to $0.7 million. At
January 1, 2006, there was $0.1 million outstanding on the line of credit and $0.1 million in letters of credit outstanding. Borrowings under the
amended line of credit were charged interest at the financial institutions prime rate plus 0.5% from the beginning of the fiscal year through May
17, 2005, and at the prime rate from May 18, 2005, through January 1, 2006. At January 1, 2006, the rate charged by the financial institution was
7.25%.




The line of credit contains
various covenants, including a requirement that the Company maintain minimum pre-tax income and tangible net worth and limitations on acquisitions,
additional debt, changes in control and capital expenditures. The Company believes that it was in compliance with all such covenants as of January 1,
2006.


|5. |  | Long-Term Debt
|-- |  | --------------



In conjunction with the
construction of the relocated St. Thomas store in 1998, the Company entered into a $2.0 million note payable to a bank which matures in June 2013.
Interest on the note at January 1, 2006 is at the prime rate plus 1% (8.25%). As of January 1, 2006, there was a balance owed of $1.0 million, which is
secured by a first leasehold priority mortgage on the St. Thomas building. The Company makes principal payments of approximately $11,000 per month,
plus interest.




In November 1999, the Company
entered into a $2.0 million credit facility with a financial institution to fund the construction of the St. Maarten store. The note payable matures in
June 2015. As of January 1, 2006, there was a balance owed of $1.3 million against this credit facility. Interest on the note at January 1, 2006 is at
the prime rate plus 1% (8.25%). The credit facility is secured by a first leasehold security interest on the St. Maarten property. The Company makes
principal payments of approximately $11,000 per month, plus interest.




Maturities of long-term debt are
as follows (in thousands):







|2006       |  |  |  | $ | 267   |  |  |  |  | 
|---------- |  |  |  | - | ----- |  |  |  |  | 
|2007       |  |  |  |   | 267   |  |  |  |  | 
|2008       |  |  |  |   | 267   |  |  |  |  | 
|2009       |  |  |  |   | 267   |  |  |  |  | 
|2010       |  |  |  |   | 267   |  |  |  |  | 
|Thereafter |  |  |  |   | 943   |  |  |  |  | 
|Total      |  |  |  | $ | 2,278 |  |  |  |  | 



39


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(continued)


|6. |  | Contingencies
|-- |  | -------------



The Company is involved from time
to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim,
proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Companys business, financial condition or
results of operations.


|7. |  | Interest Expense, Net
|-- |  | ---------------------



The components of interest
expense, net are as follows (in thousands):







|                      |  |  |  | 2005 |      | 2004 |  | 2003
|--------------------- |  |  |  | ---- | ---- | ---- |  | ----
|Interest
incurred     |  |  |  | $    | 497  |      |  | $   
|Capitalized
interest  |  |  |  |      | (104 | )    |  |     
|Interest
income       |  |  |  |      | (26  | )    |  |     
|Interest
expense, net |  |  |  | $    | 367  |      |  | $   

|8. |  | Income Taxes
|-- |  | ------------



Income before income taxes by
jurisdiction is as follows (in thousands):







|                           |  |  |  | 2005 |       | 2004 |  | 2003
|-------------------------- |  |  |  | ---- | ----- | ---- |  | ----
|United
States              |  |  |  | $    | 1,426 |      |  | $   
|U.S.
Territories           |  |  |  |      | 2,491 |      |  |     
|Foreign                    |  |  |  |      | 748   |      |  |     
|Income before
income taxes |  |  |  | $    | 4,665 |      |  | $   



The provision for income taxes is
as follows (in thousands):







|                           |  |  |  | 2005 |       | 2004 |  | 2003
|-------------------------- |  |  |  | ---- | ----- | ---- |  | ----
|Current
income taxes:      |  |  |  |      |       |      |  |     
|United
States              |  |  |  | $    | 712   |      |  | $   
|U.S.
Territories           |  |  |  |      | 854   |      |  |     
|Foreign                    |  |  |  |      | 0     |      |  |     
|Current
income taxes       |  |  |  |      | 1,566 |      |  |     
|Deferred
income taxes      |  |  |  |      |       |      |  |     
|United
States              |  |  |  |      | (223  | )    |  |     
|U.S.
Territories           |  |  |  |      | 44    |      |  |     
|Foreign                    |  |  |  |      | 263   |      |  |     
|Deferred
income taxes      |  |  |  |      | 84    |      |  |     
|Provision for
income taxes |  |  |  | $    | 1,650 |      |  | $   



A reconciliation of the
Companys effective tax rate with the federal statutory rate of 34% for the years ended January 1, 2006, December 26, 2004, and December 28, 2003,
is as follows (dollars in thousands):







|                                                             |  |  |  | 2005 |       |  |  | 2004 |      |   |  | 2003 |       |  
|------------------------------------------------------------ |  |  |  | ---- | ----- |  |  | ---- | ---- | - |  | ---- | ----- | -
|Tax at U.S.
Statutory Rate                                   |  |  |  | $    | 1,586 |  |  |      | 34.0 | % |  | $    | 1,519 |  
|Non-Deductible Permanent Differences                         |  |  |  |      | 25    |  |  |      | 0.5  | % |  |      | 3     |  
|Foreign Tax
Losses not Benefited                             |  |  |  |      |      |  |  |      |     |   |  |      | 290   |  
|Foreign Tax
Credit Taken (not utilized)                      |  |  |  |      | 10    |  |  |      | 0.2  | % |  |      | (17   | )
|Statutory
Rate Difference as Compared to U.S. Statutory Rate |  |  |  |      | 21    |  |  |      | 0.5  | % |  |      | 56    |  
|Other                                                        |  |  |  |      | 8     |  |  |      | 0.2  | % |  |      | (71   | )
|Effective
Income Tax Rate                                    |  |  |  | $    | 1,650 |  |  |      | 35.4 | % |  | $    | 1,780 |  



40


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(continued)












|Significant components of the Companys deferred tax assets and liabilities are as follows (in thousands):
|----------------------------------------------------------------------------------------------------------
|
|Deferred tax
assets                                                                                       
|Inventory
adjustments                                                                                     
|Vacation
accrual                                                                                          
|Deferred
rent                                                                                             
|Accrued
expenses                                                                                          
|Net operating
loss carryforwardforeign                                                                   
|Foreign tax
credits                                                                                       
|Total
deferred tax assets                                                                                 
|Valuation
allowance                                                                                       
|                                                                                                          
|Deferred tax
liabilities                                                                                  
|Cash
discounts                                                                                            
|Fixed asset
basis difference                                                                              
|Other                                                                                                     
|Total
deferred tax liabilities                                                                            
|Net deferred
tax assets                                                                                   
|                                                                                                          
|Net deferred tax assets are
classified on the balance sheet as follows (in thousands):                    
|
|Current
assets                                                                                            
|Long-term
liabilities, net                                                                                
|Net deferred
tax assets                                                                                   



As of January 1, 2006, we have
foreign net operating loss carryforwards (NOLs) of approximately $7.5 million, some of which, if not utilized, will begin expiring in the
year 2006. The NOLs include approximately $3.9 million related to Curacao and St. Maarten which are not subject to expiration time limits. Our ability
to utilize these NOLs is dependent upon generating taxable income in the foreign jurisdictions. As a result, we have recorded a valuation allowance of
$2.4 million attributable to the $2.6 million of tax benefits recorded for net operating loss carryforwards.




The Company had tax credit
carryforwards of $0.1 million as of January 1, 2006, expiring between 2014 and 2015. During 2005, the Company was able to utilize a portion of the tax
credit carryforward. The Company expects to be able to fully utilize the remaining tax credit carryforward of $0.1 million and therefore no valuation
allowance is provided.


|9. |  | Shareholders Equity
|-- |  | --------------------



Stock
Options




In 1998, the Company adopted, and
shareholders approved, issuance of the 1998 Stock Incentive Compensation Plan (the 1998 Plan). The 1998 Plan, as amended, provides for the
granting of various stock awards, including stock options and issuance of restricted stock, with a maximum of 1,000,000 shares of common stock
available for issuance. Options issued under the 1998 Plan vest at various terms ranging from immediately to five years and generally expire ten years
from the date of grant. The options are usually granted at prices equal to the fair value on the date of grant. There were 2,882 options available for
future grant under the 1998 Plan at January 1, 2006.




41


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(continued)




A summary of the status of stock
option plans as of January 1, 2006, December 26, 2004 and December 28, 2003, and changes during the years then ended are presented
below:







|                               |  |  |  | 2005 |          | 2004 |  | 2003 |     
|------------------------------ |  |  |  | ---- | -------- | ---- |  | ---- | ----
|
|Outstanding,
beginning of year |  |  |  |      | 838,189  |      |  | $    | 2.88
|Granted at
fair value          |  |  |  |      | 14,000   |      |  |      | 6.67
|Forfeited                      |  |  |  |      |         |      |  |      |    
|Exercised                      |  |  |  |      | (238,865 | )    |  |      | 1.79
|Outstanding,
end of year       |  |  |  |      | 613,324  |      |  |      | 3.39
|                              
|Exercisable,
end of year       |  |  |  |      | 611,234  |      |  |      | 3.40



The following summarizes
information related to options outstanding and exercisable at January 1, 2006:







|           |  |  |  | Outstanding |         | Exercisable | 
|---------- |  |  |  | ----------- | ------- | ----------- | 
|
|$1.181.88 |  |  |  |             | 219,886 |             | 
|2.003.08  |  |  |  |             | 180,667 |             | 
|4.386.10  |  |  |  |             | 159,342 |             | 
|7.008.11  |  |  |  |             | 53,429  |             | 
|           |  |  |  |             | 613,324 |             | 



Preferred Share Purchase
Rights




On February 23, 1999, the
Companys Board of Directors declared a dividend distribution of preferred share purchase rights (the Rights) pursuant to a
Shareholder Rights Plan. The Rights initially trade with shares of the Companys common stock and have no impact upon the way in which
shareholders can trade the Companys common stock. However, ten days after a person or group acquires 15% or more of the Companys common
stock, or such date, if any, as the Board of Directors may designate after a person or group commences or publicly announces its intention to commence
a tender or exchange offer which could result in that person or group owning 15% or more of the Companys common stock (even if no purchases
actually occur), the Rights will become exercisable and separate certificates representing the Rights will be distributed. The Rights would then begin
to trade independently from the Companys shares. As of January 1, 2006, no rights have become exercisable.




42


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(continued)


|10. |  | Earnings Per Share
|--- |  | ------------------



Basic earnings per share is
computed using the weighted average number of common shares outstanding during the period and excludes any dilutive effects of stock options. Diluted
earnings per share are computed using the weighted average number of common shares and potentially dilutive shares outstanding during the period.
Potentially dilutive shares are excluded from the computation if their effect is anti-dilutive.




The following table sets forth
the computation of basic and diluted earnings per common share (dollars in thousands):







|                                                                                                                    |  |  |  | Fiscal Year Ended |          
|------------------------------------------------------------------------------------------------------------------- |  |  |  | ----------------- | ---------
|
|Numerator:                                                                                                          |  |  |  |                   |          
|Net
income                                                                                                          |  |  |  | $                 | 3,015    
|Denominator:                                                                                                        |  |  |  |                   |          
|Denominator
for basic earnings per shareweighted average shares                                                    |  |  |  |                   | 3,939,190
|Effect of
potentially dilutive shares:                                                                              |  |  |  |                   |          
|Stock
options                                                                                                       |  |  |  |                   | 229,421  
|Denominator
for diluted earnings per shareadjusted weighted average shares and assumed conversion of stock options |  |  |  |                   | 4,168,611
|Basic
earnings per common share                                                                                     |  |  |  | $                 | 0.77     
|Diluted
earnings per common share                                                                                   |  |  |  | $                 | 0.72     



The diluted share calculation for
the fiscal years ended January 1, 2006, December 26, 2004 and December 28, 2003, excludes 4,000, 164,947 and 320,875 stock options outstanding,
respectively. These options are excluded due to their anti-dilutive effect.


|11. |  | Geographic Information
|--- |  | ----------------------



Geographic information pertaining
to the Companys one reporting segment is as follows (in thousands):







|                                       |  |  |  | Sales |         | Long-lived Assets
|-------------------------------------- |  |  |  | ----- | ------- | -----------------
|2005                                   |  |  |  |       |         |                  
|United
States                          |  |  |  | $     | 42,222  |                  
|U.S.
Territories and foreign countries |  |  |  |       | 177,192 |                  
|                                       |  |  |  | $     | 219,414 |                  
|                                      
|2004                                   |  |  |  |       |         |                  
|United
States                          |  |  |  | $     | 43,280  |                  
|U.S.
Territories and foreign countries |  |  |  |       | 166,110 |                  
|                                       |  |  |  | $     | 209,390 |                  
|                                      
|2003                                   |  |  |  |       |         |                  
|United
States                          |  |  |  | $     | 42,519  |                  
|U.S.
Territories and foreign countries |  |  |  |       | 134,547 |                  
|                                       |  |  |  | $     | 177,066 |                  



43


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(continued)


|12. |  | Lease Commitments
|--- |  | -----------------



The Company has entered into
operating leases for its administrative office and certain of its retail locations. The leases range from 3 to 15 years and include renewal options.
The Company is required to pay a base rent, plus insurance, taxes, and maintenance.




In January 2004, the Company sold
and leased back $0.8 million of equipment residing in its reconstructed store in Dededo, Guam. The lease is for seven years with annual rental payments
of approximately $0.1 million. In 2005, the Company entered into a capital lease for $1.0 million of equipment at its new St. Croix store. The lease is
also for seven years with annual rental payments of approximately $0.2 million.




A summary of the Companys
future minimum lease obligations at January 1, 2006, under noncancellable leases is as follows (in thousands):







|Fiscal Year                              |  |  |  | Operating Leases |        | Capital Lease
|---------------------------------------- |  |  |  | ---------------- | ------ | -------------
|2006                                     |  |  |  | $                | 4,893  |              
|2007                                     |  |  |  |                  | 4,525  |              
|2008                                     |  |  |  |                  | 4,274  |              
|2009                                     |  |  |  |                  | 3,195  |              
|2010                                     |  |  |  |                  | 1,941  |              
|Thereafter                               |  |  |  |                  | 11,159 |              
|Total                                    |  |  |  | $                | 29,987 |              
|Less imputed
interest                    |  |  |  |                  |        |              
|Present value
of minimum rental payments |  |  |  |                  |        |              
|Less current
portion                     |  |  |  |                  |        |              
|Capital lease
obligation                 |  |  |  |                  |        |              



Rent expense under operating
leases for the fiscal years ended January 1, 2006, December 26, 2004 and December 28, 2003, totaled $5.4 million, $5.4 million and $4.7 million,
respectively.


|13. |  | Employee Benefit Plans
|--- |  | ----------------------



The Company maintains a 40l(k)
profit-sharing plan covering all eligible employees over the age of 18 with at least six months of service. Participating employees may elect to defer
and contribute up to 100% of their annual compensation to the plan, subject to annual limitations under the Internal Revenue Code. The Company matches
employee contributions at a rate of 25%, up to 15% of their annual compensation. The Companys matching contributions to the plan approximated
$0.1 million in each of fiscal years 2005, 2004 and 2003.




The Company has a Manager Bonus
Program, which provides for annual bonuses for managers based on store and company performance. All amounts payable under the program are accrued in
the year earned. Accordingly, bonuses accrued under this program totaled $0.7 million, $1.4 million and $0.5 million for fiscal 2005, 2004 and 2003,
respectively.




The Company also has a sales
incentive bonus program for all store employees based on sales targets and inventory shrink goals. These bonuses are paid monthly and were
approximately $0.1 million, $0.2 million and $0.1 million in fiscal 2005, 2004 and 2003, respectively.




44


---



COST-U-LESS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(continued)


|14. |  | Quarterly Financial Data (Unaudited)
|--- |  | ------------------------------------



The following is a summary of the
Companys unaudited quarterly results of operations:







|               |  |  |  |  |     |  |  |   |        |  |  | Earnings Per Common Share |       
|-------------- |  |  |  |  | --- |  |  | - | ------ |  |  | ------------------------- | ------
|
|
|Fiscal
2005(1) |  |  |  |  |     |  |  |   |        |  |  |                           |       
|First
quarter  |  |  |  |  | 143 |  |  | $ | 53,239 |  |  | $                         | 9,574 
|Second
quarter |  |  |  |  | 143 |  |  |   | 52,295 |  |  |                           | 9,698 
|Third
quarter  |  |  |  |  | 143 |  |  |   | 53,011 |  |  |                           | 10,020
|Fourth
quarter |  |  |  |  | 154 |  |  |   | 60,869 |  |  |                           | 11,509
|              
|Fiscal
2004(1) |  |  |  |  |     |  |  |   |        |  |  |                           |       
|First
quarter  |  |  |  |  | 143 |  |  | $ | 50,078 |  |  | $                         | 9,066 
|Second
quarter |  |  |  |  | 143 |  |  |   | 50,813 |  |  |                           | 9,353 
|Third
quarter  |  |  |  |  | 143 |  |  |   | 51,088 |  |  |                           | 9,459 
|Fourth
quarter |  |  |  |  | 143 |  |  |   | 57,411 |  |  |                           | 10,646






|(1) |  | The Companys fiscal quarters are 13 weeks except fourth
quarter 2005, which was a 14 week quarter.
|--- |  | ---------------------------------------------------------------------------------------------------



45


---



|Item 9. |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
|------- |  | ------------------------------------------------------------------------------------



None.


|Item 9A. |  | Controls and Procedures
|-------- |  | -----------------------



Under the supervision and with
the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended.
Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this annual report.


|Item 9B. |  | Other Information
|-------- |  | -----------------



None.




46


---



PART III


|Item 10. |  | Executive Officers and Directors of the
Registrant
|-------- |  | --------------------------------------------------



Information called for by Part
III, Item 10, is incorporated by reference to the information in our proxy statement relating to our 2006 annual meeting of
shareholders.


|Item 11. |  | Executive Compensation
|-------- |  | ----------------------



Information called for by Part
III, Item 11, is incorporated by reference to the information in our proxy statement relating to our 2006 annual meeting of
shareholders.


|Item 12. |  | Security Ownership of Certain Beneficial Owners and
Management
|-------- |  | --------------------------------------------------------------



Information called for by Part
III, Item 12, is incorporated by reference to the information in our proxy statement relating to our 2006 annual meeting of
shareholders.


|Item 13. |  | Certain Relationships and Related Transactions
|-------- |  | ----------------------------------------------



Information called for by Part
III, Item 13, is incorporated by reference to the information in our proxy statement relating to our 2006 annual meeting of
shareholders.


|Item 14. |  | Principal Accountant Fees and Services
|-------- |  | --------------------------------------



Information called for by Part
III, Item 14, is incorporated by reference to the information in our proxy statement relating to our 2006 annual meeting of
shareholders.




47


---



PART IV


|Item 15. |  | Exhibits and Financial Statement Schedules
|-------- |  | ------------------------------------------



Documents filed as part of this
Report:


|(1) |  | Financial Statementsall consolidated financial statements
of the Company as set forth under Item 8, beginning on p. 28 of this Report.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Financial Statement SchedulesSchedule II Valuation and
Qualifying Accounts.
|--- |  | ----------------------------------------------------------------------------



The independent auditors
report with respect to the financial statement schedules appears on page 29 of this annual report. All other financial statements and schedules not
listed are omitted because either they are not applicable or not required, or the required information is included in the consolidated financial
statements.


|(3) |  | Exhibits
|--- |  | --------






|      |  |  |  |                                                                                                                                                                                                                             |  |  |  | Incorporated by Reference | 
|----- |  |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ------------------------- | 
|
|3.1   |  |  |  | Restated Articles of Incorporation of Cost-U-Less, Inc.                                                                                                                                                                     |  |  |  | S-1/A                     | 
|3.2   |  |  |  | Amended and Restated Bylaws of Cost-U-Less, Inc.                                                                                                                                                                            |  |  |  | 10-Q                      | 
|4.1   |  |  |  | Rights Agreement between Cost-U-Less, Inc. and ChaseMellon Shareholder Services, L.L.C. as rights agent, dated March 15,
1999                                                                                               |  |  |  | 8-A                       | 
|4.2   |  |  |  | Form
of Common Stock Certificate of Cost-U-Less, Inc.                                                                                                                                                                       |  |  |  | S-1/A                     | 
|10.1  |  |  |  | Amended and Restated 1998 Stock Incentive Compensation Plan*                                                                                                                                                                |  |  |  | 10-K                      | 
|10.2  |  |  |  | Form
of Stock Option Agreement                                                                                                                                                                                              |  |  |  | 10-K                      | 
|10.3  |  |  |  | Amended and Restated 1989 Stock Option Plan*                                                                                                                                                                                |  |  |  | S-1                       | 
|10.4  |  |  |  | Form
of Director Stock Option Agreement (Vesting)*                                                                                                                                                                          |  |  |  | S-1                       | 
|10.5  |  |  |  | Form
of Director Stock Option Agreement (Nonvesting)*                                                                                                                                                                       |  |  |  | S-1                       | 
|10.6  |  |  |  | Form
of Indemnification Agreement*                                                                                                                                                                                          |  |  |  | 10-Q                      | 
|10.7  |  |  |  | Credit and Security Agreement, dated April 9, 2003, by and between Cost-U-Less, Inc., CULGUAM, Inc., CULNEV, Inc., CULUSVI, Inc., and Wells
Fargo Business Credit, Inc.                                                     |  |  |  | 8-K                       | 
|10.8  |  |  |  | First Amendment dated as of October 17, 2003 to the Credit and Security Agreement dated April 9, 2003, by and between Cost-U-Less, Inc.,
CULGUAM, Inc., CULNEV, Inc., CULUSVI, Inc., and Wells Fargo Business Credit, Inc.  |  |  |  | 10-K                      | 
|10.9  |  |  |  | Second Amendment dated as of March 2, 2004 to the Credit and Security Agreement dated April 9, 2003, by and between Cost-U-Less, Inc.,
CULGUAM, Inc., CULNEV, Inc., CULUSVI, Inc., and Wells Fargo Business Credit, Inc.    |  |  |  | 10-K                      | 
|10.10 |  |  |  | Third Amendment dated as of November 11, 2004 to the Credit and Security Agreement dated April 9, 2003, by and between Cost-U-Less, Inc.,
CULGUAM, Inc., CULNEV, Inc., CULUSVI, Inc., and Wells Fargo Business Credit, Inc. |  |  |  | 10-K                      | 



48


---

|      |  |  |  |                                                                                                                                                                                                                                                                                                                     |  |   |  | Incorporated by Reference | 
|----- |  |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - |  | ------------------------- | 
|
|10.11 |  |  |  | Fourth Amendment dated as of May 18, 2005 to the Credit and Security Agreement dated April 9, 2003, by and between Cost-U-Less, Inc., CULGUAM,
Inc., CULNEV, Inc., CULUSVI, Inc., and Wells Fargo Business Credit, Inc. (Incorporated by reference to Exhibit 10.1 to the Companys Form 8-K
filed on June 1, 2005) |  |   |  | 8-K                       | 
|10.12 |  |  |  | Construction/Permanent Loan Agreement by and among CULUSVI, Inc., Cost-U-Less, Inc. and Banco Popular de Puerto Rico, dated November 6,
1997                                                                                                                                                                        |  |   |  | S-1                       | 
|10.13 |  |  |  | Employment Agreement between Cost-U-Less, Inc. and J. Jeffrey Meder, dated October 20, 2004*                                                                                                                                                                                                                        |  |   |  | 8-K                       | 
|10.14 |  |  |  | Lease Agreement between Westmall Limited and CUL (Fiji) Limited, effective March 1, 1998                                                                                                                                                                                                                            |  |   |  | S-1/A                     | 
|10.15 |  |  |  | Lease Agreement between Fiji Public Service Association and CUL (Fiji) Limited, dated June 4, 1998                                                                                                                                                                                                                  |  |   |  | 10-K                      | 
|10.16 |  |  |  | Lease Agreement between Baroud Real Estate Development N.V. and C.U.L. (Curacao) N.V., dated April 3, 1998                                                                                                                                                                                                          |  |   |  | S-1                       | 
|10.17 |  |  |  | Ground Lease between Market Square East, Inc. and CULUSVI, Inc., dated October 20, 1997                                                                                                                                                                                                                             |  |   |  | S-1                       | 
|10.18 |  |  |  | First Amendment to Ground Lease between Market Square East, Inc. and CULUSVI, Inc., dated November 29, 2005                                                                                                                                                                                                         |  | X |  |                           | 
|10.19 |  |  |  | Sublease Agreement between Tamuning Capital Investment, Inc. and Cost-U-Less, Inc., dated July 15, 1994                                                                                                                                                                                                             |  |   |  | S-1                       | 
|10.20 |  |  |  | Lease Agreement between Haleck Enterprises Incorporated and Cost-U-Less, Inc., dated February 3, 2005                                                                                                                                                                                                               |  |   |  | 8-K                       | 
|10.21 |  |  |  | Lease Agreement between Inmostrat Corporation and Cost-U-Less, Inc., dated August 1993                                                                                                                                                                                                                              |  |   |  | S-1                       | 
|10.22 |  |  |  | Lease Agreement between Hassan Rahman and Cost-U-Less, Inc., dated July 30, 1993                                                                                                                                                                                                                                    |  |   |  | S-1                       | 
|10.23 |  |  |  | Addendum to Lease Agreement between Hassan Rahman and Cost-U-Less, Inc., dated March 21, 2005                                                                                                                                                                                                                       |  |   |  | 10-Q                      | 
|10.24 |  |  |  | Industrial Real Estate Lease between Hilo Partners and Cost-U-Less, Inc., dated September 1, 1991                                                                                                                                                                                                                   |  |   |  | S-1                       | 
|10.25 |  |  |  | Indenture of Lease between H.C.L. Investments, Inc. and Cost-U-Less, Inc., dated August 21, 1992                                                                                                                                                                                                                    |  |   |  | 10-K                      | 
|10.26 |  |  |  | Amendment to Lease between H.C.L. Investments, Inc. and Cost-U-Less, Inc., dated April 27, 2000                                                                                                                                                                                                                     |  |   |  | 10-K                      | 
|10.27 |  |  |  | Lease Agreement between Caribe Lumber & Trading N.V. (St. Maarten) and CUL Sint Maarten N.V., dated February 19, 1999                                                                                                                                                                                               |  |   |  | 10-K                      | 
|10.28 |  |  |  | Sublease Agreement between New Breed Distribution Corp of California, Inc. and Cost-U-Less, Inc., dated November 1, 1999                                                                                                                                                                                            |  |   |  | 10-K/A                    | 
|10.29 |  |  |  | Lease Agreement between AMB Property, L.P. and Cost-U-Less, Inc., dated November 12, 1999                                                                                                                                                                                                                           |  |   |  | 10-K/A                    | 



49


---

|      |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |   |  | Incorporated by Reference | 
|----- |  |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - |  | ------------------------- | 
|
|10.30 |  |  |  | First Amendment to Lease Agreement between AMB Property, L.P. and Cost-U-Less, Inc., dated November 21, 2001                                                                                                                                                                                                                                                                                                                                          |  |   |  | 10-K                      | 
|10.31 |  |  |  | Lease Agreement between BDC One Preston Properties Limited Partnership and Cost-U-Less, Inc., dated April 27, 2000                                                                                                                                                                                                                                                                                                                                    |  |   |  | 10-K                      | 
|10.32 |  |  |  | Lease Agreement between Tonko Reyes, Inc., a Guam corporation and Cost-U-Less, Inc., dated October 22, 2001                                                                                                                                                                                                                                                                                                                                           |  |   |  | 10-K                      | 
|10.33 |  |  |  | Amendment to Lease Agreement between Tonko Reyes, Inc., a Guam corporation and Cost-U-Less, Inc., dated October 22, 2001                                                                                                                                                                                                                                                                                                                              |  |   |  | 10-K                      | 
|10.34 |  |  |  | Lease Agreement between Sun Life Assurance Company of Canada and Cost-U-Less, Inc., dated November 18, 2003                                                                                                                                                                                                                                                                                                                                           |  |   |  | 10-K                      | 
|10.35 |  |  |  | Executive Severance Plan*                                                                                                                                                                                                                                                                                                                                                                                                                             |  |   |  | 10-K                      | 
|10.36 |  |  |  | Real
Estate Purchase and Sale Agreement dated April 30, 2004, between Mint Capital, Casco Inc., and Cost-U-Less, Inc.                                                                                                                                                                                                                                                                                                                                 |  |   |  | 10-Q                      | 
|10.37 |  |  |  | Summary of Cost-U-Less, Inc. 2005 Incentive Bonus Program*                                                                                                                                                                                                                                                                                                                                                                                            |  |   |  | 8-K                       | 
|10.38 |  |  |  | Summary of Cost-U-Less, Inc. Non-Employee Director Compensation*                                                                                                                                                                                                                                                                                                                                                                                      |  |   |  | 8-K                       | 
|10.39 |  |  |  | Shareholders Agreement dated July 11, 2005 between Cost-U-Less Cayman Holdings, an exempted company incorporated under the laws of the Cayman
Islands; Cayman Drug Limited, a company incorporated in the Cayman Islands; Cayman Cost-U-Less Limited, a company incorporated under the laws of the
Cayman Islands; Naul Bodden of c/o NCB Consulting Ltd in the Cayman Islands; and Robert Bodden of c/o NCB Consulting Ltd in the Cayman Islands.
** |  |   |  | 10-Q                      | 
|16.1  |  |  |  | Letter re: change in certifying accountant                                                                                                                                                                                                                                                                                                                                                                                                            |  |   |  | 8-K                       | 
|21.1  |  |  |  | Subsidiaries of Cost-U-Less, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                     |  |   |  | 10-K                      | 
|23.1  |  |  |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                                              |  | X |  |                           | 
|24.10 |  |  |  | Power of Attorney (See page 51)                                                                                                                                                                                                                                                                                                                                                                                                                       |  | X |  |                           | 
|31.1  |  |  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                    |  | X |  |                           | 
|31.2  |  |  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                    |  | X |  |                           | 
|32.1  |  |  |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                    |  | X |  |                           | 
|32.2  |  |  |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                    |  | X |  |                           | 






|* |  | Management contract or compensatory plan or
arrangement
|- |  | -------------------------------------------------------

|** |  | This exhibit (or portions thereof) has been filed separately
with the Commission pursuant to an application for confidential treatment. The confidential portions of this Exhibit have been omitted and are marked
by an asterisk.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



50


---



SIGNATURES




Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.







|                     |  |  |  | COST-U-LESS, INC.                                                              
|-------------------- |  |  |  | -------------------------------------------------------------------------------
|Date: March 29,
2006 |  |  |  | By:  /s/ J. Jeffrey MederJ. Jeffrey Meder President and Chief Executive
Officer



Each person whose individual
signature appears below hereby authorizes and appoints J. Jeffrey Meder and Martin P. Moore, and each of them, with full power of substitution and
resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and
stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to
this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying
and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to
be done by virtue thereof.




Pursuant to the requirements of
the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities
indicated below on the 29th day of March 2006.







|Signature                              |  |  |  | Title                                                                                                        
|-------------------------------------- |  |  |  | -------------------------------------------------------------------------------------------------------------
|                                      
|/s/
GEORGE C. TEXTORGeorge C. Textor   |  |  |  | Chairman of the Board                                                                                        
|                                      
|/s/
J. JEFFREY MEDERJ. Jeffrey Meder   |  |  |  | President, Chief Executive Officer and Director (Principal Executive Officer)                                
|                                      
|/s/
MARTIN P. MOOREMartin P. Moore     |  |  |  | Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)
|                                      
|/s/
ROBERT C. DONEGANRobert C. Donegan |  |  |  | Director                                                                                                     
|                                      
|/s/
DAVID A. ENGERDavid A. Enger       |  |  |  | Director                                                                                                     
|                                      
|/s/
GARY W. NETTLESGary W. Nettles     |  |  |  | Director                                                                                                     



51


---





SCHEDULE II




COST-U-LESS, INC. VALUATION AND QUALIFYING
ACCOUNTS







|Description                                           |  |  |  | Balance at Beginning of Year |         | Additions (Reductions) |  | (1) Deductions |          | Balance at End of Year
|----------------------------------------------------- |  |  |  | ---------------------------- | ------- | ---------------------- |  | -------------- | -------- | ----------------------
|Year Ended
January 1, 2006                            |  |  |  |                              |         |                        |  |                |          |                       
|Reserves and
allowances deducted from asset accounts: |  |  |  |                              |         |                        |  |                |          |                       
|Allowance for
doubtful accounts                       |  |  |  | $                            | 205,000 |                        |  |                | ($15,000 | )                     
|                                                     
|Year Ended
December 26, 2004                          |  |  |  |                              |         |                        |  |                |          |                       
|Reserves and
allowances deducted from asset accounts: |  |  |  |                              |         |                        |  |                |          |                       
|Allowance for
doubtful accounts                       |  |  |  | $                            | 208,000 |                        |  | $              | 93,000   |                       
|                                                     
|Year Ended
December 28, 2003                          |  |  |  |                              |         |                        |  |                |          |                       
|Reserves and
allowances deducted from asset accounts: |  |  |  |                              |         |                        |  |                |          |                       
|Allowance for
doubtful accounts                       |  |  |  | $                            | 224,000 |                        |  | $              | 160,000  |                       






|(1) |  | Uncollectible accounts written off, net of
recoveries.
|--- |  | ------------------------------------------------------