---

---



SECURITIES AND EXCHANGE COMMISSIONWashington, 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 December 26, 2004
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

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(State or Other Jurisdictionof Incorporation or Organization) |  | 91-1615590 (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 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 an
accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [x]




The aggregate market value of the registrants
common stock held by non-affiliates of the registrant as of June 25, 2004, was approximately $21,679,759.




The number of shares of the registrants common
stock outstanding at March 11, 2005 was 3,909,673.




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 11, 2005.


---

---

---



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

|           |  |    |  |          |  |                                                                                       |  | Page
|---------- |  | -- |  | -------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART
I:    |  |    |  |          |  |                                                                                       |  |     
|           |  |    |  | Item 1.  |  | Business                                                                              |  |     
|           |  |    |  | 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 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 |  | 49 | 

2

---

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 without
limitation those identified in the section of this annual report on Form 10-K entitled Risk Factors That May Affect Future Results below.
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 (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. 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 are currently in the process of analyzing opportunities in selected markets and relocation opportunities for
existing stores with leases expiring in the next few years. While we believe these actions can improve profitability, there can be no assurance that
these actions will be successful.




We also continue to explore ways to maximize
long-term value for our shareholders, including focusing on efforts to increase earnings, responding to competition, and improving same store sales and
gross margins. 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 make it difficult for us to enter these markets. We are currently
evaluating methods of implementing future growth, including expansion opportunities in selected markets and relocation opportunities for stores in
existing markets, such as our St. Croix store. We are in the process of building 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 will expand the size of our St. Croix store by about 45% to
approximately 38,000 square feet. We expect this new store to open during the second quarter of 2005. We intend to operate in our existing location
until such time as we can move into our new location.




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.


3

---

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 115,000 square feet. These retailers typically (i) offer a range of national brand and selected
private label products at low prices, often in case, carton or multiple-pack quantities, (ii) provide no-frills, self-service warehouse facilities with
pallet-stacked product aisles, and (iii) 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 31,000 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 ahead of large warehouse club
competitors;
|- |  | ---------------------------------------------------------------------

| |  | select 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 expertise;
|- |  | -------------------------------------

| |  | utilize modern systems and merchandising methods;
|- |  | -------------------------------------------------

| |  | offer competitive prices while maintaining favorable margins;
and
|- |  | -----------------------------------------------------------------

| |  | provide a local product mix while benefiting from low overhead
costs.
|- |  | ---------------------------------------------------------------------



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 can compete effectively by offering competitive prices while maintaining low costs
of goods and services to consumers. Currently, we believe that although there are a number of new island markets with the attributes for our existing
growth strategy, licensing restrictions and political resistance to foreign retailers make it difficult for us to enter these markets. As a result, we
have no plans to open stores in new markets during 2005. However, we are evaluating methods of implementing future growth, including expansion
opportunities in selected markets and relocation opportunities for stores in existing markets, such as our St. Croix store.




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 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 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.


4

---



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, yet still above those that could be charged in large mainland markets. 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. To the extent, however, 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 Maui, Hawaii. In 1992, we began to expand by opening stores built to our specifications, in other island locations. After experiencing success with
our mid-sized store concept, we began to enter various mainland markets in late 1992, occupying existing retail spaces on favorable lease terms, while
continuing to open more stores in island markets that were built to our specifications. Due to a lack of success in the mainland markets, we decided in
1995 to return our focus to our core island markets and we began closing our mainland stores. The process of closing five of our six mainland stores
was completed in 1997.




In 1998, we opened two stores in Fiji. In 1999, we
opened two stores in New Zealand and one in Curacao. In 2000, we opened a store in St. Maarten, located in the Caribbean near our St. Thomas and St.
Croix stores.




In June 2000, we closed our two New Zealand stores,
as well as our buying office in Auckland. Although we believed that we had introduced what was to be the first warehouse club concept to the New
Zealand marketplace, we believe that the loyalty of New Zealand customers to many regional brands resulted in disappointing sales by the new stores of
the U.S. brands we primarily sold.




In February 2001, we closed one of our two Fiji
stores, due primarily to the impact that the political turmoil in Fiji was having on the tourist industry. The resulting economic downturn severely
impacted the performance of our store in Nadi, Fiji. Our remaining store in Fiji is located in the city of Suva, which is the capital and the primary
population center of Fiji.


5

---

Store Economics



During fiscal 2004, our eleven stores generated
annual average net sales of approximately $18.3 million, average net sales per square foot of approximately $590, average annual per store contribution
of approximately $1.0 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.


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 10 lanes. During a typical store visit, the average customer will spend approximately $51. 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 a vendors 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 utilize the design of 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 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 3,500 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 and in our Sonora store
during fiscal 2004.


6

---



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, 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 optimal 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. 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, Sacramento, California, Auckland, New Zealand and Sydney,
Australia. 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. 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 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
consignment depots. Each supplier of these perishable items pays a storage charge for use of the depots based on the amount of space used for the
storage of the suppliers goods. 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. All data and communications from each location are sent via our company wide area network, to
the computer system located at our corporate 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.


7

---

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.




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 6, 2005, 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, presently there is an attempt to unionize our hourly
employees in our St. Maarten store.




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 profitability targets. In 2001, we also implemented a sales
incentive bonus program for all store employees based on sales targets. In 2003, we added an inventory control target to the program.


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 payments, 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 10 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.


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 0.1% of net sales on
advertising. However, in more competitive markets we may 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 are given 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 plan to roll 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 many 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


8

---



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, we would likely face increased
competition and reduced market share and our operating results would likely suffer. To remain competitive in our markets, we may be required to
implement price reductions and other actions. For example, in response to the opening of a PriceSmart store in Guam in 2002, we remodeled our Dededo
store and increased our price competitiveness and marketing activities in Guam. Although PriceSmart closed its store in Guam in December 2003, we
believe that we will need to continue our efforts to maintain lower prices and higher levels of service to effectively compete in the markets in which
our stores reside.


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, as we pursue future expansion in foreign countries, our
operations will 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.


Risk Factors That May Affect Future Results



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 2003 and presently operate eleven stores.


9

---



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 operating results. 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 operating results. 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. 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.




We are exposed to weather and other risks
associated with island operations, which could affect our business and results of our operations. Our operations are primarily located on islands
subject to volatile weather conditions and natural disasters, such as tsunamis, floods, typhoons and earthquakes, which could result in delays in
construction or result in significant damage to, or destruction of, our stores. 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 several
hurricanes and tropical storms in the past few years.




While we have property, casualty and business
interruption insurance coverage for these types of events, insurance payments generally do not fully reimburse us for all of the damages and lost
profits caused by adverse weather events.




If we are unable to execute our growth strategy,
our business could suffer. The success of our future growth strategy will depend to a significant degree on our ability to do the
following:


| |  | Operate our stores on a profitable basis;
|- |  | -----------------------------------------

| |  | Expand our operations by opening new stores;
|- |  | --------------------------------------------

| |  | Properly identify and enter new markets;
|- |  | ----------------------------------------

| |  | Locate suitable store sites;
|- |  | ----------------------------

| |  | Negotiate acceptable lease terms;
|- |  | ---------------------------------

| |  | Locate local developers to construct facilities to
lease;
|- |  | ---------------------------------------------------------

| |  | Construct or refurbish sites;
|- |  | -----------------------------

| |  | Obtain local licenses and government permits; and
|- |  | -------------------------------------------------

| |  | Obtain necessary funds on acceptable terms.
|- |  | -------------------------------------------



We have not opened stores in foreign island markets
at a rapid pace. Currently, we have no plans to open stores in new markets during 2005, but we are in the process of exploring expansion opportunities
in selected markets and relocation opportunities for stores in existing markets, such as our St. Croix store.




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.


10

---



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. New markets may present operational, competitive, regulatory and merchandising challenges that are different from those we currently
encounter. There can be no assurance that we will be able to adapt our operations to support our future expansion plans or that our 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 operating
results.




Additionally, we rely significantly on the skill and
expertise of our on-site store managers. We will be required to hire, train and retain skilled managers and personnel to support any growth, and may
experience difficulties locating store managers and employees who possess the training and experience necessary to operate our new stores, including
our management information and communications systems, particularly in island markets where language, education and cultural factors may impose
additional challenges. We have encountered, and may continue to encounter, substantial delays, increased expenses or loss of potential 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 open new stores according to our business plans, or that we will be able to
continue to attract, develop and retain the personnel necessary to pursue our growth strategy. Failure to do so could have a material adverse effect on
our business, financial condition and operating results.




We believe that there are certain attributes of
appropriate markets into which we may expand our operations through the opening of new stores, including:


| |  | Acceptance and demand for U.S. goods;
|- |  | -------------------------------------

| |  | Familiarity with the warehouse concept;
|- |  | ---------------------------------------

| |  | Absence of large warehouse club competition;
|- |  | --------------------------------------------

| |  | Stable political and regulatory environment; and
|- |  | ------------------------------------------------

| |  | Favorable pricing structure to provide adequate return on
investment.
|- |  | ---------------------------------------------------------------------



We also will need to continually evaluate the
adequacy of our existing systems and procedures, including store management, financial and inventory control and distribution systems. As we grow, we
will need to continually analyze the sufficiency of our distribution depots and inventory distribution methods and may require additional facilities in
order to support our planned growth. There can be no assurance that we will anticipate all the changing demands that our expanding operations will
impose on such systems. Failure to adequately update our internal systems or procedures as required could have a material adverse effect on our
business, financial condition and operating results.




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 operating
results.




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 the 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, 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.




If we cannot maintain our current or similar
insurance coverage, our business and results of operations could suffer. 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


11

---



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 operating results. In
addition, 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.




In addition to weather, island operations involve
uncertainties arising from 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; and
|- |  | ------------------------------------------------------------------------

| |  | Collection of debts and other obligations in foreign
countries.
|- |  | ---------------------------------------------------------------



Our net sales from island operations represented
approximately 92.9% of our total net sales for fiscal 2004. 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. Our inability to effectively manage our island and international operations could have a significant
adverse effect on our business, results of operations and financial condition.




There can be no assurance that we will be able to
devote the resources necessary to meet the challenges posed by island operations, or that losses from business interruption will be adequately
compensated by insurance; any failure to do so would have a material adverse effect on our business, financial condition and operating
results.




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, presently there is an attempt to unionize our hourly employees in our St. Maarten store. Unionization of any of our
stores could have a material adverse effect on our business, financial condition and operating results.




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. 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.
There can be no assurance that any of these risks will not have a material adverse effect on our business, financial condition and operating
results.




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;
|- |  | ----------------------------------------------------------------------------------------------------------------

12

---

| |  | 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 operating results.




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; and
|- |  | ---------------------------------------------

| |  | Interruption in the delivery of product due to labor
disruption.
|- |  | ----------------------------------------------------------------



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 operating results.




We face a number of uncertainties associated with
expansion outside U.S. Territories. Our failure to adequately address these uncertainties could cause our business to suffer. Currently, three of
our stores are located outside the U.S. 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 operating results.




If we cannot obtain sufficient funds to grow our
business, our operations and business may suffer. We expect to have substantial future capital requirements to expand our business. Currently, we
believe we have sufficient funds from our existing cash, various credit facilities and cash flow from operations to fund our operations through the
next 12 months. We do not, however, have sufficient funds to pursue a rapid growth strategy. Our ability to expand our business and pursue a rapid
growth strategy will depend on our ability to obtain significant external financing. Our ability to obtain additional financing on acceptable terms
depends on a number of factors, such as market conditions and our operating performance. There can be no assurance that we will be able to obtain
additional financing in a timely manner and upon acceptable terms, if at all. If we fail to obtain necessary funds upon acceptable terms, we may be
forced to delay expansion of our business or otherwise curtail our operations and our operations and business may suffer.




The loss of key personnel 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. In addition, we do not carry key-man life insurance. There can be no assurance that we will be able to retain the services of such executive
officers and other key employees, the loss of any of whom could have a material adverse effect on our business, financial condition and operating
results.




A disruption of our information systems could
cause our business and results of operations to suffer. Our business is highly dependent on communications and information systems, primarily
systems provided by third-party vendors. We may experience systems failures or interruptions, which could have a material adverse effect on our
business, financial condition and operating results. 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 operating
results.


13

---



Certain provisions in our charter documents and
otherwise 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 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. The stores average approximately 31,000
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 115,000 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 recently reopened store
in Dededo, Guam, as well as the Sonora, California, store.




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 facility locations:







|Location                                       |  |  |  | Date Opened       |  | Approximate Store Square Footage |  | Original 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)                  |  |  |  | June 25,
1998     |  | 36,000                           |  | 20
years            |  | September 30,
2017      |  |                            
|Sonora,
CA                                     |  |  |  | January 27,
1994  |  | 23,150                           |  | 10
years            |  | April 30,
2009          |  |                            
|St. Croix,
USVI (1)                            |  |  |  | November 3,
1994  |  | 26,210                           |  | 10
years            |  | Expired
(1)             |  |                            
|Tamuning,
Guam                                 |  |  |  | March 15,
1995    |  | 35,000                           |  | 15
years            |  | March 1,
2010           |  |                            
|Pago Pago,
American Samoa (2)                  |  |  |  | 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 building a new St. Croix
store on a parcel of land, which is located closer to the main trade area in the center of the island. This new building will expand the size of our
St. Croix store by about 45% to approximately 38,000 square feet. We expect this new store to open during the second quarter of 2005. We are currently
operating in our existing location under a short-term lease with our current landlord until such time as we can move into our new location.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In February 2005, we entered into a new lease agreement with our
existing landlord in American Samoa. The term of the lease is for ten (10) years and commences on March 1, 2005, subject to one option to extend the
term of the lease for five (5) years.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although we are currently financing the land and
construction of our new St. Croix store with existing working capital, it is our intent to eventually finance the relocation of our St. Croix store,
and any future relocations and new stores, either through an operating lease, a sale-leaseback arrangement or by obtaining long-term funding from a
financial institution. We intend to continue leasing as many of our store locations as feasible. In those instances


14

---



where a lease is not available on acceptable terms, we expect to
finance our stores utilizing long-term funding from a financial institution (as we currently do for our St. Thomas and St. Maarten
buildings).




Currently, we have no plans to open stores in new
markets during 2005, but we are in the process of exploring expansion opportunities in selected markets and relocation opportunities for existing
stores with leases expiring in the next few years.




On April 5, 2004, we relocated our principal offices
to a new location approximately ten miles from our former offices. Our new 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. We believe that our current distribution facilities will be sufficient to meet our
present needs and that we will be able to secure additional facilities in the future as needed. However, there can be no assurance that we will be able
to obtain additional distribution facilities when needed or on terms that are acceptable to us.


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 December 26, 2004.


15

---

PART II

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



Our common stock is currently traded on the Nasdaq
SmallCap Market under the symbol CULS. The number of shareholders of record of our common stock at March 15, 2005, was 52.




The last sale price of our common stock on the
Nasdaq SmallCap Market on March 15, 2005 was $9.77 per share. High and low sales prices for our common stock for the periods indicated in 2004 and
2003, 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 2004
(ended December 26, 2004) |  |  |  |             |     
|First
Quarter                         |  |  |  | $           | 7.35
|Second
Quarter                        |  |  |  |             | 7.23
|Third
Quarter                         |  |  |  |             | 7.00
|Fourth
Quarter                        |  |  |  |             | 6.52
|Fiscal 2003
(ended December 28, 2003) |  |  |  |             |     
|First
Quarter                         |  |  |  | $           | 1.23
|Second
Quarter                        |  |  |  |             | 2.60
|Third
Quarter                         |  |  |  |             | 2.98
|Fourth
Quarter                        |  |  |  |             | 3.89



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.


16

---

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 2000, 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)

|                                                         |  |  |  | Dec. 26, 2004 |         | Dec. 28, 2003 |  | Dec. 29, 2002 |         | Dec. 30, 2001 |  | Dec. 31, 2000
|-------------------------------------------------------- |  |  |  | ------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | -------------
|Income
Statement Data:                                   |  |  |  |               |         |               |  |               |         |               |  |              
|Net
sales                                                |  |  |  | $             | 209,390 |               |  | $             | 177,066 |               |  | $            
|Gross
profit                                             |  |  |  |               | 38,524  |               |  |               | 31,503  |               |  |              
|Operating
Expenses:                                      |  |  |  |               |         |               |  |               |         |               |  |              
|Store                                                    |  |  |  |               | 26,408  |               |  |               | 22,304  |               |  |              
|General and
administrative                               |  |  |  |               | 7,103   |               |  |               | 6,853   |               |  |              
|Store
opening                                            |  |  |  |               | 188     |               |  |               | 287     |               |  |              
|Store
closing                                            |  |  |  |               | 0       |               |  |               | 0       |               |  |              
|Operating
income (loss)                                  |  |  |  |               | 4,825   |               |  |               | 2,059   |               |  |              
|Interest
expense, net                                    |  |  |  |               | (437    | )             |  |               | (458    | )             |  |              
|Other income
(expense)                                   |  |  |  |               | 80      |               |  |               | 710     |               |  |              
|Income (loss)
before income taxes                        |  |  |  |               | 4,468   |               |  |               | 2,311   |               |  |              
|Income tax
provision                                     |  |  |  |               | 1,780   |               |  |               | 930     |               |  |              
|Net income
(loss)                                        |  |  |  | $             | 2,688   |               |  | $             | 1,381   |               |  | $            
|Earnings
(loss) per common share:                        |  |  |  |               |         |               |  |               |         |               |  |              
|Basic                                                    |  |  |  | $             | 0.72    |               |  | $             | 0.38    |               |  | $            
|Diluted                                                  |  |  |  | $             | 0.69    |               |  | $             | 0.38    |               |  | $            
|Weighted
average common shares outstanding, basic        |  |  |  |               | 3,732   |               |  |               | 3,614   |               |  |              
|Weighted
average common shares outstanding, diluted      |  |  |  |               | 3,916   |               |  |               | 3,671   |               |  |              
|Selected
Operating Data:                                 |  |  |  |               |         |               |  |               |         |               |  |              
|Stores
opened                                            |  |  |  |               | 0       |               |  |               | 1       |               |  |              
|Stores closed
(1)                                        |  |  |  |               | 0       |               |  |               | 0       |               |  |              
|Stores open
at end of period                             |  |  |  |               | 11      |               |  |               | 11      |               |  |              
|Average net
comparable store sales per square foot(2)(3) |  |  |  | $             | 590     |               |  | $             | 530     |               |  | $            
|Comparable-store net sales increase (decrease)(2)(3)     |  |  |  |               | 13.6    | %             |  |               | 8.2     | %             |  |              
|Consolidated
Balance Sheet Data:                         |  |  |  |               |         |               |  |               |         |               |  |              
|Working
capital                                          |  |  |  | $             | 8,614   |               |  | $             | 6,567   |               |  | $            
|Total
assets                                             |  |  |  |               | 46,202  |               |  |               | 40,940  |               |  |              
|Line of
credit                                           |  |  |  |               | 0       |               |  |               | 960     |               |  |              
|Long-term
debt, less current portion                     |  |  |  |               | 2,277   |               |  |               | 2,544   |               |  |              
|Capital
lease, less current portion                      |  |  |  |               | 607     |               |  |               | 0       |               |  |              
|Total
shareholders equity                               |  |  |  |               | 19,933  |               |  |               | 17,000  |               |  |              



|(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 2000 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 2000 have been adjusted to reflect a 52-week year. Our fiscal
quarters are 13 weeks, except 4th quarter 2000, 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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---

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 identified in
the section of this annual report on Form 10-K entitled Risk Factors That May Affect Future Results, 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 the stores (i) are smaller (averaging approximately 31,000 square feet vs. large format warehouse clubs of approximately 115,000
square feet), (ii) 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, (iii) carry a wide assortment of local and ethnic food items, and (iv) 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.




We are currently in the process of building 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 will
expand the size of our St. Croix store by about 45% to approximately 38,000 square feet. We expect this new store to open during the second quarter of
2005. We are currently operating in our existing location under a short-term lease with our current landlord until such time as we can move into our
new location.




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 2004, we continued to experience
improvements in comparable-store sales (stores open for a full 13 months) and gross margin, which resulted in higher net income and earnings per share.
These improvements were due to several factors including better sourcing, pricing, and other merchandising initiatives in our stores, as well as the
reopening of our Dededo, Guam store. In addition, some of our markets, including Guam, Hawaii and St. Thomas, saw an improvement in their general
economic conditions.


18

---

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               |  |  |  |                   | 18.4 
|Operating
Expenses:        |  |  |  |                   |      
|Store                      |  |  |  |                   | 12.6 
|General and
administrative |  |  |  |                   | 3.4  
|Store
opening              |  |  |  |                   | 0.1  
|Operating
income           |  |  |  |                   | 2.3  
|Interest
expense, net      |  |  |  |                   | (0.2 
|Other income
(expense)     |  |  |  |                   |     
|Income before
income taxes |  |  |  |                   | 2.1  
|Income tax
provision       |  |  |  |                   | 0.8  
|Net
income                 |  |  |  |                   | 1.3  

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. We expect the level of business-to-business activity for fiscal 2005 to be lower than
fiscal 2004, as we de-emphasize such sales.




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 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


19

---

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. We expect store opening expenses in fiscal 2005 to be slightly higher than those incurred in fiscal 2004, as we relocate our
St. Croix 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 have foreign net
operating loss carryforwards (NOLs) of approximately $8.2 million, some of which, if not utilized, will begin expiring in the year
2006. The NOLs include approximately $4.5 million related to Curacao and St. Maarten which are not subject to expiration time limits. Our ability
to utilize the NOLs carryforwards 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 $2.8 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.


Fiscal 2003 Compared to Fiscal 2002



During fiscal 2003, we experienced improvements in
comparable-store sales and gross margin, which resulted in higher net income and EPS. We also experienced a successful reopening of our Dededo, Guam
store, which had sufferered substantial damage from Supertyphoon Ponsonga on December 8, 2002, forcing it to close. The store was rebuilt and reopened
on October 3, 2003.




Net Sales. Net sales in fiscal 2003 of $177.1
million increased 0.5% as compared to net sales of $176.2 million for the comparable period in the prior year. The improvement in sales came despite
the nine-month closure of our Dededo, Guam, store and lower business-to-business sales in the current year, as nine of our other ten stores experienced
comparable sales increases.




Comparable-store sales (stores open for a full 13
months) increased 8.2% during fiscal 2003 as compared to fiscal 2002. Comparable-store sales are calculated on stores excluding the Guam market as our
store in Tamuning, Guam benefited from the temporary closure of our Dededo store. Including the Tamuning store, same store sales increased 9.9% during
fiscal 2003 as compared to fiscal 2002. During the fourth quarter of 2003, we experienced comparable-store sales increases of 13.8% as compared to the
fourth quarter of fiscal 2002.




Gross Margin. Gross margin improved to $31.5
million, or 17.8% of sales, in fiscal 2003 from $29.2 million, or 16.6% of sales, in fiscal 2002. The increase in gross profit as a percent of sales
resulted primarily from improvements in merchandising, inventory management 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.


20

---



Store Expenses. Store expenses remained flat
at $22.3 million, or 12.6% of sales, for fiscal 2003 as compared to $22.2 million, or 12.6% of sales, in fiscal 2002. During fiscal 2003, increases in
insurance, utilities and volume related expenses such as payroll and bank/bankcard fees were offset by a $1.1 million reduction in store expenses
attributable to the nine month closure of our Dededo, Guam, store. As a percent of sales, payroll declined in 2003 as compared to
2002.




General and Administrative Expense. General
and administrative expenses increased to $6.9 million, or 3.9% of sales, in fiscal 2003, as compared to $5.9 million, or 3.4% of sales, in fiscal 2002.
The increase was primarily attributable to 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, as well as transaction costs incurred in connection with our discussions with
ASSI regarding various strategic transactions. On November 3, 2003, we announced that discussions with ASSI regarding those strategic transactions had
been terminated.




Store Opening Expense. Store opening expenses
were $287,000 in fiscal 2003, as compared to $14,000 in fiscal 2002. Store opening expenses in fiscal 2003 primarily related to the reopening of our
Dededo, Guam store. Store opening expense in fiscal 2002 related to costs associated with the evaluation of potential new store
locations.




Net Interest Expense. Interest expense, net,
increased to $0.5 million in fiscal 2003 as compared to $0.4 million in fiscal 2002. The increase was primarily due to commitment fees and the higher
interest rate (approximately 1.5% higher than 2002) associated with our new line of credit entered into on April 9, 2003.




Other income (expense): 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. Other expense of $0.2 million in fiscal 2002 included expense of $0.4 million
related to losses sustained from the supertyphoon that we did not expect to recover from insurance, offset by gains of $0.2 million on foreign currency
transactions and translation. 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 2003 of $0.9 million, or 40.2% 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 2003, 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 28, 2003, we had foreign net
operating loss carryforwards (NOLs) of approximately $6.4 million, which, if not utilized, will begin expiring in the year 2006.
NOLs in Curacao and St. Maarten of approximately $2.9 million are not subject to expiration time limits. Our ability to utilize the NOLs
carryforwards is dependent upon generating taxable income in the foreign jurisdictions. As a result, we have recorded a valuation allowance of $2.2
million attributable to the $2.3 million of tax benefits recorded for net operating loss carryforwards. We had tax credit carryforwards of $0.2 million
as of December 29, 2002, expiring between 2005 and 2006. During 2003, we were able to utilize a portion of the tax credit
carryforward.




Net Income. Our net income was $1.4 million,
or $0.38 per fully diluted share, in fiscal 2003, compared to net income of $0.3 million, or $0.08 per fully diluted share, in fiscal
2002.


Liquidity and Capital Resources



We currently finance our operations with proceeds
from various credit facilities and internally generated funds. We intend to finance the relocation of our St. Croix store, and any future relocations
and new stores, either through an operating lease, a sale-leaseback arrangement or by obtaining 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 expect
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 $5.7 million and $3.9 million of net
cash from operations during fiscal 2004 and fiscal 2003, respectively. We utilized $30,000 of net cash for operations in fiscal 2002. 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. The increase in net cash provided by operations in
2003, as compared to 2002, was primarily due to an increase


21

---



in net income of $1.1 million, an increase in
accrued expenses of $3.0 million, and the receipt of insurance proceeds on inventory lost in the Supertyphoon in Guam and payments received on accounts
receivable of $1.5 million.




Net cash used in investing activities was $2.5
million, $1.9 million and $0.4 million, for fiscal years 2004, 2003 and 2002, respectively. 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 where we plan to relocate our St. Croix store. The relocated store will be closer to the main trade area in the center of the island
than the existing store. Additionally, we intend to expand the size of the new St. Croix store by about 45% to 38,000 square feet. We expect to incur
an additional $3.5 to $4.5 million for the cost of site development, the new building and equipment. We intend to relocate our St. Croix store to this
new location during the second quarter of fiscal 2005. The cash used in investing activities in 2003 primarily related to the reopening of our Dededo,
Guam store. The proceeds from insurance settlement received in both 2004 and 2003 relates to insurance reimbursements received on fixed assets lost in
the Supertyphoon in Guam. The cash used in fiscal 2002 was for general store improvements. We currently have no plans to open stores in new markets
during fiscal 2005, but we are in the process of exploring expansion opportunities in selected markets and additional relocation opportunities for
stores in existing markets.




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. Net cash provided by financing
activities of $0.3 million in fiscal 2002 was due to borrowings on our line of credit and an increase in bank checks outstanding, partially offset by
reductions in the outstanding borrowings on our long-term debt.




Foreign currency translation resulted in a gain of
$15,000 in fiscal 2004 and losses of $0.2 million and $0.1 million in fiscal years 2003 and 2002, 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 a line of credit with Wells Fargo Business
Credit that has a three year term, expiring on April 9, 2006. At December 26, 2004, there were no borrowings outstanding on the line of credit, but
there was $0.1 million utilized for standby letters of credit and $0.1 million set aside for other 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 the amount up to $0.7 million. Borrowings
under the line of credit are 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 interest rate on borrowings under the line of credit is equal to Wells Fargos prime rate
plus 0.5%, which was 5.75% at December 26, 2004. A fee of 0.25% is charged on the unused portion of the line of credit and we are required to pay Wells
Fargo not less than $0.1 million of interest each calendar year. 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.




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 12 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.


22

---

Contractual Obligations



As of December 26, 2004, our commitments to make
future payments under long term contractual obligations were as follows (in thousands):


|                             |  | Payments
      Due by Period
|---------------------------- |  | ----------------------------
|
|Long-term
        debt       |  | $                           
|Operating
        Leases (1) |  |                             
|Capital
        Lease        |  |                             
|Total                        |  | $                           

|(1) |  | Adjusted to reflect new lease agreement entered into in February
2005 for our store in American Samoa.
|--- |  | ------------------------------------------------------------------------------------------------------

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.




Long Lived Assets




When facts and circumstances indicate that the
carrying values of long-lived assets, including intangibles, 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.




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


23

---



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.


Accounting Pronouncements



In December 2004, the Financial Accounting Standards
Board issued Statement 123 (revised 2004), Share-Based Payment (Statement 123(R)). Statement 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. Statement 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. Statement 123(R) replaces Statement 123, Accounting for
Stock-Based Compensation and supersedes Opinion 25, Accounting for Stock Issued to Employees. As originally issued in 1995, Statement
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 Opinion 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 will be required to apply Statement 123(R) as of the first interim
reporting period that begins after June 15, 2005, and we plan to use the modified-prospective method, effective with our third quarter of fiscal 2005.
We believe that our adoption of this new accounting standard will not have a material impact on our results of operations or financial position, as we
have a limited amount of options available for issuance in the future.


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 Netherland 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 Netherland 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 the Companys 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 the
Companys 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 December 26, 2004.


24

---

|Item 8. |  | Financial Statements and Supplementary Data
|------- |  | -------------------------------------------



The following consolidated financial statements and
supplementary data are included beginning on page 26 of this Report:


|                                                                               |  |  |  | Page
|------------------------------------------------------------------------------ |  |  |  | ----
|Report of
Grant Thornton LLP, Independent Registered Public Accounting Firm    |  |  |  |     
|Report of
Deloitte & Touche LLP, 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                                     |  |  |  |     

25

---

REPORT OF GRANT THORNTON LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM



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




We have audited the accompanying consolidated
balance sheet of Cost-U-Less, Inc. as of December 26, 2004 and December 28, 2003 and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the two years in the period ended December 26, 2004. 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 financial position of Cost-U-Less, Inc. as of December 26, 2004 and December
28, 2003 and the results of its operations and its cash flows for each of the two years in the period ended December 26, 2004 in conformity with
accounting principles generally accepted in the United States of America.




Our audit was 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 two
years in period ended December 26, 2004 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 February 25, 2005


26

---

REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



Board of
Directors Cost-U-Less, Inc. Bellevue, Washington




We have audited the consolidated balance sheet of
Cost-U-Less, Inc. and subsidiaries (collectively, the Company) as of December 29, 2002 (not presented herein) and the accompanying related consolidated
statements of operations, shareholders equity, and cash flows for the year ended December 29, 2002. Our audit also included the consolidated
financial statement schedule listed in Item 15 for the year ended December 29, 2002. These financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audit.




We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether 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 includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.




In our opinion, such consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 29, 2002 (not presented herein), and the results
of their operations and their cash flows for the year ended December 29, 2002, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such consolidated financial statement schedule for the corresponding period, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth
therein.




/s/ DELOITTE &
TOUCHE LLPSeattle, Washington March 13, 2003 (April 10, 2003 as to Note 4)


27

---



COST-U-LESS, INC.

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






|                                                    |  |  |  | Fiscal Year Ended |          
|--------------------------------------------------- |  |  |  | ----------------- | ---------
|
|Net
sales                                           |  |  |  | $                 | 209,390  
|Merchandise
costs                                   |  |  |  |                   | 170,866  
|Gross
profit                                        |  |  |  |                   | 38,524   
|Operating
expenses:                                 |  |  |  |                   |          
|Store                                               |  |  |  |                   | 26,408   
|General and
administrative                          |  |  |  |                   | 7,103    
|Store
openings                                      |  |  |  |                   | 188      
|Total
operating expenses                            |  |  |  |                   | 33,699   
|Operating
income                                    |  |  |  |                   | 4,825    
|Other income
(expenses):                            |  |  |  |                   |          
|Interest
expense, net                               |  |  |  |                   | (437     
|Other                                               |  |  |  |                   | 80       
|Income before
income taxes                          |  |  |  |                   | 4,468    
|Income tax
provision                                |  |  |  |                   | 1,780    
|Net
income                                          |  |  |  | $                 | 2,688    
|Earnings per
common share:                          |  |  |  |                   |          
|Basic                                               |  |  |  | $                 | 0.72     
|Diluted                                             |  |  |  | $                 | 0.69     
|Weighted
average common shares outstanding, basic   |  |  |  |                   | 3,731,754
|Weighted
average common shares outstanding, diluted |  |  |  |                   | 3,915,808

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

28

---

COST-U-LESS, INC.

CONSOLIDATED BALANCE SHEETS (in thousands, except share
data)






|                                                                                                                                                   |  |  |  | December 26, 2004 |        | December 28, 2003
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ----------------- | ------ | -----------------
|ASSETS                                                                                                                                            
|Current
assets:                                                                                                                                    |  |  |  |                   |        |                  
|Cash and cash
equivalents                                                                                                                          |  |  |  | $                 | 6,081  |                  
|Insurance
receivable                                                                                                                               |  |  |  |                   |       |                  
|Accounts
receivable (net of allowance of $205 and $208 in 2004 and 2003, respectively)                                                             |  |  |  |                   | 805    |                  
|Income tax
receivable                                                                                                                              |  |  |  |                   |       |                  
|Inventories                                                                                                                                        |  |  |  |                   | 23,140 |                  
|Prepaid
expenses                                                                                                                                   |  |  |  |                   | 365    |                  
|Deferred
taxes, net                                                                                                                                |  |  |  |                   | 688    |                  
|Total current
assets                                                                                                                               |  |  |  |                   | 31,079 |                  
|Buildings and
equipment, net                                                                                                                       |  |  |  |                   | 14,345 |                  
|Deposits and
other assets                                                                                                                          |  |  |  |                   | 778    |                  
|Total
assets                                                                                                                                       |  |  |  | $                 | 46,202 |                  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                              
|Current
liabilities:                                                                                                                               |  |  |  |                   |        |                  
|Accounts
payable                                                                                                                                   |  |  |  | $                 | 16,132 |                  
|Accrued
expenses                                                                                                                                   |  |  |  |                   | 5,937  |                  
|Income taxes
payable                                                                                                                               |  |  |  |                   | 27     |                  
|Line of
credit                                                                                                                                     |  |  |  |                   |       |                  
|Current
portion of long-term debt                                                                                                                  |  |  |  |                   | 267    |                  
|Current
portion capital leases                                                                                                                     |  |  |  |                   | 102    |                  
|Total current
liabilities                                                                                                                          |  |  |  |                   | 22,465 |                  
|Deferred
rent                                                                                                                                      |  |  |  |                   | 527    |                  
|Deferred
taxes, net                                                                                                                                |  |  |  |                   | 393    |                  
|Long-term
debt, less current portion                                                                                                               |  |  |  |                   | 2,277  |                  
|Capital
lease, less current portion                                                                                                                |  |  |  |                   | 607    |                  
|Total
liabilities                                                                                                                                  |  |  |  |                   | 26,269 |                  
|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, 3,751,306 and 3,688,376 in 2004 and 2003,
respectively |  |  |  |                   | 12,795 |                  
|Retained
earnings                                                                                                                                  |  |  |  |                   | 7,911  |                  
|Accumulated
other comprehensive loss                                                                                                               |  |  |  |                   | (773   | )                
|Total
shareholders equity                                                                                                                         |  |  |  |                   | 19,933 |                  
|Total
liabilities and shareholders equity                                                                                                         |  |  |  | $                 | 46,202 |                  

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

29

---

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 30, 2001                                  |  |  |  |                      | 3,606,376 |                      |  | $                 | 12,446 |                                      |  | $    
|Net
income                                                    |  |  |  |                      |          |                      |  |                   |       |                                      |  |      
|Foreign
currency translation adjustments                      |  |  |  |                      |          |                      |  |                   |       |                                      |  |      
|Comprehensive
income                                          |  |  |  |                      |           |                      |  |                   |        |                                      |  |      
|                                                              |  |  |  |                      |           |                      |  |                   |        |                                      |  |      
|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 |                                      |  | $    

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

30

---

COST-U-LESS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

|                                                                                             |  |  |  | December 26, 2004 |        | December 28, 2003 |  | December 29, 2002
|-------------------------------------------------------------------------------------------- |  |  |  | ----------------- | ------ | ----------------- |  | -----------------
|OPERATING
ACTIVITIES:                                                                        |  |  |  |                   |        |                   |  |                  
|Net
income                                                                                   |  |  |  | $                 | 2,688  |                   |  | $                
|Adjustments
to reconcile net income to net cash provided by (used for) operating activities: |  |  |  |                   |        |                   |  |                  
|Depreciation
and amortization                                                                |  |  |  |                   | 1,849  |                   |  |                  
|(Gain) loss
on property damaged by Supertyphoon Ponsonga                                     |  |  |  |                   |       |                   |  |                  
|(Gain) loss
on buildings and equipment                                                       |  |  |  |                   | (31    | )                 |  |                  
|Deferred tax
(benefit) provision                                                             |  |  |  |                   | 264    |                   |  |                  
|Allowance for
doubtful accounts                                                              |  |  |  |                   | (3     | )                 |  |                  
|Stock option
expense                                                                         |  |  |  |                   | 9      |                   |  |                  
|Cash provided
(used) by changes in operating assets and liabilities:                         |  |  |  |                   |        |                   |  |                  
|Insurance
receivable                                                                         |  |  |  |                   | 410    |                   |  |                  
|Accounts
receivable                                                                          |  |  |  |                   | 36     |                   |  |                  
|Income tax
receivable                                                                        |  |  |  |                   | 555    |                   |  |                  
|Inventories                                                                                  |  |  |  |                   | (3,600 | )                 |  |                  
|Prepaid
expenses                                                                             |  |  |  |                   | 35     |                   |  |                  
|Deposits and
other assets                                                                    |  |  |  |                   | 26     |                   |  |                  
|Accounts
payable                                                                             |  |  |  |                   | 1,708  |                   |  |                  
|Accrued
expenses                                                                             |  |  |  |                   | 1,676  |                   |  |                  
|Deferred
rent                                                                                |  |  |  |                   | 29     |                   |  |                  
|Net cash
provided (used) by operating activities                                             |  |  |  |                   | 5,651  |                   |  |                  
|INVESTING
ACTIVITY:                                                                          |  |  |  |                   |        |                   |  |                  
|Cash used to
purchase buildings and equipment                                                |  |  |  |                   | (3,258 | )                 |  |                  
|Proceeds from
insurance settlement                                                           |  |  |  |                   | 725    |                   |  |                  
|Net cash used
by investing activities                                                        |  |  |  |                   | (2,533 | )                 |  |                  
|FINANCING
ACTIVITIES:                                                                        |  |  |  |                   |        |                   |  |                  
|Proceeds from
exercise of common stock options .                                             |  |  |  |                   | 189    |                   |  |                  
|Proceeds
(payments) from (on) line of credit, net                                            |  |  |  |                   | (960   | )                 |  |                  
|Increase
(decrease) in bank checks outstanding                                               |  |  |  |                   | (816   | )                 |  |                  
|Proceeds from
capital lease obligations                                                      |  |  |  |                   | 805    |                   |  |                  
|Payments on
capital lease obligations                                                        |  |  |  |                   | (96    | )                 |  |                  
|Payments on
long-term debt                                                                   |  |  |  |                   | (267   | )                 |  |                  
|Net cash
provided (used) by financing activities                                             |  |  |  |                   | (1,145 | )                 |  |                  
|Foreign
currency translation adjustments                                                     |  |  |  |                   | 15     |                   |  |                  
|Net increase
(decrease) in cash and cash equivalents                                         |  |  |  |                   | 1,988  |                   |  |                  
|Cash and cash
equivalents:                                                                   |  |  |  |                   |        |                   |  |                  
|Beginning of
period                                                                          |  |  |  |                   | 4,093  |                   |  |                  
|End of
period                                                                                |  |  |  | $                 | 6,081  |                   |  | $                
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                            |  |  | 
|Noncash
activities:                                                                          |  |  |  |                   |        |                   |  |                  
|Writeoff of
Inventory lost in Supertyphoon and accrual of related costs                      |  |  |  | $                 |       |                   |  | $                
|Writeoff of
Fixed Assets lost in Supertyphoon                                                |  |  |  |                   |       |                   |  |                  
|Establishment
of Insurance Receivable for Supertyphoon losses                                |  |  |  |                   |       |                   |  |                  
|Cash paid
during the period for:                                                             |  |  |  |                   |        |                   |  |                  
|Interest                                                                                     |  |  |  | $                 | 486    |                   |  | $                
|Income
taxes                                                                                 |  |  |  |                   | 857    |                   |  |                  

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

31

---

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 December 26, 2004, 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, December 28, 2003
and December 29, 2002 were 52-week fiscal years.




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.




Cash Equivalents




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


32

---

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



Financial Instruments




The carrying value of financial instruments,
including cash, cash equivalents, receivables, payables, and long-term debt, approximates market value at December 26, 2004 and December 28, 2003. 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, including intangibles, 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 December 26, 2004 and December 28, 2003 are $3.5 million and $4.4
million, respectively, representing the excess of outstanding checks over cash on deposit in the accounts on which the checks were
drawn.




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.


33

---

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



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 2004, 2003 and 2002 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, 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, 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, no compensation cost has been
recognized.




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:







|                                                                                                                       |  |  |  | 2004 |       | 2003 |  | 2002
|---------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ----- | ---- |  | ----
|
|Net income as
reported                                                                                                 |  |  |  | $    | 2,688 |      |  | $   
|Less: Total
stock-based employee compensation expense   determined under fair value method for all awards,  net of tax |  |  |  |      | 223   |      |  |     
|Net income
pro forma                                                                                                   |  |  |  | $    | 2,465 |      |  | $   
|Earnings per
common share, basic as reported                                                                           |  |  |  | $    | 0.72  |      |  | $   
|Earnings per
common share, basic pro forma                                                                             |  |  |  | $    | 0.66  |      |  | $   
|Earnings per
common share, diluted as reported                                                                         |  |  |  | $    | 0.69  |      |  | $   
|Earnings per
common share, diluted pro forma                                                                           |  |  |  | $    | 0.63  |      |  | $   



The fair value of each option is estimated on the
date of grant under the Black-Scholes option-pricing model using the following assumptions:







|                        |  |  |  | 2004    |  | 2003    |  | 2002   
|----------------------- |  |  |  | ------- |  | ------- |  | -------
|Risk-free
interest rate |  |  |  | 3.13%   |  | 3.90%   |  | 3.37%  
|Expected
life           |  |  |  | 5
years |  | 5
years |  | 5
years
|Expected
dividend yield |  |  |  | 0%      |  | 0%      |  | 0%     
|Volatility              |  |  |  | 74%     |  | 74%     |  | 75%    



The weighted average fair values of options granted
in 2004, 2003, and 2002 were $1.61, $0.78 and $0.42, respectively.


34

---

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



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.




New Accounting
Pronouncements




In December 2004, the Financial Accounting Standards
Board issued Statement 123 (revised 2004), Share-Based Payment (Statement 123(R)). Statement 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. Statement 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. Statement 123(R) replaces Statement 123, Accounting for
Stock-Based Compensation and supersedes Opinion 25, Accounting for Stock Issued to Employees. As originally issued in 1995, Statement
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 Opinion 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 Statement 123(R) as of the first
interim reporting period that begins after June 15, 2005, and the Company plans on using the modified-prospective method, effective with its third
quarter of fiscal 2005. The Company believes that the adoption of this new accounting standard will not have a material impact on the Companys
results of operations or financial position, as the Company has a limited amount of options available for issuance in the future.




Reclassifications




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


2.    Insurance Receivable



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.




The Company lost inventory, leasehold improvements
and equipment as a result of the supertyphoon. At December 29, 2002, the Company recorded a $1.5 million receivable for losses that it expected to be
recovered from insurance. The receivable represented $0.9 million for inventory losses and $0.6 million for fixed asset losses. Additionally, the
Company recorded a loss of $0.4 million in Other Income/(Expense) during fiscal 2002, which represented the amount of inventory losses and other
expenses that were not expected to be recovered from insurance.




During the fourth quarter of fiscal 2003, the
Company recorded a gain of $0.4 million in Other Income/(Expense), which represented a pre-tax gain on the receipt of insurance reimbursements for
damage to its inventory and equipment. In January 2004, the Company received payment for the entire $1.1 million of insurance receivables recorded on
the balance sheet as of December 28, 2003.


35

---

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

3.    Buildings and Equipment



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







|                                                     |  |  |  | December 26, 2004 |        | December 28, 2003
|---------------------------------------------------- |  |  |  | ----------------- | ------ | -----------------
|Buildings                                            |  |  |  | $                 | 7,175  |                  
|Equipment                                            |  |  |  |                   | 15,528 |                  
|Leasehold
improvements                               |  |  |  |                   | 1,234  |                  
|Leased
equipment under capital lease                 |  |  |  |                   | 805    |                  
|Buildings,
equipment and leasehold improvements      |  |  |  |                   | 24,742 |                  
|Less
accumulated depreciation and amortization       |  |  |  |                   | 12,681 |                  
|Net book
value of depreciable assets                 |  |  |  |                   | 12,061 |                  
|Building
under construction                          |  |  |  |                   | 2,253  |                  
|Computer
system and software development in progress |  |  |  |                   | 31     |                  
|Total
Buildings and Equipment                        |  |  |  | $                 | 14,345 |                  



During fiscal 2003, the Company wrote off $0.4
million of inactive equipment from previously closed stores.




Included in Equipment at December 28, 2003, is $0.8
million of equipment residing in the Companys reconstructed store in Dededo, Guam. In January 2004, the Company sold and leased back this
equipment under a seven year capital lease.


4.    Line of Credit



On April 9, 2003, the Company entered into a line of
credit with Wells Fargo Business Credit that has a three year term, expiring on April 9, 2006. 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 the amount up to $0.7 million. At December 26, 2004,
there were no borrowings outstanding on the line of credit. At December 26, 2004, there were $0.1 million utilized for standby letters of credit and
$0.1 million set aside for other reserves.




Borrowings are 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, as amended, provided for the following: (i) an immediate reduction in the interest rate on the line of credit of one half of one percent
(0.50%), (ii) a further reduction in the interest rate of one half of one percent (0.50%) if the Company met certain net income levels from December
29, 2003, through June 27, 2004, and (iii) the adoption of new measurement values for fiscal 2004. As the Company met the certain net income levels
from December 29, 2003, through June 27, 2004, specified in the March 2, 2004, amendment, its interest rate was reduced from August 1, 2004, forward to
the financial institutions prime rate plus 0.5%. Borrowings under the amended line of credit were charged interest at the financial
institutions prime rate plus (i) 1.5% in January and February, (ii) 1.0% in March through July, and (iii) 0.5% in August through December 2004.
At December 26, 2004, the rate charged by the financial institution was 5.75%.




A fee of 0.25% is charged on the unused portion of
the line of credit. 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 is
currently in compliance with all such covenants.


5.    Long-Term Debt



In conjunction with the construction of the 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 December 26,
2004 is at the prime rate plus 1% (6.25%). As of December 26, 2004, there was a balance owed of $1.1 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.


36

---

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



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
December 26, 2004, there was a balance owed of $1.4 million against this credit facility. Interest on the note at December 26, 2004 is at the prime
rate plus 1% (6.25%). 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):


|2005       |  |  |  | $ | 267   |  |  |  |  | 
|---------- |  |  |  | - | ----- |  |  |  |  | 
|2006       |  |  |  |   | 267   |  |  |  |  | 
|2007       |  |  |  |   | 267   |  |  |  |  | 
|2008       |  |  |  |   | 267   |  |  |  |  | 
|2009       |  |  |  |   | 267   |  |  |  |  | 
|Thereafter |  |  |  |   | 1,209 |  |  |  |  | 
|Total      |  |  |  | $ | 2,544 |  |  |  |  | 

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):







|                      |  |  |  | 2004 |     | 2003 |  | 2002
|--------------------- |  |  |  | ---- | --- | ---- |  | ----
|Interest
expense      |  |  |  | $    | 450 |      |  | $   
|Capitalized
interest  |  |  |  |      | (12 | )    |  |     
|Interest
income       |  |  |  |      | (1  | )    |  |     
|Interest
expense, net |  |  |  | $    | 437 |      |  | $   

37

---

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

8.    Income Taxes



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







|                           |  |  |  | 2004 |       | 2003 |  | 2002
|-------------------------- |  |  |  | ---- | ----- | ---- |  | ----
|United
States              |  |  |  | $    | 1,655 |      |  | $   
|U.S.
Territories           |  |  |  |      | 2,444 |      |  |     
|Foreign                    |  |  |  |      | 369   |      |  |     
|Income before
income taxes |  |  |  | $    | 4,468 |      |  | $   



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







|                                   |  | 2004 |       | 2003 |  | 2002
|---------------------------------- |  | ---- | ----- | ---- |  | ----
|Current
        income taxes:      |  |      |       |      |  |     
|United
        States              |  | $    | 506   |      |  | $   
|U.S.
        Territories           |  |      | 1,010 |      |  |     
|Foreign                            |  |      | 0     |      |  |     
|Current
        income taxes       |  |      | 1,516 |      |  |     
|Deferred
        income taxes      |  |      |       |      |  |     
|United
        States              |  |      | 134   |      |  |     
|U.S.
        Territories           |  |      | 18    |      |  |     
|Foreign                            |  |      | 112   |      |  |     
|Deferred
        income taxes      |  |      | 264   |      |  |     
|Provision
        for income taxes |  | $    | 1,780 |      |  | $   



A reconciliation of the Companys effective tax
rate with the federal statutory rate of 34% for the years ended December 26, 2004, December 28, 2003, and December 29, 2002, is as follows (dollars in
thousands):







|                                                                     |  | 2004 |       |   |  | 2003 |      |    |  | 2002 |     |  
|-------------------------------------------------------------------- |  | ---- | ----- | - |  | ---- | ---- | -- |  | ---- | --- | -
|Tax
        at U.S. Statutory Rate                                   |  | $    | 1,519 |   |  |      | 34.0 | %  |  | $    | 786 |  
|Non-Deductible Permanent Differences                                 |  |      | 3     |   |  |      | 0.1  | %  |  |      | 3   |  
|Foreign
        Tax Losses not Benefited                             |  |      | 290   |   |  |      | 6.5  | %  |  |      | 165 |  
|Foreign
        Tax Credit not Utilized                              |  |      | (17   | ) |  |      | (0.4 | )% |  |      | (68 | )
|Statutory
        Rate Difference as Compared to U.S. Statutory Rate |  |      | 56    |   |  |      | 1.2  | %  |  |      | 38  |  
|Other                                                                |  |      | (71   | ) |  |      | (1.6 | )% |  |      | 6   |  
|Effective
        Income Tax Rate                                    |  | $    | 1,780 |   |  |      | 39.8 | %  |  | $    | 930 |  

38

---

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):







|                                        |  |  |  | December 26, 2004 |        | December 28, 2003
|--------------------------------------- |  |  |  | ----------------- | ------ | -----------------
|Deferred tax
assets                     |  |  |  |                   |        |                  
|Inventory
adjustments                   |  |  |  | $                 | 207    |                  
|Vacation
accrual                        |  |  |  |                   | 310    |                  
|Deferred
rent                           |  |  |  |                   | 178    |                  
|Store closure
reserve                   |  |  |  |                   | 97     |                  
|Net operating
loss carryforwardforeign |  |  |  |                   | 2,836  |                  
|Foreign tax
credits                     |  |  |  |                   | 114    |                  
|Other                                   |  |  |  |                   | (21    | )                
|Total
deferred tax assets               |  |  |  |                   | 3,721  |                  
|Valuation
allowance                     |  |  |  |                   | (2,418 | )                
|                                        |  |  |  |                   | 1,303  |                  
|Deferred tax
liabilities                |  |  |  |                   |        |                  
|Cash
discounts                          |  |  |  |                   | (20    | )                
|Fixed asset
basis difference            |  |  |  |                   | (988   | )                
|Total
deferred tax liabilities          |  |  |  |                   | (1,008 | )                
|Net deferred
tax assets                 |  |  |  | $                 | 295    |                  



Net deferred tax assets are classified on the
balance sheet as follows (in thousands):







|                           |  |  |  | December 26, 2004 |      | December 28, 2003
|-------------------------- |  |  |  | ----------------- | ---- | -----------------
|Current
assets             |  |  |  | $                 | 688  |                  
|Long-term
liabilities, net |  |  |  |                   | (393 | )                
|Net deferred
tax assets    |  |  |  | $                 | 295  |                  



As of December 26, 2004, the Company has foreign net
operating loss carryforwards (NOLs) of approximately $8.2 million, some of which, if not utilized, will begin expiring in the year
2006. The NOLs include approximately $4.5 million related to Curacao and St. Maarten which are not subject to expiration time limits. The
Companys ability to utilize the NOLs carryforwards is dependent upon generating taxable income in the foreign jurisdictions. As a result,
the Company has recorded a valuation allowance of $2.4 million attributable to the net operating loss carryforwards.




The Company had tax credit carryforwards of $0.1
million as of December 26, 2004, expiring between 2014 and 2015. During 2003, 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




The Company maintains an Amended and Restated 1989
Stock Option Plan (the 1989 Plan), which provides for the granting of incentive and nonqualified stock options to employees, directors, and
consultants of the Company. An aggregate of 398,496 shares of common stock has been authorized for issuance under the 1989 Plan. Options issued under
the 1989 Plan vest ratably over five years and expire ten years from the date of grant and were generally granted at prices equal to the fair value on
the date of grant. There were 285,885 options available for future grant under the 1989 Plan at December 29, 2002. No additional options will be
granted under the 1989 Plan. All options issued under this plan were expired as of December 29, 2002.




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,


39

---

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



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 16,882 options available for future grant under the 1998 Plan at December 26, 2004.




A summary of the status of stock option plans as of
December 26, 2004, December 28, 2003 and December 29, 2002, and changes during the years then ended are presented below:


|                               |  |  |  | 2004 |         | 2003 |  | 2002 |       
|------------------------------ |  |  |  | ---- | ------- | ---- |  | ---- | ------
|
|Outstanding, beginning of
year |  |  |  |      | 839,243 |      |  |      | $ 2.92
|Granted at fair
value          |  |  |  |      | 156,167 |      |  |      | 4.43  
|Forfeited                      |  |  |  |      | (94,291 | )    |  |      | 6.72  
|Exercised                      |  |  |  |      | (62,930 | )    |  |      | 1.44  
|Outstanding, end of year       |  |  |  |      | 838,189 |      |  |      | 2.88  



The following summarizes information related to
options outstanding and exercisable at December 26, 2004:







|           |  |  |  | Outstanding |         | Exercisable | 
|---------- |  |  |  | ----------- | ------- | ----------- | 
|
|$1.141.44 |  |  |  |             | 196,167 |             | 
|1.502.65  |  |  |  |             | 355,437 |             | 
|3.076.00  |  |  |  |             | 225,805 |             | 
|7.00       |  |  |  |             | 60,780  |             | 
|           |  |  |  |             | 838,189 |             | 



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 December 26, 2004, no rights have become exercisable.


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.


40

---

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



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







|                                                                                                                    |  |  |  | Fiscal Year Ended |          
|------------------------------------------------------------------------------------------------------------------- |  |  |  | ----------------- | ---------
|
|Numerator:                                                                                                          |  |  |  |                   |          
|Net
income                                                                                                          |  |  |  | $                 | 2,688    
|Denominator:                                                                                                        |  |  |  |                   |          
|Denominator
for basic earnings per shareweighted average shares                                                    |  |  |  |                   | 3,731,754
|Effect of
potentially dilutive shares:                                                                              |  |  |  |                   |          
|Stock
options                                                                                                       |  |  |  |                   | 184,054  
|Denominator
for diluted earnings per shareadjusted weighted average shares and assumed conversion of stock options |  |  |  |                   | 3,915,808
|Basic
earnings per common share                                                                                     |  |  |  | $                 | 0.72     
|Diluted
earnings per common share                                                                                   |  |  |  | $                 | 0.69     



The diluted share calculation for the fiscal years
ended December 26, 2004, December 28, 2003 and December 29, 2002, excludes 164,947, 320,875 and 761,351 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
|------------------------------------------ |  |  |  | ----- | ------- | -----------------
|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 (1) |  |  |  |       | 134,547 |                  
|                                           |  |  |  | $     | 177,066 |                  
|2002                                       |  |  |  |       |         |                  
|United
States                              |  |  |  | $     | 44,628  |                  
|U.S.
Territories and foreign countries (1) |  |  |  |       | 131,562 |                  
|                                           |  |  |  | $     | 176,190 |                  



|(1) |  | On December 8, 2002, the Companys Dededo store on the
island of Guam suffered damage from Supertyphoon Pongsona, resulting in its immediate closure. The store was rebuilt and reopened on October 3, 2003.
As of December 29, 2002, the Company had written-off $0.6 million of equipment and leasehold improvements lost in the Supertyphoon in Guam. The Company
recovered this write-off from its insurance company in January 2004. Included in long-lived assets of U.S. Territories at December 28, 2003, is $0.8
million of equipment residing in the Companys reconstructed store in Dededo, Guam. In January 2004, the Company sold and leased back this
equipment under a seven year capital lease.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

41

---

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

12.    Lease Commitments



The Company has entered into operating leases for
its retail and administrative office 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 new lease is for seven years with annual rental payments of
approximately $0.1 million.




A summary of the Companys future minimum lease
obligations at December 26, 2004, under noncancellable leases is as follows (in thousands):







|Fiscal Year                              |  |  |  | Operating   Leases |        | Capital   Lease
|---------------------------------------- |  |  |  | ------------------ | ------ | ---------------
|2005                                     |  |  |  | $                  | 4,775  |                
|2006                                     |  |  |  |                    | 4,825  |                
|2007                                     |  |  |  |                    | 4,457  |                
|2008                                     |  |  |  |                    | 4,203  |                
|2009                                     |  |  |  |                    | 3,115  |                
|Thereafter                               |  |  |  |                    | 12,428 |                
|Total                                    |  |  |  | $                  | 33,803 |                
|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 December 26, 2004, December 28, 2003 and December 29, 2002, totaled $5.4 million, $4.7 million and $5.0 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
15% of their compensation to the plan, subject to annual limitations under the Internal Revenue Code. The Company matches employee contributions at a
rate of 25%. The Companys matching contributions to the plan approximated $0.1 million in each of fiscal years 2004, 2003 and
2002.




The Company has a Manager Bonus Program, which
provides for annual bonuses for managers based on store and company profitability targets. All amounts payable under the program are accrued in the
year earned. Accordingly, bonuses accrued under this program totaled $1.4 million, $0.5 million and $0.2 million for fiscal 2004, 2003 and 2002,
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 $0.2 million, $0.1
million and $0.1 million in fiscal 2004, 2003 and 2002, respectively.


42

---

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
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
|Fiscal
2003 (1)    |  |  |  |  |     |  |  |   |        |  |  |                           |       
|First quarter      |  |  |  |  | 130 |  |  | $ | 42,334 |  |  | $                         | 7,368 
|Second
quarter     |  |  |  |  | 130 |  |  |   | 42,010 |  |  |                           | 7,404 
|Third quarter      |  |  |  |  | 130 |  |  |   | 42,258 |  |  |                           | 7,760 
|Fourth
quarter (2) |  |  |  |  | 142 |  |  |   | 50,464 |  |  |                           | 8,971 



|(1) |  | The Companys fiscal quarters are 13 weeks.
|--- |  | -------------------------------------------

|(2) |  | On December 8, 2002, one of the Companys stores in Guam
closed due to damage caused by Supertyphoon Pongsona. The store was rebuilt and it reopened for business on October 3, 2003.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

43

---



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



On March 21, 2005, we entered into a short-term
agreement with our existing St. Croix landlord to extend our lease term to June 30, 2005 at a rate of $35,000 per month.


44

---



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 annual meeting of shareholders to be held on May 11,
2005.


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 annual meeting of shareholders to be held on May 11,
2005.


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 annual meeting of shareholders to be held on May 11,
2005.


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 annual meeting of shareholders to be held on May 11,
2005.


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 annual meeting of shareholders to be held on May 11,
2005.


45

---



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. 26 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 26 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. |  | X | 

46

---



|      |  |                                                                                                                                                      |  |   |  | Incorporated
      by Reference | 
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------- |  | - |  | ------------------------------- | 
|
|10.11 |  | 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                             | 
|10.12 |  | Employment Agreement between Cost-U-Less, Inc. and J. Jeffrey Meder,
        dated October 20, 2004*                                                 |  |   |  | 8-K                             | 
|10.13 |  | Lease
        Agreement between Westmall Limited and CUL (Fiji) Limited, effective March
        1, 1998                                             |  |   |  | S-1/A                           | 
|10.14 |  | Lease
        Agreement between Fiji Public Service Association and CUL (Fiji) Limited,
        dated June 4, 1998                                   |  |   |  | 10-K                            | 
|10.15 |  | Lease
        Agreement between Baroud Real Estate Development N.V. and C.U.L. (Curacao)
        N.V., dated April 3, 1998                           |  |   |  | S-1                             | 
|10.16 |  | Ground Lease between Market Square East, Inc. and CULUSVI, Inc., dated
        October 20, 1997                                                      |  |   |  | S-1                             | 
|10.17 |  | Sublease Agreement between Tamuning Capital Investment, Inc. and Cost-U-Less,
        Inc., dated July 15, 1994                                      |  |   |  | S-1                             | 
|10.18 |  | Lease
        Agreement between Haleck Enterprises Incorporated and Cost-U-Less, Inc.,
        dated February 3, 2005                                |  |   |  | 8-K                             | 
|10.19 |  | Lease
        Agreement between Inmostrat Corporation and Cost-U-Less, Inc., dated August
        1993                                               |  |   |  | S-1                             | 
|10.20 |  | Lease
        Agreement between Hassan Rahman and Cost-U-Less, Inc., dated July 30,
        1993                                                     |  |   |  | S-1                             | 
|10.21 |  | Industrial Real Estate Lease between Hilo Partners and Cost-U-Less, Inc.,
        dated September 1, 1991                                            |  |   |  | S-1                             | 
|10.22 |  | Indenture of Lease between H.C.L. Investments, Inc. and Cost-U-Less,
        Inc., dated August 21, 1992                                             |  |   |  | 10-K                            | 
|10.23 |  | Amendment to Lease between H.C.L. Investments, Inc. and Cost-U-Less,
        Inc., dated April 27, 2000                                              |  |   |  | 10-K                            | 
|10.24 |  | Lease
        Agreement between Caribe Lumber & Trading N.V. (St. Maarten) and CUL
        Sint Maarten N.V., dated February 19, 1999                |  | X |  |                                 | 
|10.25 |  | Sublease Agreement between New Breed Distribution Corp of California,
        Inc. and Cost-U-Less, Inc., dated November 1, 1999                     |  |   |  | 10-K/A                          | 
|10.26 |  | Lease
        Agreement between AMB Property, L.P. and Cost-U-Less, Inc., dated November
        12, 1999                                            |  |   |  | 10-K/A                          | 
|10.27 |  | First
        Amendment to Lease Agreement between AMB Property, L.P. and Cost-U-Less,
        Inc., dated November 21, 2001                         |  |   |  | 10-K                            | 
|10.28 |  | Lease
        Agreement between BDC One Preston Properties Limited Partnership and Cost-U-Less,
        Inc., dated April 27, 2000                   |  |   |  | 10-K                            | 
|10.29 |  | Lease
        Agreement between Tonko Reyes, Inc., a Guam corporation and Cost-U-Less,
        Inc., dated October 22, 2001                          |  |   |  | 10-K                            | 

47

---



|      |  |                                                                                                                                       |  |   |  | Incorporated
      by Reference | 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | - |  | ------------------------------- | 
|
|10.30 |  | Amendment to Lease Agreement between Tonko Reyes, Inc., a Guam corporation
        and Cost-U-Less, Inc., dated October 22, 2001      |  |   |  | 10-K                            | 
|10.31 |  | Lease
        Agreement between Sun Life Assurance Company of Canada and Cost-U-Less,
        Inc., dated November 18, 2003           |  |   |  | 10-K                            | 
|10.32 |  | Executive Severance Plan*                                                                                                             |  |   |  | 10-K                            | 
|10.33 |  | Real
        Estate Purchase and Sale Agreement dated April 30, 2004, between Mint
        Capital, Casco Inc., and Cost-U-Less, Inc. |  |   |  | 10-Q                            | 
|10.34 |  | Summary of Cost-U-Less, Inc. 2005 Incentive Bonus Program*                                                                            |  |   |  | 8-K                             | 
|10.35 |  | Summary of Cost-U-Less, Inc. Non-Employee Director Compensation*                                                                      |  | X |  |                                 | 
|16.1  |  | Letter re: change in certifying accountant                                                                                            |  |   |  | 8-K                             | 
|21.1  |  | Subsidiaries of Cost-U-Less, Inc.                                                                                                     |  |   |  | 10-K                            | 
|23.1  |  | Consent of Grant Thornton LLP                                                                                                         |  | X |  |                                 | 
|23.2  |  | Consent of Deloitte & Touche LLP                                                                                                      |  | X |  |                                 | 
|24.10 |  | Power
        of Attorney (See page 49)                                                                                               |  | 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                                                                               |  |   |  |                                 | 

48

---



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.
| |  | -----------------

| |  | /s/ J. Jeffrey Meder
| |  | --------------------

|Date: March 23, 2005 |  | By:            J. Jeffrey Meder
     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
23rd day of March 2005.







|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                                                                                                      | 

49

---



SCHEDULE II

COST-U-LESS, INC.

VALUATION AND QUALIFYING ACCOUNTS

|Description                                           |  |  |  | Balance at Beginning of Year |         | Additions |  | (1) Deductions |         | Balance at End of Year
|----------------------------------------------------- |  |  |  | ---------------------------- | ------- | --------- |  | -------------- | ------- | ----------------------
|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 |                       
|Year Ended
December 29, 2002                          |  |  |  |                              |         |           |  |                |         |                       
|Reserves and
allowances deducted from asset accounts: |  |  |  |                              |         |           |  |                |         |                       
|Allowance for
doubtful accounts                       |  |  |  | $                            | 120,000 |           |  | $              | 135,000 |                       



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

50

---