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

FORM 10-K/A

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

For the fiscal year
ended January 29, 2006

or

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

Commission File Number
0-20269

DUCKWALL-ALCO
STORES, INC. (Exact name of
registrant as specified in its charter)

|Kansas
      (State or other jurisdiction of
                                          incorporation or organization)                   |  | 48-0201080
      (I.R.S. Employer              Identification No.)
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------
|                                                                                                                                        |  |                                                                   
|401
Cottage Street                                                       Abilene, Kansas
      (Address of principal
executive offices) |  | 67410-2832
      (Zip Code)                                       

Registrants telephone
number including area code: (785) 263-3350

Securities  registered
 pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange
on which registered

NONE

Securities registered
pursuant to Section 12(g) of the Act:                                           
  Common
Stock, par value $.0001 per share

---

(Title of Class)


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.     Yes |_|   No |X|

Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.  Yes |_|   No |X|

Indicate
by check mark whether the registrant  (1) has filed all reports  required to be filed by
Section   13 or 15(d) of the  Securities  Exchange Act of 1934 during the  preceding 12
months (or for such shorter  period   that the registrant was required to file such
reports),  and (2) has been subject to such filing requirements for   the past 90 days.
 Yes   |X|          No |_|

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

Indicate
by check mark whether the  registrant is a large  accelerated   filer, an accelerated
 filer, or a non-accelerated  filer.  See definition of   accelerated  filer and large
accelerated filer in Rule 12b-2 of the Exchange   Act. Large accelerated filer [_]
Accelerated filer [X] Non-accelerated filer [_]

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

The
aggregate  market value of the  3,889,694  shares of Common Stock,   par value $.0001 per
share,  of the registrant held by  non-affiliates  of the   registrant is $91,330,015 on
August 1, 2005,  based on a closing sale price of   $23.48.  As of April 7, 2006,  there
 were  3,788,989  shares of Common  Stock   outstanding.

Documents
 incorporated by reference:  portions of the  Registrants   Proxy Statement for the 2006
Annual Meeting of Stockholders  are  incorporated   by reference in Part III hereof.

---

PART I

ITEM 1. BUSINESS

History

Duckwall-ALCO
 Stores,  Inc.,  (the  Company or  Registrant),  was   founded as a general
merchandising  operation in 1901 in Abilene, Kansas by A.   L. Duckwall.  From its
founding  until 1968, the Company  conducted its retail   operations as small variety or
dime stores. In 1968, the Company followed an   emerging  trend to discount  retailing
 when it opened its first ALCO discount   store.  The Companys  overall  business
 strategy  involves  identifying  and   opening  stores in towns that will provide the
Company with the highest return   on  investment.  Although the Company  prefers  markets
that dont have direct   competition from national or regional  full-line discount
stores, its strategy   does not preclude it from entering competitive markets. This
strategy includes   opening either an ALCO discount store or a Duckwall  variety store,
 depending   upon the market size. As of January 29, 2006, the Company  operates 251
retail   stores  located in the central  United  States,  consisting of 183 ALCO retail
  discount stores and 68 Duckwall variety stores.

The
Company was incorporated on July 2, 1915 under the laws of Kansas.   The Companys
 executive  offices are located at 401 Cottage Street,  Abilene,   Kansas 67410-2832, and
its telephone number is (785) 263-3350.

General

The
Company is a regional  retailer  operating 251 stores in 21 states   in the central
 United  States.  The Companys  strategy is to target  smaller   markets not served by
other  regional or national  full-line  retail  discount   chains and to provide the most
 convenient  access to retail  shopping  within   each  market.  The  Companys  ALCO
 discount  stores  offer  a full  line  of   merchandise  consisting of approximately
35,000 items,  including  automotive,   candy, crafts, domestics,  electronics,  fabrics,
furniture,  hardware, health   and beauty aids,  housewares,  jewelry,  ladies, mens
and childrens apparel   and shoes,  pre-recorded  music and video,  sporting  goods,
 seasonal  items,   stationery and toys.  The Companys  smaller  Duckwall  variety
stores offer a   more limited selection of similar merchandise.

Of
the Companys 183 ALCO discount  stores,  154 stores are located in   communities that do
not have another full-line  discounter.  The ALCO discount   stores  account for 93% of
the  Companys  net sales.  The current  ALCO store   averages  20,800 square feet of
selling space.  However,  the Companys  store   expansion  program is primarily
 directed  toward opening stores with a design   prototype of  approximately  18,000
 square feet of selling  space  (Class 18   Stores). Based on the Companys experience,
the design of the Class 18 Stores   produces the greatest return on investment for newly
opened stores.

The
 Companys 68 Duckwall  variety  stores are  primarily  located in   communities  of less
 than  2,500  residents  and are  designed  to act as the   primary convenience retailer
in these smaller communities. These stores, which   account for the remaining 7% of the
Companys net sales, average approximately   5,400  square  feet of selling  space and
offer  approximately  12,000  items.   Operating Duckwall stores offer the Company the
opportunity to serve the needs   of a community that would not support a full-line retail
discount store with a   reduced investment per store.

All
of the Companys  discount and variety  stores are serviced by the   Companys 352,000
square foot distribution center in Abilene, Kansas.

Business Strategy

The
Company  intends to focus on  executing a business  strategy  that includes the following
key components:

| | Markets:The Company intends to open ALCO stores primarily in towns with populations
of typically less than 5,000 that are in trade areas with populations of less
than 16,000 where: (1) there is no direct competition from national or
regional full-line discount retailers; (2) economic and demographic criteria
indicate the market is able to commercially support a discount retailer;
and (3) the opening of an ALCO store would significantly reduce the
likelihood of the entry into such market by another full-line discount retailer.
This key component of the Companys strategy has guided the Company in both its
opening of new stores and in its closing of existing stores.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Market
Selection:The Company utilizes a detailed process to analyze under-served
markets which includes examining factors such as distance from competition,
trade area, demographics, retail sales levels, existence and stability
of major employers, location of county government, disposable income,
and distance from the Companys distribution center. Markets that are
determined to be sizable enough to support an ALCO or a Duckwall store, and
that have no direct
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2 | 
| | - | 

---

| | competition
 from another  full-line  discount  retailer,  are examined          closely  and
 eventually  selected  or  passed  over  by the  Companys          experienced
management team.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Store
Expansion:The Companys expansion program is designed primarily around the
prototype Class 18 Store. This prototype details shelf space, merchandise
presentation, store items to be offered, parking, storage requirements, as
well as other store design considerations. The 18,000 square feet of selling
space is large enough to permit a full line of the Companys
merchandise, while minimizing capital expenditures, labor costs and
general overhead costs. The Company will also consider opportunities in
acceptable markets to open ALCO stores in available space in buildings
already constructed. The expansion strategy for its Duckwall variety stores
is based on opportunities in smaller communities where there is a need and
where existing premises are available for lease at a relatively low cost,
resulting in limited downside exposure. One Duckwall store was opened in fiscal
2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Technology:The Company has evaluated the costs and benefits of upgrading its
current point-of-sale POS, merchandising, human resources/payroll and
financial systems. The Companys project team has selected the hardware and
software and entered into agreements with the respective vendors.
Implementation is currently underway. The Company went live on the human
resources/payroll and financial systems during the third quarter of fiscal
2006. The Companys goal is to conduct a pilot of the new POS system in five
stores in the second quarter of fiscal 2007, with roll out of the POS
system to all stores later that year. Financial Planning, Performance
Analysis, and Merchandise Allocation systems are expected to go live in
the first quarter of fiscal 2007. This represents an investment of
approximately $8.9 million for hardware and software in fiscal 2006, and an
investment of an additional $10.2 million in fiscal 2007, as the POS
systems are rolled out to all existing stores. A required feature of this new
POS system is perpetual inventory, which the Company does not currently
have in its stores. Perpetual inventory allows tracking of on-hand
quantities at the item level, and enables automated replenishment. Once
the Company has on-hand information and the ability to automatically
replenish items in the stores, the benefits of these new systems can be
significant. For example, the Company estimates it can reduce its
inventory levels by 5% to 10%, and potentially more, because the system
will have parameters set at the item level relating to how much
inventory to order based on criteria set centrally. A reduction in
inventory will improve the Companys return on assets ratio. In
addition to lowering inventory, the new system has the potential to
improve in-stock levels in the stores, thereby increasing same-store
sales and profits. The new system will also enable other improvements
in the stores which are not available today due to technology
limitations. Once those limitations are removed, the Company expects to
re-engineer the stores to take full advantage of the new technology.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Advertising
and Promotion:The Company utilizes full-color photography advertising
circulars of 16 to 24 pages distributed through newspaper insertion or, in the
case of inadequate newspaper coverage, through direct mail. During fiscal
2006, these circulars were distributed 38 times in ALCO markets. In its
Duckwall markets, the Company distributed a full-color, 4 page insert 12 times
during fiscal 2006. The Companys marketing program is designed to create
awareness and recognition of its competitive pricing on a comprehensive
merchandise selection for the whole family. During fiscal 2007, the
Company will distribute approximately 40 circulars in ALCO markets, and
12 in the Duckwall markets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Store
Environment:The Companys stores are open, clean, bright and offer a
pleasant atmosphere with disciplined product presentation, attractive
displays and efficient check-out procedures. The Company endeavors to
staff its stores with courteous, highly motivated, knowledgeable store
associates in order to provide a convenient, friendly and enjoyable
shopping experience.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Store Development

The
Company expects to open approximately ten ALCO stores during fiscal year 2007. The
Companys  strategy  regarding  store  development is to increase sales  and
 profitability  at  existing  stores  by  continually   refining  the merchandising mix
and improving  operating  efficiencies,  and through new store openings in the Companys
 targeted base of under-served  markets in the central United States.  The following
table  summarizes the Companys store  development during the past three fiscal years:

|               | 2006 | 2005 | 2004
|-------------- | ---- | ---- | ----
|
|Stores Opened  |      | 7    |     
|Stores Closed  |      | 10   |     
|               |      |      |     
|Net New Stores |      | (3   | )   

| | 3 | 
| | - | 

---

As
of January  29,  2006,  the Company  owned 13 ALCO and one  Duckwall location,  and
leased 170 ALCO and 67 Duckwall  store  locations.  The Companys present intention is to
lease all new stores;  however, the company may own some of the ALCO  locations.  The
 estimated  investment  to open a new Class 18 ALCO Store that is leased is approximately
$800,000 for the equipment and inventory.

As
 discussed  above,  before  entering  a new  market  with an ALCO or Duckwall store, the
Company analyzes and screens available competitive,  market, and  demographic  data to
evaluate the  suitability  and  attractiveness  of the potential market. The screening
process also involves a visit by officers of the Company to more subjectively evaluate
the potential new site.

Store Environment and
Merchandising

The
Company manages its stores to attractively and conveniently display a full line of
merchandise  within the confines of the stores  available square footage. Corporate
merchandising direction is provided to each ALCO and Duckwall store to ensure a
consistent  company-wide  store  presentation.  To  facilitate long-term merchandising
planning, the Company divides its merchandise into three core categories driven by the
Companys  customer profile:  primary,  secondary, and convenience.  The primary core
receives  managements  primary focus, with a wide  assortment of merchandise  being
placed in the most  accessible  locations within the stores  and  receiving  significant
 promotional  consideration.  The secondary  core  consists of  categories  of
 merchandise  for which the Company maintains a strong  assortment  that is easily and
readily  identifiable  by its customers.  The convenience core consists of categories of
merchandise for which ALCO will maintain convenient (but limited)  assortments,  focusing
on key items that are in keeping with customers expectations for a discount store.
Secondary and convenience cores include merchandise that the Company feels is important
to carry, as the target  customer  expects to find them within a discount store and they
ensure a high level of customer traffic. The Company continually  evaluates and ranks all
product lines, shifting product  classifications when necessary to reflect the changing
demand for products.

Purchasing

Procurement
and merchandising of products is directed by a staff of two Vice President - Divisional
 Merchandise  Managers who are each  responsible for specific product categories.  The
Company employs 19 merchandise buyers and five assistant  buyers who each report to a
Vice  President - Divisional  Merchandise Manager.  Buyers are assisted by a management
 information  system that provides them with current  price and volume  information  by
SKU,  thus allowing them to react quickly with buying and pricing  adjustments  dictated
by customer  buying patterns.

The
 Company  purchases  its  merchandise  from   approximately   2,000 suppliers.  The
Company  generally does not utilize  long-term supply contracts. Only one supplier
accounted for more than 5% of the Companys total purchases in fiscal 2006 and competing
 brand name and private  label  products are available from other  suppliers  at
 competitive  prices.  The Company  believes  that its relationships  with its  suppliers
are good and that the loss of any one or more of its suppliers would not have a material
adverse effect on the Company.

Pricing

Merchandise
 pricing is done at the corporate  level and is essentially the  same  for  all  of the
 ALCO  stores,  regardless  of the  level  of  local competition. This pricing strategy,
with its promotional activities, is designed to bring consistent value to the customer.
In fiscal 2007, promotions on various items will be offered approximately 40 times
through advertising circulars. Even though the same general pricing and  advertising
 activities are carried out for all ALCO  stores,  the  impact of such  activities  is
 significantly  different depending upon the level of competition in the market.

Distribution and
Transportation

The
 Company  operates a 352,000  square  foot  distribution  center in Abilene, Kansas, from
which it services each of the 183 ALCO discount stores and 68  Duckwall  variety  stores.
 The  distribution   center  is  responsible  for distributing  approximately 80% of the
Companys  merchandise,  with the balance being  delivered   directly  to  the  Companys
 stores  by  its  vendors.   The distribution  center  ships to each of the  Companys
 ALCO  stores once a week, primarily  through  irregular route common  carriers.  The
 distribution  center maintains a fully integrated management information system,
allowing the Company to utilize  such cost cutting  efficiencies  as  perpetual
 inventories,  safety programs, and employee productivity software.

The
Company also utilized its wholly owned subsidiary,  SPD Truck Line, Inc. (the
 Subsidiary)  for delivery to the stores.  The Subsidiary acted as a contract  carrier
for the Company in transporting  goods to and from its stores. The  Subsidiary  used five
tractors and leases 23 trailers for such  deliveries. Effective January 1, 2006, the
Company contracted with Werner

| | 4 | 
| | - | 

---

Enterprises,  Inc. to  be  its
 dedicated   transportation   provider.   Werner  will  utilize  the Subsidiarys
equipment until such equipment leases expire.

Management Information
Systems

The
Company has  committed  significant  resources  to the purchase and application  of
 available  computer  hardware  and  software  to  its  discount retailing  operations
with the intent to lower costs,  improve  customer service and enhance general business
planning.  In general, the Companys  merchandising systems are  designed  to  integrate
 the key  retailing  functions  of seasonal merchandise planning, purchase order
management, merchandise distribution, sales information and inventory  maintenance and
 replenishment.  All of the Companys ALCO discount stores have POS computer  terminals
that record certain sales data in a format that can be  transmitted  nightly to the
Companys  data  processing facility where it is used to produce daily and weekly
management reports. During the last three fiscal years, the Company has devoted resources
to development of systems that have  improved  information  available to  management  and
improved specific operational efficiencies.

Approximately
 2,000 of the Companys  merchandise  suppliers currently participate in the Companys
 electronic data interchange (EDI) system,  which makes it possible for the Company to
place  purchase  orders  electronically.  A number  of  these  suppliers  are  able to
 utilize  additional  EDI  functions, including  transmitting invoices and advance
shipment notices to the Company and receiving sales history from the Company.  Refer to
the section above:  Business Strategy:  Technology,  for  additional  discussion  on  the
 Companys  planned technology upgrades.

Store Locations

As
of January  29,  2006,  the Company  operated  183 ALCO stores in 21 states located in
smaller  communities  in the central  United States.  The ALCO stores  average
 approximately  20,800  square  feet of selling  space,  with an additional  5,000 square
feet  utilized for  merchandise  processing,  temporary storage and  administration.  The
Company also operates 68 Duckwall stores in 10 states. The geographic distribution of the
Companys stores is as follows:

|Duckwall Stores (68)
|--------------------
|                    
|Arkansas (1)        
|New Mexico (1)      



|ALCO Stores (183)
|-----------------
|                 
|Arizona (9)      
|Iowa (9)         
|New Mexico (8)   
|Utah (6)         
|                 

Competition

While
the discount  retail  business in general is highly  competitive, the Companys business
strategy is to locate its ALCO discount stores in smaller markets where there is no
direct  competition  with larger  national or regional full-line  discount  chains,  and
where it is  believed no such  competition  is likely to develop.  Accordingly, the
Companys primary method of competing is to offer  its  customers  a  conveniently
 located  store  with  a  wide  range  of merchandise at discount prices in a primary
trade area  population  under 16,000 that does not have a large national or regional
 full-line  discount store.  The Company  believes  that trade  area size is a
 significant  deterrent  to larger national and regional  full-line  discount  chains.
 Duckwall variety stores are located  in very  small  markets,  and  like  the  ALCO
 stores,  emphasize  the convenience of location to the primary customer base.

In
 the  discount  retail  business  in  general,  price,   merchandise selection,
 merchandise  quality,  advertising  and  customer  service  are  all important aspects
of competing.  The Company  encounters direct competition with national full-line
discount stores in 27 of its ALCO markets, and another 8 ALCO stores are in direct
 competition with regional  full-line  discount stores. The competing  regional and
national  full-line  discount  retailers  are  generally larger  than the  Company and
the stores of such  competitors  in the  Companys markets are substantially larger, have
a somewhat wider selection of merchandise and are very price competitive in some lines of
merchandise.  Where there are no national or regional  full-line  discount retail stores
directly  competing with the Companys ALCO stores, the Companys  customers
 nevertheless shop at retail discount  stores and other retailers  located in regional
trade centers,  and to that extent the Company  competes with such discount  stores and
retailers.  The

| | 5 | 
| | - | 

---

Company  also  competes for retail
 sales with mail order  companies,  specialty retailers,  mass merchandisers,  dollar
stores,  manufacturers outlets, and the internet.  In the 138  markets in which the
 Company  operates a Class 18 Store, only three markets have direct competition from a
national or regional full-line discount  retailer.  The Company  competes with dollar
 stores in  approximately three-fourths of its ALCO stores and approximately forty
percent of its Duckwall stores.

Executive Officers of
the Company

The
following table sets forth the names,  ages,  positions and certain other  information
 regarding the executive  officers of the Company as of April 14, 2006.

|Name                 | Age | Position
|-------------------- | --- | --------
|Bruce C. Dale        |     | 58      
|James E. Schoenbeck  |     | 62      
|John R. Sturdivant   |     | 61      
|Tom L. Canfield, Jr  |     | 51      
|Michael S. Marcus    |     | 51      
|Michael J. Gawin     |     | 54      
|Robert E. Swartz, Jr |     | 49      
|Anthony C. Corradi   |     | 45      

---

Except as set forth below,  all of
the executive  officers have been  associated with the Company in their present  position
or other  capacity for more than the past five years. There are no family  relationships
among the executive officers of the Company.

Bruce
C. Dalehas served as President and Chief Executive Officer of the Company since March
28, 2005. From 2003 to 2004, Mr. Dale was President and CEO of Franks Nursery and
Crafts, Inc. From 1993 to 2003, Mr. Dale was with Michaels Stores, Inc., where he
served for eight of those years as president of Aaron Brothers Art & Framing. Mr.
Dale has approximately 36 years of experience in the retail industry.

James
E. Schoenbeckhas served as Senior Vice President of Real Estate and Human Resources
since 2005. From 1988 to 2005, Mr. Schoenbeck served as Senior Vice President -
Operations and Advertising. From 1975 to 1988, Mr. Schoenbeck served in various
capacities with the Company. Mr. Schoenbeck has approximately 31 years of experience in
the retail industry.

John
R. Sturdivanthas served as Senior Vice President - Stores since February 13, 2006.
For more than five years prior to that, he served as Regional Vice President of Jo-Ann
Stores, Inc. Mr. Sturdivant has approximately 43 years experience in the retail industry.

Tom
L. Canfield, Jr.has served as Vice President - Distribution and Administration
since 1992. From 1973 to 1992, Mr. Canfield served in various capacities with the
Company. Mr. Canfield has approximately 33 years of experience in the retail
industry.

Michael
S. Marcushas served as Vice President - Finance and Treasurer since March 23, 2006.
From 2004 to 2006, Mr. Marcus served in various capacities with the Company. From 1997
to 2003, Mr. Marcus served as Vice President and Chief Financial Officer of Weiners
Stores, Inc. Mr. Marcus has approximately 17 years experience in the retail industry.

Michael
J. Gawinhas served as Vice President - Divisional Merchandise Manager since 1997.
For more than five years prior to that, he served as Divisional Merchandise
Manager for Shopko Stores, Inc. Mr. Gawin has approximately 33 years experience
in the retail industry.

Robert
E. Swartz, Jr.has served as Vice President - Divisional Merchandise Manger since 2000.
From 1978 to 2000, Mr. Swartz served in various capacities with the Company. Mr.
Swartz has approximately 28 years experience in the retail industry.

Anthony
C. Corradihas served as Vice President - Chief Technology Officer since 2005. For five
years prior to that, he was an independent consultant. Mr. Corradi has approximately 23
years experience in the retail technology industry.

| | 6 | 
| | - | 

---

Employees

As
of January  29,  2006,  the  Company  employed  approximately  4,800 people.  Of these
 employees,  approximately  450 were  employed  in the general office and distribution
 center in Abilene Kansas,  3,900 in the ALCO stores and 450 in the Duckwall stores.
 Additional employees are hired on a seasonal basis, most of whom are sales  personnel.
 There is no collective  bargaining agent for any of the Companys  employees.  The
Company  considers its relations  with its employees to be excellent.

ITEM 1A.      RISK
FACTORS

The
 Company  encourages  investors  to  carefully  consider  the risks described  below  and
 other   information   contained  in  this  document  when considering  an  investment
 decision  with respect to he Companys  securities. Additional risks and  uncertainties
 not presently known to management,  or that management  currently deems immaterial,  may
also impair the Companys  business operations.  Any of the events discussed in the risk
factors below may occur. If one or more of these  events  do  occur,  business,  results
 of  operations  or financial condition could be materially  adversely  affected.  In
that instance, the trading price of the Companys securities could decline, and investors
might lose part or all of their investment.

Economic Conditions

Similar
to other retail  businesses,  the Companys  operations  may be affected  adversely by
general  economic  conditions  and events which result in reduced  consumer  spending in
the markets served by its stores.  Also,  smaller communities  where the Companys
 stores are located may be dependent upon a few large employers or may be significantly
 affected by economic  conditions in the industry upon which the community relies for its
economic viability, such as the agricultural  industry.  This may make the Companys
stores more vulnerable to a downturn in a particular segment of the economy than the
Companys  competitors, which  operate in markets  which are larger  metropolitan  areas
where the local economy is more diverse.

Competition

The
Company operates in the discount retail  business,  which is highly competitive.
 Although  the  Company  prefers  markets  that dont  have  direct competition from
national or regional  full-line  discount  stores,  competition still exists. Even in
non-competitive  markets,  the Companys customers shop at retail discount  stores and
other  retailers  located in regional trade centers. The Company also  competes for
retail  sales with other  entities,  such as mail order  companies,  specialty
 retailers,  mass  merchandisers,   dollar  stores, manufacturers outlets, and the
internet. This competitive environments subjects the  Company to the risk of reduced
 profitability  because  the  Company may be forced to lower its prices, resulting in
lower margins, in order to maintain its competitive position.

Store Expansion

The
growth in the Companys sales and operating net income depends to a substantial  degree
 on  its  expansion  program.  This  expansion  strategy  is dependent   upon  the
 Companys   ability  the  open  and  operate  new  stores effectively,  efficiently,
 and on a profitable  basis.  The Company  prefers to locate its ALCO stores in smaller
 retail  markets where no competing  full-line discount  retail store is located  within
the primary trade area.  The Companys ability to timely open new stores and to expand
 into  additional  market  areas depends in part on the following factors:  availability
of store locations,  the ability to hire and train new store personnel,  the ability to
react to consumer needs and trends on a timely basis, and the  availability of sufficient
 capital for expansion.

Information  Technology

The
Companys  ability to implement and train  employees on the new POS software, its ability
to utilize technology upgrades, and to meet the timetables for rolling out the new
technology to the stores could have a material impact on the Companys results of
operations.

Government Regulation

The
Company is subject to numerous federal,  state and local government laws and regulations,
including those relating to the development,  construction and  operation  of the
 Companys  stores.  The Company is also  subject to laws governing its relationship with
employees,  including minimum wage requirements, laws and regulations  relating to
overtime,  working and safety conditions,  and citizenship requirements.  Material
increases in the cost of compliance with any applicable law or regulation and similar
matters could  materially and adversely affect the Company.

Quarterly Fluctuations

Quarterly
 results of  operations  have  historically  fluctuated  as a result of retail  consumers
 purchasing  patterns,  with the highest  quarter in terms of sales and profitability
being the fourth quarter.  Quarterly results of operations will likely continue to
fluctuate  significantly  as a result of such patterns and may fluctuate due to the
timing of new store openings.

| | 7 | 
| | - | 

---

Dependence on Officers

The
development of the Companys  business is largely  dependent on the efforts of its
current  management  team headed by Bruce C. Dale and seven other executive  officers.
 The loss of the services of one or more of these  officers could have a material adverse
effect on the Company.

Interest Rate Risk

The
 Company  is  subject to market  risk from  exposure  to changes in interest  rates based
on its financing  requirements.  Changes in interest rates could have a negative impact
on the Companys profitability.

ITEM 1B. UNRESOLVED
STAFF COMMENTS

None.

ITEM 2.  PROPERTIES.

The
 Company  owns  facilities  in Abilene,  Kansas  that  consist of a general  office
 (approximately  35,000 square feet),  the  Distribution  Center (approximately  352,000
square feet) and additional  warehouse space adjacent to the general office.

Thirteen
of the ALCO stores and one of the Duckwall  stores  operate in buildings  owned  by the
 Company.  The  remainder  of  the  stores  operate  in properties  leased by the
 Company.  As of January  29,  2006,  such ALCO leases account for approximately
 4,300,000 square feet of lease space, which expire as follows:  approximately  357,960
square feet (8.4%) expire  between  January 29, 2006 and January 28, 2007;  approximately
 958,488  square feet  (22.4%)  expire between January 29, 2007 and February 3, 2008; and
approximately  637,081 square feet (14.9%) expire between  February 3, 2008 and February
2, 2009. The remainder of the  leases  expire  through  2021.  All  Duckwall  store
 leases  have terms remaining of fifty months or less.  The majority of the leases that
are about to expire have  renewal  options with lease terms that are the same as the
existing lease.

ITEM 3.
              LEGAL PROCEEDINGS.

Other
than routine  litigation from time to time in the ordinary course of business, the
Company is not a party to any material litigation.

ITEM 4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No
matters were submitted to a vote of the  stockholders of the Company during the fourth
quarter of the fiscal year ended January 29, 2006.

PART II

ITEM 5.
              MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF                       EQUITY SECURITIES.

The
Common Stock of the Company is quoted on the NASDAQ National Market tier of The NASDAQ
Stock Market under the symbol  DUCK.  The  following  table sets forth the range of
high and low bid  information  for the Companys  Common Stock for each quarter of fiscal
2006 and 2005.

|            | High           | Low
|----------- | -------------- | ---
|Fiscal 2006 | First quarter  |    
|            | Second quarter |    
|            | Third quarter  |    
|            | Fourth quarter |    
|
|
|Fiscal 2005 | First quarter  |    
|            | Second quarter |    
|            | Third quarter  |    
|            | Fourth quarter |    

| | 8 | 
| | - | 

---

As
of April 7, 2006, there were  approximately  1,231 holders of record of the Common Stock
of the Company.  The Company has not paid cash  dividends on its Common  Stock during the
last five fiscal  years.  The terms of the Loan and Security Agreement,  dated as of
April 15, 2002, between the Company and Bank of America  (formerly Fleet Retail Finance
Inc.) allow for the payment of dividends unless  certain loan  covenants are  triggered,
 which are not expected to occur during fiscal 2007.

Equity Compensation
Plan Information

|Plan Category                                                             | Number of securities 
to be issued upon 
exercise of 
outstanding options, 
warrants and rights | Weighted-average 
exercise price of 
outstanding options, 
warrants and rights | Number of securities 
remaining available for 
future issuance under 
equity compensation plans
|------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------
|                                                                         
|Equity compensation plans  
          
      approved by stockholders:    |                                                                                                 |                                                                                |                                                                                                
|1993 Incentive Stock Option Plan                                          |                                                                                                 | 23,238                                                                         |                                                                                                
|2003 Incentive Stock Option Plan                                          |                                                                                                 | 110,000                                                                        |                                                                                                
|Equity compensation plans not  
          
      approved by stockholders |                                                                                                 | 0                                                                              |                                                                                                
|                                                                         

No Recent Dividend
Payments; Restrictions on Payment of Dividends

The
Company has not paid a cash  dividend on the Common  Stock for more than five years,  and
it has no plans to commence  paying cash  dividends on the Common Stock. The Companys
 revolving loan credit facility currently allows the payment of cash dividends unless
certain loan covenants are triggered.

Company Repurchases of
Common Stock

As
shown in the following table, the Company  repurchased  93,398 shares of the Common Stock
during the three months ended January 29, 2006.

|                             
|-----------------------------
|
|Oct. 31 - Nov 30, 2005       
|Dec. 1 - Dec. 30, 2005       
|Dec. 31, 2005 - Jan. 29, 2006
|                             

(a)
The Board of Directors has  authorized the purchase of an aggregate of  1,814,461  shares
of the  Common  Stock of which  1,814,461  shares had been purchased as of January 29,
2006.  This program was first announced in September 1998.  During the three  months
 ended  January  29,  2006,  93,398  shares were purchased  under the program.  The
program has no expiration  date. On March 23, 2006, the Board of Directors  approved a
new plan  authorizing the repurchase of 200,000 shares of the Companys common stock. The
plan has no expiration date.

| | 9 | 
| | - | 

---

ITEM 6. SELECTED
FINANCIAL DATA.

SELECTED
CONSOLIDATED FINANCIAL DATA                                     (dollars in thousands,
except per share and store data)

The
selected  consolidated  financial data  presented  below for, and as of the          end
 of,  each  of the  last  five  fiscal  years  under  the  captions          Statements
of Operations  Data and Balance Sheet Data have been derived          from the audited
consolidated financial statements of the Company. This          data should be read in
conjunction  with  Managements  Discussion and          Analysis of Financial Condition
and Results of Operations (Item 7) and          the  consolidated  financial
 statements,   related  notes,  and  other          financial information included herein
(Item 8).

|                                                | Fiscal Year Ended
|----------------------------------------------- | -----------------
|Statement of Operations Data                   
|Net Sales                                       |                  
|Cost of Sales                                   |                  
|                                                |                  
|Gross Margin                                    |                  
|                                                |                  
|Selling, general and administrative expenses    |                  
|Depreciation and amortization                   |                  
|                                                |                  
|Income from continuing operations               |                  
|Interest expense                                |                  
|                                                |                  
|Earning from continuing operations before       |                  
|income taxes and discontinued operations        |                  
|Income tax expense                              |                  
|                                                |                  
|Earning from continuing operations before       |                  
|discontinued operations                         |                  
|(Loss) income from discontinued operations, net |                  
|of income tax (1)                               |                  
|                                                |                  
|Net earnings                                    |                  
|                                                |                  
|Per Share Information                           |                  
|Earnings (loss) per share - basic:              |                  
|Earnings (loss) before discontinued operations  |                  
|Discontinued operations                         |                  
|                                                |                  
|Net earnings                                    |                  
|                                                |                  
|Earnings (loss) per share - diluted:            |                  
|Earnings (loss) before discontinued operations  |                  
|Discontinued operations                         |                  
|                                                |                  
|Net earnings                                    |                  
|                                                |                  
|Weighted average shares outstanding:            |                  
|Basic                                           |                  
|Diluted                                         |                  

| | 10 | 
| | -- | 

---

|                                                          | Fiscal Year Ended
|--------------------------------------------------------- | -----------------
|
|Operating Data                                            |                  
|Stores open at year-end                                   |                  
|Stores in non-competitive markets at year-end (2)         |                  
|                                                          |                  
|Percentage of total stores in non-competitive markets (2) |                  
|Net sales of stores in non-competitive markets (2)        |                  
|Percentage of net sales from stores in                    |                  
|non-competitive markets (2)                               |                  
|Comparable stores sales for all stores (3)                |                  
|Comparable stores sales for stores in                     |                  
|non-competitive markets (2)(3)                            |                  
|                                                          |                  
|Balance Sheet Data                                        |                  
|Total assets                                              |                  
|Total debt (includes capital lease                        |                  
|obligation and current maturities                         |                  
|Stockholders equity                                      |                  

|(1) |  | Effective
  February  4,  2002,  the  Company  adopted  SFAS  No.  144,          Accounting  for
the Impairment or Disposal of Long-Lived  Assets.  SFAS          No. 144 provides a
single  accounting model for long-lived assets to be          disposed of. The statement
also changes the criteria for classifying an          asset as held for sale,  broadens
the scope of assets to be disposed of          that qualify for reporting as
 discontinued  operations and changes the          timing of recognizing  losses on such
operations.  The adoption of SFAS          No. 144 resulted in the reclassification as
discontinued  operations of          certain prior year revenue and expense  activity
related to twenty-two,          seven,  and eight stores  closed during  fiscal years
2006,  2005,  and          2004, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Non-competitive
 markets  refer to those markets where there is not a          national or regional
 full-line  discount  store located in the primary          market   served  by  the
 Company.   The   Companys   stores  in  such          non-competitive  markets
 nevertheless  face  competition  from various          sources. See Item 1
Business-Competition.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Percentages,
 as adjusted  to a  comparable  52 week year,  reflect the          increase or decrease
based upon a comparison of the  applicable  fiscal          year with the immediately
 preceding fiscal year for stores open during          the entirety of both years.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 7.  MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

Overview

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

| |  |  | the
ALCO Stores segment.  As of January 29, 2006, the Company  operated         183 ALCO
Stores which offer a wide variety of general merchandise and a         limited variety of
food products and accounted for 93% of the Companys         sales for  fiscal  2006.
 Total  selling  square  footage  for the ALCO         segment at the end of fiscal 2006
was 3,801,349.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
 Duckwall  Stores  segment.  As of January  29,  2006,  the Company          operated  68
 Duckwall  Stores  which  offer  a  more  limited  general          merchandise
 selection,  but serve the needs of a community that is not          large  enough  to
 support  a  full-line  retail  discount  store,  and          accounted for 7% of the
Companys sales for fiscal 2006.  Total selling          square  footage for the Duckwall
 segment at the end of fiscal 2006 was          366,928.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
 Companys  fiscal  year ends on the Sunday  closest to January 31. Fiscal 2006,  2005,
 and 2004 each  consisted of 52 weeks.  For purposes of this managements  discussion
 and  analysis of  financial  condition  and results of operations, the financial numbers
are presented in thousands.

Strategy.The Companys overall business strategy involves identifying and opening stores in
towns that will provide the Company with the highest return on investment. Although
the Company prefers markets that dont have direct competition from national or
regional full-line discount stores, its strategy does not preclude it from
entering competitive markets. Even in non-competitive

| | 11 | 
| | -- | 

---

markets,  competition still exists,
as the Companys  customers still shop at retail  discount  stores and other  retailers
 located in regional trade centers.  The Company also competes for retail sales with
other  entities, such as mail order companies,  specialty retailers,  mass merchandisers,
 dollar stores, manufacturers outlets, and the internet.

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

The
Company has  evaluated  the costs and  benefits  of  upgrading  its current
 point-of-sale  POS,   merchandising,   human   resources/payroll  and financial
 systems.  The  Companys  project  team has selected the hardware and software and
entered into agreements with the respective vendors. Implementation is currently
underway. The Company went live on the human  resources/payroll and financial systems
during the third quarter of fiscal 2006. The Companys goal is to conduct a pilot of the
new POS system in five stores in the second quarter of fiscal  2007,  with roll out of
the POS  system to all  stores  later that year. Financial Planning, Performance
Analysis, and Merchandise Allocation systems are expected to go live in the first
 quarter of fiscal  2007.  This  represents  an investment  of  approximately  $8.9
 million for hardware and software in fiscal 2006,  and an investment  of an additional
 $10.2 million in fiscal 2007, as the POS systems are rolled out to all existing  stores.
 A required  feature of this new POS system is perpetual inventory, which the Company
does not currently have in its stores.  Perpetual inventory allows tracking of on-hand
quantities at the item level, and enables  automated  replenishment.  Once the Company
has on-hand information and the ability to automatically  replenish items in the stores,
the benefits of these new  systems  can be  significant.  For  example,  the Company
estimates it can reduce its inventory levels by 5% to 10%, and potentially more, because
the system will have  parameters  set at the item level  relating to how much  inventory
 to order  based on  criteria  set  centrally.  A  reduction  in inventory  will improve
the  Companys  return on assets  ratio.  In addition to lowering inventory,  the new
system has the potential to improve in-stock levels in the stores,  thereby increasing
 same-store sales and profits. The new system will also enable other  improvements in the
stores which are not available today due to technology  limitations.  Once those
limitations are removed, the Company expects to re-engineer the stores to take full
advantage of the new technology.

The
 Company,  when  appropriate,   implements  new  merchandising  and marketing
 initiatives in an effort to increase  customer traffic and same-store sales.  The
Company is changing its focus from consumable  products that carry a lower margin to
higher margin soft goods.  This  includes  more fashion  apparel that will  appeal to a
broad base of  customers.  The Company is also adding new items to its assortments  and
has made changes to its  advertising  program that reduces the number of items
 advertised,  but  increases  the  frequency  of the advertising.

The
Company is also proactive in looking for and  implementing  ways to improve the bottom
 line  through  expense  reductions  in selling,  general and administrative  expenses
(SG&A).  The Company finalized its restructuring plan on April  28,  2005 and on
May 3,  2005,  the  Company  publicly  announced  the restructuring.   The
  restructuring  is  designed  to  help  the  Company  more effectively compete in
todays competitive retail environment.  As a part of the restructuring,  46 corporate
positions were eliminated,  which will result in an annualized savings of approximately
 $2,200.  One-time costs associated with the restructuring were approximately $734.

Recent
Events. As described more completely under Liquidity and Capital Resources-Subsequent
  Events,  on  December  1,  2005  and  December  5,  2005, respectively,  the Company
 entered into a software  lease and a flexible  lease financing  proposal  regarding  the
 lease of POS  hardware,  including  new POS terminals and centralized hardware. The
software lease begins on January 1, 2006 and the POS hardware lease is to begin by
September 30, 2006.

As
 of  July  31,  2005,   the   Companys   market   capital  held  by non-affiliates
 exceeded  $75,000.  As a result,  the Company is an  accelerated filer.  This caused the
Company to incur  additional  costs to document and test internal controls, as well as
having those controls audited. These costs will be an on-going expense in all future
fiscal years.

On
 March  17,  2005,  the  Company  announced  that,  as  part of its initiatives designed
to improve performance of the Company for its shareholders, it would be closing 8 ALCO
and 12 Duckwall stores that do not meet the Companys minimum  return on investment
 threshold.  The process to close these stores was completed  on  schedule  in early June
2005.  Of the stores  being  closed,  the Company  owned two ALCO stores and leased the
 properties  for the  remaining 18 stores.  The cost to close these stores,  before
income taxes, was approximately $2,000 in the first quarter and approximately  $1,600 in
the second quarter. The twenty stores that closed  produced  gross sales of $19,900 in
fiscal year 2005, and employed approximately 260 associates.

During
fiscal 2006, the Company purchased and retired 729,861 shares of the  Companys  Common
 Stock  for  an  average  price  of  $20.54.  All  shares repurchased were retired.  On
March 23, 2006, the Board of Directors  approved a plan to repurchase an additional
200,000 shares of the Companys common stock.

| | 12 | 
| | -- | 

---

Key
Items in Fiscal 2006.The Company measures itself against a number of financial
metrics to assess its performance. Some of the important financial items during
fiscal 2006 were:

| |  |  | Net
sales increased 6.3% to $435,015. Same store sales increased 3.1% compared to the prior
year.
| | - |  | -------------------------------------------------------------------------------------------------

| |  |  | Gross
margin decreased to 31.8% of sales, compared to 33.4% in the prior year.
| | - |  | ------------------------------------------------------------------------------

| |  |  | Selling,
 general and administrative expenses were 28.7% of sales,  compared  to 29.6% in the
prior  year.
| | - |  | ----------------------------------------------------------------------------------------------------------

| |  |  | Earnings
 per share was $0.47, compared to  earnings  of $.88 per share in the prior year.
| | - |  | ------------------------------------------------------------------------------------------

| |  |  | Return
on average equity was 1.8%, compared to 3.5% in the prior year.
| | - |  | ----------------------------------------------------------------------

Same
 store  sales  growth is a  measure  which  may  indicate  whether existing stores are
maintaining their market share.  Other factors,  such as the overall  economy,  may also
affect same store  sales.  The Company  defines same stores as those  stores  that were
open as of the first day of the prior  fiscal year  and  remain  open at the end of the
 reporting  period  (this  may also be referred to as  comparable  stores).  Same store
 sales for all  Company  stores increased 3.1% compared to last year. The ALCO same store
sales  increased 3.1%, and the Duckwall same store sales increased 2.8% during fiscal
2006.

Gross
margin  percentage is a key measure of the  Companys  ability to maximize  profit on the
 purchase  and  subsequent  sale of  merchandise,  while minimizing promotional and
clearance markdowns,  shrinkage, damage, and returns. Gross margin  percentage is defined
as sales less cost of sales,  expressed as a percentage of sales.

Selling,
 general  and  administrative  expenses  are a measure  of the Companys ability to
manage and control its expenses to purchase, distribute and sell merchandise.

Earnings
 per share  (EPS)  growth  is an  indicator  of the  returns generated for the
Companys  stockholders.  EPS from  continuing  operations was $1.11 per diluted share
for fiscal 2006, compared to $1.13 per diluted share for the prior fiscal year.

Return
on average  equity is a measure of how much income was  produced on the average equity of
the Company.

Results
of Operations.The following table sets forth, for the fiscal years indicated, the
components of the Companys consolidated statements of operations expressed as a
percentage of net sales:

|                                                              | Fiscal Year Ended
|------------------------------------------------------------- | -----------------
|
|Net sales                                                     |                  
|Cost of sales                                                 |                  
|                                                              |                  
|Gross margin                                                  |                  
|                                                              |                  
|Selling, general and administrative expenses                  |                  
|Depreciation and amortization                                 |                  
|                                                              |                  
|Total operating expenses                                      |                  
|                                                              |                  
|Income from continuing operations                             |                  
|Interest expense                                              |                  
|                                                              |                  
|Earnings from continuing operations before income             |                  
|taxes and discontinued operations                             |                  
|Income tax expense                                            |                  
|                                                              |                  
|Earnings from continuing operations before discontinued       |                  
|operations                                                    |                  
|(Loss) income from discontinued operations, net of income tax |                  
|                                                              |                  
|Net earnings                                                  |                  
|                                                              |                  
|                                                              |                  

Critical Accounting
Policies

Inventory:As discussed in Note 1(d) to the Consolidated Financial Statements, inventories are
stated at the lower of cost or net realizable value with cost determined using the
last-in, first-out (LIFO) method. The retail inventory method (RIM) used by the
Company is an averaging method that has been widely used in the retail industry. This
method calculates a cost to retail ratio that is applied to the retail value of
inventory to calculate cost inventory and the resulting gross margin. Use of the
RIM method does not eliminate the use of management judgments and estimates, including
markdowns and shrinkage, which significantly impact the ending inventory valuation at
cost and the resulting gross margins. The Company continually evaluates product
categories to determine if markdown action is appropriate, or if a markdown reserve
should be established. The Company

| | 13 | 
| | -- | 

---

recognizes that the use of the RIM
will result in valuing  inventories  at lower of cost or market if markdowns are
currently taken as a reduction of the retail value of inventories. As of January 29, 2006
and January 30, 2005,  the Company had recorded  markdowns that had not been taken and
which served to reduce  inventories to lower of cost or market by approximately $597,000
and $398,000, respectively.  Management believes that the RIM provides an  inventory
 valuation  which  reasonably  approximates  cost and results in carrying inventory at
the lower of cost or market.

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

| | Workers
Compensation and General Liability.The Company is essentially self insured
for workers compensation and general liability claims due to large deductibles
on its policies. The Company records estimates for expense accruals. During
the Companys third quarter in fiscal 2005, the Company determined that
previous estimates were inadequate due to escalating costs per claim.
As a result of this change in estimate, in the third quarter in fiscal 2005,
the Company had to increase its workers compensation and general liability
reserves significantly and recorded additional expense of $463. During the
Companys second quarter in fiscal 2006, the Company determined that
previous reserves were more than required due to fewer claims
developing than estimated. As a result of this change in estimate, in
the second quarter in fiscal 2006, the Company decreased its workers
compensation and general liability reserves significantly and recorded
a reduction of expense of $901.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Medical.The Company is also essentially self insured for medical insurance and
covers all claims in a plan year related to an individual until they exceed
$125. The Company has responded to increases in the cost of medical
coverage by taking steps that were effective August 1, 2005 to increase
the premiums paid by its associates and by implementing other changes
that are designed to control future medical insurance costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Income
Taxes:The Companys tax provision and establishment of reserves for potential
tax liabilities involves the use of estimates and judgment. The Company has
identified exposures for which they have established a reserve, such as differences in
interpretation of tax laws at the federal, state, and local units of government. In
the ordinary course of business, the Company analyzes its income accounts. During
fiscal years 2006 and 2004, the Company determined that it was overaccrued with
respect to certain matters arising in prior years. The Company reversed such
overaccrual of approximately $371 and $618 during fiscal years 2006 and 2004,
respectively.

Fiscal 2006 Compared
to Fiscal 2005

Fiscal
year 2006  included a number of one-time  costs and markdowns associated with the
 implementation  of programs focused on improving  long-term performance.  The Company
has outlined a number of initiatives  that address the poor  performance  of each of the
key  performance  measures,  with  the goal of improving performance in each area over
the long term.

Net
sales for fiscal 2006 increased $25.7 million or 6.3% to $435.0 million  compared to
$409.3  million for fiscal 2005.  During  fiscal 2006,  the Company  opened  seven  ALCO
and one  Duckwall  stores.  Ten  ALCO and  thirteen Duckwall  stores were closed,
 resulting in a year end total of  251stores.  Net sales for all  stores  open the full
 year in both  fiscal  2006 and 2005  (same stores),  increased  by $12,596 or 3.1% in
fiscal 2006  compared to fiscal 2005. During  the  second  quarter  of fiscal  2006,  the
 Company  began a process of eliminating  seasonal  carryover and distressed  inventory.
 Markdowns that were taken to eliminate  this  inventory  were  completed in the third
 quarter,  and affected gross margin as discussed below. A number of factors contributed
to the same store sales growth, including liquidation of distressed inventory discussed
above, as well as expanded store operating hours,  better in-stock  position and new
product offerings.

Gross
margin for fiscal 2006 increased $2.8 million, or 2.1%, to $138.5 million compared to
$135.7 million in fiscal 2005. As a percentage of net sales, gross margin decreased to
31.8% in fiscal 2006 compared to 33.2% in fiscal 2005. This  decrease  in the  gross
 margin  percentage  was  attributable  to  higher markdowns  resulting from the
Companys efforts to reduce its seasonal inventory carryover.  The impact of the
 additional  markdowns  was $6.6  million at cost, which  reduced the gross margin
 percentage  by 1.5%.  Other  factors  affecting margin included higher  transportation
 costs, offset in part by an improved mix of sales and higher markup on purchases.

Selling,
general and administrative expenses increased $4.6 million or 3.8% to $125.0  million in
fiscal 2006  compared to $120.4  million in fiscal 2005. As a percentage of net sales,
selling, general and administrative expenses were  28.7% in  fiscal  2006 and  29.4% in
fiscal  2005.  Non-comparable  stores accounted  for $3,871 of this  increase.  Other  SG&A
 expense  categories  were subject  to  inflationary  pressures,  but those  increases
 were  offset by the Companys cost containment initiatives.

Depreciation
 and amortization  expense  decreased $482 or 7.5 % to $5.9  million  in fiscal  2006
 compared  to $6.4  million in fiscal  2005.  The decrease in  depreciation  and
 amortization  expense was  attributable to store fixtures and equipment  becoming fully
depreciated in the current fiscal year on a large number of ALCO stores that were opened
in fiscal years 1997 and 1998.

| | 14 | 
| | -- | 

---

Income
from continuing operations decreased $1.3 million, or 14.9%, to $7.6 million in fiscal
2006  compared to $8.9 million in fiscal 2005.  Income from continuing  operations as a
percentage of net sales was 1.7% in fiscal 2006 compared to 2.2% in fiscal  2005.  The
 reduction  in gross  margin as described above had the largest impact on the reduced
income from continuing operations.

Interest
expense  increased $43, or 3.5%, to $1.3 million in fiscal 2006 compared to $1.2 million
in fiscal 2005.  Interest  expense may increase if interest rates continue to rise or if
the Company  expands its borrowing to fund capital expenditures or other programs.

Income
taxes on  continuing  operations  were $1.7 million in fiscal 2006 compared to $2.6
million in fiscal 2005.  The Companys  effective tax rate was 27.4% in fiscal 2006 and
34.3% in fiscal 2005.  The rate was lower in fiscal 2006 because,  during the fourth
quarter of fiscal 2006,  the Company,  based on current  information,  analyzed its
income tax liability  account and determined that it was over-accrued with respect to
certain matters arising in prior years. The Company reversed such over-accrual of $371
during fiscal 2006.

Loss
from  discontinued  operations,  net of income taxes was $2.6 million in fiscal 2006,
compared to a loss of $1.1 million in fiscal 2005.

Fiscal 2005 Compared
to Fiscal 2004

Fiscal
 2005 was a  disappointing  year in every  category  of the Companys key performance
measures. Company revenue goals were not met, and same store sales performance was
unacceptable.  Fiscal year 2005 included a number of one-time  costs and markdowns
 associated  with the  implementation  of programs focused on improving long-term
performance. The Company has outlined a number of initiatives  that address the poor
 performance  of each of the key  performance measures,  with the goal of  improving
 performance  in each  area over the long term.

Net
sales for fiscal 2005 increased $11.2 million or 2.8% to $409.3 million  compared to
$398.2  million for fiscal 2004.  During  fiscal 2005,  the Company opened 6 ALCO and 3
Duckwall stores. Four ALCO and three Duckwall stores were closed,  resulting  in a year
end total of 266 stores.  The increase in net sales was due primarily to new stores
opened over the last two fiscal years. Net sales for all  stores  open the full  year in
both  fiscal  2005 and 2004  (same stores),  increased  by $512 or 0.1% in fiscal  2005
 compared  to fiscal  2004. Comparable store sales of the ALCO stores in  non-competitive
 markets increased 0.6%.  Sales in the Duckwall  division were  comparatively  strong,
 with a 2.5% comparable store increase.

Gross
margin for fiscal 2005 increased $2.7 million, or 2.0%, to $135.7 million compared to
$133.1 million in fiscal 2004. As a percentage of net sales, gross margin decreased to
33.2% in fiscal 2005 compared to 33.4% in fiscal 2004. This  decrease  in  the  gross
 margin  percentage  was  attributable  to a less favorable mix of sales and higher
 markdowns,  partially offset by lower shrink. The  gross  margin   percentage   was
 also   unfavorably   impacted  by  higher transportation  costs, as a result of higher
fuel prices. The shift in sales mix partly  reflects the  Companys  decision to expand
the  offerings of consumable products  within its stores.  The higher  markdowns were
primarily in the fourth quarter,  and included those resulting from the Companys
 efforts to reduce its seasonal inventory carryover.

Selling,
general and administrative expenses increased $3.6 million or 3.1% to $120.4  million in
fiscal 2005  compared to $116.7  million in fiscal 2004. As a percentage of net sales,
selling, general and administrative expenses were 29.4% in fiscal 2005 and 29.3% in
fiscal 2004, due to significantly  higher general  and  medical  insurance  costs,  and
the  one-time  costs of a business advisory service,  the abandonment of a technology
asset,  costs associated with the retirement of the Companys President,  and a lease
accounting charge in the fourth  quarter of the fiscal year.  The largest  impact on SG&A
was  insurance, where rising costs added $2.2 million in additional  expense during
fiscal 2005. This equates to an additional 0.5% of sales.

Depreciation
 and  amortization  expense  decreased $400 or 6.2% to $6.4  million  in fiscal  2005
 compared  to $6.8  million in fiscal  2004.  The decrease in  depreciation  and
 amortization  expense was  attributable to store fixtures and equipment  becoming fully
depreciated in the current fiscal year on a large number of ALCO stores that were opened
in fiscal years 1996 and 1997.

Income
from continuing  operations decreased $585, or 6.2%, to $8.9 million in fiscal 2005
compared to $9.5 million in fiscal 2004. The decrease was a result of SG&A expenses
increasing by more than the amount of the Gross Profit dollars increase. Income from
continuing operations as a percentage of net sales was 2.2% in fiscal 2005 compared to
2.4% in fiscal 2004.

Interest
expense  decreased $156, or 11.3%, in fiscal 2005 compared to fiscal  2004.  The
 reduction  in interest  expense was due to lower  amounts borrowed on the revolver.

Income
 taxes were $2.6  million  in fiscal  2005  compared  to $2.5 million in fiscal 2004.
 The  Companys  effective tax rate was 34.3 % in fiscal 2005 and 30.3% in fiscal 2004.
The rate was lower in fiscal 2004 because, during the fourth  quarter of fiscal 2004, the
Company,  based on current  information, analyzed  its  income  tax  liability   account
 and  determined   that  it  was over-accrued with respect to certain matters arising in
prior years. The Company reversed  such  over-accrual  of $618 during  2004.
 Approximately  $200 of this adjustment was for previously  unidentified  state tax
credits relating to prior years, which the Company became aware of in the fourth quarter
of fiscal 2004.

| | 15 | 
| | -- | 

---

Loss
from  discontinued  operations,  net of income taxes was $1.1 million  in fiscal  2005,
 compared  to income,  net of income  taxes of $852 in fiscal 2004.  In fiscal 2004, a
company  owned store was closed and the building was sold.  The  pre-tax  gain on sale of
the  building in the amount of $406 was accounted for as part of discontinued operations.

SG&A Detail;
Certain Financial Matters

The Company believes the following
 detailed  information is useful in analyzing its business  results and has been
requested to provide this  information by its shareholders. All information presented is
from continuing operations.

|                                               | Year to Date
|---------------------------------------------- | ------------
|
|SG&A Expenses Breakout                         |             
|General Office                                 |             
|Distribution Center                            |             
|SPD Truck Lines                                |             
|Profit Sharing                                 |             
|Comparable Stores SG&A                         |             
|Non Comp Stores SG&A #                         |             
|                                               |             
|Final SG&A as reported in financial statements |             
|                                               |             
|Return on Average Equity****                   |             
|(ROE)                                          |             
|Net Sales                                      |             
|SG&A as % of Sales                             |             
|                                               |             
|SG&A per average selling square foot*          |             
|                                               |             
|EBITDA**                                       |             
|EBITDA per average selling square foot***      |             
|                                               |             
|Sales per average selling square feet*         |             
|ALCO                                           |             
|Duckwall                                       |             
|Total                                          |             
|                                               |             
|Average Selling Square Feet*                   |             
|Average Square Feet % Change                   |             
|                                               |             
|Total Stores Operating beginning of Period     |             
|Total Stores Operating end of Period           |             

|* |  | Average
selling square feet is (beginning square feet plus ending square feet) divided by 2.
|- |  | --------------------------------------------------------------------------------------------

|** |  | EBITDA
 is  earnings  from  continuing  operations  before  interest,  taxes, depreciation and
amortization.
|-- |  | ------------------------------------------------------------------------------------------------------------

|*** |  | EBITDA
per selling square foot is a non-GAAP financial measure and is calculated as EBITDA
     divided by selling square feet.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------

|**** |  | Return
on average  equity (ROE) is  calculated  as Net Earnings  divided by average
stockholders equity.       Average Stockholders Equity is calculated as (beginning of
period stockholders equity plus end of          period stockholders equity) divided by 2.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|# |  | Non
Comp Stores are those stores opened in Fiscal 2005 & Fiscal 2006.
|- |  | ---------------------------------------------------------------------

---

| | 16 | 
| | -- | 

---

Fiscal 2006 Compared
to Fiscal 2005

General Office expenses for fiscal
2006 decreased  $1,156, or 7.3%. The majority of the  decrease  was related to
 reductions  in payroll  ($425) and health care benefits  ($295),  along with a loss on
asset  disposals that occurred in fiscal 2005  that did not recur in fiscal  2006
 ($485).  The  Companys  cost  cutting initiatives  produced  reductions  throughout
 the  other  areas of the  general office.  These  reductions  were  offset  by
 increased  costs  related  to  the implementation of the new previously discussed IT
systems.

Distribution  center  expenses
 decreased  $53,  or 0.6%.  Employee  health care benefits accounted for this reduction.

SPD Truck Line expenses  increased
$84, or 8.1%. The increase is attributable to increased costs of diesel fuel.

Comparable store SG&A expenses
increased $2,292, or 2.5%. Utilities, credit card fees, and advertising accounted for the
majority of this increase.

Non Comparable Stores SG&A
expenses  increased $3,871.  The Company opened seven new stores during the year.

Reconciliation and
Explanation of Non-GAAP Financial Measures

The following  table shows the
 reconciliation  of EBITDA and EBITDA per selling square foot to the earnings (loss) from
continuing operations, the most directly comparable financial measure calculated and
presented in accordance with GAAP:

|                                                    | 2006 | 2005  
|--------------------------------------------------- | ---- | ------
|Earnings from continuing operations                 |      | 4,590 
|Plus interest                                       |      | 1,273 
|Plus taxes                                          |      | 1,729 
|Plus depreciation and amortization                  |      | 5,946 
|=EBITDA                                             |      | 13,538
|
|
|Earnings from continuing operations per square foot |      | $1.15 
|Plus interest per square foot                       |      | $0.32 
|Plus taxes per square foot                          |      | $0.43 
|Plus depreciation and amortization per square foot  |      | $1.49 
|=EBITDA per selling square foot                     |      | $3.39 

Seasonality and
Quarterly Results

The
 following  table sets  forth the  Companys  net sales,  gross margin,  income from
operations,  and net earnings during each quarter of fiscal 2006 and 2005.

|            | First 
Quarter                      | Second 
Quarter | Third 
Quarter | Fourth 
Quarter (1)
|----------- | ----------------------------------- | --------------- | -------------- | -------------------
|
|Fiscal 2006 | Net Sales                           |                 | $98            | .0                 
|            | Gross Margin                        |                 | 30             | .6                 
|            | Earnings from continuing operations |                 | (1             | .2)                
|            | Net Earnings (loss)                 |                 | (2             | .7)                
|            |                                     |                 |                |                    
|Fiscal 2005 | Net Sales                           |                 | $95            | .4                 
|            | Gross Margin                        |                 | 31             | .9                 
|            | Earnings from continuing operations |                 | 0              | .9                 
|            | Net Earnings                        |                 | 0              | .7                 

(1)
In fiscal 2006,  the reduction in shrinkage  related to a warehouse inventory adjustment
contributed $1.3 million to the gross margin. A reversal of an over-accrual of income
taxes of $371 positively impacted net earnings.

See
Note 10 of Notes to Consolidated Financial Statements for quarterly earnings per share
information.

| | 17 | 
| | -- | 

---

The
 Companys  business is subject to seasonal  fluctuations.  The Companys  highest  sales
levels occur in the fourth  quarter of its fiscal year which includes the Christmas
 holiday selling season.  The Companys  results of operations in any one quarter are not
 necessarily  indicative of the results of operations  that can be  expected  for any
other  quarter or for the full fiscal year.  The Companys  results of operations  may
also  fluctuate from quarter to quarter as a result of the amount and timing of sales
 contributed by new stores and the  integration  of the new stores into the  operations
of the Company,  as well as other  factors.  The  addition  of a large  number  of new
 stores  can, therefore, significantly affect the quarterly results of operations.

Inflation

Management
does not believe that its merchandising  operations have been materially  affected by
inflation over the past few years. The Company will continue  to  monitor  costs,  take
 advantage  of  vendor  incentive  programs, selectively buy from competitive  vendors
and adjust merchandise prices based on market conditions.

The
Companys operating expenses have been impacted by increases in insurance  expenses,  as
well as  competitive  pressures  in wages  in  selected markets.  See  additional
 discussion  of wages in the  Government  Regulation section.

The
increase in the price of oil  adversely  affects the  Companys transportation  costs,
both on inbound  shipments to the Companys  distribution center, and on outbound
shipments of merchandise to the stores. The Company also believes  the higher  retail
price of gasoline  adversely  affects the amount of discretionary spending dollars our
customers have to spend at our stores.

Liquidity and Capital
Resources

At
the end of fiscal  2006,  working  capital  (defined  as current assets less current
 liabilities) was $90.6 million compared to $95.4 million at the end of fiscal 2005 and
$89.5 million at the end of fiscal 2004.

The
 Companys   primary  sources  of  funds  are  cash  flow  from operations,  borrowings
under its revolving loan credit  facility,  vendor trade credit financing and lease
financing.  In fiscal year 2005 the Company completed a  sale-leaseback  of a number  of
its  owned  stores.  The  proceeds  from this transaction  amounted  to $1.7  million.
 No  sale-leaseback  transactions  were completed in fiscal 2006 or fiscal 2004.

Cash
provided by operating  activities  aggregated $12.2 million,  $5.8 million,  and $16.4
million,  in fiscal 2006, 2005 and 2004,  respectively.  The decrease in cash provided in
fiscal 2005 relative to fiscal 2006 and fiscal 2004 resulted primarily from a decrease in
accounts payable.

The
Company uses its  revolving  loan credit  facility and vendor trade credit  financing to
fund the build up of  inventories  periodically  during the year  for  its  peak  selling
  seasons  and  to  meet  other   short-term  cash requirements.  The revolving loan
credit facility  provides up to $70 million of financing in the form of notes payable and
letters of credit. The loan agreement expires in April  2010.  The  revolving  loan note
 payable and letter of credit balance at January 29, 2006 was $21.0 million, resulting in
an available line of credit at that date of $49.0  million.  Loan  advances are secured
by a security interest  in the  Companys  inventory.  The  loan  agreement  contains
 various restrictions  that are  applicable  when  outstanding  borrowings  exceed  $42.5
million.  Short-term trade credit  represents a significant  source of financing for
inventory to the Company.  Trade credit arises from the  willingness  of the Companys
vendors to grant payment terms for inventory purchases.

In
fiscal 2006,  the Company had net cash  borrowings of $13.0 million on its revolving
credit  facility,  made cash payments of $1.1 million to reduce its capital lease
 obligations,  and repurchased $13.1 million of Company stock. The Company  received
 $423 in proceeds from the exercise of  outstanding  stock options.  In fiscal 2005,  the
Company made net cash  payments on its  revolving credit  facility of $935 and made cash
 payments  of $1.3  million to reduce its long-term debt and capital lease  obligations,
 and  repurchased  $80 of Company stock.  The  Company  received  $1.3  million in
proceeds  from the  exercise of outstanding stock options. In fiscal 2004, the Company
made net cash payments on its  revolving  credit  facility of $12.5 million and made cash
payments of $1.2 million  to  reduce  its  long-term  debt and  capital  lease
 obligations,  and repurchased  $658 of Company stock.  The Company  received $868 in
proceeds from the exercise of outstanding stock options. The Company executed operating
leases for 15 additional stores during the three year period ending in fiscal 2006. The
Companys  long-range  plan  assumes  growth in the  number of  stores  and,  in
accordance with this plan, 7 new ALCO and one new Duckwall stores were opened in fiscal
2006 and  approximately  10 new ALCO stores are  expected to be opened in fiscal  2007.
 The Company  believes  that with the $70 million  line of credit, sufficient capital is
available to fund the Companys planned expansion.

Cash
used for  acquisition  of property  and  equipment in fiscal 2006, 2005  and  2004
 totaled  $11.1  million,   $6.5  million,   and  $4.3  million, respectively. A
sale-leaseback of store buildings was completed in the amount of $1.7 million in fiscal
2005. In fiscal 2005, company owned surplus land was sold for $315,  and in fiscal 2004,
a company owned store was closed and the building was sold for $1.2 million. Anticipated
cash payments for acquisition of property and equipment in fiscal 2007,  principally for
store buildings and fixtures, and equipment,  are $22.3  million.  The net cash used in
 investing  activities  in fiscal 2006, 2005, and 2004 was $11.1 million,  $4.6 million,
 and $3.1 million, respectively.

Since
1998,  the  Companys  Board of Directors  has approved  plans to repurchase  up to
 1,814,461  shares of the  Companys  Common Stock (the Stock Repurchase  ProgramI).
 Purchases  pursuant to the Stock Repurchase Program were made

| | 18 | 
| | -- | 

---

from time to time in the open
 market or  directly  from  stockholders  at prevailing  market  prices.  The Stock
 Repurchase  Program  was  funded by cash generated from operations and borrowing under
the Companys credit facility.  As of January 29, 2006, the Company had purchased and
retired  1,814,461  shares of Common Stock for $23.9 million,  which represents 35% of
the shares  outstanding as of the initial Stock Repurchase  Program approval in 1998. On
March 23, 2006, the Board of Directors approved a new plan authorizing the repurchase of
200,000 shares of the Companys common stock.

The
following table  summarizes the Companys  significant  contractual obligations  payable
as of January 29, 2006 (in  thousands).  Payments due under the  revolving  loan credit
 facility and  long-term  debt  represent  principal payments only.

|                                   | Payments due by Period
|---------------------------------- | ----------------------
|Contractual Obligations           
|Revolving Loan Credit Facility     |                       
|Capital Lease Obligations          |                       
|Operating Leases                   |                       
|Contingent Rentals                 |                       
|                                   |                       
|Total contractual cash obligations |                       
|                                   |                       

Expansion Plans

The
continued  growth of the Company is dependent,  in large part, upon the Companys
 ability to open and operate new stores on a timely and profitable basis. The Company
plans to open  approximately  ten ALCO stores in fiscal 2007. While the Company believes
that adequate sites are currently available, the rate of new store  openings  is subject
to various  contingencies,  many of which are beyond the Companys control.  These
 contingencies  include the availability of acceptable  communities  for store
 locations,  the Companys  ability to secure suitable store sites on a timely basis and
on satisfactory  terms, the Companys ability to hire,  train and retain  qualified
 personnel,  the  availability  of adequate  capital  resources and the  successful
 integration of new stores into existing operations.  There can be no assurance that the
Company will be able to continue  to  successfully  identify  and  obtain  new store
 sites or that once obtained, the new stores will achieve satisfactory sales or
profitability.

New Accounting Standard

In
December 2004, the Financial Accounting Standards Board adopted SFAS No. 123(R),
 (123(R)),  Share-Based Payment. 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees.  Generally, the approach in 123(R) is similar to the approach
 described in SFAS No. 123. However,  123(R) requires all  share-based  payments to
 employees,  including  grants of  employee  stock options,  to be recognized in the
income  statement  based on their fair values. Pro forma disclosure is no longer an
alternative.  Accordingly,  the adoption of 123(R)s fair value method will have an
impact on our results of operations. The Company is required to adopt  123(R)  during the
first  quarter of fiscal  2007; however,  the  Company  has not yet  determined  the
 impact it will have on its results of operations.

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

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

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

| | 19 | 
| | -- | 

---

There
are a number of factors and uncertainties that could cause actual results of  operations,
 financial  condition  or business  contemplated  by the forward-looking  statements  to
differ  materially  from those  discussed in the forward-looking statements made herein
or elsewhere orally or in writing, by, or on behalf of, the Company,  including those
factors  described in Item 1A. Risk Factors  above.  Other  factors not  identified
 herein could also have such an effect.

ITEM 7A.
          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The
 Company  is  subject to market  risk from  exposure  to changes in interest rates based
on its financing, investing and cash management activities. The Company  maintains a
secured  line of credit at variable  interest  rates to meet the  short-term  needs of
its  expansion  program  and  seasonal  inventory increases.  The credit line available
is $70,000,  which carries a variable rate of interest.  On June 1, 2005, the Company
agreed to extend the existing line of credit with Bank of America, which was due on April
15, 2006. The loan agreement is now due on April 15, 2010.

The
 Companys  borrowing  arrangement  contains no  limitation  on the change in the
variable interest rate paid by the Company. Based on the Companys average  borrowing
 outstanding  during the year of  approximately  $9,391, a 1% change  either up or down
in the LIBOR  rate would have  changed  the  Companys interest expense by approximately
$94.

ITEM 8.
             FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  AND FINANCIAL STATEMENT SCHEDULES

| | DUCKWALL-ALCO STORES, INC. AND SUBSIDIARIES
| | -------------------------------------------

|Report of Independent Registered Public Accounting Firm                                                                                                   |  | 22
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|                                                                                                                                                          |  |   
|Financial Statements:                                                                                                                                     |  |   
|Consolidated Balance Sheets  
             January 29, 2006 and January 30, 2005                                                                         |  | 23
|                                                                                                                                                          |  |   
|Consolidated Statements of Operations  
             Fiscal Years Ended January 29, 2006,  
             January 30, 2005, and February 1, 2004          |  | 25
|                                                                                                                                                          |  |   
|Consolidated Statements of  Stockholders 
             Equity  Fiscal Years Ended January 29, 2006 
             January 30, 2005, and February 1, 2004 |  | 26
|                                                                                                                                                          |  |   
|Consolidated Statements of  Cash Flows Fiscal Years Ended January 29, 2006,  
             January 30, 2005, and February 1, 2004                        |  | 27
|                                                                                                                                                          |  |   
|Notes to Consolidated Financial Schedules                                                                                                                 |  | 28

Financial
Statement Schedules:

| | No
financial statement schedules are included as they                            are not
applicable to the Company.
| | -------------------------------------------------------------------------------------------------------------------

| | 20 | 
| | -- | 

---




[THIS PAGE INTENTIONALLY LEFT BLANK]



| | 21 | 
| | -- | 

---

Report of
Independent Registered Public Accounting Firm

The Board of Directors  Duckwall-ALCO
Stores, Inc.:

We have audited the  accompanying
 consolidated  balance sheets of Duckwall-ALCO Stores,  Inc. and subsidiaries  (the
Company) as of January 29, 2006 and January 30, 2005, and the related consolidated
 statements of operations,  stockholders equity,  and cash  flows for each of the years
in the  three-year  period  ended January 29, 2006. These consolidated financial
statements are the responsibility of the  Companys  management.  Our  responsibility  is
to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in
accordance  with the standards of the Public  Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement.  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
 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  Duckwall-ALCO Stores,  Inc. and  subsidiaries as of January 29,
2006 and January 30, 2005, and the  results of their  operations  and their cash flows
for each of the years in the three-year  period ended January 29, 2006 in conformity with
U.S.  generally accepted accounting principles.

We also have  audited,  in
accordance  with the standards of the Public  Company Accounting  Oversight Board (United
States),  the effectiveness of Duckwall-ALCO Stores,  Inc. internal control over
financial  reporting as of January 29, 2006, based on criteria  established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring  Organizations of
the Treadway Commission (COSO), and our  report  dated  April 14,  2006  expressed  an
 unqualified  opinion  on managements  assessment of, and an adverse  opinion on the
effective  operation of, internal control over financial reporting.

/s/ KPMG LLP

Omaha, Nebraska  April 14, 2006

| | 22 | 
| | -- | 

---

DUCKWALL-ALCO
STORES, INC. AND SUBSIDIARIES

Consolidated Balance
Sheets

January 29, 2006 and
January 30, 2005

(Dollars in thousands)

|Assets                                         | 2006 | 2005      
|---------------------------------------------- | ---- | ----------
|Current assets:                                |      |           
|Cash and cash equivalents                      |      | $    1,565
|Receivables                                    |      | 1,781     
|Inventories                                    |      | 135,077   
|Prepaid expenses                               |      | 2,621     
|Property held for sale                         |      | 585       
|                                               |      |           
|Total current assets                           |      | 141,629   
|                                               |      |           
|Property and equipment, at cost:               |     
|Land and land improvements                     |      | 2,559     
|Buildings and building improvements            |      | 17,822    
|Furniture, fixtures, and equipment             |      | 52,406    
|Transportation equipment                       |      | 1,370     
|Leasehold improvements                         |      | 13,897    
|Construction work in progress                  |      | 4,561     
|                                               |      |           
|Total property and equipment                   |      | 92,615    
|Less accumulated depreciation and amortization |      | 63,591    
|                                               |      |           
|Net property and equipment                     |      | 29,024    
|                                               |      |           
|Property under capital leases                  |      | 23,228    
|Less accumulated amortization                  |      | 16,367    
|                                               |      |           
|Net property under capital leases              |      | 6,861     
|                                               |      |           
|Other assets                                   |      | 55        
|Deferred income taxes                          |      | 1,353     
|                                               |      |           
|                                               |      | $178,922  
|                                               |      |           

See accompanying notes to
consolidated financial statements.

| | 23 | 
| | -- | 

---

|Liabilities and Stockholders Equity               | 2006 | 2005      
|-------------------------------------------------- | ---- | ----------
|Current liabilities:                               |      |           
|Current maturities of capital lease obligations    |      | $    1,879
|Accounts payable                                   |      | 28,300    
|Income taxes payable                               |      | 1,163     
|Accrued salaries and commissions                   |      | 6,001     
|Accrued taxes other than income                    |      | 4,743     
|Self-insurance claim reserves                      |      | 3,915     
|Stock purchase payable                             |      | 1,910     
|Other current liabilities                          |      | 2,998     
|Deferred income taxes                              |      | 86        
|                                                   |      |           
|Total current liabilities                          |      | 50,995    
|                                                   |      |           
|Notes payable under revolving loan credit facility |      | 17,062    
|Capital lease obligations, less current maturities |      | 7,299     
|Other noncurrent liabilities                       |      | 1,419     
|                                                   |      |           
|Total liabilities                                  |      | 76,775    
|                                                   |      |           
|Stockholders equity:                              |     
|Common stock, $0.0001 par value. Authorized        |     
|20,000,000 shares in 2006 and                      |     
|2005; issued and outstanding                       |     
|3,786,953 and 4,475,079 shares                     |     
|in 2006 and 2005, respectively                     |      | 1         
|Additional paid-in capital                         |      | 36,411    
|Retained earnings                                  |      | 65,735    
|                                                   |      |           
|Total stockholders equity                         |      | 102,147   
|                                                   |      |           
|                                                   |      | $178,922  
|                                                   |      |           

| | 24 | 
| | -- | 

---

DUCKWALL-ALCO
STORES, INC. AND SUBSIDIARIES

Consolidated Statements
of Operations

Fiscal
              years ended January 29, 2006; January 30, 2005; and February 1,
              2004

(Dollars in thousands,
except per share amounts)

|                                                          | 2006 | 2005         | 2004
|--------------------------------------------------------- | ---- | ------------ | ----
|Net sales                                                 |      | $ 435,015    |     
|Cost of sales                                             |      | 296,503      |     
|                                                          |      |              |     
|Gross margin                                              |      | 138,512      |     
|                                                          |      |              |     
|Selling, general, and administrative                      |      | 124,974      |     
|Depreciation and amortization                             |      | 5,946        |     
|                                                          |      |              |     
|Total operating expenses                                  |      | 130,920      |     
|                                                          |      |              |     
|Income from continuing operations                         |      | 7,592        |     
|Interest expense                                          |      | 1,273        |     
|                                                          |      |              |     
|Earnings from continuing operations before                |     
|income taxes and discontinued operations                  |      | 6,319        |     
|Income tax expense                                        |      | 1,729        |     
|                                                          |      |              |     
|Earnings from continuing operations before                |     
|discontinued operations                                   |      | 4,590        |     
|                                                          |     
|Income (loss) from discontinued operations, net of income |     
|tax expense (benefit) of $(1,445), $(636), and $371 in    |     
|2006, 2005 and 2004, respectively                         |      | (2,641       | )   
|                                                          |      |              |     
|Net earnings                                              |      | $     1,949  |     
|                                                          |      |              |     
|Earnings (loss) per share:                                |     
|Basic:                                                    |     
|Earnings before discontinued operations                   |      | $       1.12 |     
|Discontinued operations                                   |      | (0.64        | )   
|                                                          |      |              |     
|Net earnings                                              |      | $       0.48 |     
|                                                          |      |              |     
|Earnings (loss) per share:                                |     
|Diluted:                                                  |     
|Earnings before discontinued operations                   |      | $       1.11 |     
|Discontinued operations                                   |      | (0.64        | )   
|                                                          |      |              |     
|Net earnings                                              |      | $       0.47 |     
|                                                          |      |              |     

See accompanying notes to
consolidated financial statements.

| | 25 | 
| | -- | 

---

DUCKWALL-ALCO
STORES, INC. AND SUBSIDIARIES

Consolidated Statements
of Stockholders                     Equity

Fiscal years ended
January 29, 2006; January 30,                     2005; and February 1, 2004

(Dollars in thousands)

|                                          | Common 
stock 
shares 
outstanding | Common 
stock | Additional 
paid-in 
capital | Retained 
earnings | Total 
stockholders 
equity
|----------------------------------------- | ---------------------------------- | ------------- | ---------------------------- | ------------------ | ----------------------------
|Balance, February 2, 2003                 |                                    | 4,260,557     |                              | $1                 |                             
|Net earnings for the year ended           |                                   
|February 1, 2004                          |                                    |              |                              |                   |                             
|Repurchase and retirement of              |                                   
|common shares                             |                                    | (69,300       | )                            |                   |                             
|Income tax benefit related to exercise of |                                   
|stock options                             |                                    |              |                              |                   |                             
|Options exercised to purchase shares      |                                    | 108,559       |                              |                   |                             
|                                          |                                    |               |                              |                    |                             
|Balance, February 1, 2004                 |                                    | 4,299,816     |                              | 1                  |                             
|                                          |                                   
|Net earnings for the year ended           |                                   
|January 30, 2005                          |                                    |              |                              |                   |                             
|Repurchase and retirement of              |                                   
|common shares                             |                                    | (5,000        | )                            |                   |                             
|Income tax benefit related to exercise of |                                   
|stock options                             |                                    |              |                              |                   |                             
|Options exercised to purchase shares      |                                    | 180,263       |                              |                   |                             
|                                          |                                    |               |                              |                    |                             
|Balance, January 30, 2005                 |                                    | 4,475,079     |                              | 1                  |                             
|                                          |                                   
|Net earnings for the year ended           |                                   
|January 29, 2006                          |                                    |              |                              |                   |                             
|Repurchase and retirement of              |                                   
|common shares                             |                                    | (729,861      | )                            |                   |                             
|Income tax benefit related to exercise of |                                   
|stock options                             |                                    |              |                              |                   |                             
|Options exercised to purchase shares      |                                    | 41,735        |                              |                   |                             
|                                          |                                    |               |                              |                    |                             
|Balance, January 29, 2006                 |                                    | 3,786,953     |                              | $1                 |                             
|                                          |                                    |               |                              |                    |                             

See accompanying notes to
consolidated financial statements.

| | 26 | 
| | -- | 

---

DUCKWALL-ALCO
STORES, INC. AND SUBSIDIARIES

Consolidated Statements
of Cash Flows

Fiscal
               years ended January 29, 2006; January 30, 2005; and February 1,
               2004

(Dollars in thousands)

|                                                        | 2006 | 2005        | 2004
|------------------------------------------------------- | ---- | ----------- | ----
|Cash flows from operating activities:                   |      |             |     
|Net earnings                                            |      | $   1,949   |     
|Adjustments to reconcile net earnings to net cash       |     
|provided by operating activities:                       |     
|Depreciation and amortization                           |      | 6,006       |     
|Amortization of debt financing costs                    |      | 95          |     
|Deferred income taxes                                   |      | (831        | )   
|Loss (gain) on disposition or impairment of             |     
|property and equipment                                  |      | 629         |     
|(Increase) decrease in receivables                      |      | (47         | )   
|(Increase) decrease in inventories                      |      | (5,591      | )   
|Decrease (increase) in prepaid expenses                 |      | 301         |     
|Increase (decrease) in accounts payable                 |      | 6,066       |     
|Increase (decrease) in income taxes payable             |      | 896         |     
|Increase (decrease) in accrued salaries and commissions |      | 1,273       |     
|Increase (decrease) in accrued taxes other than income  |      | 376         |     
|Increase in self-insured claims reserves                |      | 550         |     
|Increase (decrease) in other liabilities                |      | 539         |     
|Decrease in deferred revenue                            |      |            |     
|                                                        |      |             |     
|Net cash provided by operating activities               |      | 12,211      |     
|                                                        |      |             |     
|Cash flows from investing activities:                   |     
|Proceeds from sale of property and equipment            |      | 50          |     
|Acquisition of:                                         |     
|Buildings                                               |      | (4,971      | )   
|Fixtures, equipment and leasehold improvements          |      | (6,150      | )   
|                                                        |      |             |     
|Net cash used in investing activities                   |      | (11,071     | )   
|                                                        |      |             |     
|Cash flows from financing activities:                   |     
|Decrease in notes payable under revolving loan          |     
|credit facility                                         |      |            |     
|Net borrowings under revolving loan credit agreement    |      | 13,039      |     
|Refinancing costs on revolving loan                     |      | (61         | )   
|Proceeds from exercise of outstanding stock options     |      | 423         |     
|Repurchase of stock                                     |      | (13,075     | )   
|Principal payments on long-term debt                    |      |            |     
|Principal payments under capital lease obligations      |      | (1,101      | )   
|                                                        |      |             |     
|Net cash generated by (used in) financing activities    |      | (775        | )   
|                                                        |      |             |     
|Net increase (decrease) in cash and cash equivalents    |      | 365         |     
|                                                        |      |             |     
|Cash and cash equivalents at beginning of year          |      | 1,200       |     
|                                                        |      |             |     
|Cash and cash equivalents at end of year                |      | $   1,565   |     
|                                                        |      |             |     
|Supplemental disclosure of noncash activity:            |     
|Tax benefit related to stock options exercised          |      | $        84 |     
|Assets acquired under capital lease                     |      | 5,697       |     

See accompanying notes to
consolidated financial statements.

| | 27 | 
| | -- | 

---

|1. |  | Summary
of Significant Accounting Policies
|-- |  | ------------------------------------------

| | (a) |  | Nature
of Business
| | --- |  | ------------------

| | Duckwall-ALCO
 Stores,  Inc.  and  subsidiaries  (the  Company) is               engaged  in  the
  business  of  retailing   general   merchandise               throughout  the  central
 portion of the United  States of America               through discount department and
variety store outlets. Merchandise               is purchased for resale from many
vendors,  and transactions  with               individual  vendors and  customers do not
 represent a significant               portion of total purchases and sales.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Principles
of Consolidation
| | --- |  | ---------------------------

| | The
consolidated  financial statements include the accounts of the               Company  and
 its  wholly  owned  subsidiaries.   All  significant               intercompany
   account   balances   have   been   eliminated   in               consolidation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | Basis
of Presentation
| | --- |  | ---------------------

| | The
 Companys  fiscal year ends on the Sunday  nearest to January               31. Fiscal
2006, 2005, and 2004 each consists of 52 weeks.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | Inventories
| | --- |  | -----------

| | Store
 inventories  are  stated  at  the  lower  of  cost  or  net               realizable
 value as  estimated  by the retail  inventory  method.               Warehouse
 inventories  are  stated  at the  lower  of cost or net               realizable  value.
 The Company  utilizes the  last-in,  first-out               (LIFO)  method  of
  determining   cost  of  store  and  warehouse               inventories.  The Company
 considers  payments  from vendors (i.e.               vendor  rebates and  incentives)
 to be  reductions in the cost of               inventory  unless  the  payments  are for
 specific,  incremental,               identifiable  costs  incurred  to sell the
 vendors  products  or               services,  in which case they are  treated as a
 reduction  of the               related costs.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | Property
and Equipment
| | --- |  | ----------------------

| | Depreciation
 is  computed  on  a  straight-line  basis  over  the               estimated  useful
 lives of the  assets.  Amortization  of capital               leases is computed on a
straight-line  basis over the terms of the               lease  agreements.  Leasehold
 improvements  are  amortized  on  a               straight-line  basis over the lesser
of the remaining  lease term,               or 10 years,  unless  the cost of the
 improvement  is  considered               major and the lease is within three years of
its  remaining  term,               in  which  case  one  renewal  term of the  lease  is
 considered.               Estimated useful lives are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | 
|---------------------------------- | 
|Buildings                          | 
|Building improvements              | 
|Coolers and freezers               | 
|Furniture, fixtures, and equipment | 
|Transportation equipment           | 
|Leasehold improvements             | 

| | Major
improvements are capitalized,  while maintenance and repairs               that do not
 extend the  useful  life of the asset are  charged to               expense as incurred.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
 Company  has sold and leased back  certain  stores  (land and               buildings).
The net proceeds from the sale-leaseback  transactions               amounted to
 approximately  $0,  $1,660,  and $0 for fiscal  2006,               2005,  and  2004,
 respectively.   If  a  gain  results  from  the               sale-leaseback
 transaction,  such  gains  are  deferred  and  are               included  within  other
 noncurrent   liabilities  and  are  being               amortized over the term of the
related leases (15 - 20 years).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) |  | Operating
Leases
| | --- |  | ----------------

| | The
Company  accounts for operating  leases over the initial lease               term without
 regard to  available  renewal  options.  The Company               considers  free rent
 periods  and  scheduled  rent  increases  in               determining  total rent
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 28 | 
| | -- | 

---

| | expense
for the initial lease term.  Total               rent  expense is  recognized  on a
 straight-line  basis over that               term.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | (g) |  | Insurance
| | --- |  | ---------

| | The
 Company  is   essentially   self  insured  for  its  workers
              compensation, general liability, and medical insurance. Due to the
              fact that it takes  more  than one year to  determine  the  actual
              costs under these plans,  these costs are  estimated  based on the
              Companys  historical  loss  experience  and  estimates  from  the
              insurance carriers and consultants.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (h) |  | Income
Taxes
| | --- |  | ------------

| | The
 Company  accounts  for  income  taxes  under  the  asset  and               liability
  method.   Deferred  tax  assets  and  liabilities  are               recognized  for
 the  future  tax  consequences   attributable  to               differences  between the
financial  statement  carrying amounts of               existing assets and liabilities
and their respective tax bases and               operating loss and tax credit
 carryforwards.  Deferred tax assets               and  liabilities  are measured using
enacted tax rates expected to               apply to  taxable  income  in the years in
which  those  temporary               differences are expected to be recovered or
settled. The effect on               deferred  tax assets and  liabilities  of a change
in tax rates is               recognized  in income in the period that  includes  the
 enactment               date. The Company reflects  changes in estimates  related to
prior               period  income taxes as a component of current  period  income tax
              expense.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) |  | Net
Sales
| | --- |  | ---------

| | Sales
are recorded in the period of sale. Sales returns, which are               not material,
 are recorded in the period of return as a reduction               of sales.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (j) |  | Net
Earnings Per Share
| | --- |  | ----------------------

| | Basic
net  earnings per share is computed by dividing net earnings               by the
weighted average number of shares outstanding.  Diluted net               earnings per
share  reflects  the  potential  dilution  that could               occur if contracts
 to issue  securities  (such as stock  options)               were exercised. See note 9.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (k) |  | Consolidated
Statements of Cash Flows
| | --- |  | -------------------------------------

| | For
purposes of the  consolidated  statements  of cash flows,  the               Company
considers cash and cash equivalents to include currency on               hand and money
market funds.  During fiscal 2006,  2005, and 2004,               the following amounts
were paid for interest and income taxes:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | 2006 | 2005 | 2004
|---------------------------------------- | ---- | ---- | ----
|Interest, excluding interest on capital  |      |      |     
|lease obligations and amortization of    |     
|debt financing costs (net of capitalized |     
|interest of $54 in fiscal 2006, $16 in   |     
|fiscal 2005, and $16 in fiscal 2004)     |      | $774 |     
|Income taxes                             |      | 584  |     

| | (l) |  | Use
of Estimates
| | --- |  | ----------------

| | Management
  of  the  Company  has  made  certain   estimates  and               assumptions in the
reporting of assets and  liabilities to prepare               these  consolidated
  financial   statements  in  conformity  with               accounting  principles
 generally accepted in the United States of               America. Actual results could
differ from those estimates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (m) |  | Long-lived
Assets
| | --- |  | -----------------

| | Long-lived
 assets are reviewed for impairment  whenever events or               changes in
 circumstances  indicate that the carrying amount of an               asset may not be
recoverable.  Recoverability of assets to be held               and used is measured by a
comparison of the carrying  amount of an               asset to estimated  future net
cash flows expected to be generated               by the asset.  If such assets are
 considered to be impaired,  the               impairment to be recognized
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 29 | 
| | -- | 

---

| | is
measured by the amount by which the               carrying  amount  of the  assets
 exceeds  the  fair  value of the               assets. For purposes of determining
impairment, the Company groups               assets at the store  level.  Assets to be
disposed of are reported               at the lower of the  carrying  amount or fair
 value less costs to               sell. No provisions for asset impairment in fiscal
2006, 2005, and               2004 are included in the consolidated statements of
operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (n) |  | Store
Closings and Discontinued Operations
| | --- |  | ------------------------------------------

| | A
 provision  for store  closure  expenses  is  recorded  when the               Company
 discontinues using the facility. A summary of the expense               and liability
(included in other current  liabilities)  related to               store  closures  as of
and for the years ended  January 29,  2006;               January 30, 2005; and February
1, 2004 is as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | 2006 | 2005  | 2004
|------------------------------------ | ---- | ----- | ----
|Store closure liability at beginning |      |       |     
|of year                              |      | $ 107 |     
|Store closure expense (included in   |     
|discontinued operations)             |      | 808   |     
|Payments                             |      | (438  | )   
|                                     |      |       |     
|Store closure liability at           |     
|end of year                          |      | $ 477 |     
|                                     |      |       |     

| | As
a result of the store closings,  the Company had two properties               that were
 vacant and  classified  as  Assets  Held for Sale. At               January 29, 2006,
they are recorded at their net realizable  value               of $585.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
 Company  has  determined  that  generally  each  store  is  a               component
 of the  entity and that for each  closed  store (i) the               operations  and
cash flows of the component  have been  eliminated               from the ongoing
operations of the entity and (ii) the entity will               not have any significant
 continuing involvement in the operations               of the  component  after the
store is closed.  This is a result of               the Companys stores being
geographically  disbursed.  The results               of  operations  for stores  that
have been  closed by the  Company               (twenty-three, seven, and eight stores in
fiscal years 2006, 2005,               and 2004,  respectively)  have been  reclassified
 to discontinued               operations  in  the   accompanying   consolidated
  statements  of               operations  for  all  periods  presented.  The  Company
 does  not               allocate interest expense to discontinued operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (o) |  | Advertising
Costs
| | --- |  | -----------------

| | The
Company expenses  advertising  costs as incurred.  Advertising               expense of
$6,180,  $5,594,  and $5,570 in the fiscal  years 2006,               2005, and 2004,
respectively, are included in selling, general and               administrative expenses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 30 | 
| | -- | 

---

| | (p) |  | Stock-based
Compensation
| | --- |  | ------------------------

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

|                                | 2006 | 2005          | 2004
|------------------------------- | ---- | ------------- | ----
|Net earnings as reported        |      | $      1,949  |     
|Pro forma stock-based employee  |     
|compensation cost, net of tax   |      | (250          | )   
|                                |      |               |     
|Pro forma net earnings          |      | $      1,699  |     
|                                |      |               |     
|Earnings per share as reported: |     
|Basic                           |      | $        0.48 |     
|Diluted                         |      | 0.47          |     
|Earnings, per share, pro forma: |     
|Basic                           |      | 0.42          |     
|Diluted                         |      | 0.41          |     

| | The
fair value of each option  grant is  estimated  on the date of               grant  in
the  applicable  fiscal  year  using  the  Black-Scholes               option-pricing
model with the following assumptions:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | 2006
|------------------------------- | ----
|Expected dividend yield         |     
|Expected stock price volatility |     
|Risk-free interest rate         |     
|Expected life of options        |     

| | The
 weighted  average  grant date fair  value of options  granted               during
 fiscal  2006 is $18.40 per share.  No options  were issued               during fiscal
years 2005 and 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (q) |  | Future
Accounting Pronouncement
| | --- |  | -------------------------------

| | In
December 2004, the Financial Accounting Standards Board adopted               SFAS No.
123(R),  Share-Based Payment.  SFAS No. 123(R) supersedes               APB  Opinion No.
25,  Accounting  for Stock  Issued to  Employees.               Generally,  the  approach
 in SFAS No.  123(R) is  similar  to the               approach  described  in SFAS No.
 123.  However,  SFAS No.  123(R)               requires all share-based  payments to
employees,  including grants               of  employee  stock  options,  to  be
 recognized  in  the  income               statement based on their fair values.  Pro
forma  disclosure is no               longer  an  alternative.  Accordingly,  the
 adoption  of SFAS No.               123(R)s  fair value  method will have an impact on
the  Companys               results of  operations.  The Company is required to adopt
SFAS No.               123(R)  during the first  quarter  of fiscal  2007;  however,  the
              Company  has not yet  determined  the  impact  it will have on its
              results of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 31 | 
| | -- | 

---

|2. |  | Inventories
|-- |  | -----------

| | Inventories
 at January  29,  2006 and January 30, 2005 are stated at the        lower of cost or net
realizable value as determined under the LIFO method        of  accounting.  Inventories
at January 29, 2006 and January 30, 2005 are        summarized as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | 2006 | 2005     
|------------------------------- | ---- | ---------
|FIFO cost                       |      | $ 136,269
|Less LIFO and markdown reserves |      | (1,192   
|                                |      |          
|LIFO cost                       |      | $ 135,077
|                                |      |          

|3. |  | Credit
Arrangements, Notes Payable, and Long-term Debt
|-- |  | ------------------------------------------------------

| | The
Company  entered into a loan  agreement with its lenders on April 15,        2002 that
provides a revolving  loan credit  facility of up to $70,000 of        long-term
 financing.  The amount advanced  (through a note or letters of        credit)  to the
 Company  bears  interest  at (i) the  prime  rate plus a        margin,  as defined,
 which varies based on the amount  outstanding (Base        Loan) or (ii) based on the
Euro  dollar  rate plus a margin,  as defined,        (Index Loan). The amount advanced
is generally limited to 70% of eligible        inventory, as defined. Advances are
secured by a security interest in the        Companys  inventory.  The loan
agreement  contains various  restrictions        that are applicable when outstanding
borrowings reach certain thresholds,        including limitations on additional
indebtedness, acquisitions of assets,        and  payment of  dividends.  On June 1, 2005
the  Company and its lender,        Bank of America, agreed to extend the revolving loan
credit facility. The        loan agreement, which was due on April 15, 2006, will now be
due on April        15, 2010.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Notes
payable  outstanding at January 29, 2006 and January 30, 2005 under        the  revolving
 loan  credit  facility  aggregated  $17,062  and  $4,023,        respectively.  The
lender had also issued  letters of credit  aggregating        $3,978 and $3,611,
respectively,  at such dates on behalf of the Company.        The interest  rates on
 outstanding  borrowings  at January 29, 2006 were        7.25%.  The Company had
 additional  borrowings  available at January 29,        2006 under the revolving loan
credit facility amounting to $48,960.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
 expense on notes  payable and  long-term  debt in fiscal  2006,        2005, and 2004
aggregated $644, $522, and $659, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | Employee
Benefits
|-- |  | -----------------

| | The
Company has a trusteed Profit Sharing Plan (the Plan) for the benefit        of eligible
 employees.  The Plan provides for an annual  contribution of        not more than 20% of
 earnings  for the year  before the  profit  sharing        contribution  and Federal and
state income  taxes,  limited to 15% of the        annual compensation of the
participants in the Plan. Contributions by the        Company vest with the participants
over a seven-year  period. The Company        reserves the right to discontinue its
contributions at any time.  Expense        arising from such Plan for fiscal 2006,  2005,
 and 2004  amounted to $0,        $420, and $699, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 32 | 
| | -- | 

---

|5. |  | Leases
|-- |  | ------

| | The
Company is lessee under long-term  capital leases expiring at various        dates.  The
components of property under capital leases as of January 29,        2006 and January 30,
2005 are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | 2006 | 2005    
|--------------------------------- | ---- | --------
|Buildings                         |      | $14,890 
|Fixtures                          |      | 3,338   
|Software                          |      | 5,000   
|                                  |      |         
|                                  |      | 23,228  
|Less accumulated amortization     |      | 16,367  
|                                  |      |         
|Net property under capital leases |      | $  6,861
|                                  |      |         

| | The
 Company  also has  noncancelable  operating  leases,  primarily  for        buildings
 that expire at various dates.  The Company  expects to acquire        additional
 software  which will be added to the  software  lease  during        fiscal 2007.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Future
minimum lease payments under all  noncancelable  leases,  together        with the
present  value of the net  minimum  lease  payments  pursuant to        capital leases,
as of January 29, 2006 are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   | Capital 
leases | Operating 
leases
|-------------------------------------------------- | --------------- | -----------------
|Fiscal year:                                       |                 |                  
|2007                                               |                 | $  2,818         
|2008                                               |                 | 2,547            
|2009                                               |                 | 2,044            
|2010                                               |                 | 1,931            
|2011                                               |                 | 1,563            
|Later years                                        |                 | 1,263            
|                                                   |                 |                  
|Total minimum lease payments                       |                 | 12,166           
|                                                   |                 |                  
|Less amount representing interest                  |                 | 2,988            
|                                                   |                 |                  
|Present value of net minimum lease payments        |                 | 9,178            
|                                                   |                 |                  
|Less current maturities                            |                 | 1,879            
|                                                   |                 |                  
|Capital lease obligations, less current maturities |                 | $  7,299         
|                                                   |                 |                  

| | Minimum
payments have not been reduced by minimum sublease rentals of $20        under operating
leases due in the future under  noncancelable  subleases.        They also do not
 include  contingent  rentals,  which may be paid  under        certain  store  leases on
the basis of  percentage  of sales in excess of        stipulated  amounts.  Contingent
 rentals  applicable  to capital  leases        amounted  to  $100,  $88,  and $87  for
 fiscal  2006,  2005,  and  2004,        respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company  entered into a software lease and a flexible lease financing        proposal
 regarding  the  lease of POS  hardware  with  General  Electric        Capital
 Corporation  (GECC) on December 1, 2005 and  December 5, 2005,
       respectively.  GECC  has  established  a  $14,500  fixed  lease  line for
       existing  stores  for the  Company.  The lease line can be  increased  to
       accommodate  any new stores that the Company opens.  The software  lease,
       which is a capital lease, is not to exceed $7,000. It began on January 1,
       2006  and has a term of five  years.  The  hardware  lease,  which  is an
       operating  lease,  is to begin by September  30, 2006,  and has a term of
       four years. As of January 29, 2006,  $5,451 was outstanding  against this
       lease line.  The Company has  additional  borrowing  available  under the
       lease line of $8,803 as of January 29, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
 on capital  lease  obligations  in fiscal  2006,  2005 and 2004        aggregated $544,
$583, and $672, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------

| | 33 | 
| | -- | 

---

| | The
following schedule presents the composition of total rent expense for        all
operating leases for fiscal 2006, 2005, and 2004:
| | --------------------------------------------------------------------------------------------------------------------------------------

|                      | 2006 | 2005     | 2004
|--------------------- | ---- | -------- | ----
|Minimum rentals       |      | $ 10,768 |     
|Contingent rentals    |      | 1,120    |     
|Less sublease rentals |      | (53      | )   
|                      |      |          |     
|                      |      | $ 11,835 |     
|                      |      |          |     

|6. |  | Income
Taxes
|-- |  | ------------

| | The
Companys income tax expense (benefit) consists of the following:
| | ---------------------------------------------------------------------

|                                       | 2006 | 2005     | 2004
|-------------------------------------- | ---- | -------- | ----
|Income tax expense (benefit) allocated |      |          |     
|to continuing operations               |      | $ 1,729  |     
|Income tax expense (benefit) allocated |     
|to discontinued operations             |      | (1,445   | )   
|                                       |      |          |     
|Total income tax expense               |      | $    284 |     
|                                       |      |          |     

| | Income
tax expense  (benefit)  attributable to continuing  operations for        fiscal 2006,
2005, and 2004 consists of:
| | -------------------------------------------------------------------------------------------------------------------------

|        | Current | Deferred | Total
|------- | ------- | -------- | -----
|2006:   |         |          |      
|Federal |         | $ 2,124  |      
|State   |         | 436      |      
|        |         |          |      
|        |         | $ 2,560  |      
|        |         |          |      
|2005:   |        
|Federal |         | $ 3,288  |      
|State   |         | 423      |      
|        |         |          |      
|        |         | $ 3,711  |      
|        |         |          |      
|2004:   |        
|Federal |         | $ 2,850  |      
|State   |         | 578      |      
|        |         |          |      
|        |         | $ 3,428  |      
|        |         |          |      

| | Income
tax expense  attributable  to  continuing  operations  was $1,729,        $2,640,  and
$2,456 for fiscal 2006,  2005, and 2004,  respectively,  and        differs from the
amounts computed by applying the Federal income tax rate        of 35% in 2006, 2005, and
2004 as a result of the following:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       | 2006 | 2005    | 2004
|-------------------------------------- | ---- | ------- | ----
|Computed expected tax expense        |      | $ 2,212 |     
|State income taxes, net of the Federal |     
|income tax benefit                     |      | 212     |     
|Adjustment for prior period taxes      |      | (371    | )   
|Other, net                             |      | (324    | )   
|                                       |      |         |     
|                                       |      | $ 1,729 |     
|                                       |      |         |     

| | 34 | 
| | -- | 

---

| | The
Company  analyzes its income tax  liability  account based on current        information.
As a result of this analysis, the Company determined that it        was  overaccrued
 with respect to certain matters arising in prior years.        The Company  reversed
this  overaccrual  of  approximately  $371 and $618        during the fourth quarter of
fiscal 2006 and 2004, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax effects of temporary  differences  that give rise to  significant        portions of
deferred tax assets and  liabilities  at January 29, 2006 and        January 30, 2005 are
presented below:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                           | 2006 | 2005    
|---------------------------------------------------------- | ---- | --------
|Deferred tax assets:                                       |      |         
|Capital leases                                             |      | $    645
|Other liabilities                                          |      | 3,715   
|Property and equipment, due to differences in depreciation |     
|and a prior business combination accounted for as          |     
|a purchase                                                 |      | 133     
|State net operating loss carryforwards                     |      | 179     
|                                                           |      |         
|Total gross deferred tax assets                            |      | 4,672   
|                                                           |      |         
|Less valuation allowance                                   |      | (122    
|                                                           |      |         
|Net deferred tax assets                                    |      | 4,550   
|                                                           |      |         
|Deferred tax liabilities:                                  |     
|Inventories, principally due to differences in the LIFO    |     
|reserve arising from a prior business combination          |     
|accounted for as a purchase                                |      | 3,012   
|Property and equipment, due to differences in depreciation |     
|and a prior business combination accounted for as          |     
|a purchase                                                 |      |        
|Other assets                                               |      | 271     
|                                                           |      |         
|Total gross deferred tax liabilities                       |      | 3,283   
|                                                           |      |         

| | At
January 29, 2006, the Company has net operating loss carryforwards for        state
 income tax purposes  aggregating  $2,167,  which are  available to        offset future
state  taxable  income in those  states,  if any,  expiring        beginning in fiscal
year 2020.  The valuation  allowance  offsets the net        operating loss
carryforwards. The Company believes it is more likely than        not that the  results
 of  future  operations  will  generate  sufficient        taxable income to realize the
remaining deferred tax assets.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 35 | 
| | -- | 

---

|7. |  | Stock
Option Plan
|-- |  | -----------------

| | The
 Company  has a 1993  Incentive  Stock  Option  Plan  under  which no        securities
 remain  available  for  issuance.  The  Company  has  a  2003        Incentive  Stock
 Option  Plan under which  options to  purchase  500,000        shares of common stock
may be granted to key employees. As of January 29,        2006, 390,000 securities remain
available for issuance. The plan provides        that the option price shall not be less
than the fair market value of the        shares  on the date of grant and that
 unexercised  options  expire  five        years from that date.  The options  become
 exercisable  in equal amounts        over a  four-year  period  from the  grant  date.
 Information  regarding        options that were outstanding at January 29, 2006;
 January 30, 2005; and        February 1, 2004 is presented below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      | Number 
of 
shares | Weighted 
average 
exercise 
price
|------------------------------------- | ------------------ | ----------------------------------
|Options outstanding, February 2, 2003 |                    | 434,375                           
|Issued                                |                    |                                  
|Exercised                             |                    | (108,559                          
|Canceled                              |                    | (43,845                           
|                                      |                    |                                   
|Options outstanding, February 1, 2004 |                    | 281,971                           
|Issued                                |                    |                                  
|Exercised                             |                    | (180,263                          
|Canceled                              |                    | (30,534                           
|                                      |                    |                                   
|Options outstanding, January 30, 2005 |                    | 71,174                            
|Issued                                |                    | 110,000                           
|Exercised                             |                    | (41,735                           
|Canceled                              |                    | (6,201                            
|                                      |                    |                                   
|Options outstanding, January 29, 2006 |                    | 133,238                           
|                                      |                    |                                   

|       | Options outstanding |        
|------ | ------------------- | -------
|
|$12.50 |                     | 23,238 
|18.25  |                     | 100,000
|19.90  |                     | 10,000 

|8. |  | Stockholders
Equity
|-- |  | --------------------

| | Since
1998,  the  Companys  board of  directors  has  approved  plans to
       repurchase  up to  1,814,461  shares of the  Companys  common stock (the
       Stock  Repurchase  Program).  Purchases  pursuant to the Stock Repurchase
       Program  are to be made from time to time in the open  market or directly
       from  stockholders  at prevailing  market  prices.  The Stock  Repurchase
       Program is  anticipated to be funded with  internally  generated cash and
       borrowings under the credit facility. As of January 29, 2006, the Company
       had purchased and retired  1,814,461  shares of common stock for $23,857.
       All shares  purchased by the Company  under this program are retired.  On
       March 23, 2006,  the  Companys  board of  directors  approved a new plan
       authorizing  the  repurchase  of up to  200,000  shares of the  Companys
       common stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 36 | 
| | -- | 

---

|9. |  | Earnings
Per Share
|-- |  | ------------------

| | The
following is a reconciliation  of the outstanding  shares utilized in        the
computation of earnings per share:
| | -----------------------------------------------------------------------------------------------------------------------

|                                       | 2006 | 2005      | 2004
|-------------------------------------- | ---- | --------- | ----
|Weighted average shares outstanding    |      |           |     
|(basic)                                |      | 4,083,798 |     
|Effect of dilutive options to purchase |     
|common stock                           |      | 34,124    |     
|                                       |      |           |     
|As adjusted for diluted                |     
|calculation                            |      | 4,117,922 |     
|                                       |      |           |     

|10. |  | Quarterly
Financial Information (Unaudited)
|--- |  | -------------------------------------------

| | Financial
results by quarter are as follows:
| | --------------------------------------------

|                                   | First 
quarter | Second 
quarter | Third 
quarter | Fourth 
quarter (1)
|---------------------------------- | -------------- | --------------- | -------------- | -------------------
|2006:                              |                |                 |                |                    
|Net sales                          |                | $ 98,026        |                | 108,679            
|Gross margin                       |                | 30,560          |                | 32,683             
|Earnings from                      |               
|continuing operations              |                | (1,156          | )              | 699                
|Net earnings (loss)                |                | (2,730          | )              | (294               
|Net earnings (loss) per share (2): |               
|Basic                              |                | (0.62           | )              | (0.07              
|Diluted                            |                | (0.62           | )              | (0.07              
|                                   |               
|2005:                              |               
|Net sales                          |                | $ 95,351        |                | 102,286            
|Gross margin                       |                | 31,934          |                | 33,923             
|Earnings from                      |               
|continuing operations              |                | 882             |                | 1,432              
|Net earnings (loss)                |                | 687             |                | 1,187              
|Net earnings (loss) per share (a): |               
|Basic                              |                | 0.16            |                | 0.27               
|Diluted                            |                | 0.16            |                | 0.27               

| | (1) |  | In
fiscal 2006, the reduction in shrinkage  related to a warehouse               inventory
adjustment contributed $1.3 million to the gross margin.               A reversal of an
 over-accrual  of income taxes of $371 positively               impacted net earnings.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Earnings
per share amounts are computed  independently for each of               the  quarters
 presented.  Therefore,  the  sum of  the  quarterly               earnings  per share in
fiscal  2006 and fiscal 2005 does not equal               the total computed for the year.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) |  | The
amounts shown for net sales,  gross margin,  and earnings from               continuing
operations for the first, second, and third quarters do               not agree to
previously reported amounts due to  reclassifications               that  have been made
for  discontinued  operations  (see also note               1(n)).
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 37 | 
| | -- | 

---

|11. |  | Fair
Value of Financial Instruments
|--- |  | -----------------------------------

| | The
Company has determined the fair value of its financial instruments in        accordance
with SFAS No. 107, Disclosures  About Fair Value of Financial        Instruments.
For notes payable under revolving loan credit facility, fair        value  approximates
the carrying value due to the variable interest rate.        For all other financial
instruments including cash, receivables, accounts        payable,  and accrued  expenses,
 the carrying  amounts  approximate fair        value due to the short maturity of those
instruments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12. |  | Related
Party Transactions
|--- |  | --------------------------

| | Operating
 lease  payments to related  parties (board members and related        companies)
amounted to approximately $680, $673, and $679 in fiscal 2006,        2005, and 2004,
respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
fiscal 2006,  2005, and 2004,  the Company paid a consulting  firm        $0,  $15,  and
 $270,   respectively,   to  develop   certain   retailing        initiatives.  A board
member of the Company has an ownership  interest in        the consulting firm.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13. |  | Business
Operations and Segment Information
|--- |  | -------------------------------------------

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

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

| | 38 | 
| | -- | 

---

Segment Information

|                                             |  |             |  
|-------------------------------------------- |  | ----------- | -
|
|Net sales:                                   |  |             |  
|ALCO Discount Stores                         |  | $ 405,773   |  
|All other:                                   | 
|External                                     |  | 30,851      |  
|Intercompany                                 |  | 247,667     |  
|                                             |  |             |  
|                                             |  | $ 684,291   |  
|                                             |  |             |  
|Depreciation and amortization:               | 
|ALCO Discount Stores                         |  | $     3,713 |  
|All other                                    |  | 2,233       |  
|                                             |  |             |  
|                                             |  | $     5,946 |  
|                                             |  |             |  
|Income (expense) from continuing operations: | 
|ALCO Discount Stores                         |  | $   33,593  |  
|All other                                    |  | (26,339     | )
|                                             |  |             |  
|                                             |  | $     7,254 |  
|                                             |  |             |  
|Capital expenditures:                        | 
|ALCO Discount Stores                         |  | $     6,208 |  
|All other                                    |  | 4,913       |  
|                                             |  |             |  
|                                             |  | $   11,121  |  
|                                             |  |             |  
|Identifiable assets:                         | 
|ALCO Discount Stores                         |  | $ 130,908   |  
|All other                                    |  | 48,014      |  
|                                             |  |             |  
|                                             |  | $ 178,922   |  
|                                             |  |             |  

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

| | Intercompany
Sales
| | ------------------

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

| | Intercompany
Expense Allocations
| | --------------------------------

| | General
and  administrative  expenses incurred at the general office have        not  been
 allocated  to  the  ALCO  Discount   Stores  for  purposes  of        determining income
from operations for the segment information.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Inventories
| | -----------

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

| | 39 | 
| | -- | 

---

| | Leases
| | ------

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

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

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

|                                          | 2006 | 2005        | 2004
|----------------------------------------- | ---- | ----------- | ----
|Net sales per above segment information   |      | $ 684,291   |     
|Intercompany elimination                  |      | (247,667    | )   
|Sales included in discontinued operations |      | (1,609      | )   
|                                          |      |             |     
|Net sales per consolidated                |     
|statements of operations                  |      | $ 435,015   |     
|                                          |      |             |     
|
|
|Income from continuing operations per     |     
|above segment information                 |      | $     7,254 |     
|Leases                                    |      | 338         |     
|                                          |      |             |     
|Income from continuing                    |     
|operations per consolidated               |     
|statements of operations                  |      | $     7,592 |     
|                                          |      |             |     

| | 40 | 
| | -- | 

---

ITEM 9.
          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.

None

ITEM 9A. CONTROLS AND
PROCEDURES.

(a)      Evaluation of Disclosure
Controls and Procedures

As
of the end of the period  covered by this report,  management of the      Company,  with
the  participation  of the Chief  Executive  Officer and the      Chief  Financial
 Officer,  evaluated the  effectiveness  of the design and      operation of the
Companys  disclosure  controls and procedures (as defined      in Rules  13a-15(e) of
the Securities and Exchange Act of 1934, as amended)      as of January 29, 2006.  Based
upon this  evaluation,  the Chief  Executive      Officer and the Chief  Financial
 Officer have concluded that the Companys      disclosure  controls and  procedures
 were not  effective as of January 29,      2006 because of the materials weaknesses
described in internal control over      financial reporting described below in (Item
9A(b)).

KPMG
LLP has issued an audit report on our financial statements for the      fiscal year ended
January 29, 2006, which is included in this report. Also,      our Chief Executive
 Officer and the Chief Financial Officer have certified      that, to their knowledge,
 the financial  information included in this 10-K      fairly presents in all material
respects the financial  condition,  results      of  operations  and cash flows of the
 Company as of, and for,  the periods      presented in the report.

(b) Managements Report on Internal
Control over Financial Reporting

Management
 of  the  Company  is  responsible  for   establishing   and      maintaining  adequate
control over financial  reporting as defined in Rules      13a-15(f)  under the
Securities  and Exchange Act of 1934, as amended.  The      Companys  internal  control
 system  is  a  process  designed  to  provide      reasonable  assurance to the
Companys  management,  Board of Directors and      shareholders  regarding  the
 reliability  of financial  reporting  and the      preparation  of financial  statements
 for external  reporting  purposes in      accordance with U.S. generally accepted
accounting  principals.  Because of      its inherent limitations, internal control over
financial reporting may not      prevent or detect  misstatements.  Also,  projections
 of any evaluation of      effectiveness  to future  periods are subject to the risk that
controls may      become inadequate  because of changes in conditions,  or that the
degree of      compliance with the policies or procedures may deteriorate.

A
material weakness represents a significant  deficiency (as defined in      the Public
Company  Accounting  Oversight Boards Auditing Standard No. 2),      or a combination of
significant  deficiencies,  that results in more than a      remote  likelihood  that a
material  misstatement  of the annual or interim      financial statements will not be
prevented or detected on a timely basis.

Management
assessed the effectiveness of the Companys internal control      over  financial
 reporting  as of January  29,  2006 based on the  criteria      established  in
 Internal  Control-  Integrated  Framework  issued  by  the      Committee of Sponsoring
 Organizations of the Treadway Commission (COSO).      As a result of this  assessment,
 management  concluded  that the Companys      internal  control over financial
 reporting was not effective as of January      29, 2006.

Managements
 assessment  identified the following material weaknesses      in the Companys  internal
 control over financial  reporting as of January      29, 2006:

|1. |  | The
Company has not established controls to require a review of certain          information
  prepared  for  inclusion  in  the   Companys   financial          statements.
Specifically:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
 Companys  information  system  generates a report of all                   changes in
or additions to its accounts  payable vendor master                   file.  The  Company
 does not have a control  that  requires a                   review of this report by
personnel independent of the accounts                   payable  function  to assure that
all  changes  were  properly                   authorized.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
 Company  makes  manual  journal  entries  as  part of its
                  reconciliation and closing process.  The Company does not have
                  a control that requires a review of these journal  entries and
                  supporting  analysis by someone other than the preparer  prior
                  to being recorded in the general ledger.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
 Company  does  not  have  a  control   that   requires  a                   sufficiently
  detailed  review  of  the  Companys  financial                   statements prior to
their issuance.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 41 | 
| | -- | 

---

As
a  result  of  this  deficiency,  adjustments  were  made  to  cash,      inventory  and
 accrued  liabilities.  Furthermore,  there is a more than a      remote  likelihood
 that a material  misstatement  of our annual or interim      financial statements would
not have been prevented or detected.

|2. |  | The
 Company  has  insufficient   controls  to  ensure  that  warehouse          inventory
 and cost of  sales  are  properly  reported  in the  interim          financial
 statements.   Specifically,   warehouse  inventory  is  only          reconciled to the
general ledger annually.  This deficiency resulted in          more  than a remote
 likelihood  that a  material  misstatement  of our          interim financial statements
would not have been prevented or detected.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
independent  auditor,  KPMG LLP, the independent  registered public      accounting  firm
that  audited the  financial  statements  included in this      report on Form 10-K, has
issued an audit report on managements  assessment      of the Companys  internal
 control over financial  reporting.  Their audit      report appears in Item 8 above.

(c) Changes in Internal Control over
Financial reporting

The
Company is  currently  implementing  procedures  to  establish  and      maintain
 controls  which  will  result  in  the  necessary  reviews  being      performed.  The
Company  initiated the  development and  implementation  of      controls over the
 development  of the  financial  statements in the fourth      quarter of fiscal  2006.
 The Company is also  designing  and  implementing      procedures to reconcile the
warehouse  inventory to the general ledger on a      quarterly basis.

There
were no changes in the Companys  internal control over financial      reporting  that
 occurred  during the quarter  ended  January  29,2006 that      materially  affected,
 or are  reasonably  likely to material  affect,  the      Companys internal control
over financial reporting.

(d)      Report of Independent
Registered Public Accounting Firm

The Board of Directors
      Duckwall-ALCO Stores, Inc.:

We have  audited  managements
 assessment,  included  in the  accompanying      Managements  Report on Internal
Control over Financial Reporting appearing      under item 9A(b),  that  Duckwall-ALCO
 Stores,  Inc. and subsidiaries (the      Company)  did  not  maintain  effective
 internal  control  over  financial      reporting as of January 29, 2006, based on
criteria established in Internal      Control --  Integrated  Framework  issued by the
 Committee  of  Sponsoring      Organizations of the Treadway  Commission (COSO). The
Companys  management      is responsible for maintaining  effective  internal  control
over financial      reporting and for its assessment of the  effectiveness  of internal
control      over financial  reporting.  Our  responsibility is to express an opinion on
     managements  assessment  and  an  opinion  on  the  effectiveness  of  the
     Companys internal control over financial reporting 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 effective internal control over
financial  reporting was maintained      in all material respects.  Our audit included
obtaining an understanding of      internal  control  over  financial   reporting,
  evaluating   managements      assessment,  testing and evaluating the design and
operating  effectiveness      of internal control,  and performing such other procedures
as we considered      necessary  in the  circumstances.  We  believe  that our audit
 provides  a      reasonable basis for our opinion.

A companys internal control over
financial reporting is a process designed      to provide  reasonable  assurance
 regarding the  reliability  of financial      reporting and the preparation of financial
statements for external purposes      in accordance with generally accepted  accounting
 principles.  A companys      internal  control over  financial  reporting  includes
 those  policies and      procedures  that  (1)  pertain  to the  maintenance  of
 records  that,  in      reasonable  detail,  accurately  and fairly  reflect the
 transactions  and      dispositions of the assets of the company; (2) provide reasonable
assurance      that  transactions  are  recorded as  necessary  to permit  preparation
 of      financial  statements  in accordance  with  generally  accepted  accounting
     principles,  and that  receipts and  expenditures  of the company are being
     made only in accordance with  authorizations of management and directors of      the
company;  and (3) provide reasonable  assurance regarding prevention or      timely
 detection of unauthorized  acquisition,  use, or disposition of the      companys
 assets  that  could  have a  material  effect  on the  financial      statements.

Because  of its  inherent
 limitations,  internal  control  over  financial      reporting may not prevent or
detect misstatements. Also, projections of any      evaluation of  effectiveness to
future periods are subject to the risk that      controls may become  inadequate  because
of changes in conditions,  or that      the degree of compliance with the policies or
procedures may deteriorate.

| | 42 | 
| | -- | 

---

A material  weakness is a control
 deficiency,  or  combination  of control      deficiencies, that results in more than a
remote likelihood that a material      misstatement  of the annual or  interim  financial
 statements  will not be      prevented  or  detected.   The  following  material
 weaknesses  have  been      identified and included in managements assessment as of
January 29, 2006:

|1. |  | The
Company has not established controls to require a review of certain          information
  prepared  for  inclusion  in  the   Companys   financial          statements.
Specifically:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
 Companys  information  system  generates a report of all                   changes in
or additions to its accounts  payable vendor master                   file.  The  Company
 does not have a control  that  requires a                   review of this report by
personnel independent of the accounts                   payable  function  to assure that
all  changes  were  properly                   authorized.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
 Company  makes  manual  journal  entries  as  part of its
                  reconciliation and closing process.  The Company does not have
                  a control that requires a review of these journal  entries and
                  supporting  analysis by someone other than the preparer  prior
                  to being recorded in the general ledger.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
 Company  does  not  have  a  control   that   requires  a                   sufficiently
  detailed  review  of  the  Companys  financial                   statements prior to
their issuance.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of this deficiency,
 adjustments  were made to cash,  inventory      and  accrued  liabilities.  Furthermore,
 there  is a more  than  a  remote      likelihood that a material  misstatement of our
annual or interim financial      statements would not have been prevented or detected.

|2. |  | The
 Company  has  insufficient   controls  to  ensure  that  warehouse          inventory
 and cost of  sales  are  properly  reported  in the  interim          financial
 statements.   Specifically,   warehouse  inventory  is  only          reconciled to the
general ledger annually.  This deficiency resulted in          more  than a remote
 likelihood  that a  material  misstatement  of our          interim financial statements
would not have been prevented or detected.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also have  audited,  in
 accordance  with the  standards  of the  Public      Company  Accounting  Oversight
 Board  (United  States),  the  consolidated      balance  sheets of the Company as of
January 29, 2006 and January 30, 2005,      and the related consolidated statements of
operations, stockholders equity      and cash flows for each of the years in the
three-year period ended January      29,  2006.  The  aforementioned  material
 weaknesses  were  considered  in      determining  the nature,  timing,  and extent of
audit tests applied in our      audit of the 2006 consolidated  financial statements,
 and this report does      not affect our report dated April 14, 2006 which  expressed an
 unqualified      opinion on those consolidated financial statements.

In our opinion,  managements
 assessment that the Company did not maintain      effective internal control over
financial reporting as of January 29, 2006,      is fairly stated, in all material
respects,  based on criteria  established      in Internal  Control --  Integrated
 Framework  issued by the  Committee of      Sponsoring  Organizations of the Treadway
 Commission (COSO).  Also, in our      opinion,  because of the effect of the material
weaknesses  described above      on the achievement of the objectives of the control
 criteria,  the Company      has not maintained  effective internal control over
financial  reporting as      of January 29, 2006,  based on criteria  established in
Internal Control --      Integrated Framework issued by the Committee of Sponsoring
Organizations of      the Treadway Commission (COSO).

/s/ KPMG LLP

Omaha, Nebraska       April 14, 2006

| | 43 | 
| | -- | 

---

ITEM 9B. OTHER
INFORMATION.

None

PART III

ITEM 10.
         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The
 Registrants  Proxy  Statement to be used in  connection  with the Annual Meeting of
 Stockholders  to be held on May 23, 2006,  contains under the caption Election of
Directors certain information  required by Item 10 of Form 10-K,  and such  information
 is  incorporated  herein  by this  reference.  The information  required  by Item 10 of
Form 10-K as to  executive  officers is set forth in Item 1 of this Form 10-K. The
 Registrants  Proxy Statement to be used in  connection  with the Annual  Meeting of
 Stockholders  to be held on May 23, 2006,  contains under the caption Section 16(a)
Beneficial  Ownership Reporting Compliance  certain  information  required  by Item 10
of Form  10-K,  and such information is incorporated  herein by this reference.  The
 Registrants  Proxy Statement also contains under the caption Code of Ethics  certain
 information required by Item 10 of Form 10-K, and such information is incorporated
herein by this reference.

ITEM 11.
         EXECUTIVE COMPENSATION.

The
 Registrants  Proxy  Statement to be used in  connection  with the Annual Meeting of
 Stockholders  to be held on May 23, 2006,  contains under the caption Executive
 Compensation and Other Information the information required by Item 11 of Form 10-K,
 and such  information is  incorporated  herein by this reference (except that the
information set forth under the following subcaptions is expressly excluded from such
incorporation:  Compensation Committee Report, Audit Committee Report, and Company
Performance).

ITEM 12.
         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.

The
 Registrants  Proxy  Statement to be used in  connection  with the Annual Meeting of
 Stockholders  to be held on May 23, 2006,  contains under the caption Ownership of
Duckwall Common Stock the information required by Item 12 of Form 10-K and such
information is incorporated herein by this reference.

ITEM 13.
         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The
 Registrants  Proxy  Statement to be used in  connection  with the Annual Meeting of
 Stockholders  to be held on May 23, 2006,  contains under the caption  Compensation
 Committee Interlocks and Related Party Transactions the information   required  by
 Item  13  of  Form  10-K  and  such  information  is incorporated herein by this
reference.

ITEM 14.
         PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The
 Registrants  Proxy  Statement to be used in  connection  with the Annual Meeting of
 Stockholders  to be held on May 23, 2006,  contains under the caption  Ratification of
Selection of Independent  Accountants the information required by Item 14 of Form 10-K
and such information is incorporated  herein by this reference.

| | 44 | 
| | -- | 

---

PART IV

ITEM 15.
         EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

|(a) |  | Financial
Statements, Financial Statement Schedules, and Exhibits
|--- |  | -----------------------------------------------------------------

| | (1) |  | Consolidated
Financial Statements The financial statements are listed in the index
for Item 8 of this Form 10-K.
| | --- |  | ----------------------------------------------------------------------------------------------------------------

| | (2) |  | Financial
Statement Schedules No financial statement schedules are included as
they are not applicable to the Company.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------

| | (3) |  | Exhibits The exhibits filed with or incorporated by reference in this report
are listed below:
| | --- |  | ----------------------------------------------------------------------------------------------

|Number |  | Description
|------ |  | -----------

|3.1 |  | Amended
and  Restated  Articles of  Incorporation  (filed as Exhibit             3(a) to
 Companys  Registration  Statement  on Form S-1 and  hereby             incorporated
herein by reference).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 |  | Certificate
of Amendment to the Articles of Incorporation (filed as Exhibit  3(b) to Companys
 Annual  Report on Form 10-K for the fiscal year ended January 29, 1995, and incorporated
herein by reference) (filed as
                                                                    Exhibit  3(b) to
 Companys  Annual  Report  on Form   10-K for the fiscal year ended January 29, 1995,
and incorporated  herein        by reference.)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.3 |  | Bylaws
 (filed  as  Exhibit  3(b)  to  Companys Registration Statement on Form S-1 and hereby
incorporated herein                                                         by reference).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | Specimen
 Common  Stock  Certificates                                            (filed as
 Exhibit  4.1 to  Companys                                            Registration
 Statement  on Form  S-1                                            and     incorporated
    herein    by                                            reference).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Reference
 is made to the  Amended                                               and    Restated
    Articles    of                                               Incorporation and Bylaws
described                                               above   under   3(1)   and
  3(3),                                               respectively   (filed  as  Exhibit
                                              4(a) to Companys Registration
      Statement      on      Form      S-1      and      hereby       incorporated
     herein      by reference).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Reference
is made to the  Certificate  of Amendment to the  Articles of  Incorporation  described
 above under 3(2)     (filed     as     Exhibit     3(2)    to     Companys     Annual
    Report     on    Form    10-K    for the fiscal year ended January 29, 1995, and
                                  incorporated herein by reference).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Form
of 10% Subordinated Notes (filed                                            as   Exhibit
   4(c)   to   Companys                                            Registration
 Statement  on Form  S-1                                            and  hereby
 incorporated   herein  by                                            reference).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Separation
 Agreement  and  Release,  dated as of December  27,  2004,  between the Company and Glen
L. Shank.
|---- |  | --------------------------------------------------------------------------------------------------------------

|10.2 |  | Employment
Agreement dated August 1, 2005 between the Company and Bruce          C. Dale is
 incorporated  by  reference  to Exhibit 10.1 to the Current          Report on Form 8-K
of the Company dated August 1, 2005.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Employment
 Agreement  dated January 5, 2006 between the Company and Tom L. Canfield,  Jr. is
incorporated by reference               to Exhibit 10.1 to the Current Report on Form 8-K
of the Company dated January 9, 2006.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | Employment
 Agreement  dated  January 5, 2006  between  the Company and          James E. Schoenbeck
is incorporated by reference to Exhibit 10.5 to the          Current Report on Form 8-K
of the Company dated January 9, 2006.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | Employment
 Agreement  dated  January 5, 2006  between  the Company and          Michael J. Gawin is
 incorporated  by  reference to Exhibit 10.3 to the          Current Report on Form 8-K
of the Company dated January 9, 2006.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Employment
 Agreement  dated  December 28, 2000 between the Company and          Richard A.
 Mansfield  (filed as Exhibit 10.14 to the Companys  Annual          Report on Form 10-K
for the  fiscal  year  ended  February  1, 2004 and          hereby incorporated by
reference).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | Employment
 Agreement  dated  January 5, 2006  between  the Company and          Robert E. Swartz,
 Jr. is  incorporated by reference to Exhibit 10.4 to          the Current Report on Form
8-K of the Company dated January 9, 2006.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 45 | 
| | -- | 

---

|10.8 |  | Employment
 Agreement  dated  January 5, 2006  between  the Company and          Anthony C. Corradi
is  incorporated by reference to Exhibit 10.2 to the          Current Report on Form 8-K
of the Company dated January 9, 2006.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 |  | Employment
 Agreement  dated  January 27, 2006  between the Company and          John R.  Sturdivant
is incorporated by reference to Exhibit 10.1 to the          Current Report on Form 8-K
of the Company dated January 31, 2006.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Employment
 Agreement  dated  March 23,  2006  between  the Company and          Michael S. Marcus
is  incorporated  by reference to Exhibit 10.1 to the          Current Report on Form 8-K
of the Company dated March 28, 2006.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Loan
and Security  Agreement,  dated as of April 15, 2002,  between the          Company and
Fleet Retail  Finance Inc.  (filed as Exhibit  10.16 to the          Companys Annual
Report on Form 10-K for the fiscal year ended February          2, 2003 and hereby
incorporated by reference).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Joinder
 Agreement and First  Amendment to Loan and Security  Agreement          dated  September
9, 2002 among the Company,  Fleet Retail Finance Inc.,          and DA Good Buys, Inc.
(filed as Exhibit 10.17 to the Companys  Annual          Report on Form 10-K for the
 fiscal  year  ended  February  2, 2003 and          hereby incorporated by reference).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | Stock
 Purchase   Agreement   dated  April  19,  2005  with  K&A  Asset
         Management, LLC on behalf of Kenneth A. Macke Revocable Trust. (Filed as Exhibit 10.20 to the Companys Annual Report on 10-K for the fiscal year ended January 30, 2005 and hereby incorporated by reference.)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|23.1 |  | Consent
of Independent Auditors.
|---- |  | --------------------------------

|31.1 |  | Certification
of Chief Executive Officer of Duckwall-ALCO  Stores, Inc.          dated April 14, 2006,
 pursuant to Rule 13a-4(a)  under the  Securities          Exchange  Act of  1934,  as
 adopted  pursuant  to  Section  302 of the          Sarbanes-Oxley Act of 2003.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.2 |  | Certification
of Chief Financial Officer of Duckwall-ALCO  Stores, Inc.          dated April 14, 2006,
 pursuant to Rule 13a-4(a)  under the  Securities          Exchange  Act of  1934,  as
 adopted  pursuant  to  Section  302 of the          Sarbanes-Oxley Act of 2003.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.1 |  | Certification
of Chief Executive Officer of Duckwall-ALCO  Stores, Inc.,          dated April 14, 2006,
 pursuant to 18 U.S.C.  Section  1350, as adopted          pursuant to Section  906 of
the  Sarbanes-Oxley  Act of 2002,  which is          furnished  with this  Annual  Report
 on Form  10-K for the year  ended          January 29,  2006 and is not  treated as
filed in reliance  upon §         601(b)(32) of Regulations S-K.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 |  | Certification
of Chief Financial Officer of Duckwall-ALCO Stores, Inc.,          dated April 14, 2006,
 pursuant to 18 U.S.C.  Section  1350, as adopted          pursuant to Section  906 of
the  Sarbanes-Oxley  Act of 2002,  which is          furnished  with this  Annual  Report
 on Form  10-K for the year  ended          January 29,  2006 and is not  treated as
filed in reliance  upon §         601(b)(32) of Regulations S-K.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 46 | 
| | -- | 

---

SIGNATURES

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

| | DUCKWALL-ALCO
STORES, INC.  
      by /s/ Bruce
C. Dale
      Bruce
C. Dale, President and Chief Executive Officer
| | ------------------------------------------------------------------------------------------------------------------

Dated: April 14, 2006

Pursuant
to the  requirement  of the  Securities  Exchange Act of 1934, this  report has been
 signed  below by the  following  persons on behalf of the registrant and in the
capacities and on the dates indicated:

|Signature and Title                          |  | Date          
|-------------------------------------------- |  | --------------
|/s/ Bruce C. Dale                            |  | April 14, 2006
|Bruce C. Dale                                | 
|President and Chief Executive Officer        | 
|(Principal Executive Officer)                | 
|                                             |  |               
|/s/ Michael S. Marcus                        |  | April 14, 2006
|Michael S. Marcus                            | 
|Vice President - Finance and Treasurer       | 
|(Principal Financial and Accounting Officer) | 
|                                             |  |               
|/s/ Warren H. Gfeller                        |  | April 14, 2006
|Warren H. Gfeller                            | 
|Director                                     | 
|                                             |  |               
|/s/ Dennis A. Mullin                         |  | April 14, 2006
|Dennis A. Mullin                             | 
|Director                                     | 
|                                             |  |               
|/s/ Lolan C. Mackey                          |  | April 14, 2006
|Lolan C. Mackey                              | 
|Director                                     | 
|                                             |  |               
|/s/ Jeffrey J. Macke                         |  | April 14, 2006
|Jeffrey J. Macke                             | 
|Director                                     | 
|                                             |  |               
|/s/ Robert L. Ring                           |  | April 14, 2006
|Robert L. Ring                               | 
|Director                                     | 
|                                             |  |               
|/s/ Dennis E. Logue                          |  | April 14, 2006
|Dennis E. Logue                              | 
|Director                                     | 

| | 47 | 
| | -- | 

---