|UNITED STATESSECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549
|----------------------------------------------------------------------



|FORM 10-K
|---------



|(Mark One)
|----------

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



|For the fiscal year ended February
1, 2004
|------------------------------------------



|OR
|--

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



|For the transition period from
_____________ to ___________
|-----------------------------------------------------------



|Commission File Number 0-20269
|------------------------------



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

|(Exact name of registrant as
specified in its charter)
|------------------------------------------------------

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



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



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



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



|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. [ ]
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The aggregate
market value of the 2,755,056 shares of Common Stock,  par value $.0001 per share, of the
registrant held by non-affiliates of the  registrant is $34,438,200 on August 4, 2003,
based on a closing sale price of  $12.50. As of April 9, 2004, there were 4,317,619
shares of Common Stock  outstanding.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Documents
incorporated by reference: portions of the Registrants  Proxy Statement for the
2004 Annual Meeting of Stockholders are incorporated  by reference in Part III hereof.
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| |  | 
| |  | 



---





|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. In 1991, the Company adopted its
current business strategy that focuses  on under-served markets that have no direct
competition from another full-line  discount retailer. This strategy includes opening
either an ALCO discount  store or a Duckwall variety store, depending upon the market
size. As of April  30, 2004, the Company operates 265 retail stores located in the
central United  States, consisting of 185 ALCO retail discount stores and 80 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 265 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
185 ALCO discount stores, 151 stores are located in  communities that do not have another
full-line discounter. The Company intends  to continue its strategy of opening ALCO
stores in markets that do not have  other full-line discount retailers and where the
opening of an ALCO store is  likely to be preemptive to the entry by other full-line
discount competitors  in the market. The ALCO discount stores account for 92% of the
Companys net  sales. While the current ALCO stores average 20,800 square feet of
selling  space, the Companys store expansion program is primarily directed toward
stores with a design prototype of approximately 18,000 square feet of selling  space (Class
18 Stores), which, based on the Companys experience, has been  a design that
maximizes return on investment for newly constructed stores.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Companys
80 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 8% 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s
focus over the last three fiscal years has been to  implement new merchandising and
marketing initiatives in an effort to increase  customer traffic and same-store sales.
One of the initiatives was a remodel  program. During fiscal 2004, the Company remodeled
23 stores. During each of  fiscal 2003 and fiscal 2002, the Company remodeled 32 stores.
These stores  feature an improved merchandise mix, with greater emphasis on everyday low
values that are highlighted through a new and more dominant sign program. The  Company
plans to continue its remodeling program next year by remodeling  approximately 23
stores. The Company has also opened a total of 17 new ALCO  stores during the last three
fiscal years that incorporate the enhanced  merchandising concepts of the remodeled
stores, bringing the total number of  stores with this new format to 104 at the end of
fiscal 2004. The Company  plans to open approximately seven ALCO stores in fiscal 2005.
The Company  continues to close non-performing stores in competitive markets, which slows
the growth of overall store count. The Company intends to focus on executing a  business
strategy that includes the following key components:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Markets: The
Company intends to open ALCO stores 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. Since
1991, the  Company has opened  136 ALCO discount stores (with an approximate  average
size of 18,800 square feet of  selling space) and 87 Duckwall  variety stores. Except for
ten stores, all of these  stores were opened  in a primary market in which there was no
direct competition from a  national or regional full-line discount retailer.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Market
Selection: The Company has a detailed process that it uses 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 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 for each new store plans for shelf
space, merchandise presentation, store items to be offered, parking, storage, 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. Although it has closed 21 Duckwall stores within the last five years, the
Company continues to look for expansion opportunities in its target market areas.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Technology:
The Company is continually improving its management information technologies to support
the operation of the Company. In fiscal 1999, the Company implemented a new system for
merchandise administration and distribution. In fiscal 2000, the Company completed the
roll-out of new point-of-sale (POS) store software that has extended the
life and capabilities of its POS hardware. In conjunction with this roll-out of POS
software, the stores received radio frequency hand held devices to allow for additional
operating efficiencies. The Company also devoted resources to identify and fix or
replace software and hardware that was not year 2000 compliant. During the last three
fiscal years, the Company has continued to devote resources to development of systems
that have improved information available to management and improved specific operational
efficiencies. The Company also selected a warehouse management software package that is
expected to go into production in fiscal 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During fiscal
2005, the Company plans to begin the process of  evaluating its options to replace and
upgrade its store POS hardware,  which varies in age from 7 to over 10 years old, and
related software.  The objective of the upgrade will be to take advantage of newer
technology available today and re-engineer the stores to eliminate  in-efficiencies
caused by the older technology. This will be a  significant undertaking and the total
cost of the changeover could be  several million dollars, and could take several years to
complete. The  Company also plans to begin the process of replacing its outdated  payroll
system.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 2004, these circulars were
distributed 34 times in ALCO markets. In its Duckwall markets, the Company initiated,
in fiscal 2004, a full-color, 4 page insert program. Distributed through insertion in
the local papers, this program has been deemed a success. 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 2005, the
Company will distribute approximately 34 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 7 ALCO stores during fiscal  year 2005, and approximately
10 ALCO stores during each of the fiscal years 2006  and 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. Since fiscal 1995, the Company has  opened a total of 104 ALCO
stores with an average selling area of approximately 19,000  square feet, and 67
Duckwall stores. The following table summarizes the Companys  growth during the
past three fiscal years:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|               |      |  |          |  |      |  |                        |  |      |  |          |  | 2005
|-------------- | ---- |  | -------- |  | ---- |  | ---------------------- |  | ---- |  | -------- |  | ----
|               | 2002 |  | 2003     |  | 2004 |  | (As of April 30, 2004)
|               | ALCO |  | Duckwall |  | ALCO |  | Duckwall               |  | ALCO |  | Duckwall |  | ALCO
|Stores Opened  | 4    |  | 0        |  | 5    |  | 0                      |  | 8    |  | 0        |  | 1   
|Stores Closed  | 2    |  | 5        |  | 2    |  | 3                      |  | 2    |  | 6        |  | 0   
|               |      |  |          |  |      |  |                        |  |      |  |          |  |     
|Net New Stores | 2    |  | (5)      |  | 3    |  | (3)                    |  | 6    |  | (6)      |  | 1   



|Currently, the
Company owns 12 ALCO and one Duckwall location, and  leases 173 ALCO and 79 Duckwall
store locations. The Companys present intention  is to lease all new Duckwall
stores. The Company may own some of the ALCO  locations, but will generally try to lease
these store locations.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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. The Company is in  the site selection and/or procurement process in
approximately 20 of those  markets, each of which has been approved by the Company for a
new store  location.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The estimated
investment to build and open a new Class 18 ALCO Store is  approximately $1.375 million
for the land, building, equipment, and inventory.  If the building is leased, the initial
investment is approximately $625,000.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 the Companys  Senior Vice President -
Merchandise, who reports to the Companys President. The  Senior Vice President -
Merchandise is supported by a staff of three Vice  President - Divisional Merchandise
Managers who are each responsible for  specific product categories. The Company employs
20 merchandise buyers and three  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. No  single supplier accounted for more than 5% of
the Companys total purchases in  fiscal 2004 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
2005, promotions on various  items will be offered approximately 34 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 185 ALCO discount stores and  80 Duckwall variety stores. This
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. This  distribution center ships to each of the Companys ALCO stores
once a week,  primarily through irregular route common carriers. The Company also
utilizes its  wholly owned subsidiary, SPD Truck Line, Inc. (the Subsidiary)
for delivery to  the stores. The distribution center is fully integrated into the Companys
management information system, allowing the Company to utilize such cost cutting
efficiencies as perpetual inventories, safety programs, and employee  productivity
software.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Subsidiary
acts as a contract carrier for the Company in  transporting goods to and from its stores.
The Subsidiary uses five tractors and  leases 23 trailers for such deliveries.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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. In
fiscal 1999, the Company  implemented a new system for merchandise administration and
distribution. In  fiscal 2000, the Company completed the roll-out of new POS store
software that  has extended the life and capabilities of its POS hardware. In conjunction
with  this roll-out of POS software, the stores received radio frequency hand held
devices to allow for additional operating efficiencies. During the last three  fiscal
years, the Company has continued to devote resources to development of  systems that have
improved information available to management and improved  specific operational
efficiencies. The Company also selected a warehouse  management software package that is
expected to go into production in fiscal  2005.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Approximately
1,500 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.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Store Locations
|---------------



|As of April 30,
2004, the Company operated 185 ALCO stores in 21 states located  in smaller communities
in the central United States. Of the ALCO stores, 12 are  owned by the Company and 173
are leased by the Company. The ALCO stores average  approximately 20,800 square feet of
selling space, with an additional 4,900  square feet utilized for merchandise processing,
temporary storage and  administration. The Company also operates 80 Duckwall stores in 10
states, one  of which is owned by the Company, and 79 of which are leased by the Company.
The  geographic distribution of the Companys stores is as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|Duckwall Stores (80) |                  |               |                  |                 
|-------------------- | ---------------- | ------------- | ---------------- | ----------------
|                     |                  |               |                  |                 
|Arkansas (1)         | Colorado (6)     | Iowa (6)      | Kansas (34)      | Nebraska (8)    
|New Mexico (1)       | North Dakota (1) | Oklahoma (8)  | South Dakota (3) | Texas (12)      
|                     |                  |               |                  |                 
|ALCO Stores (185)    |                  |               |                  |                 
|                     |                  |               |                  |                 
|Arizona (9)          | Arkansas (5)     | Colorado (13) | Idaho (3)        | Illinois (8)    
|Iowa (8)             | Kansas (25)      | Minnesota (7) | Missouri (5)     | Montana (1)     
|New Mexico (9)       | North Dakota (7) | Ohio (6)      | Oklahoma (8)     | South Dakota (9)
|Utah (5)             | Wisconsin (1)    | Wyoming (3)   |                  |                 

|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 25 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  Company also competes for retail
sales with mail order companies, specialty  retailers, mass merchandisers, dollar stores,
manufacturers outlets, and the  internet. In the 136 markets in which the Company
operates a Class 18 Store,  there is no 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 one-third 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  30, 2004.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------

|Name                 | Age |  | Position                                          
|-------------------- | --- |  | --------------------------------------------------
|                     |     |  |                                                   
|Glen L. Shank        | 59  |  | Chairman of the Board and President               
|                     |     |  |                                                   
|James E. Schoenbeck  | 60  |  | Senior Vice President - Operations and Advertising
|                     |     |  |                                                   
|James R. Fennema     | 53  |  | Senior Vice President - Merchandise               
|                     |     |  |                                                   
|Richard A. Mansfield | 48  |  | Vice President - Finance and Treasurer            
|                     |     |  |                                                   
|Tom L. Canfield, Jr. | 50  |  | Vice President - Distribution and Administration  



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



|Glen L. Shank has
served as President of the Company since June 1988 and as Chairman of the Board since
May 1991. Between 1982 and 1988, Mr. Shank served as Vice President of Merchandising of
the Company. Prior to 1982, Mr. Shank served as a Buyer and as a Merchandise Manager for
the Company. Mr. Shank has approximately 37 years of experience in the retail industry.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|James E.
Schoenbeck has served as Vice President of Store Operations and Advertising since 1988.
From 1979 to 1988, Mr. Schoenbeck served as the Vice President of Administration. Mr.
Schoenbeck has approximately 30 years of experience in the retail industry.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|James R. Fennema
has served as Vice President - Merchandise of the Company since March 1993. For the four
years prior to that he served as Vice President and a divisional merchandise manager
with Caldor, Inc., a chain of regional discount stores in New England and the
mid-Atlantic states of the United States. For more than the four years prior to that he
served as a divisional merchandise manager of Fishers Big Wheel, a regional discount
store chain. Mr. Fennema has approximately 31 years of experience in the retail industry.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Richard A.
Mansfield has served as Vice President - Finance and Treasurer of the Company since May
1997. For the two years prior to that he served as Chief Financial Officer of Country
General Stores, Inc., a regional chain of specialty farm and ranch stores located in the
Midwest. For the three years prior to that he served as Chief Financial Officer of
American Laminates, Inc. and Relco, Inc. Mr. Mansfield has approximately 23 years of
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 31 years of experience in the retail industry.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Employees
|---------



|As of April 30,
2004, the Company employed approximately 5,300 people.  Of these employees, approximately
500 were employed in the general office and  distribution center in Abilene, 4,200 in the
ALCO stores and 600 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 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Twelve 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. Such ALCO leases
account for approximately  4,425,000 square feet of lease space, which expire as follows:
approximately  505,417 square feet (11.4%) expire between April 30, 2004 and January 30,
2005;  approximately 419,952 square feet (9.5%) expire between January 31, 2005 and
January 29, 2006; and approximately 447,410 square feet (10.1%) expire between  January
30, 2006 and January 28, 2007. The remainder of the leases expire  through 2021. All
Duckwall store leases have terms remaining of three years 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 February 1, 2004.
|--------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|PART II
|-------

|ITEM 5.   MARKET
      FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER                  MATTERS.
|-------------------------------------------------------------------------------------------------------



|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 2004
and 2003.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|            |                | High   | Low
|----------- | -------------- | ------ | ---
|Fiscal 2004 | First quarter  | $10.25 |    
|            | Second quarter | 13.56  |    
|            | Third quarter  | 15.00  |    
|            | Fourth quarter | 15.68  |    
|            |                |        |    
|Fiscal 2003 | First quarter  | $15.50 |    
|            | Second quarter | 15.51  |    
|            | Third quarter  | 13.35  |    
|            | Fourth quarter | 11.99  |    

|As of April 9,
2003, there were approximately 1,272 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 Fleet  Retail Finance Inc. allow for the payment of
dividends unless certain loan  covenants are triggered, which are not expected to occur
during fiscal 2005.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Equity Compensation
        Plan Information
|--------------------------------------------
|                                            
|Plan Category                               
|                                            
|Equity compensation plans approved          
|by stockholders:                            
|1993
      Incentive Stock Option Plan      
|2003
      Incentive Stock Option Plan      
|Equity compensation plans not               
|approved
      by stockholders              
|                                            



| |  | 
| |  | 



---





|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     
|----------------------------------------------------------------------- | ----------------------
|                                                                        |                       
|                                                                        | February
      1, 2004
|Statements
      of Operations Data                                    
|Net sales                                                               | $433,270              
|Cost of sales                                                           | 289,702               
|                                                                        |                       
|Gross margin                                                            | 143,568               
|Selling, general and
      administrative expenses (including           |                       
|provision for asset
      impairment and store closure)                 | 125,726               
|Depreciation and amortization                                           | 7,284                 
|                                                                        |                       
|Income from continuing
      operations                                 | 10,558                
|Interest expense                                                        | 1,386                 
|                                                                        |                       
|Earnings from continuing
      operations before income taxes,          |                       
|discontinued operations
      and  cumulative  effect of                |                       
|accounting change                                                       | 9,172                 
|Income tax expense                                                      | 2,769                 
|                                                                        |                       
|Earnings from continuing
      operations before discontinued           |                       
|operations and cumulative
      effect of accounting change             | 6,403                 
|Income (loss) from
      discontinued operations, net of income tax (1) | 110                   
|Cumulative effect of
      accounting change, net of income             |                       
|tax benefit of
      $111 in 2001 (2)                                   | 0                     
|                                                                        |                       
|Net earnings                                                            | $6,513                
|                                                                        |                       
|Per Share Information:                                                  |                       
|Earnings per share
      - basic:                                       |                       
|Earnings before
      discontinued operations and                       |                       
|cumulative
      effect of accounting change                            | $1.50                 
|Discontinued
      operations                                           | 0.03                  
|Cumulative
      effect of accounting change                            | 0.00                  
|                                                                        |                       
|Net earnings                                                            | $1.53                 
|                                                                        |                       
|Earnings per share
      - diluted:                                     |                       
|Earnings before
      discontinued operations and                       |                       
|cumulative
      effect of accounting change                            | $1.47                 
|Discontinued
      operations                                           | 0.03                  
|Cumulative
      effect of accounting change                            | 0.00                  
|                                                                        |                       
|Net earnings                                                            | $1.50                 
|                                                                        |                       
|Weighted average shares
      outstanding:                              |                       
|Basic                                                                   | 4,243,441             
|Diluted                                                                 | 4,343,381             
|                                                                        |                       
|Operating Data                                                          |                       
|Stores open at year-end                                                 | 264                   
|Stores in non-competitive
      markets at year-end (3)                 | 230                   
|Percentage of total
      stores in                                     |                       
|non-competitive markets
      (3)                                       | 87.12%                
|Net sales of stores
      in non-competitive markets (3)                | $363,634              
|Percentage of net sales
      from stores in                            |                       
|non-competitive markets
      (3)                                       | 83.99%                
|Comparable store sales
      for all stores (4)                         | 0.98%                 
|Comparable store sales
      for stores in                              |                       
|non-competitive markets
      (3)(4)                                    | 2.09%                 
|                                                                        |                       
|Balance
      Sheet Data                                                |                       
|Total assets                                                            | $167,493              
|Total debt (includes
      capital lease                                |                       
|obligation and current
      maturities)                                | 10,876                
|Stockholders' equity                                                    | 109,193               

|(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 eight and  five stores closed during fiscal years 2004 and 2003,
respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Effective
October 30, 2000, the Company, in response to the Securities  and Exchange Commission
Staff Accounting Bulletin No. 101 (SAB 101),  changed its method of accounting for
layaway sales, retroactive to the  beginning of the year. Previously, the Company
recognized revenue on  the entire amount of layaway sales at the time merchandise was
placed  on layaway. Under the new method, revenue on layaway sales are  recognized upon
delivery of the merchandise to the customer.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---



|(3) |  | 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | 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 OPERATIONS
|------- | ----------------------------------------------------------------------------------------



|Overview
|--------



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

| |  |  | the
ALCO Stores segment. The Company operates 165 ALCO Stores which  offer a wide variety of
general merchandise and a limited variety of  food products and account for 92% of the
Companys fiscal 2004 sales.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
Duckwall Stores segment. The Company operates 80 Duckwall Stores  which offer a more
limited general merchandise selection, but serve the  needs of a community that is not
large enough to support a full-line  retail discount store, and account for 8% of the
Companys fiscal 2004  sales.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Companys
fiscal year ends on the Sunday closest to January 31.  Fiscal 2004 and fiscal 2003
consisted of 52 weeks, and fiscal 2002 consisted of  53 weeks.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------



|As used below, the
term competitive market refers to any market in  which there is one or more
national or regional full-line discount stores  located in the primary market served by
the Company. The term non-competitive  market refers to any market in which
there is no national or regional full-line  discount store located in the primary market
served by the Company. Even in a  non-competitive market, the Company faces competition
from a variety of sources.  See Item 1 Business-Competition.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|Key Items in
Fiscal 2004.  Significant financial items during fiscal 2004 were:
|-------------------------------------------------------------------------------

| |  |  | Net
sales increased 7.4% to $433.3 million and net earnings increased  22%. Net earnings
included a one-time tax-related benefit of  approximately $618,000.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Outstanding
debt was reduced by $13 million.  Year end  equity-to-total-capitalization  ratio
improved to 91% from  81% at the end of fiscal 2003.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Book
value per share increased 5.9% to $25.39 per share.
| | - |  | --------------------------------------------------------



|Company
Performance Measures. The Company measures itself against a number of financial metrics
to assess its performance. The following are the most frequently discussed metrics, and
are discussed in more detail under the heading Fiscal 2004 Compared to Fiscal 2003.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Same
store sales growth is a measure which indicates whether existing  stores are maintaining
their market share. We define same stores as  those stores that were open as of the first
day of the prior fiscal  year. Same store sales of the ALCO stores in non-competitive
markets  increased 1.7%. Sales in the Duckwall division were relatively strong,  with a
5.6% same store increase.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Gross
margin percentage is a key measure of the Companys ability to  maximize profit on
the purchase and subsequent sale of merchandise,  while minimizing promotional and
clearance markdowns, shrinkage,  damage, and returns. Gross margin percentage is defined
as sales less  cost of sales, expressed as a percentage of sales. Gross margin percent
declined to 33.1% of sales in fiscal 2004, compared to 33.4% in fiscal  2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Earnings
per share (EPS) growth is an indicator of the returns  generated for the
Companys stockholders. EPS grew to $1.50 per diluted  share, compared to $1.23 per
diluted share for the prior fiscal year.  Net earnings included a one-time tax-related
benefit of approximately  $618,000, or $0.14 per diluted share.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|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      
|------------------------------------------------------------------- | -----------------------------
|
|                                                                    | February
      1, 
      2004
|                                                                    |                              
|Net
      sales                                                     | 100.0                        
|Cost
      of sales                                                 | 66.9                         
|                                                                    |                              
|Gross
      margin                                                  | 33.1                         
|                                                                    |                              
|Selling,
      general and administrative expenses                  | 29.0                         
|Depreciation
      and amortization                                 | 1.7                          
|                                                                    |                              
|Total
      operating expenses                                      | 30.7                         
|                                                                    |                              
|Income
      from continuing operations                             | 2.4                          
|Interest
      expense                                              | 0.3                          
|Earnings
      from continuing operations before income             |                              
|taxes and discontinued operations                                   | 2.1                          
|Income
      tax expense                                            | 0.6                          
|                                                                    |                              
|Earnings
      from continuing operations before discontinued       |                              
|operations                                                          | 1.5                          
|Income
      (loss) from discontinued operations, net of income tax | 0.0                          
|                                                                    |                              
|Net
      earnings                                                  | 1.5                          
|                                                                    |                              



|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 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 February 1, 2004 and February 2,
2003, the Company had recorded markdowns that had not been taken and which served to
reduce inventories to lower of cost or market by approximately $658,000 and $943,000,
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.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|Insurance: The
Company considers general insurance cost a critical accounting policy. Starting with the
insurance policy year of June 2003, the Company has a $100,000 deductible and is
essentially self insured for workers compensation claims. The previous deductible was
$2,500. For general liability insurance, the deductible was increased from $5,000 to
$50,000. 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.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|Income Taxes: The
Companys tax provision and establishment of reserves for potential tax liabilities
involves the use of estimates and professional judgment. The Company has identified
exposures for which they have established a reserve, such as differences in
interpretation of tax laws at the federal, state, and local units of government. During
fiscal year 2004, the Company, based on current information, analyzed its income tax
liability account and determined that it was overaccrued with respect to certain matters
arising in prior years. The Company reversed such overaccrual of approximately $618,000
during fiscal 2004.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Fiscal 2004 Compared to Fiscal 2003
|-----------------------------------



|Net sales for
fiscal 2004 increased  $29.8 million or 7.4% to $433.3 million compared to $403.5 million
for fiscal  2003.  During fiscal 2004, the Company opened eight ALCO stores, seven of
which were in  new non-competitive markets. Two ALCO and six Duckwall stores were closed,
resulting in a year end total of 264 stores. The increase in net sales was due  to new
stores opened over the last two fiscal years. Net sales for all stores  open the full
year in both fiscal 2004 and 2003 (comparable stores), increased  by $3.9 million or 1.0%
in fiscal 2004 compared to fiscal 2003. Comparable store  sales of the ALCO stores in
non-competitive markets increased 1.7%. Sales in the  Duckwall division were relatively
strong, with a 5.6% comparable store increase.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Gross margin for
fiscal 2004 increased $9.0 million, or 6.7%, to  $143.6 million compared to $134.6
million in fiscal 2003. As a percentage of net  sales, gross margin decreased to 33.1% in
fiscal 2004 compared to 33.4% in  fiscal 2003. The decrease in the gross margin
percentage was attributable to a  less favorable mix of sales and higher shrinkage costs,
partially offset by  slightly lower markdowns. The shift in sales mix partly reflects the
Companys  decision to expand the offerings of consumable products within its
stores. While  consumables generally carry a lower margin than most other store
merchandise,  the Companys management believes the decision to place greater
emphasis upon  consumables had a positive impact upon sales and profits during fiscal
2004.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Selling, general
and administrative expenses increased $8.4 million  or 7.2% to $125.7 million in fiscal
2004 compared to $117.3 million in fiscal  2003. As a percentage of net sales, selling,
general and administrative expenses  were 29.0% in fiscal 2004 and 29.1% in fiscal 2003,
primarily due to lower  distribution center, advertising and remodeling expenses, which
were partially  offset by higher general insurance and store opening costs.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Depreciation and
amortization expense increased $459,000 or 6.7% to  $7.3 million in fiscal 2004 compared
to $6.8 million in fiscal 2003. The  increase in depreciation and amortization expense
was attributable to capital  expenditures of $4.3 million and $7.6 million in fiscal 2004
and 2003,  respectively.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Income from
continuing operations increased $137,000, or 1.3%, to  $10.6 million in fiscal 2004
compared to $10.4 million in fiscal 2003. Income  from continuing operations as a
percentage of net sales was 2.4% in fiscal 2004  compared to 2.6% in fiscal 2003.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Interest expense
decreased $223,000, or 13.9%, in fiscal 2004  compared to fiscal 2003. The reduction in
interest expense was due to lower  interest rates and lower amounts borrowed on the
revolver.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Income taxes were
$2.8 million in fiscal 2004 compared to $3.2  million in fiscal 2003. The Companys
effective tax rate was 30.3% in fiscal  2004 and 36.7% in fiscal 2003. 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 $618,000 during 2004. Approximately $200,000 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. The Company
currently expects its effective tax rate for fiscal 2005 to be  approximately 37.0%.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Earnings from
continuing operations before discontinued operations  for fiscal 2004 increased by
$826,000, or 14.8%, to $6.4 million compared to  $5.6 million in fiscal 2003.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Income (loss) from
discontinued operations, net of income taxes  was $110,000 in fiscal 2004, compared to
($223,000) in fiscal 2003. In fiscal  2004, a company owned store was closed and the
building was sold. The gain on  sale of the building in the amount of $406,000 was
accounted for as part of  discontinued operations. The gain on sale more than offset the
losses from the  operations of the eight stores closed in fiscal 2004, resulting in an
income  from discontinued operations in the amount of $110,000 net of taxes.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Fiscal 2003 Compared to Fiscal 2002
|-----------------------------------



|Net sales for
fiscal 2003 increased $3.2 million or 0.8% to  $403.5million compared to $400.3 million
for fiscal 2002. During fiscal 2003,  the Company opened five ALCO stores, all of which
were in new non-competitive  markets. Two ALCO and three Duckwall stores were closed,
resulting in a year end  total of 264 stores. The increase in net sales was due to new
stores opened over  the last two fiscal years. This increase was partially offset because
fiscal  2002 had sales from a 53rd week of $5.9
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|million. Fiscal 2003 only had sales from  52
weeks. Net sales for all stores open the full year in both fiscal 2003 and  2002
(comparable stores), increased by $186,000 or 0.1% in fiscal 2003 compared  to fiscal
2002. Sales in the Class 18 Stores, the main focus of the Companys  expansion
efforts, increased $1.2 million, or 0.6%. Strong sales during the  first half of the year
gave way to a softer second half, when economic and  consumer spending trends
deteriorated throughout the United States.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Gross margin for
fiscal 2003 increased $3.6 million, or 2.7%, to  $134.6 million compared to $131.0
million in fiscal 2002. As a percentage of net  sales, gross margin increased to 33.4% in
fiscal 2003 compared to 32.7% in  fiscal 2002. The increase in the gross margin
percentage was attributable to a  reduction in both markdowns and shrinkage.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Selling, general
and administrative expenses increased $4.1 million  or 3.7% to $117.3 million in fiscal
2003 compared to $113.2 million in fiscal  2002, primarily due to higher insurance and
distribution center costs. As a  percentage of net sales, selling, general and
administrative expenses were 29.1%  in fiscal 2003 and 28.4% in fiscal 2002. The selling,
general and administrative  expense percentage was unfavorably impacted as a result of
Fiscal 2003 having  one less week compared to the 53 week Fiscal 2002.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In fiscal 2003, there was no
      expense for asset impairment, and store closing costs were included in Discontinued
      Operations. The provision for asset impairment and store closure in
      fiscal 2002 was $601,000, which consisted of $498,000 for asset impairment
      and $103,000 for closing stores. 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
      is measured by the amount by which the carrying amount of the assets exceed
      the fair value of the assets. For purposes of determining impairment, assets
      are grouped 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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Income from
continuing operations decreased $512,000, or 4.7%, to  $10.4 million in fiscal 2003
compared to $10.9 million in fiscal 2002. Income  from continuing operations as a
percentage of net sales was 2.6% in fiscal 2003  and 2.7% in fiscal 2002.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Interest expense
decreased $1.2 million, or 42.1%, in fiscal 2003  compared to fiscal 2002. The reduction
in interest expense is due primarily to  lower interest rates.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Income taxes were
$3.2 million in fiscal 2003 compared to $3.1  million in fiscal 2002. The Companys
effective tax rate was 36.7% in fiscal  2003 and 38.1% in fiscal 2002. Increased earnings
in fiscal 2003 generated a  higher income tax expense compared to fiscal 2002 even though
the effective tax  rate decreased.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Earnings before
loss from discontinued operations for fiscal 2003  increased by $527,000, or 10.4%, to
$5.6 million compared to $5.1 million in  fiscal 2002.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------



|Loss from
discontinued operations, net of income taxes was  $223,000 in fiscal 2003, compared to
$296,000 in fiscal 2002.
|-------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|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  2004 and 2003.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |                                     | First Quarter         |  | Second Quarter |  | Third Quarter |  | Fourth Quarter | 
|----------------- |  | ----------------------------------- | --------------------- |  | -------------- |  | ------------- |  | -------------- | 
|
|                  |  |                                     | (dollars in millions)
|Fiscal
      2004 |  | Net Sales                           | $100.0                |  | $109.5         |  | $100.5        |  | $123.3         | 
|                  |  | Gross Margin                        | 33.4                  |  | 35.8           |  | 34.3          |  | 40.1           | 
|                  |  | Earnings from continuing operations | 0.7                   |  | 1.4            |  | 0.5           |  | 3.8            | 
|                  |  | Net Earnings                        | 0.6                   |  | 1.6            |  | 0.5           |  | 3.8            | 
|                  |  |                                     |                       |  |                |  |               |  |                | 
|Fiscal
      2003 |  | Net Sales                           | $94.9                 |  | $101.8         |  | $91.8         |  | $115.0         | 
|                  |  | Gross Margin                        | 31.6                  |  | 34.0           |  | 32.2          |  | 36.8           | 
|                  |  | Earnings from continuing operations | 0.6                   |  | 1.3            |  | 0.5           |  | 3.2            | 
|                  |  | Net Earnings                        | 0.5                   |  | 1.3            |  | 0.5           |  | 3.1            | 



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



|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. Also, refer  to
Impact of Change in Accounting Principle and Note 10 to the Consolidated  Financial
Statements regarding the impact of the accounting change on quarterly  results.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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  general and medical insurance, as
well as competitive pressures in wages in  selected markets. See additional discussion of
wages in the Government  Regulation section.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Liquidity and Capital Resources
|-------------------------------



|At the end of
fiscal 2004, working capital (defined as current  assets less current liabilities) was
$89.5 million compared to $93.4 million at  the end of fiscal 2003 and $70.4 million at
the end of fiscal 2002. The increase  in working capital between the end of fiscal 2002
and fiscal 2003 was due to the  classification of the revolving loan as a long term
liability. On April 15,  2002, the revolving loan was replaced with a new revolving loan
that matures in  April 2006.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 years
2003 and 2002, the Company  completed a sale-leaseback of a number of its owned stores.
The proceeds from  these transactions amounted to $1.3 million and $0.6 million, in
fiscal years  2003 and 2002, respectively.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Cash provided by
operating activities aggregated $16.4 million, $5.4  million, and $11.1 million, in
fiscal 2004, 2003 and 2002, respectively. The  increase in cash provided in fiscal 2004
relative to fiscal 2003 resulted  primarily from a smaller increase in inventory and a
larger increase in accounts  payable. The decrease in cash provided in fiscal 2003
relative to fiscal 2002  resulted primarily from a larger increase in inventory as well
as a reduction in  income taxes 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 2006. The revolving loan note payable and letter of credit
balance at February 1, 2004 was $7.3 million, resulting in an
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|available line of  credit  at that date of $62.7
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 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  $658,000 of Company stock . The Company received $868,000
in proceeds from the  exercise of outstanding stock options. In fiscal 2003, the Company
made net cash  payments on its revolving credit facility of $654,000 and made cash
payments of  $1.2 million to reduce its long-term debt and capital lease obligations. The
Company received $1.2 million in proceeds from the exercise of outstanding stock
options. In fiscal 2002, the Company made net cash payments on its revolving  credit
facility of $7.5 million, made cash payments of $1.2 million to reduce  its long-term
debt and capital lease obligations, and repurchased $1.7 million  of Company stock. The
Company executed operating leases for 20 additional stores  during the three year period
ending in fiscal 2004. The Companys long-range  plan assumes growth in the number
of stores in smaller markets where there is  less competition, and, in accordance with
this plan, 8 new ALCO stores were  opened in fiscal 2004 and 7 new ALCO stores are
expected to be opened in fiscal  2005. 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 2004,  2003 and 2002 totaled $4.3
million, $7.6 million, and $6.0 million,  respectively. In fiscal 2004, a company owned
store was closed and the building  was sold for $1.2 million. A sale-leaseback of store
buildings was completed in  the amount of $1.3 million and $0.6 million in fiscal 2003
and 2002,  respectively. This resulted in net cash used for acquisition of property and
equipment in fiscal 2004, 2003, and 2002 of $3.1 million, $6.3 million, and $5.4
million, respectively. Anticipated cash payments for acquisition of property and
equipment in fiscal 2005, principally for store buildings and fixtures, are $8  million.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|During fiscal
1999, the Companys Board of Directors approved a plan to  repurchase up to 411,000
shares of the Companys Common Stock (the Stock  Repurchase Program).
During fiscal 2000, the Companys Board of Directors  approved the repurchase of an
additional 1,000,000 shares. 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 borrowing  under the Companys credit facility. As of February 1,
2004, the Company had  purchased and retired 1,079,600 shares of Common Stock for $8.8
million, which  represents 21% of its outstanding shares.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The following
table summarized the Companys significant contractual  obligations payable as of
February 1, 2004 (in thousands). Payments due under  the revolving loan credit facility
and long-term debt represent principle  payments only.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | Payments
      due by Period
|---------------------------------------- | ----------------------------
|Contractual Obligations                  | Total                       
|
|                                         |                             
|                                         |                             
|Revolving
      Loan Credit Facility     | 4,958                       
|Long-Term
      Debt                     | 533                         
|Capital
      Lease Obligations          | 7,826                       
|Operating
      Leases                   | 69,895                      
|                                         |                             
|                                         |                             
|Total
      contractual cash obligations | 83,212                      
|                                         |                             

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



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



|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
7 ALCO stores in the current fiscal year and at  least 10 ALCO stores in both fiscal 2006
and 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.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Competition
|-----------



|The Companys
strategy is to locate its ALCO stores in smaller retail  markets where there is no
competing full-line discount retail store within the  primary trade area and where the
Company believes the opening of a store would  significantly reduce the likelihood of
such a competitor entering the market. No  assurance can be given, however, that
competition will not emerge in such  markets which, if developed, could seriously reduce
the prospect of a profitable  store in such market. In those markets in which the Company
has direct  competition, it often competes with national or regional full-line discount
stores which often have substantially greater financial and other resources than  the
Company.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|In 1996, Congress
enacted The Small Business Job Protection Act of 1996  (the Act), raising the
hourly minimum wage from $4.75 to $5.15 effective as of  September 1, 1997. The majority
of the Companys store employees were paid  hourly wages below these increased
minimum wage rates. As a result, the Act  increased the Companys payroll expense.
Additional increases in the minimum  wage could have a material impact on the results of
the Companys operations if  it is unable to pass those increased costs on to
customers or if sales are not  increasing at a rate large enough to offset the impact.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Control by Significant Stockholders
|-----------------------------------



|Jeffrey Macke is a
principal stockholder of the Company, beneficially  owning approximately 16% of the
outstanding shares of Common Stock of the  Company as of March 1, 2004.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|Dependence on Officers
|----------------------



|The development of
the Companys business has been largely dependent on  the efforts of its current
management team headed by Glen L. Shank and fifteen  other officers. The loss of the
services of one or more of these officers could  have a material adverse effect on the
Company.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|Impact of Change in Accounting Principle
|----------------------------------------



|Effective February 3, 2003,
      the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations.
      SFAS No. 143 requires the Company to record the fair value of an asset retirement
      obligation as a liability in the period in which it incurs a legal obligation
      associated with the retirement of tangible long-lived assets that result
      from the acquisition, construction, development, and/or normal use of the
      assets. The Company also records a corresponding asset that is depreciated
      over the life of the asset. Subsequent to the initial measurement of the
      asset retirement obligation, the obligation will be adjusted at the end
      of each period to reflect the passage of time and changes in the estimated
      future cash flows underlying the obligation. The adoption of SFAS No. 143
      did not have a material effect on the Companys financial statements.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Effective February
2, 2003, the Company adopted SFAS No. 148,  Accounting for Stock-Based Compensation -
Transition and Disclosure, an  amendment of FASB Statement No. 123. This Statement
required additional  disclosures in the consolidated financial statements.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Effective January
1, 2003, the Company adopted Statement of Financial  Accounting Standards (SFAS) No. 146,
Accounting for Costs Associated with Exit  or Disposal Activities. SFAS No. 146 addresses
financial accounting and  reporting for costs associated with exit or disposal
activities. The adoption of  this statement had the effect of delaying when the Company
records liabilities  associated with store closures.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Company
adopted Emerging Issues Task Force Issue 02-16, Accounting  by a Customer (including a
Reseller) for Certain Consideration Received from a  Vendor, (EITF 02-16). EITF 02-16
provides guidance on the income statement  classification of amounts received by a
customer, including a reseller  (including reimbursements for expenses such as
cooperative advertising), for  transactions entered into after December 31, 2002, and
limited guidance  regarding timing of recognition for volume rebates, for transactions
entered  into after November 21, 2002. The adoption of EITF 02-16 did not have a
significant impact on the Companys financial statements for the year ended
February 1, 2004.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 of  certain
prior year revenue and expense activity related to five stores closed  during fiscal year
2003 as discontinued operations.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|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. On April 15, 2002, the Company replaced the
existing line of credit  with a new line of credit with Fleet Retail Finance Inc. that
expires in April  2006. The credit line available is $70,000,000, which carries a
variable rate of  interest.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 8.  FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.
|-----------------------------------------------------



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





|Independent Auditors Report
|----------------------------



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



|We have audited the accompanying consolidated
balance sheets of Duckwall-ALCO  Stores, Inc. and subsidiaries as of February 1, 2004 and
February 2, 2003, and  the related consolidated statements of operations, stockholders equity,
and  cash flows for each of the years in the three-year period ended February 1,  2004.
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
auditing standards generally accepted  in the United States of America. 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 February 1, 2004, and
February 2, 2003, and  the results of their operations and their cash flows for each of
the years in  the three-year period ended February 1, 2004, in conformity with accounting
principles generally accepted in the United States of America.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|/s/ KPMG LLP
|------------



|Wichita, KansasMarch 12, 2004
|-----------------------------



| |  | 
| |  | 



---





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



|Consolidated Balance Sheets
|---------------------------



|February 1, 2004 and February 2,
2003
|-------------------------------------



|(Dollars in thousands)
|----------------------

|                                               | Assets                                    | 2004              |  | 2003  
|---------------------------------------------- | ----------------------------------------- | ----------------- |  | ------
|Current
      assets:                          |                                           |                   |  |       
|                                               | Cash
      and cash equivalents           | $           1,084 |  |       
|                                               | Receivables                               | 1,521             |  |       
|                                               | Inventories
      (note 2)                | 131,661           |  |       
|                                               | Prepaid
      expenses                    | 2,188             |  |       
|                                               |                                           |                   |  |       
|                                               | Total
      current assets                | 136,454           |  |       
|                                               |                                           |                   |  |       
|Property and equipment, at cost:               |                                           |                   |  |       
|                                               | Land
      and land improvements          | 2,582             |  |       
|                                               | Buildings
      and building improvements | 15,827            |  |       
|                                               | Furniture,
      fixtures, and equipment  | 51,747            |  |       
|                                               | Transportation
      equipment            | 2,872             |  |       
|                                               | Leasehold
      improvements              | 13,274            |  |       
|                                               | Construction
      work in progress       | 47                |  |       
|                                               |                                           |                   |  |       
|                                               | Total
      property and equipment        | 86,349            |  |       
|Less accumulated depreciation and amortization | 59,586                                    |                   |  | 54,125
|                                               |                                           |                   |  |       
|                                               | Net
      property and equipment          | 26,763            |  |       
|                                               |                                           |                   |  |       
|Property under capital leases (note 5)         | 20,120                                    |                   |  | 20,120
|                                               | Less
      accumulated amortization       | 17,041            |  |       
|                                               |                                           |                   |  |       
|                                               | Net
      property under capital leases   | 3,079             |  |       
|                                               |                                           |                   |  |       
|Other assets                                   | 164                                       |                   |  | 239   
|Deferred income taxes (note 6)                 | 1,033                                     |                   |  | 557   
|                                               |                                           |                   |  |       
|                                               |                                           |                   |  |       
|                                               |                                           | $        167,493  |  |       
|                                               |                                           |                   |  |       



|See accompanying notes to consolidated financial
statements.
|------------------------------------------------------------



| |  | 
| |  | 



---





|Liabilities
      and Stockholders Equity                        | 2004            |  | 2003   
|----------------------------------------------------------------- | --------------- |  | -------
|Current
      liabilities:                                        |                 |  |        
|Current
      maturities of long-term debt (note 3)               | $           533 |  | 500    
|Current
      maturities of capital lease obligations (note 5)    | 802             |  | 712    
|Accounts
      payable                                            | 27,799          |  | 25,241 
|Income
      taxes payable                                        | 1,944           |  | 1,326  
|Accrued
      salaries and commissions                            | 5,475           |  | 5,372  
|Accrued
      taxes other than income                             | 4,496           |  | 3,935  
|Other
      current liabilities                                   | 4,276           |  | 2,836  
|Deferred
      income taxes (note 6)                              | 1,668           |  | 2,164  
|                                                                  |                 |  |        
|Total
      current liabilities                                   | 46,993          |  | 42,086 
|Notes
      payable under revolving loan credit facility (note 3) | 4,958           |  | 17,483 
|Long-term
      debt, less current maturities (note 3)            |                |  | 532    
|Capital
      lease obligations, less current maturities (note 5) | 4,583           |  | 5,384  
|Other
      noncurrent liabilities                                | 1,347           |  | 1,448  
|Deferred
      revenue                                            | 419             |  | 857    
|                                                                  |                 |  |        
|Total
      liabilities                                           | 58,300          |  | 67,790 
|                                                                  |                 |  |        
|Stockholders
      equity (notes 7 and 8):                       |                 |  |        
|Common
      stock, $0.0001 par value. Authorized 20,000,000      |                 |  |        
|shares
      in 2004 and 2003; issued and outstanding             |                 |  |        
|4,299,816
      and 4,260,557 shares in 2004 and 2003,            |                 |  |        
|Respectively                                                      | 1               |  | 1      
|Additional
      paid-in capital                                  | 49,329          |  | 48,759 
|Retained
      earnings                                           | 59,863          |  | 53,350 
|                                                                  |                 |  |        
|Total
      stockholders equity                                  | 109,193         |  | 102,110
|Commitments
      (note 5)                                        |                 |  |        
|                                                                  | $  167,493      |  | 169,900
|                                                                  |                 |  |        



| |  | 
| |  | 



---





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



|Consolidated Statements of
Operations
|-------------------------------------



|Fiscal years ended February 1,
2004, February 2, 2003, and February 3, 2002
|---------------------------------------------------------------------------



|(Dollars in thousands, except per
share amounts)
|------------------------------------------------

|                                                           | 2004        |  | 2003    |  | 2002   
|---------------------------------------------------------- | ----------- |  | ------- |  | -------
|Net
      sales                                            | $433,270    |  | 403,471 |  | 400,283
|Cost
      of sales                                        | 289,702     |  | 268,892 |  | 269,293
|                                                           |             |  |         |  |        
|Gross
      margin                                         | 143,568     |  | 134,579 |  | 130,990
|                                                           |             |  |         |  |        
|Selling,
      general, and administrative (notes 4 and 5) | 125,726     |  | 117,333 |  | 113,191
|Depreciation
      and amortization                        | 7,284       |  | 6,825   |  | 6,265  
|Provision
      for asset impairment and store closure     |            |  |        |  | 601    
|                                                           |             |  |         |  |        
|Total
      operating expenses                             | 133,010     |  | 124,158 |  | 120,057
|                                                           |             |  |         |  |        
|Income
      from continuing operations                    | 10,558      |  | 10,421  |  | 10,933 
|Interest
      expense (notes 3 and 5)                     | 1,386       |  | 1,609   |  | 2,778  
|                                                           |             |  |         |  |        
|Earnings
      from continuing operations                  |             |  |         |  |        
|before
      income taxes and discontinued                 |             |  |         |  |        
|Operations                                                 | 9,172       |  | 8,812   |  | 8,155  
|Income
      tax expense (note 6)                          | 2,769       |  | 3,235   |  | 3,105  
|                                                           |             |  |         |  |        
|Earnings
      from continuing operations                  |             |  |         |  |        
|before
      discontinued operations                       | 6,403       |  | 5,577   |  | 5,050  
|Income
      (loss) from discontinued operations, net of   |             |  |         |  |        
|income
      tax (expense) benefit of $(59), $129,         |             |  |         |  |        
|and
      $182 in 2004, 2003, and 2002 respectively        | 110         |  | (223)   |  | (296)  
|                                                           |             |  |         |  |        
|Net
      earnings                                         | $    6,513  |  | 5,354   |  | 4,754  
|                                                           |             |  |         |  |        
|Earnings
      per share:                                  |             |  |         |  |        
|Basic
      (note 9):                                      |             |  |         |  |        
|Earnings
      before discontinued operations              | $      1.50 |  | 1.32    |  | 1.20   
|Discontinued
      operations                              | 0.03        |  | (0.06)  |  | (0.07) 
|                                                           |             |  |         |  |        
|Net
      earnings                                         | $      1.53 |  | 1.26    |  | 1.13   
|                                                           |             |  |         |  |        
|Earnings
      per share:                                  |             |  |         |  |        
|Diluted
      (note 9):                                    |             |  |         |  |        
|Earnings
      before discontinued operations              | $      1.47 |  | 1.28    |  | 1.20   
|Discontinued
      operations                              | 0.03        |  | (0.05)  |  | (0.07) 
|                                                           |             |  |         |  |        
|Net
      earnings                                         | $      1.50 |  | 1.23    |  | 1.13   
|                                                           |             |  |         |  |        



|See accompanying notes to consolidated financial
statements.
|------------------------------------------------------------



| |  | 
| |  | 



---





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



|Consolidated Statements of
Stockholders Equity
|-----------------------------------------------



|Fiscal years ended February 1,
2004, February 2, 2003, and February 3, 2002
|---------------------------------------------------------------------------



|(Dollars in thousands)
|----------------------

|                                                | Common 
      stock |  | Additional 
      paid-in 
      capital |  | Retained 
      earnings |  | Accumulated 
      other 
      comprehensive 
      income (loss) |  | Total stockholders 
      equity
|----------------------------------------------- | ------------------- |  | ---------------------------------------- |  | ------------------------ |  | ------------------------------------------------------------------ |  | ---------------------------------
|
|
|
|                                                |                    
|Balance,
      January 28, 2001                 | $1                  |  | 49,263                                   |  | 43,242                   |  |                                                                   |  | 92,506                           
|Net
      earnings for the year ended           |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|February 3, 2002                                |                    |  |                                         |  | 4,754                    |  |                                                                   |  | 4,754                            
|Cumulative
      effect adjustment upon         |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|adoption of SFAS No. 133, net                   |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|of tax (note 1)                                 |                    |  |                                         |  |                         |  | (76)                                                               |  | (76)                             
|Amortization
      of cumulative effect         |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|adjustment                                      |                    |  |                                         |  |                         |  | 60                                                                 |  | 60                               
|                                                |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|Comprehensive income                            |                     |  |                                          |  |                          |  |                                                                    |  | 4,738                            
|                                                |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|Repurchase
      and retirement of 270,000      |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|common shares                                   |                    |  | (1,654)                                  |  |                         |  |                                                                   |  | (1,654)                          
|                                                |                    
|Balance,
      February 3, 2002                 | 1                   |  | 47,609                                   |  | 47,996                   |  | (16)                                                               |  | 95,590                           
|Net
      earnings for the year ended           |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|February 2, 2003                                |                    |  |                                         |  | 5,354                    |  |                                                                   |  | 5,354                            
|Amortization
      of cumulative effect         |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|adjustment                                      |                    |  |                                         |  |                         |  | 16                                                                 |  | 16                               
|                                                |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|Comprehensive income                            |                     |  |                                          |  |                          |  |                                                                    |  | 5,370                            
|                                                |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|Options
      exercised to purchase             |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|110,958 shares                                  |                    |  | 1,150                                    |  |                         |  |                                                                   |  | 1,150                            
|                                                |                    
|Balance,
      February 2, 2003                 | 1                   |  | 48,759                                   |  | 53,350                   |  |                                                                   |  | 102,110                          
|Net
      earnings for the year ended           |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|February 1, 2004                                |                    |  |                                         |  | 6,513                    |  |                                                                   |  | 6,513                            
|Repurchase
      and retirement of              |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|69,300 common shares                            |                    |  | (658)                                    |  |                         |  |                                                                   |  | (658)                            
|Income
      tax benefit related to exercise of |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|stock options                                   |                    |  | 360                                      |  |                         |  |                                                                   |  | 360                              
|Options
      exercised to purchase             |                     |  |                                          |  |                          |  |                                                                    |  |                                  
|108,559 shares                                  |                    |  | 868                                      |  |                         |  |                                                                   |  | 868                              
|                                                |                    
|Balance,
      February 1, 2004                 | $1                  |  | 49,329                                   |  | 59,863                   |  |                                                                   |  | 109,193                          
|                                                |                    



|See accompanying notes to consolidated financial
statements.
|------------------------------------------------------------



| |  | 
| |  | 



---





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



|Consolidated Statements of Cash
FlowsFiscal years ended February 1, 2004, February 2, 2003, and February 3, 2002
(Dollars in thousands)
|---------------------------------------------------------------------------------------------------------------------------------------

|                                                     | 2004                                                 |          | 2003 |       | 2002    
|---------------------------------------------------- | ---------------------------------------------------- | -------- | ---- | ----- | --------
|Cash
      flows from operating activities:          |                                                      |          |      |       |         
|                                                     | Net earnings                                         | $6,513   |      |       | 5,354   
|                                                     | Adjustments to reconcile net earnings to cash        |          |      |       |         
|                                                     | provided by operating activities:                    |          |      |       |         
|                                                     | Depreciation and amortization                        | 7,311    |      |       | 6,912   
|                                                     | Amortization of debt financing costs                 | 75       |      |       | 76      
|                                                     | Deferred income taxes                                | (972)    |      |       | 425     
|                                                     | (Gain) loss on disposition or impairment of          |          |      |       |         
|                                                     | property and equipment                               | (406)    |      |       | (268)   
|                                                     | Decrease (increase) in receivables                   | 494      |      |       | (352)   
|                                                     | Increase in inventories                              | (1,984)  |      |       | (4,512) 
|                                                     | Decrease (increase) in prepaid expenses              | 227      |      |       | (1,456) 
|                                                     | Increase (decrease) in accounts payable              | 2,558    |      |       | 730     
|                                                     | Increase (decrease) in income taxes payable          | 978      |      |       | (2,351) 
|                                                     | Increase in accrued salaries and commissions         | 103      |      |       | 401     
|                                                     | Increase (decrease) in accrued taxes other           |          |      |       |         
|                                                     | than income                                          | 561      |      |       | (145)   
|                                                     | Increase (decrease) in other liabilities             | 1,339    |      |       | 464     
|                                                     | (Decrease) increase in deferred revenue              | (438)    |      |       | 141     
|                                                     |                                                      |          |      |       |         
|                                                     | Net cash provided by operating activities            | 16,359   |      |       | 5,419   
|                                                     |                                                      |          |      |       |         
|Cash
      flows from investing activities:          |                                                      |          |      |       |         
|                                                     | Proceeds from sale of property and equipment         | 1,169    |      |       | 1,316   
|                                                     | Acquisition of:                                      |          |      |       |         
|                                                     | Buildings                                            | (59)     |      |       | (252)   
|                                                     | Fixtures, equipment, and leasehold improvements      | (4,216)  |      |       | (7,370) 
|                                                     |                                                      |          |      |       |         
|                                                     | Net cash used in investing activities                | (3,106)  |      |       | (6,306) 
|                                                     |                                                      |          |      |       |         
|Cash
      flows from financing activities:          |                                                      |          |      |       |         
|                                                     | Decrease in notes payable under revolving loan       |          |      |       |         
|                                                     | credit facility                                      | (12,525) |      |       | (18,137)
|                                                     | Net borrowings under revolving loan credit agreement |         |      |       | 17,483  
|                                                     | Proceeds from exercise of outstanding stock options  | 868      |      |       | 1,150   
|                                                     | Repurchase of stock                                  | (658)    |      |       |        
|                                                     | Principal payments on long-term debt                 | (499)    |      |       | (469)   
|                                                     | Principal payments under capital lease obligations   | (711)    |      |       | (703)   
|                                                     | Debt issuance costs                                  |         |      |       | (300)   
|                                                     |                                                      |          |      |       |         
|                                                     | Net cash used in financing activities                | (13,525) |      |       | (976)   
|                                                     |                                                      |          |      |       |         
|                                                     | Net decrease in cash and cash equivalents            | (272)    |      |       | (1,863) 
|Cash
      and cash equivalents at beginning of year | 1,356                                                |          |      | 3,219 |         
|                                                     |                                                      |          |      |       |         
|Cash
      and cash equivalents at end of year       | $1,084                                               |          |      | 1,356 |         
|                                                     |                                                      |          |      |       |         
|Supplemental
      disclosure of non-cash activity:  |                                                      |          |      |       |         
|                                                     | Tax benefit related to stock options exercised       | $360     |      |       |        



|See accompanying notes to consolidated financial
statements.
|------------------------------------------------------------



| |  | 
| |  | 



---





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



|Notes to Consolidated Financial
Statements
|------------------------------------------



|February 1, 2004, February 2,
2003, and February 3, 2002
|--------------------------------------------------------



|(Dollars in thousands, except per
share amounts)
|------------------------------------------------



|(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 2004
consists of 52 weeks,  fiscal 2003 consists of 52  weeks, and fiscal 2002 consists of 53
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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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. Estimated useful lives are as
follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Buildings                          | 25 years  
| | ---------------------------------- | ----------
| | Building improvements              | 10 years  
| | Furniture, fixtures, and equipment | 38 years 
| | Transportation equipment           | 35 years 
| | Leasehold improvements             | 210 years



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





| | (f) 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | (g) | Net Sales and Deferred Revenue
| | --- | ------------------------------



| | 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. The Company has one significant vendor
arrangement  entered into prior to the adoption of Emerging Issues Task Force  Issue
02-16 (as discussed in note 1(h)). For such arrangement,  vendor rebates received in
advance of meeting the criteria for  recognition in the consolidated statements of
operations are  recorded as deferred revenue.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (h) | Change in Accounting Principle
| | --- | ------------------------------



| | Effective February 2, 2003, the Company adopted
      Statement of Financial Accounting Standards (SFAS) No. 148, Accounting
      for Stock-based Compensation - Transition and Disclosure, an Amendment of
      FASB Statement No. 123. This Statement required additional disclosures
      in the consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Effective January 1, 2003, the Company adopted
      SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
      SFAS No. 146 addresses financial accounting and reporting for costs associated
      with exit or disposal activities. The adoption of this statement had the
      effect of delaying when the Company records liabilities associated with
      store closures (see note 1(m)).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The Company adopted Emerging Issues Task Force
      Issue 02-16, Accounting by a Customer (Including a Reseller) for Certain
      Consideration Received from a Vendor (EITF 02-16). EITF 02-16 provides
      guidance on the income statement classification of amounts received by a
      customer, including a reseller (including reimbursements for expenses such
      as cooperative advertising), for transactions entered into after December
      31, 2002 and limited guidance regarding timing of recognition for volume
      rebates for transactions entered into after November 21, 2002. The adoption
      of EITF 02-16 did not have a significant impact on the Companys financial
      statements for the year ended February 1, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 eight and five stores closed during
      fiscal years 2004 and 2003, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | In
accordance  with SFAS No. 144, long-lived assets, such as  property, plant, and equipment
and  purchased intangibles subject  to amortization, 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 undiscounted future cash
flows expected to be  generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is  recognized in the amount by
which the carrying amount of the asset  exceeds the fair value of the asset. Assets to be
disposed of  would be separately presented in the balance sheet and reported at  the
lower of the carrying amount or fair value less costs to sell  and are no longer
depreciated. The assets and liabilities of a  disposed group classified as held for sale
would be presented  separately in the appropriate asset and liability sections of the
balance sheet. Prior to the adoption of SFAS No. 144, the Company  accounted for
long-lived assets in
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





| | accordance with SFAS No. 121, Accounting for
      Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
      Of.
| | -------------------------------------------------------------------------------------------------------------------------------------



| | Effective January 29, 2001, the Company adopted
      SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
      SFAS No. 133 requires that all derivative instruments be recorded on the
      balance sheet at fair value. The accounting for changes in the fair value
      of a derivative depends on its designation and effectiveness. For derivatives
      that qualify as effective hedges, the change in fair value has no net impact
      on earnings until the hedged transaction affects earnings. For derivatives
      that are not designated as hedging instruments, or for the ineffective portion
      of a hedging instrument, the change in fair value is recognized in current
      period earnings.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | At
January 29,  2001, the Company held one derivative instrument,  an interest rate swap
agreement  entered into in December 2000 with  a notional principal amount of $10,000,
whereby the  Company pays a  fixed rate of interest and receives interest based on LIBOR
for  the  period from April 15, 2001 to April 15, 2002. The purpose of  the interest rate
swap  agreement was to mitigate the Companys  interest rate risk under its
revolving  credit facility.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Prior
to  January 29, 2001, the Company had accounted for the  interest rate swap agreement as
a  cash flow hedge. Upon adoption  of SFAS No. 133, the Company elected to not use hedge
accounting  for the interest rate swap agreement. Accordingly, a  cumulative-effect-type
adjustment was made to accumulated other  comprehensive income in the amount of $76,
which represents the  fair value of the interest rate swap at the date of adoption of
SFAS No. 133 ($123) net of income tax effect ($47). The cumulative  effect adjustment was
amortized to earnings over the period from  April 15, 2001 to April 15, 2002. During
2002, the Company  recorded interest expense of $97 ($60 net of tax) to amortize the
transition adjustment. Subsequent to the adoption of SFAS No. 133,  the Company recorded
a reduction in interest expense of $16 to  reflect the change in fair value of the
interest rate swap  agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (j) | 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
2004, 2003, and 2002, the following amounts were  paid for interest and income taxes:
| | ---------------------------------------------------------------------------------------------------

| |                                           | 2004             |  |  | 2003  |  |  | 2002  | 
| | ----------------------------------------- | ---------------- |  |  | ----- |  |  | ----- | 
| | Interest, excluding
      interest on     |                  |  |  |       |  |  |       | 
| | capital lease
      obligations and       |                  |  |  |       |  |  |       | 
| | amortization
      of debt financing      |                  |  |  |       |  |  |       | 
| | costs (net
      of capitalized           |                  |  |  |       |  |  |       | 
| | interest
      of $16 in fiscal 2004, $31 |                  |  |  |       |  |  |       | 
| | in fiscal
      2003, and $26 in fiscal   |                  |  |  |       |  |  |       | 
| | 2002)                                     | $   
        639 |  |  | 802   |  |  | 2,031 | 
| | Income taxes                              | 2,822            |  |  | 5,032 |  |  | 1,520 | 





| |  | 
| |  | 



---





| | (k) | Use of Estimates
| | --- | ----------------



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



| | (l) | 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 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. Provisions for asset impairment of $0, $0, and $498 for  fiscal 2004,
2003, and 2002, respectively, are included in the  consolidated statements of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (m) | Store Closure Expenses
| | --- | ----------------------



| | Prior
to January 1, 2003, the Company recorded a provision for  store closure expenses and a
related liability in the period the  Company makes the decision to close a store and puts
in a  definitive plan of closure for each store that will be completed  in the near term.
Such store closure expenses consist primarily of  lease costs and property tax amounts
that relate to the period  subsequent to the date of closure. The liability is charged as
the  related amounts are paid. There were no significant adjustments to  the liability in
fiscal 2004, 2003, or 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Beginning
with store closures for which the definitive plan was  established after January 1, 2003,
a provision for such 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 February 1, 2004,
February 2, 2003, and February  3, 2002, is as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                              | 2004      |  |  | 2003  |  |  | 2002  | 
| | -------------------------------------------- | --------- |  |  | ----- |  |  | ----- | 
| | Store
      closure liability at beginning   |           |  |  |       |  |  |       | 
| | of
      year                                | $    146  |  |  | 76    |  |  | 218   | 
| | Store
      closure expense (included in     |           |  |  |       |  |  |       | 
| | discontinued
      operations in 2004)       | 11        |  |  | 172   |  |  | 103   | 
| | Payments                                     | (139)     |  |  | (102) |  |  | (245) | 
| |                                              |           |  |  |       |  |  |       | 
| | Store
      closure liability at end of year | $      18 |  |  | 146   |  |  | 76    | 
| |                                              |           |  |  |       |  |  |       | 



| |  | 
| |  | 



---





| | (n) | 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:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                 | 2004                 |  |  | 2003  |  |  | 2002  | 
| | ------------------------------- | -------------------- |  |  | ----- |  |  | ----- | 
| | Net earnings as reported        | $      
      6,513  |  |  | 5,354 |  |  | 4,754 | 
| | Pro forma stock-based employee  |                      |  |  |       |  |  |       | 
| | compensation cost, net of tax   | (109)                |  |  | (215) |  |  | (206) | 
| |                                 |                      |  |  |       |  |  |       | 
| | Pro forma net earnings          | $      
      6,404  |  |  | 5,139 |  |  | 4,548 | 
| |                                 |                      |  |  |       |  |  |       | 
| | Earnings per share as reported: |                      |  |  |       |  |  |       | 
| | Basic                           | $      
        1.53 |  |  | 1.26  |  |  | 1.13  | 
| | Diluted                         | 1.50                 |  |  | 1.23  |  |  | 1.13  | 
| | Earnings, per share, pro forma: |                      |  |  |       |  |  |       | 
| | Basic                           | 1.51                 |  |  | 1.21  |  |  | 1.08  | 
| | Diluted                         | 1.47                 |  |  | 1.18  |  |  | 1.08  | 



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

| |                                       | 2003         
| | ------------------------------------- | -------------
| | Expected
      dividend yield         |             
| | Expected
      stock price volatility | 38.6         
| | Risk-free
      interest rate         | 5.0          
| | Expected
      life of options        | 5
      years



| | The
weighted average grant date fair value of options granted  during 2003 is $5.23 per
share. No options were issued during  fiscal year 2004 and 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Inventories
|--- | -----------



| | Inventories
at February 1, 2004 and February 2, 2003 are stated at the  lower of cost or net
realizable value as determined under the LIFO method  of accounting. Inventories at
February 1, 2004 and February 2, 2003 are  summarized as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | 2004       |  |  | 2003    | 
| | ----------------------- | ---------- |  |  | ------- | 
| | FIFO cost               | $  132,256 |  |  | 130,272 | 
| | Less
      LIFO reserve | (595)      |  |  | (595)   | 
| |                         |            |  |  |         | 
| | LIFO
      cost         | $  131,661 |  |  | 129,677 | 
| |                         |            |  |  |         | 



|(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. The loan agreement expires on April 15, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
Company entered into an interest rate swap in December 2000 with a  notional principal
amount of $10,000, whereby the Company paid a fixed  rate of interest and receives
interest based on LIBOR for the period  April 15, 2001 to April 15, 2002 to mitigate its
interest rate risk under  the LIBOR Rate Loan. This interest rate swap agreement was
terminated  during April 2002. Interest expense for fiscal 2003 includes $27 of  interest
paid by the Company under the interest rate swap agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Notes
payable outstanding at February 1, 2004 and February 2, 2003 under  the revolving loan
credit facility aggregated $4,958 and $17,483,  respectively. The lender had also issued
letters of credit aggregating  $2,417 and $4,123, respectively, at such dates on behalf
of the Company.  The interest rates on outstanding borrowings at February 1, 2004 were
4%.  The Company had additional borrowings available at February 1, 2004 under  the
revolving loan credit facility amounting to $62,683.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Long-term
debt, exclusive of notes payable under the revolving loan  credit facility as described
above, at February 1, 2004 and February 3,  2003 consisted of the following:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                 | 2004       |  |  | 2003 
| | --------------------------------------------------------------- | ---------- |  |  | -----
| | 6.4% note payable, due
      in monthly installments, including |            |  |  |      
| | interest,
      through January 2005; secured by equipment      | $      533 |  |  | 1,032
| | Less
      current maturities                                   | $      533 |  |  | 500  
| |                                                                 |            |  |  |      
| | Long-term
      debt, less current maturities                   | $         |  |  | 532  
| |                                                                 |            |  |  |      



| | Interest
expense on notes payable and long-term debt in fiscal 2004,  2003, and 2002, aggregated
$659, $855, and $1,941, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------



| | Maturities
of long-term debt, including the notes payable under the  revolving loan credit facility,
in each of the next four years as of  February 1, 2004 are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fiscal year: |              
| | ------------ | -------------
| | 2005         | $         533
| | 2006         |             
| | 2007         | 4,958        
| |              |              
| |              | $      5,491 
| |              |              



|(4) | Employee Benefits
|--- | -----------------



| | The
Company has a trusteed Profit Sharing Plan (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 2004, 2003, and 2002 amounted to $699,  $573, and $512, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|(5) | Leases
|--- | ------



| | The
Company is lessee under long-term capital leases expiring at various  dates. The
components of property under capital leases as of February 1,  2004 and February 2, 2003
are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                         | 2004         |  | 2003  
| | --------------------------------------- | ------------ |  | ------
| | Buildings                               | $    16,624  |  | 16,624
| | Fixtures                                | 3,496        |  | 3,496 
| |                                         |              |  |       
| |                                         | 20,120       |  | 20,120
| | Less accumulated amortization           | 17,041       |  | 16,509
| |                                         |              |  |       
| | Net
      property under capital losses | $      3,079 |  | 3,611 
| |                                         |              |  |       



| | The
Company also has noncancelable operating leases, primarily for  buildings that expire at
various dates.
| | -----------------------------------------------------------------------------------------------------------



| | 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 February 1, 2004 are
as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                          | Capital
      
      leases |  | Operating
      
      leases
| | -------------------------------------------------------- | --------------------------- |  | -----------------------------
|
| | Fiscal
      year:                                       |                             |  |                              
| | 2005                                                     | $    1,384                  |  |                              
| | 2006                                                     | 1,339                       |  |                              
| | 2007                                                     | 1,229                       |  |                              
| | 2008                                                     | 1,014                       |  |                              
| | 2009                                                     | 606                         |  |                              
| | Later
      years                                        | 2,254                       |  |                              
| |                                                          |                             |  |                              
| | Total
      minimum lease payments                       | 7,826                       |  |                              
| |                                                          |                             |  |                              
| | Less
      amount representing interest                  | 2,441                       |  |                              
| |                                                          |                             |  |                              
| | Present
      value of net minimum lease payments        | 5,385                       |  |                              
| | Less
      current maturities                            | 802                         |  |                              
| |                                                          |                             |  |                              
| | Capital
      lease obligations, less current maturities | $    4,583                  |  |                              
| |                                                          |                             |  |                              



| | 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 $87, $82, and $105 for fiscal 2004, 2003, and 2002,  respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Interest
on capital lease obligations in fiscal 2004, 2003, and 2002  aggregated $672, $754, and
$838, respectively.
| | --------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





| | The
following schedule presents the composition of total rent expense for  all operating
leases for fiscal 2004, 2003, and 2002:
| | --------------------------------------------------------------------------------------------------------------------------------

| |                       | 2004      |  | 2003   |  | 2002  
| | --------------------- | --------- |  | ------ |  | ------
| | Minimum rentals       | $  11,053 |  | 10,441 |  | 10,096
| | Contingent rentals    | 872       |  | 744    |  | 681   
| | Less sublease rentals | (68)      |  | (157)  |  | (152) 
| |                       |           |  |        |  |       
| |                       | $  11,857 |  | 11,028 |  | 10,625
| |                       |           |  |        |  |       



| | Sale-leaseback
Transaction
| | --------------------------



| | The
Company has sold and leased back certain stores (land and buildings).  The net proceeds
from the sale-leaseback transactions amounted to  approximately $0, $1,316, and $609 for
fiscal 2004, 2003, and 2002,  respectively. As a result of the sale-leaseback
transactions, the Company  incurred gains of $0, $285, and $36 in fiscal 2004, 2003, and
2002,  respectively, which have been deferred for financial reporting purposes.  Such
deferred gains are included within other noncurrent liabilities and  are being amortized
over the term of the related leases (15-20 years).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Income Taxes
|--- | ------------



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

| |                                                                        | 2004        |  | 2003  |  | 2002 
| | ---------------------------------------------------------------------- | ----------- |  | ----- |  | -----
| | Income
      tax expense (benefit) allocated                           |             |  |       |  |      
| | to
      continuing operations                                         | $     2,769 |  | 3,235 |  | 3,105
| | Income
      tax expense (benefit) allocatedto discontinued operations | 59          |  | (129) |  | (182)
| |                                                                        |             |  |       |  |      
| | Total
      income tax expense                                         | $     2,828 |  | 3,106 |  | 2,923
| |                                                                        |             |  |       |  |      



| | Income
tax expense (benefit) for fiscal 2004, 2003, and 2002 consists of:
| | -------------------------------------------------------------------------

| |         | Current             |  | Deferred |         | Total
| | ------- | ------------------- |  | -------- | ------- | -----
| | 2004:   |                     |  |          |         |      
| | Federal | $             3,158 |  |          | (810)   |      
| | State   | 642                 |  |          | (162)   |      
| |         |                     |  |          |         |      
| |         | $             3,800 |  |          | (972)   |      
| |         |                     |  |          |         |      
| | 2003:   |                     |  |          |         |      
| | Federal | $             2,269 |  |          | 354     |      
| | State   | 412                 |  |          | 71      |      
| |         |                     |  |          |         |      
| |         | $             2,681 |  |          | 425     |      
| |         |                     |  |          |         |      
| | 2002:   |                     |  |          |         |      
| | Federal | $             3,839 |  |          | (1,306) |      
| | State   | 652                 |  |          | (262)   |      
| |         |                     |  |          |         |      
| |         | $             4,491 |  |          | (1,568) |      
| |         |                     |  |          |         |      



| |  | 
| |  | 



---





| | Income
tax expense was $2,828, $3,106, and $2,923 for fiscal 2004, 2003,  and 2002,
respectively, and differs from the amounts computed by applying  the Federal income tax
rate of 35% in 2004, 2003, and 2002 as a result of  the following:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                               |  | 2004   | 2003 | 2002 
|-------------------------------------------------------------- |  | ------ | ---- | -----
|Computed
      expected tax expense                          |  | $3,269 |      | 2,961
|State
      income taxes, net of the Federalincome tax benefit |  | 311    |      | 314  
|Adjustment
      for prior period taxes                        |  | (618)  |      |     
|Other,
      net                                               |  | (134)  |      | (169)
|                                                               |  |        |      |      
|                                                               |  | $2,828 |      | 3,106
|                                                               |  |        |      |      
|                                                               |  |        |      |      



| | During
fiscal year 2004, the Company, based on current information,  analyzed its income tax
liability account and determined that it was  overaccrued with respect to certain matters
arising in prior years. The  Company reversed such overaccrual of approximately $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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
tax effects of temporary differences that give rise to significant  portions of deferred
tax assets and liabilities at February 1, 2004 and  February 2, 2003 are presented below:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                |                                                                                                                                                                                               | 2004  |  | 2003 
|------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- |  | -----
|Deferred
      tax assets:      |                                                                                                                                                                                               |       | 
|                                | Capital
      leases                                                                                                                                                                          | $881  |  | 950  
|                                | Other
      liabilities                                                                                                                                                                       | 1,726 |  | 1,211
|                                | State
      net operating loss carryforwards                                                                                                                                                  | 20    |  | 31   
|                                |                                                                                                                                                                                               |       |  |      
|                                | Total
      gross deferred tax assets                                                                                                                                                         | 2,627 |  | 2,192
|                                | Less
      valuation allowance                                                                                                                                                                | (20)  |  | (31) 
|                                |                                                                                                                                                                                               |       |  |      
|                                | Net
      deferred tax assets                                                                                                                                                                 | 2,607 |  | 2,161
|                                |                                                                                                                                                                                               |       | 
|Deferred
      tax liabilities: |                                                                                                                                                                                               |       | 
|                                | Inventories,
      principally due to differences in the LIFOreserve
      arising from a prior business combinationaccounted
      for as a purchase                                         | 2,358 |  | 2,398
|                                | Property
      and equipment, due to differences in depreciation
                          and
      a prior business combination accounted for as
                          a
      purchase | 821   |  | 1,348
|                                | Other
      assets                                                                                                                                                                            | 63    |  | 22   
|                                |                                                                                                                                                                                               |       |  |      
|                                | Total
      gross deferred tax liabilities                                                                                                                                                    | 3,242 |  | 3,768
|                                |                                                                                                                                                                                               |       |  |      
|                                | Net
      deferred tax liability                                                                                                                                                              | $635  |  | 1,607
|                                |                                                                                                                                                                                               |       |  |      



| | At
February 1, 2004, the Company has net operating loss carryforwards for  state income tax
purposes in various states aggregating $400, which are  available to offset future state
taxable income in those states, if any,  expiring at various dates through fiscal 2006.
The valuation allowance  relates to the net operating loss (NOL) carryforwards.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|(7) | Stock Option Plan
|--- | -----------------



| | The
Company has a stock option plan under which options to purchase  500,000 shares of common
stock may be granted to key employees. 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 which were outstanding at February 1, 2004, February 2,  2003, and February 3,
2002 is presented below:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                            |  |                               |                                                    |          | 
|------------------------------------------- |  | ----------------------------- | -------------------------------------------------- | -------- | 
|                                            |  | Number
      of 
      shares | Weighted
      average
      exercise 
      price
|Options
      outstanding, January 28, 2001 |  | 548,287                       |                                                    | $   9.58 | 
|Issued                                      |  |                              |                                                    |         | 
|Canceled                                    |  | (56,737)                      |                                                    | 10.93    | 
|                                            |  |                               |                                                    |          | 
|Options
      outstanding, February 3, 2002 |  | 491,550                       |                                                    | 9.42     | 
|Issued                                      |  | 65,000                        |                                                    | 12.50    | 
|Exercised                                   |  | (117,475)                     |                                                    | 10.63    | 
|Canceled                                    |  | (4,700)                       |                                                    | 11.46    | 
|                                            |  |                               |                                                    |          | 
|Options
      outstanding, February 2, 2003 |  | 434,375                       |                                                    | 9.53     | 
|Issued                                      |  |                              |                                                    |         | 
|Exercised                                   |  | (108,559)                     |                                                    | 8.00     | 
|Canceled                                    |  | (43,845)                      |                                                    | 17.06    | 
|                                            |  |                               |                                                    |          | 
|Options
      outstanding, February 1, 2004 |  | 281,971                       |                                                    | 8.94     | 
|                                            |  |                               |                                                    |          | 



|                     |  | Options
        outstanding        |  | Options
        exercisable            
|-------------------- |  | ---------------------------------- |  | ---------------------------------------
|                     |  |                                    |  |                                        
|Rangeofexerciseprice |  | NumberoutstandingatFebruary 1,2004 |  | Weightedaverageremainingcontractuallife
|7.94 to $12.50       |  | 281,971                            |  | 1.45                                   



|(8) | Stockholders Equity
|--- | --------------------



| | The
Companys board of directors has approved a plan to repurchase up to  1,411,000
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 February 1, 2004, the Company had purchased  1,079,600 shares
of common stock for $8,789.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|(9) | Earnings Per Share
|--- | ------------------



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



|                                                          |  | 2004      | 2003 | 2002     
|--------------------------------------------------------- |  | --------- | ---- | ---------
|Weighted
      average shares outstanding (basic)         |  | 4,243,441 |      | 4,235,911
|Effect
      of dilutive options to purchase common stock |  | 99,940    |      | 119,742  
|                                                          |  |           |      |          
|As
      adjusted for diluted calculation                 |  | 4,343,381 |      | 4,355,653
|                                                          |  |           |      |          



| | Employee
stock options of 0, 101,000, and 104,550 for the years ended  February 1, 2004, February
2, 2003, and February 3, 2002, respectively,  are not included in the computation of
diluted earnings because to do so  would have been antidilutive for the periods
presented. Such options  could potentially dilute basic earnings per share in the future.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|      |                                             |  | Firstquarter | Secondquarter | Thirdquarter | Fourthquarter
|----- | ------------------------------------------- |  | ------------ | ------------- | ------------ | -------------
|2004: |                                             |  |              |               |              |              
|      | Net
        sales                           |  | $100,048     |               | 109,501      |              
|      | Gross
        margin                        |  | 33,348       |               | 35,789       |              
|      | Earnings
        from continuing operations |  | 675          |               | 1,383        |              
|      | Net
        earnings                        |  | 558          |               | 1,599        |              
|      | Net
        earnings per share (a):         |  |              |               |              |              
|      | Basic                                       |  | 0.13         |               | 0.38         |              
|      | Diluted                                     |  | 0.13         |               | 0.37         |              
|      |                                             |  |              |               |              |              
|2003: |                                             |  |              |               |              |              
|      | Net
        sales                           |  | $  94,846    |               | 101,785      |              
|      | Gross
        margin                        |  | 31,620       |               | 33,925       |              
|      | Earnings
        from continuing operations |  | 629          |               | 1,337        |              
|      | Net
        earnings                        |  | 531          |               | 1,269        |              
|      | Net
        earnings per share (a):         |  |              |               |              |              
|      | Basic                                       |  | 0.13         |               | 0.30         |              
|      | Diluted                                     |  | 0.12         |               | 0.29         |              



| | (a) | Earnings
per share amounts are computed independently for each of  the quarters presented.
Therefore, the sum of the quarterly  earnings per share in fiscal 2004 and fiscal 2003
does not equal  the total computed for the year.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | 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(h)).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 



---







|(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 long-term debt, the fair
      value is estimated by discounting the future cash flows at rates currently
      available for similar types of debt instruments. Such fair value approximated
      the carrying value of long-term debt at February 1, 2004 and February 2,
      2003. 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 $679, $683, and $670 in fiscal 2004,  2003, and 2002, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During
fiscal 2004, 2003, and 2002, the Company paid a consulting firm  $270, $178, and $275,
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 which 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|Segment
Information
|-------------------



|                                                     |                              | 2004     | 2003 | 2002    
|---------------------------------------------------- | ---------------------------- | -------- | ---- | --------
|Net
        sales:                                   |                              |          |      |         
|                                                     | ALCO Discount
        Stores | $401,289 |      | 377,893 
|                                                     | All other:                   |          |      |         
|                                                     | External                     | 32,698   |      | 32,753  
|                                                     | Intercompany                 | 234,806  |      | 227,053 
|                                                     |                              |          |      |         
|                                                     |                              | $668,793 |      | 637,699 
|                                                     |                              |          |      |         
|Depreciation
        and amortization:               |                              |          |      |         
|                                                     | ALCO Discount
        Stores | $4,395   |      | 4,160   
|                                                     | All other                    | 2,889    |      | 2,665   
|                                                     |                              |          |      |         
|                                                     |                              | $7,284   |      | 6,825   
|                                                     |                              |          |      |         
|Income
        (expense) from continuing operations: |                              |          |      |         
|                                                     | ALCO Discount
        Stores | $35,444  |      | 33,769  
|                                                     | All other                    | (25,065) |      | (23,566)
|                                                     |                              |          |      |         
|                                                     |                              | $10,379  |      | 10,203  
|                                                     |                              |          |      |         
|Capital
        expenditures:                        |                              |          |      |         
|                                                     | ALCO Discount
        Stores | $3,376   |      | 6,028   
|                                                     | All other                    | 899      |      | 1,594   
|                                                     |                              |          |      |         
|                                                     |                              | $4,275   |      | 7,622   
|                                                     |                              |          |      |         
|Identifiable
        assets:                         |                              |          |      |         
|                                                     | ALCO Discount
        Stores | $128,637 |      | 127,847 
|                                                     | All other                    | 38,380   |      | 42,053  
|                                                     |                              |          |      |         
|                                                     |                              | $167,017 |      | 169,900 
|                                                     |                              |          |      |         



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



| | 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:
| | ---------------------------------------------------------------------------------------------------------------------------------



|                                                                                                  | 2004        | 2003 | 2002     
|------------------------------------------------------------------------------------------------- | ----------- | ---- | ---------
|Net sales
        per above segment information                                                   | $  668,793  |      | 637,699  
|Intercompany
        elimination                                                                  | (234,806)   |      | (227,053)
|Sales
        included in discontinued operations                                                 | (717)       |      | (7,175)  
|                                                                                                  |             |      |          
|Net sales
        per consolidated statements of operations                                       | $  433,270  |      | 403,471  
|                                                                                                  |             |      |          
|Income
        from continuing operations per above 
              segment information            | $    10,379 |      | 10,203   
|Property
        costs                                                                            |            |      | 85       
|Leases                                                                                            | 179         |      | 133      
|                                                                                                  |             |      |          
|Income
        from continuing operations per
              consolidated statements of operations | $    10,558 |      | 10,421   
|                                                                                                  |             |      |          



| |  | 
| |  | 



---





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



|None
|----



|ITEM 9A.   CONTROLS AND PROCEDURES
|----------------------------------



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



|There were no
changes in our internal control over financial reporting  that occurred during the year
ended February 1, 2004 that materially affected,  or are reasonably likely to materially
affect, our internal control over  financial reporting.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 27, 2004, 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 27, 2004, 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 27, 2004, 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.
|-----------------------------------------------------------------------------------------------------------------



|The Registrants
Proxy Statement to be used in connection with the  Annual Meeting of Stockholders to be
held on May 27, 2004, 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 27, 2004, 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 27, 2004, 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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|PART IV
|-------



|ITEM 15.    EXHIBITS, FINANCIAL STATEMENT
      SCHEDULES, AND REPORTS ON FORM 8-K.
|-----------------------------------------------------------------------------------



|(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 inancial 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 herby incorporated herein by reference).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------



|10.11 | Employment
Agreement dated December 28, 2000 between the Company and  Glen L. Shank (filed as
Exhibit 10.11 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 | Employment
Agreement dated December 28, 2000 between the Company and  James E. Schoenbeck (filed as
Exhibit 10.12 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 | Employment
Agreement dated December 28, 2000 between the Company and  James R. Fennema (filed as
Exhibit 10.13 to the Companys Annual Report  on Form 10-K for the fiscal year ended
February 2, 2003 and hereby  incorporated by reference).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.14 | 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 2, 2003 and  hereby incorporated by reference).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | 
| |  | 



---





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



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



|31.1 | Certification
of Chief Executive Officer of Duckwall-ALCO Stores, Inc.  dated April 30, 2004, pursuant
to Rule 13a-4(a) under the Securities  Exchange Act of 1934, as adopted pursuant to
Section 302 of the  Sarbanes-Oxley Act of 2003.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|31.2 | Certification
of Chief Financial Officer of Duckwall-ALCO Stores, Inc.  dated April 30, 2004, ,
pursuant to Rule 13a-4(a) under the Securities  Exchange Act of 1934, as adopted pursuant
to Section 302 of the  Sarbanes-Oxley Act of 2003.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|32.1 | Certification
of Chief Executive Officer of Duckwall-ALCO Stores, Inc,  dated April 30, 2004, pursuant
to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, which is  furnished with this Annual Report on Form 10-K for the year ended
February 1, 2004 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 30, 2004, pursuant
to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, which is  furnished with this Annual Report on Form 10-K for the year ended
February 1, 2004 and is not treated as filed in reliance upon  §601(b)(32) of
Regulations S-K.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

| | (b) | Reports
on Form 8-K.
| | --- | --------------------



| |  | (1) | The
Company furnished a report on Form 8-K on November 25,  2003, providing under Item 12.
Results of Operations and Financial Condition a  press release that was to be
issued on November 24, 2003 disclosing information  regarding the Companys results
of operations for it s fiscal quarter ended  November 2, 2003.
| |  | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (2) | The
Company furnished a report on Form 8-K on December 17,  2003, providing under Item 5.
Other Events a press release issued by the  Company regarding the appointment
of Warren H. Gfeller to the Companys Board of  Directors.
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Exhibits
| | --- | --------

| |  | The
      exhibits filed with this report are identified above under Item 15(a)(3)
| |  | ----------------------------------------------------------------------------------



| | (d) | Financial
Statement Schedules.
| | --- | ------------------------------

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



| |  | 
| |  | 



---





|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/ Glen L. Shank         
| | Glen
        L. Shank        
| | Chairman
        of the Board
| | and
        President        



|Dated: April 30, 2004
|---------------------



|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/ Glen L. Shank                                  | April 30, 2004
|Glen
      L. Shank                                |               
|Chairman
      of the Board                        |               
|and
      President                                |               
|(Principal
      Executive Officer)                |               
|                                                   |               
|/s/ Richard A. Mansfield                           | April 30, 2004
|Richard
      A. Mansfield                         |               
|Vice
      President - Finance and Treasurer       |               
|(Principal
      Financial and Accounting Officer) |               
|                                                   |               
|/s/ Dennis A. Mullin                               | April 30, 2004
|Dennis
      A. Mullin                             |               
|Director                                           |               
|                                                   |               
|/s/ Lolan C. Mackey                                | April 30, 2004
|Lolan
      C. Mackey                              |               
|Director                                           |               
|                                                   |               
|/s/ Jeffrey Macke                                  | April 30, 2004
|Jeffrey
      Macke                                |               
|Director                                           |               
|                                                   |               
|/s/ Warren H. Gfeller                              | April 30, 2004
|Warren
      H. Gfeller                            |               
|Director                                           |               



| |  | 
| |  | 



---





|DIRECTORS
|---------



|Glen L. ShankDennis A. Mullin
Lolan C. MackeyJeffrey MackeWarren H. Gfeller
|---------------------------------------------------------------------------





|OFFICERS                                                 
|---------------------------------------------------------
|                                                         
|Chairman of the Board and President                      
|Senior Vice President- Operations
      and Advertising  
|Senior Vice President- Merchandising                     
|Vice President- Finance and Treasurer                    
|Vice President- Administration and
      Distribution    
|Vice President- Secretary                                
|Vice President- Personnel                                
|Vice President- Real Estate                              
|Vice President- Divisional Merchandise
      Manager     
|Vice President- ALCO Division                            
|Vice President- Divisional Merchandise
      Manager     
|Vice President- Divisional Merchandise
      Manager     
|Vice President- Duckwall Division                        
|Vice President- ALCO Division                            
|Vice President- Controller, and Assistant
      Secretary
|Vice President-Training and Recruiting                   
|                                                         
|                                                         
|TRANSFER AGENT                                           
|                                                         
|UMB Bank, N.A.                                           
|928 Grand Avenue                                         
|P.O. Box 410064                                          
|Kansas City, MO 64141-0064                               
|(816) 860-7761                                           



|STOCK LISTING
|-------------



|NASDAQ National Market tier of the NASDAQ Stock
Market under the symbol DUCK
|------------------------------------------------------------------------------



|FORM 10-K REPORT
|----------------



|A copy of the Companys Annual Report on
Form 10-K, as filed with the Securities  and Exchange Commission for the year end
February 1, 2004, excluding exhibits,  which includes audited financial statements, is
included in this Annual Report.  Additional copies are available upon request. Requests
should be directed to  Charles E. Bogan, Duckwall-ALCO Stores, Inc., 401 Cottage,
Abilene, KS 67410. A  list of the excluded exhibits is included under Item 15 of Part IV
of the Annual  Report on Form 10-K and the Company will provide copies of any such
exhibit upon  the Companys receipt of a request and a payment of a fee of $.20 per
page,  which fee does not exceed the Companys reasonable expenses in furnishing
such  exhibit.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ANNUAL MEETING
|--------------



|The Annual Meeting of the Stockholders of
Duckwall-ALCO Stores, Inc. will be  held at 10:00 A.M. CDT, Thursday, May 27, 2004 at the
principal executive  offices of the Company, located at 401 Cottage, Abilene, KS 67410.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---