SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549



FORM
10-Q



|ý                                              | QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 
|---------------------------------------------- | ------------------------------------------------------------------------------------------
|                                              
|FOR
  THE QUARTERLY PERIOD ENDED APRIL 2, 2006
|                                              
|OR                                            
|                                              
|o                                              | 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:  0-24543            



COST-U-LESS,
      INC.(Exact name of registrant as specified in its charter)



|Washington                                                         |  | 91-1615590                            
|------------------------------------------------------------------ |  | --------------------------------------
|(State or other
  jurisdiction of
  incorporation or organization) |  | (I.R.S. Employer
  Identification No.)
|                                                                   |  |                                       
|**3633 136th
Place SE, Suite 110Bellevue,
Washington 98006******  
|(Address
        of principal executive offices) (Zip Code)       
|                                                                   |  |                                       
|(425)
           945-0213                                         
|(Registrants
         telephone number, including area code)     



Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities and 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.



|ý  YES |  | o  NO
|------ |  | -----



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

|Large accelerated filer   o | Accelerated filer   o | Non-accelerated filer   ý
|--------------------------- | --------------------- | -------------------------

Indicate by check
mark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange act).



|o  YES |  | ý  NO
|------ |  | -----



The
  registrant had 4,021,998 common shares, par value $0.001, outstanding at May
    10,
2006.

---

COST-U-LESS, INC.

                                                          INDEX TO FORM 10-Q

|**PART I. FINANCIAL INFORMATION**
|---------------------------------
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|**PART II. OTHER INFORMATION**   
|                                 
|                                 
|                                 
|**SIGNATURES**                   

2

---

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

COST-U-LESS, INC.

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

                                   (Unaudited)



|                                                    |  |                          
|--------------------------------------------------- |  | -------------------------
|                                                    |  | **13 Weeks Ended**       
|                                                    |  | **April
             2,**
|                                                    |  | **2006**                 
|Net sales                                           |  | $      54,692            
|Merchandise costs                                   |  | 44,493                   
|Gross profit                                        |  | 10,199                   
|Operating expenses:                                 | 
|Store                                               |  | 7,216                    
|General
     and administrative                     |  | 1,663                    
|Store
     openings                                 |  | 14                       
|Total operating expenses                            |  | 8,893                    
|                                                   
|Operating income                                    |  | 1,306                    
|Other income (expense):                             | 
|Interest
     expense, net                          |  | (106                     
|Other                                               |  | (12                      
|Income before income taxes                          |  | 1,188                    
|Income tax provision                                |  | 430                      
|Net income                                          |  | $           758          
|Earnings per common share:                          | 
|Basic                                               |  | $          0.19          
|Diluted                                             |  | $          0.18          
|                                                   
|Weighted average common shares outstanding, basic   |  | 3,997,839                
|Weighted average common shares outstanding, diluted |  | 4,221,979                

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

3

---

COST-U-LESS, INC.

                                                 CONDENSED CONSOLIDATED BALANCE SHEETS
                                                            (in thousands)

                                                              (Unaudited)

|                                               |  | **April
             2,** |  | **January 1,** | 
|---------------------------------------------- |  | ------------------------- |  | -------------- | 
|                                               |  | **2006**                  |  | **2006**       | 
|**ASSETS**                                     |  |                           |  |                | 
|Current assets:                                | 
|Cash
     and cash equivalents                 |  | $  4,573                  |  | $  5,304       | 
|Accounts
     receivable, net                  |  | 924                       |  | 843            | 
|Inventories,
     net                          |  | 24,902                    |  | 23,027         | 
|Other
     current assets                      |  | 1,584                     |  | 1,136          | 
|Total
     current assets                      |  | 31,983                    |  | 30,310         | 
|Buildings and equipment, net                   |  | 18,907                    |  | 18,550         | 
|Deposits and other assets                      |  | 767                       |  | 772            | 
|Total
     assets                              |  | $51,657                   |  | $49,632        | 
|                                              
|**LIABILITIES
     AND SHAREHOLDERS EQUITY**   |  |                           |  |                | 
|Current liabilities:                           | 
|Accounts
     payable                          |  | $16,161                   |  | $15,062        | 
|Accrued
     expenses and other liabilities    |  | 5,525                     |  | 5,422          | 
|Line
     of credit                            |  | 28                        |  | 80             | 
|Current
     portion of long-term debt         |  | 267                       |  | 267            | 
|Current
     portion of capital lease          |  | 230                       |  | 226            | 
|Total
     current liabilities                 |  | 22,211                    |  | 21,057         | 
|Other long-term liabilities                    |  | 1,293                     |  | 1,192          | 
|Long-term debt, less current portion           |  | 1,944                     |  | 2,011          | 
|Capital lease, less current portion            |  | 1,270                     |  | 1,329          | 
|Total
     liabilities                         |  | 26,718                    |  | 25,589         | 
|Commitments and contingencies                  |  |                          |  |               | 
|                                              
|Shareholders equity                            |  | 24,939                    |  | 24,043         | 
|Total
     liabilities and shareholders equity |  | $51,657                   |  | $49,632        | 

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

4

---

COST-U-LESS, INC.


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

                                                              (Unaudited)

|                                                                    |  | **Common
        Stock
        Shares** | **** | **Common
        Stock--
        Amount** | **** | **Retained
        Earnings** | **** | **Accumulated
        Other
        Comprehensive
        Loss** | **** | **Total** |  
|------------------------------------------------------------------- |  | ---------------------------------------- | ---- | ----------------------------------------- | ---- | ----------------------------- | ---- | ---------------------------------------------------------------- | ---- | --------- | -
|Balance
      at December 26, 2004                                  |  | 3,751,306                                |      | $12,795                                   |      | $  7,911                      |      | $(773                                                            | )    | $ 19,933  |  
|Net
      income                                                    |  |                                         |      |                                          |      | 734                           |      |                                                                 |      | 734       |  
|Foreign
      currency translation adjustments                      |  |                                         |      |                                          |      |                              |      | (2                                                               | )    | (2        | )
|Comprehensive
      income                                          |  |                                          |      |                                           |      |                               |      |                                                                  |      | 732       |  
|Exercise
      of common stock options including income tax benefit |  | 158,367                                  |      | 745                                       |      |                              |      |                                                                 |      | 745       |  
|Balance
      at March 27, 2005                                     |  | 3,909,673                                |      | $13,540                                   |      | $  8,645                      |      | $(775                                                            | )    | $ 21,410  |  
|                                                                   
|Balance
      at January 1, 2006                                    |  | 3,990,171                                |      | $13,931                                   |      | $10,926                       |      | $(814                                                            | )    | $ 24,043  |  
|Net
      income                                                    |  |                                         |      |                                          |      | 758                           |      |                                                                 |      | 758       |  
|Foreign
      currency translation adjustments                      |  |                                         |      |                                          |      |                              |      | (24                                                              | )    | (24       | )
|Comprehensive
      income                                          |  |                                          |      |                                           |      |                               |      |                                                                  |      | 734       |  
|Exercise
      of common stock options including income tax benefit |  | 29,852                                   |      | 162                                       |      |                              |      |                                                                 |      | 162       |  
|Balance
      at April 2, 2006                                      |  | 4,020,023                                |      | $14,093                                   |      | $11,684                       |      | $(838                                                            | )    | $ 24,939  |  

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

5

---

COST-U-LESS, INC.

                                                                                                                                                           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                            (in thousands)

                                                              (Unaudited)

|                                                                                                 |  | **13
            Weeks Ended** |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------ | -
|                                                                                                 |  | **April
            2,**       |  
|                                                                                                 |  | **2006**                       |  
|OPERATING
        ACTIVITIES:                                                                    |  |                                |  
|Net
        income                                                                               |  | $    758                       |  
|Adjustments
        to reconcile net income to net cash provided/(used) by operating activities: |  |                                |  
|Depreciation
        and amortization                                                            |  | 562                            |  
|Deferred
        tax provision                                                                   |  | 101                            |  
|Loss
        on buildings and equipment                                                          |  | 12                             |  
|Tax
        benefit from exercise of stock options                                               |  |                               |  
|Cash
        provided by/(used in) changes in operating assets and liabilities:                  | 
|Accounts
        receivable                                                                      |  | 247                            |  
|Inventories                                                                                      |  | (1,875                         | )
|Other
        current assets                                                                     |  | (456                           | )
|Deposits
        and other assets                                                                |  | 5                              |  
|Accounts
        payable                                                                         |  | 963                            |  
|Accrued
        expenses and other liabilities                                                   |  | (482                           | )
|Other
        long-term liabilities                                                              |  | 8                              |  
|Net
        cash provided/(used) by operating activities                                         |  | (157                           | )
|                                                                                                
|INVESTING
        ACTIVITY:                                                                      |  |                                |  
|Cash
        used to purchase property and equipment                                             |  | (949                           | )
|Proceeds
        from sale of buildings and equipment                                            |  | 8                              |  
|Net
        cash used by investing activities                                                    |  | (941                           | )
|                                                                                                
|FINANCING
        ACTIVITIES:                                                                    |  |                                |  
|Proceeds
        from exercise of common stock options                                           |  | 118                            |  
|Tax
        benefit from exercise of stock options                                               |  | 44                             |  
|Proceeds
        from short term note payable                                                    |  | 257                            |  
|Payments
        on line of credit, net                                                          |  | (52                            | )
|Increase/(decrease)
        in bank checks outstanding                                           |  | 136                            |  
|Principal
        payments on capital lease obligations                                          |  | (55                            | )
|Principal
        payments on long-term debt                                                     |  | (67                            | )
|Net
        cash provided/(used) by financing activities                                         |  | 381                            |  
|Foreign
        currency translation adjustments                                                 |  | (14                            | )
|                                                                                                
|Net
        decrease in cash and cash equivalents                                                |  | (731                           | )
|Cash
        and cash equivalents:                                                               | 
|Beginning
        of period                                                                      |  | 5,304                          |  
|End
        of period                                                                            |  | $ 4,573                        |  
|                                                                                                
|SUPPLEMENTAL
        DISCLOSURE OF CASH FLOW INFORMATION:                                        |  |                                |  
|Cash
        paid during the period for:                                                         | 
|Interest                                                                                         |  | $    115                       |  
|Income
        taxes                                                                             |  | $                             |  
|Cash
        received during the period for:                                                     |  |                                |  
|Income
        taxes                                                                             |  | $      45                      |  

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

6

---

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

                                                              (Unaudited)

1.   Nature of Business and Summary of Significant Accounting Policies

Nature of Business

Cost-U-Less, Inc. (the Company) operates mid-sized warehouse club-style
stores in various United States Territories (U.S. Territories), foreign island
countries in the Pacific and the Caribbean, the Hawaiian Islands and Sonora,
California. As of April 2, 2006, the Company operated eleven retail stores as
follows: two stores in each of Hawaii and Guam, and one store in each of St.
Thomas, St. Croix, American Samoa, Fiji, Curacao, St. Maarten and Sonora,
California. On May 26, 2005, the Company moved its St. Croix store into a newly
constructed building on a parcel of land located closer to the main trade area
in the center of the island than its former store. The size of the new store is
38,000 square feet, a 45% increase in square footage over the previous store.

On July 8, 2005, the Company announced that it had been granted approval
from the Cayman Islands Trade and Business Licensing Board to operate a retail
and wholesale business through a controlled subsidiary organized in the Cayman
Islands. And on April 25, 2006, the Company announced that it had entered into a
long-term lease with the developer of Governors Square in Grand Cayman to lease
land on which to construct and operate a store under the Cost-U-Less name. The
signing of the lease is one in a number of steps that must be undertaken before
a store operating under the Cost-U-Less name can be opened in the Cayman
Islands. Although there are still a number of steps that have to be taken before
the store can be opened, the Company expects to open the store during the first
half of 2007.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting and pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). In the
opinion of management, the financial information includes all adjustments that
the Company considers necessary for a fair presentation of the financial
position at such dates and the operations and cash flows for the periods then
ended. The condensed consolidated balance sheet at January 1, 2006, has been
derived from the audited financial statements at that date. Certain information
and footnote disclosures normally included in the financial statements prepared
in accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to SEC rules and regulations on
quarterly reporting. Operating results for the 13 weeks ended April 2, 2006, are
not necessarily indicative of results that may be expected for the entire year.
All quarterly periods reported consist of 13 weeks. For further information,
refer to the financial statements and footnotes included in the Companys annual
report on Form 10-K filed with the SEC on March 29, 2006.

Fiscal Year

The Company reports on a 52/53-week fiscal year, consisting of four
thirteen-week periods and ending on the Sunday nearest to the end of December.
Fiscal 2006, ending on December 31, 2006, is a 52-week year. Fiscal 2005, which
ended on January 1, 2006, was a 53-week fiscal year.

Principles of Consolidation

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

7

---

COST-U-LESS, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

                                   (Unaudited)

Foreign Currency Translations and Comprehensive Income

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

Use of Estimates

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

Stock-Based Compensation

The Company maintains a stock incentive compensation plan that provides
for the granting of various stock awards, including stock options and restricted
stock, with a maximum of 1,000,000 shares of common stock available for
issuance. Options issued under the plan vest at various terms ranging from
immediately to five years and generally expire ten years from the date of grant.
The options are generally granted at prices equal to the fair value on the date
of grant. There were 4,357 shares available for future grant under the plan at
April 2, 2006.

Prior to the adoption of Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payments, which revises SFAS 123, Accounting for
Stock-Based Compensation in the first quarter of fiscal 2006, the Company
accounted for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for stock
options. Because the Company generally grants stock options to employees at
exercise prices equal to fair market value on the date of grant, no significant
compensation cost has been recognized for option grants in periods prior to
fiscal 2006. As permitted by SFAS 123, stock-based compensation was included as
a pro forma disclosure in the notes to the consolidated financial statements.

Effective with the first fiscal quarter of fiscal 2006, the Company
adopted the fair value recognition provisions of SFAS 123R, using the
modified-prospective transition method. Under this transition method,
stock-based compensation expense will be recognized in the consolidated
financial statements for stock options granted subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions
of SFAS 123R.

The expense recorded for the portion vesting in the current period for the
2,090 options granted prior to, but not vested as of January 1, 2006, is less
than $1,000. The remaining unrecognized compensation cost related to these
unvested options, as of January 1, 2006, is also less than $1,000, as these
options will be fully vested as of August 2006. Results for prior periods have
not been restated, as provided for under the modified-prospective method.

8

---

COST-U-LESS, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

                                   (Unaudited)

Prior to the adoption of SFAS 123R, the Company presented all tax benefits
resulting from the exercise of stock options as operating cash inflows in the
consolidated statements of cash flows, in accordance with the provisions of the
Emerging Issues Task Force (EITF) Issue No 00-15, Classification in the
Statement of Cash Flows of the Income Tax Benefit Received by a Company upon
Exercise of a Nonqualified Employee Stock Option. SFAS 123R requires the
benefits of tax deductions in excess of the compensation cost recognized for
those options to be classified as financing cash inflows rather than operating
cash inflows, on a prospective basis. This amount is shown as Tax benefit from
exercise of stock options on the consolidated statement of cash flows.

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

|                                                                                                                                                           | **13
            Weeks Ended**
|---------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------
|                                                                                                                                                           | **March
            27, 2005**
|Net
        income as reported (in thousands)                                                                                                              |                               
|Less:
        Total stock-based employee compensation expense determined under fair
        value method for all awards, net
        of tax (in thousands) |                               
|Net
        income pro forma (in thousands)                                                                                                                |                               
|Earnings
        per common share, basic as reported                                                                                                       |                               
|Earnings
        per common share, basic pro forma                                                                                                         |                               
|Earnings
        per common share, diluted as reported                                                                                                     |                               
|Earnings
        per common share, diluted pro forma                                                                                                       |                               

Disclosures for the 13-week period ended April 2, 2006, are not presented
because the amounts are recognized in the consolidated financial statements.

The following table summarizes the stock option transactions during the
13-weeks ended April 2, 2006:

|                                     | **Options** |   | **Weighted 
        Average 
        Exercise 
        Price** |  | **Weighted 
        Average 
        Contractual 
        Life** |  | **Aggregate 
        Intrinsic 
        Value (a)**
|------------------------------------ | ----------- | - | -------------------------------------------------------------- |  | ---------------------------------------------------------------- |  | ---------------------------------------------------
|Outstanding
      at January 1, 2006 | 613,324     |   | $ 3.39                                                         |  |                                                                 |  |                                                   
|Granted at fair value                |            |   |                                                               |  |                                                                 |  |                                                   
|Forfeited                            | (1,475      | ) | 4.75                                                           |  |                                                                 |  |                                                   
|Exercised                            | (29,852     | ) | 3.95                                                           |  |                                                                 |  |                                                   
|Outstanding at April
      2, 2006   | 581,997     |   | 3.36                                                           |  | 6.45                                                             |  | $2,613,999                                         
|Exercisable at April
      2, 2006   | 579,907     |   | 3.37                                                           |  | 6.45                                                             |  | $2,600,828                                         

|(a) |  | The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option | 
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- | 

---

9

COST-U-LESS, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

                                   (Unaudited)

Cash proceeds, tax benefits and intrinsic value related to total stock
options exercised during the first quarter of fiscal 2006 and fiscal 2005 were
as follows (in thousands):

|                                               | **13 Weeks Ended**    
|---------------------------------------------- | ----------------------
|                                               | **April
     2, 2006**
|Proceeds from stock options exercised          | $118                  
|Tax benefit related to stock options exercised | 44                    
|Intrinsic value of stock options exercised     | 129                   

Reclassifications

Certain reclassifications of prior period balances have been made for
consistent presentation with the current period.

New Accounting Pronouncements

In October 2005, the FASB issued Staff Position No. FAS 13-1, Accounting
for Rental Costs Incurred During a Construction Period (FSP 13-1). FSP 13-1
requires that rental costs associated with ground or building operating leases
that are incurred during a construction period be recognized as rental expense.
FSP 13-1 is effective for the first reporting period beginning after December
15, 2005. The adoption of FSP 13-1 did not impact the Companys financial
statements for the first quarter of fiscal 2006, as the Company did not have a
lease for a site under construction. However, on April 25, 2006, the Company
announced that it had entered into a long-term lease with the developer of
Governors Square in Grand Cayman to lease land on which to construct and
operate a store under the Cost-U-Less name. Rental payments under this lease
commenced on April 1, 2006. In accordance with FSP 13-1 and other applicable
lease accounting guidance, the Company will expense rental costs over the lease
term, which includes the construction period.

2.   Earnings Per Share

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

The following table sets forth the computation of basic and diluted
earnings per common share:

|                                                          | **13
          Weeks Ended**
|--------------------------------------------------------- | ----------------------------
|                                                          | **April
          2, 2006** 
|Numerator:                                                |                             
|Net
    income (in thousands)                             | $          758              
|Denominator:                                              |                             
|Denominator
      for basic earnings per shareweighted   |                             
|average
      shares                                      | 3,997,839                   
|Effect of potentially dilutive shares:                    |                             
|Stock
    options and warrants                            | 224,140                     
|Denominator
      for diluted earnings per shareadjusted |                             
|weighted
      average shares and assumed conversion of   |                             
|stock
      options and warrants                          | 4,221,979                   
|Basic earnings per common share                           | $         0.19              
|Diluted earnings per common share                         | $         0.18              

10

---

COST-U-LESS, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

                                   (Unaudited)

The diluted share calculation for the 13 weeks ended April 2, 2006,
excludes 4,000 stock options outstanding. These options are excluded due to
their anti-dilutive effect.

3.   Line of Credit

The Company has maintained a line of credit with Wells Fargo Business
Credit since April 9, 2003. On May 26, 2005, the Company entered into the Fourth
Amendment to the Credit and Security Agreement (the Fourth Amendment) as it
relates to the line of credit. The Fourth Amendment extended the maturity date
of the line of credit from April 9, 2006, to May 18, 2007. Additionally, the
Fourth Amendment (1) reduced the interest rate to an annual interest rate equal
to the prime rate as defined by Wells Fargo Bank National Association, (2)
reduced the minimum interest charge to not less than $25,000 per calendar year,
(3) increased the unused line fee to a rate of three-eighths of one percent
(0.375%) per annum on the average daily unused line and (4) eliminated the one
day interest charge on all payments received on the line of credit. The line of
credit was further amended on April 20, 2006, to update specific financial
covenants contained in the credit agreement, including minimum book net worth,
minimum net income and capital expenditures.

The line of credit consists of a $6.0 million committed, secured
revolving credit line with a sublimit for letters of credit and bankers
acceptances in an amount up to $0.7 million. At April 2, 2006, there was $28,000
outstanding on the line of credit and $27,000 in letters of credit outstanding.
At April 2, 2006, the rate charged by Wells Fargo was 7.75%.

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

The line of credit contains various covenants, all of which the Company
believes it was in compliance with as of April 2, 2006.

4.   Commitments and Contingencies

Legal Proceedings

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

11

---

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

Certain Factors That May Affect Future Results of Operations

This discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements and the related notes
thereto appearing in Item 1 of this report. In addition to historical
information, this quarterly report on Form 10-Q contains, and may incorporate by
reference, statements which may constitute forward-looking statements which
involve known and unknown risks, uncertainties and other factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements. Forward-looking statements may be identified by
the use of forward-looking terminology such as may, will, expect,
estimate, anticipate, continue, or similar terms, variations of such terms
or the negative of those terms, but the absence of such terms does not mean that
a statement is not forward-looking. Forward-looking statements reflect the
expectations of our management at the time that they are made and do not
represent an opinion about what may happen in the future. More information about
factors that could affect our financial results is included in Item 1A. of Part
II of this report and in the Risk Factors that May Affect Future Results and
Managements Discussion and Analysis of Financial Condition and Results of
Operations sections of our annual report on Form 10-K for the fiscal year ended
January 1, 2006, which was filed on March 29, 2006, with the Securities and
Exchange Commission.

The following managements discussion and analysis of financial condition
and results of operations should be read in conjunction with managements
discussion and analysis of financial condition and results of operations
included in our annual report on Form 10-K for the fiscal year ended January 1,
2006.

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

Overview

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

Our stores are patterned after the warehouse club concept, except our
stores (i) are smaller (averaging approximately 32,000 square feet vs. large
format warehouse clubs of approximately 115,000 square feet), (ii) generally
target niche markets, mainly U.S. Territories, U.S. island states and foreign
island countries, (iii) carry a wide assortment of local and ethnic food items,
and (iv) do not charge a membership fee. Although we do not have large seasonal
fluctuations in sales, the fourth quarter is typically the highest sales quarter
due to additional holiday sales.

During fiscal 2005, we built a new St. Croix store on a parcel of land
located closer to the main trade area in the center of the island than our
existing store. This new building expanded the size of our St. Croix store by
about 45% to approximately 38,000 square feet. The new store opened on May 26,
2005.

On April 25, 2006, we announced that we had entered into a long-term lease
with the developer of Governors Square in Grand Cayman to lease land on which
to construct and operate a store under the Cost-U-Less name through a controlled
subsidiary organized in the Cayman Islands. The signing of the lease is one in a
number of steps that we must undertake before we can open a store operating
under the Cost-U-Less name in the Cayman Islands. Although there are still a
number of steps that we have to take before the store can be opened, we expect
to open the store during the first half of 2007.

Additionally, we just completed a remodel of our Kauai store to add retail
enhancements such as fresh produce by the pound. We are also in the process of
renovating and expanding the size of our store in St. Thomas by approximately
6,400 square feet (an increase of approximately 18%). In addition to these
projects, we continue to explore expansion opportunities in selected markets and
additional relocation opportunities for stores in existing markets. We currently
have no plans to open stores in new markets during fiscal 2006.

12

---

Results of Operations

During the first quarter of fiscal 2006, we continued to experience
improvements in comparable-store sales. Additionally, the strong margins we
experienced in the second half of fiscal 2005 continued during the first quarter
of fiscal 2006 and our corporate expenses, both in dollars and as a percentage
of sales, were lower than the same period in 2005. Although, increasing energy
prices have impacted our cost of doing business in the form of higher freight
charges and store utility costs, we were able to generate increased operating
margins due to improved merchandising and reduced expenses in other areas.
However, if higher energy costs persist, we may not be able to continue to
offset these increases in the future.

Comparison of the 13 Weeks Ended April 2, 2006 to the 13 Weeks Ended March 27,
2005:

Net Sales: Net sales of $54.7 million for the first quarter of fiscal 2006
increased 2.7% compared to net sales of $53.2 million for the first quarter of
fiscal 2005. The increase in net sales was due to comparable-store sales
increases offset by a decline in business-to-business sales as compared to the
same period in the prior year. We expect the level of business-to-business
activity for fiscal 2006 to be similar or slightly less than the levels in 2005.

Comparable-store sales (stores open for a full 13 months) increased 3.7%
for the first quarter of fiscal 2006 compared to the first quarter of fiscal
2005. Nine of our eleven stores experienced increased sales in the first quarter
of fiscal 2006 as compared to the same period in the prior year primarily due to
general inflationary trends, improvements in our assortment of goods and
operating improvements including better in-stock inventory levels. Additionally,
our comparable-store sales benefited from the fact that the Easter holiday,
during which all of our stores are closed for a least one day, falls in the
second quarter of fiscal 2006 as compared to the first quarter of fiscal 2005.
This shift in the holiday weekend positively impacted sales for the first
quarter of fiscal 2006 by approximately 1%.

Gross Profit: Gross profit of $10.2 million, or 18.6% of sales, for the
first quarter of fiscal 2006 increased as compared to gross profit of $9.6
million, or 18.0% of sales, for the first quarter of fiscal 2005, primarily due
to improvements in merchandising, including enhanced sourcing and pricing
strategies.

Store expenses: Store expenses of $7.2 million, or 13.2% of sales, for the
first quarter of fiscal 2006 increased $0.5 million compared to expenses of $6.7
million, or 12.6% of sales, for the first quarter of fiscal 2005. Approximately
38% of the dollar increase in store expenses was attributable to higher energy
(utility) expenses, which were 21% higher than the same period in the prior
year. Another 28% of the dollar increase was due to increased depreciation
expense, primarily due to our new store in St. Croix. An additional 23% of the
dollar increase was attributable to payroll and related costs such as health
care, which were 4% higher than the same period in the prior year. Payroll and
related costs, although higher due to volume, remained comparable as a percent
of store sales at 5.2% of store sales for the first quarters of both fiscal 2006
and fiscal 2005.

General and administrative expenses: General and administrative expenses
remained flat at $1.7 million for the first quarters of both fiscal 2006 and
fiscal 2005. As a percent of sales, general and administrative expenses for the
first quarter of fiscal 2006 decreased to 3.0% as compared to 3.2% for the first
quarter of fiscal 2005, primarily due to the leveraging of corporate expenses
over increased store sales.

Store opening expenses: Store opening expenses were $14,000 for the first
quarter of fiscal 2006 compared to $31,000 for the first quarter of fiscal 2005.
Store opening expenses in both periods primarily related to costs associated
with the evaluation of potential new store locations. We expect store opening
expenses in fiscal 2006 to be higher than those incurred in fiscal 2005 as we
begin construction on our new store in the Cayman Islands.

Interest expense, net: Interest expense, net increased to $106,000 for the
first quarter of fiscal 2006 as compared to $51,000 for the first quarter of
fiscal 2005, as we capitalized approximately $64,000 of interest related to the
construction of our new store in St. Croix during the first quarter of fiscal
2005.

Other income/(expense): We incurred $12,000 of expense for the first
quarter of fiscal 2006 as compared to $116,000 of income for the first quarter
of fiscal 2005 primarily due to the receipt of a $0.1 million non-recurring
insurance reimbursement in 2005. All other amounts included in other
income/(expense) are attributable to gains on foreign currency transactions and
translation of intercompany balances for transactions that exceed the permanent
investments in those countries.

Income tax provision: We recorded a tax provision of $430,000, or 36.2% of
pre-tax income, for the first quarter of fiscal 2006 as compared to $450,000, or
38.0% of pre-tax income, for the first quarter of fiscal 2005. The tax provision
primarily represents taxes associated with income generated in the U.S. and U.S.
Territories. The decrease in tax rate in fiscal 2006 was

13

---

primarily due to the
implementation of certain tax planning strategies in the latter half of fiscal
2005, which enabled us to offset a portion of our foreign subsidiary losses
against foreign subsidiary income, and thereby reduce our effective tax rate as
compared to prior years.

Net income: Net income was $758,000, or $0.18 per fully diluted share, for
the first quarter of fiscal 2006 compared to net income for the first quarter of
fiscal 2005 of $734,000, or $0.18 per fully diluted share. Weighted average
diluted common shares outstanding were 4,221,979 for first quarter of 2006 as
compared to 4,085,090 in the same period in the prior year.

Liquidity and Capital Resources

We currently finance our operations with proceeds from various credit
facilities and internally generated funds. Although we utilized existing working
capital to finance the $5.6 million used to purchase the land and construct our
new St. Croix store during fiscal 2005, we hope to re-finance our St. Croix
store, and any future relocations and new stores, either through an operating
lease, a sale-leaseback arrangement or long-term funding from a financial
institution. We intend to continue leasing as many of our store locations as
feasible. In those instances where a lease is not available on acceptable terms,
we intend to finance our stores utilizing long-term funding from a financial
institution (as we currently do for our St. Thomas and St. Maarten buildings).

We utilized $0.2 million of net cash from operations during the first
quarter of fiscal 2006 compared to $0.2 million that was generated during the
first quarter of fiscal 2005. The decrease in cash provided by operations in the
first quarter of fiscal 2006, as compared to the same period in the prior year,
was primarily due to an increase in cash used to acquire inventory during the
first quarter of fiscal 2006, partially offset by a decrease in cash utilized to
pay down accrued expenses, as compared to the same period in the prior year.

Net cash used in investing activities was $1.0 million for the first
quarter of fiscal 2006 compared to $2.0 million in the first quarter of fiscal
2005. The cash used in investing activities in the first quarter of fiscal 2006
was primarily due to costs associated with renovating and expanding the size of
our store in St. Thomas by approximately 6,400 square feet (an increase of
approximately 18%). We anticipate that the cost associated with building
construction and updating equipment will be approximately $1.4 to $2.0 million,
of which approximately $0.4 million was spent during the first quarter of fiscal
2006. Additionally, we spent approximately $0.1 million (and expect to spend an
additional $0.1 million) on the remodel of our Kauai store in order to add
retail enhancements such as fresh produce by the pound. During the first quarter
of fiscal 2006, we also began replacing our current point of sale system with a
new and improved version, which we anticipate will cost approximately $0.7 to
$1.0 million when complete, most of which will be financed with a capital lease.
The cash used in investing activities in the first quarter of fiscal 2005 was
primarily due to costs associated with the construction of the new building in
St. Croix where we relocated our St. Croix store on May 26, 2005.

We currently have no plans to open stores in new markets during fiscal
2006. However, we are currently in the process of working with local architects
and engineers to define the type of building we could construct in the Cayman
Islands, which we expect to open during the first half of 2007. We anticipate
spending approximately $3.5 to $4.5 million dollars during fiscal 2006 on our
new store in the Cayman Islands. In addition, we are continuing to explore
expansion opportunities in selected markets and additional relocation
opportunities for stores in existing markets.

We generated $0.4 million of cash from financing activities in the first
quarter of fiscal 2006, as compared to utilizing $0.2 million in the first
quarter of fiscal 2005. The $0.6 million increase was primarily due to an
increase in bank checks outstanding during the first quarter of 2006 as compared
to the first quarter of 2005. Additionally, during the first quarter of fiscal
2006, we financed a portion of the replacement of our point of sale system
through a short term note payable that will be converted into a capital lease
once all of our stores are converted over to the new system.

We maintain a line of credit with Wells Fargo Business Credit. The line of
credit expires on May 18, 2007, has an annual interest rate equal to the prime
rate as defined by Wells Fargo Bank National Association, and has an unused
line fee of three-eighths of one percent (0.375%) per annum on the average daily
unused line. The line of credit contains various financial covenants, including
minimum book net worth, minimum net income and capital expenditures.

The line of credit consists of a $6.0 million committed, secured revolving
credit line with a sublimit for letters of credit and bankers acceptances in an
amount up to $0.7 million. At April 2, 2006, there was $28,000 outstanding on
the line of credit and $27,000 in letters of credit outstanding. At April 2,
2006, the rate charged by Wells Fargo was 7.75%.

14

---

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

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

Contractual Obligations

As of April 2, 2006, our commitments to make future payments under
long-term contractual obligations were as follows (in thousands):

|                                 |  | **Payments
    Due by Period** | 
|-------------------------------- |  | ------------------------------ | 
|**Contractual
     Obligations** |  | **Total**                      | 
|Long-term debt                   |  | $  2,211                       | 
|Operating Leases (1)             |  | 36,943                         | 
|Capital Lease                    |  | 1,803                          | 
|Total                            |  | $40,957                        | 

|(1) |  | Adjusted to reflect a new agreement to lease land entered into in
           April 2006 for a potential store location in the Cayman Islands. The
           agreement commenced on April 1, 2006 and provides for a lease term of
           20 years from the date on which the building is completed and ready
           for occupancy. Initial payments under the agreement are $15,000 per
           month until the building is completed and ready for occupancy, after
           which the base rent under the lease agreement will increase pursuant
           to its terms.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting Policies

We have chosen accounting policies that we believe are appropriate to
report accurately and fairly our operating results and financial position, and
we apply those accounting policies in a consistent manner. The significant
accounting policies are summarized in Note 1 to the consolidated financial
statements included in our annual report on Form 10-K for the fiscal year ended
January 1, 2006.

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. We base our estimates on historical experience and other
factors believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates.

We believe that the following accounting policies are the most critical in
the preparation of our financial statements because they involve the most
difficult, subjective or complex judgments about the effect of matters that are
inherently uncertain.

Inventories

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

15

---

Long Lived Assets

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

Foreign Currency Translation

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

Income Taxes

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

Accounting Pronouncements

In October 2005, the FASB issued Staff Position No. FAS 13-1, Accounting
for Rental Costs Incurred During a Construction Period (FSP 13-1). FSP 13-1
requires that rental costs associated with ground or building operating leases
that are incurred during a construction period be recognized as rental expense.
FSP 13-1 is effective for the first reporting period beginning after December
15, 2005. The adoption of FSP 13-1 did not impact our financial statements for
the first quarter of fiscal 2006, as we did not have a lease for a site under
construction. However, on April 25, 2006, we announced that we had entered into
a long-term lease with the developer of Governors Square in Grand Cayman to
lease land on which to construct and operate a store under the Cost-U-Less name.
Rental payments under this lease commenced on April 1, 2006. In accordance with
FSP 13-1 and other applicable lease accounting guidance, we will expense rental
costs over the lease term, which includes the construction period.

16

---

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

We did not have any derivative financial instruments as of April 2, 2006.

ITEM 4.  CONTROLS AND PROCEDURES

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

17

---

PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Because we have a small store base, adverse store performance or increased
expenses will have a more significant adverse impact on our operating and
financial results than if we had a larger store base.

We opened our first store in 1989 and opened a total of 21 stores through
March 2006 and presently operate eleven stores. Our closure of the ten other
stores prior to March 2001 adversely affected our operating results. Should any
existing store experience a significant decline in profitability or any new
store be unprofitable, the negative effect on our business would be more
significant than would be the case if we had a larger store base, and could have
a material adverse effect on our business, financial condition and results of
operations. In addition, if our general and administrative expenses increase,
the negative effect on our business and results of operations would be more
significant than if we had a larger store base. Although we intend to carefully
plan for the implementation of additional stores, there can be no assurance that
such plans can be executed as envisioned or that the implementation of those
plans will not have a material adverse effect on our business, financial
condition and results of operations. In addition, our ability to acquire
products at a lower cost than competitors or obtain volume-based pricing can be
adversely affected because of our small store base.

Our ability to operate profitably in existing markets and to expand into new
markets may be adversely affected by competing warehouse clubs or discount
retailers.

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

One or more of our stores may be damaged or destroyed by volatile weather
conditions or natural disasters, which would severely harm our business and
financial results.

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

18

---

If we were to experience a catastrophic loss as a result of severe weather
conditions or otherwise, we may exceed our insurance policy limits and we may
have difficulty obtaining similar insurance coverage in the future.

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

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

If energy costs and fuel surcharges continue to rise, the profitability of our
stores may decline and our business and financial condition could suffer.

We have experienced increasing energy and fuel surcharge costs over the
last few years and have largely been able to pass these additional costs on to
our customers with higher prices. For example, in the first quarter of fiscal
2006 our energy (utility) expenses were approximately 38% higher than the same
period in fiscal 2005. If these costs continue to rise, we may not be able to
continue the practice of passing on these additional costs to our customers. Our
inability to effectively pass on these costs to our customers could have a
significant adverse effect on our business, results of operations and financial
condition.

If we fail to effectively manage the logistical and local operating challenges
we face because our business primarily consists of island and international
operations, our business and results of operations would suffer.

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

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

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

We do not have operating experience in many of the markets in which we may
consider opening new stores. If we are unable to adapt our operations to support
any future expansion plans or if any new stores we open are not profitable, our
business and financial condition could suffer.

We have not opened stores in foreign island markets at a rapid pace.
Although we have no plans to open stores in new markets during 2006, we continue
to explore expansion opportunities in selected markets and additional relocation
opportunities for stores in existing markets. For example, in May 2005 we moved
our St. Croix store into a newly constructed building on a

19

---

parcel of land
        located closer to the main trade area in the center of the island than
      our former store. Additionally, on April 25, 2006, we announced that we
    had entered
        into a long-term lease with the developer of Governors Square in Grand
      Cayman to lease land on which to construct and operate a store under the
      Cost-U-Less
        name through a controlled subsidiary organized in the Cayman Islands.
    The signing of the lease is one in a number of steps that we must undertake
      before we can open a store operating under the Cost-U-Less name in the
    Cayman
      Islands.
        Although there are still a number of steps that we have to take before
      the store can be opened, we expect to open the store during the first half
        of 2007. New
        markets such as the Cayman Islands and others we may enter may present
        operational, competitive, regulatory and merchandising challenges that
      are
        different from those we currently encounter. We do not have operating
    experience in many of the markets in which we may consider opening new stores.
    In
      fact, in June 2000, we closed the two stores that we had opened in New
    Zealand in 1999,
        as they had performed below expectations, due in part to competitive
    and merchandising challenges that are different from our other stores. Additionally,
        in February 2001, we closed one of our two Fiji stores, due primarily
    to
        the impact that political turmoil and the resulting economic downturn
    in Fiji were
        having on the tourist industry. We have encountered, and may continue
    to encounter, substantial delays, increased expenses or loss of potential
      store
        sites due to the complexities, cultural differences, and local political
        issues associated with the regulatory and permitting processes in the
        island markets in which we may locate our stores. There can be no assurance
        that
        we will be able
        to adapt our operations to support our future expansion plans or that
        any new stores will be profitable. Any failure on our part to manage
        our growth
        could
        have a material adverse effect on our business, financial condition and
        results of operations.

A decline in the general economic condition in the United States or in island
markets in which we operate could have a significant impact on our financial
performance.

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

A prolonged decrease in tourism and air travel could have an indirect but
significant impact on our financial performance, operations and liquidity.

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

The loss of key personnel or our inability to successfully hire skilled store
managers could harm our business and results of operations.

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

20

---

If our information systems are disrupted, our business and results of operations
could suffer.

Our business is highly dependent on communications and information systems,
primarily systems provided by third-party vendors. Any failure or interruption
of our systems or systems provided by third-party vendors could cause delays or
other problems in our operations, which could have a material adverse effect on
our business, financial condition and results of operations.

If our store employees decided to become unionized, we may experience increased
operating costs or other operation problems.

None of our employees are currently covered by a collective bargaining
agreement. However, several of our hourly employees in our St. Maarten store
have joined the local union. Unionization of any of our stores could result in
higher employee compensation and restrictive working condition demands that
could increase our operating costs and have a material adverse effect on our
business, financial condition and results of operations.

We are subject to various governmental regulations and licensing requirements,
which may have an adverse effect on our business.

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

If we are unable to overcome challenges resulting from the isolation of store
operations from our corporate management and our increased dependence on local
managers, we may experience decreased productivity or other operational
problems.

Our headquarters and administrative offices are located in Washington
State; however, ten of our eleven stores and a majority of our employees are
located on islands. Although we invest resources to hire and train our on-site
managers, the inability of our executives to be physically present at our
current and planned store sites on a regular basis may result in the following:

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

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

We may encounter disruption in the transportation of our products, which would
significantly harm our business.

Our island locales require the transportation of products over great
distances on water, which results in the following:

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



21

---

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

Our failure to adequately address barriers and challenges associated with
expansion outside of the United States or its territories could cause our
business to suffer.

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

Certain provisions in our charter documents and elsewhere may discourage third
parties from attempting to acquire control of our Company, which may have an
adverse effect on the price of our stock.

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

ITEM 5.  OTHER INFORMATION

As previously announced, we have been granted approval from the Cayman
Islands Trade and Business Licensing Board to operate a retail and wholesale
business through a majority owned subsidiary organized in the Cayman Islands. On
April 19, 2006, Cayman Cost-U-Less Limited, a Cayman Islands company majority
owned and controlled by our wholly-owned Cayman Islands subsidiary, entered into
an agreement to lease land with the developer of Governors Square in Grand
Cayman, Governors Square Limited, on which to construct and operate a store
under the Cost-U-Less name. Governors Square Limited is an entity affiliated
with Robert Bodden, a minority owner of Cayman Cost-U-Less.

Under the terms of the agreement, Cayman Cost-U-Less has the right to
construct a retail and wholesale store of approximately 41,000 square feet on
the leased premises. The agreement commenced on April 1, 2006 and provides for a
lease term of 20 years from the date on which the building is completed and
ready for occupancy. The agreement also contains two five-year options to extend
the term of the lease. Initial payments under the agreement are $15,000 per
month until the building is completed and ready for occupancy, after which the
base rent under the lease agreement will increase pursuant to its terms.

The signing of the agreement is one in a number of steps that we must
undertake before a store operating under the Cost-U-Less name can be opened in
the Cayman Islands. Although there are still a number of steps that have to be
taken before the store can be opened, we expect to open the store during the
first half of 2007.

22

---

ITEM 6.  EXHIBITS

|**Exhibit No.** |  | **Description**                                                                                                                                                                                                                                                                   
|--------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1            |  | Fifth Amendment to Credit and Security Agreement by and between Cost-U-Less,
      Inc., CULGUAM, Inc., CULNEV, Inc., CULUSVI, Inc., and Wells Fargo Business
      Credit, Inc. (Incorporated by reference to Exhibit 10.1 to the Companys
    Form 8-K filed on April 25, 2006)
|               
|31.1            |  | Certification of Chief Executive Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                            
|31.2            |  | Certification of Chief Financial Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                            
|32.1            |  | Certification of Chief Executive Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                            
|32.2            |  | Certification of Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                            

23

---

SIGNATURES

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

|                   |  | COST-U-LESS, INC.                                                                                                                                                                                 
|------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date: May 15, 2006 |  | /s/ J. Jeffrey Meder
      J. Jeffrey Meder
                                                     
      President and
                                                     Chief Executive Officer
|                  
|Date: May 15, 2006 |  | /s/ Martin P. Moore
      Martin P. Moore
                                                     
      Chief Financial Officer                                                                     

24

---