SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

      |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2003

                                       OR

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

      FOR THE TRANSITION PERIOD FROM _________ TO ___________

                         COMMISSION FILE NUMBER 0-24543

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

          Washington                                     91-1615590
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

                    8160 304th Avenue S.E., Bldg. 3, Suite A
                            PRESTON, WASHINGTON 98050
               (Address of principal executive office) (Zip Code)

                                 (425) 222-5022
              (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. |X| YES |_| NO.

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |_| YES |X| NO

The registrant had 3,606,376 common shares, par value $0.001, outstanding at
August 4, 2003.

<PAGE>

                                COST-U-LESS, INC.

                               INDEX TO FORM 10-Q
<TABLE>
<S>                                                                                                           <C>
PART I.    FINANCIAL INFORMATION

           Item 1.      Financial Statements (Unaudited)

                        Condensed Consolidated Statements of  Operations...................................... 3

                        Condensed Consolidated Balance Sheets................................................. 4

                        Condensed Consolidated Statements of Shareholders' Equity............................. 5

                        Condensed Consolidated Statements of Cash Flows....................................... 6

                        Notes to Condensed Consolidated Financial Statements.................................. 7

           Item 2.      Management's Discussion and Analysis of Financial Condition and Results of
                        Operations............................................................................11

           Item 3.      Quantitative and Qualitative Disclosures About Market Risk............................21

           Item 4.      Controls and Procedures...............................................................21

PART II.   OTHER INFORMATION

           Item 4.      Submission of Matters to a Vote of Security Holders...................................22

           Item 6.      Exhibits and Reports on Form 8-K......................................................23

SIGNATURES              ......................................................................................24
</TABLE>


                                       2
<PAGE>

                         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)

<TABLE>
<CAPTION>
                                                               13 Weeks Ended                  26 Weeks Ended
                                                               --------------                  --------------
                                                          June 29,        June 30,        June 29,        June 30,
                                                            2003            2002            2003            2002
                                                            ----            ----            ----            ----
<S>                                                    <C>             <C>             <C>             <C>
Net sales .........................................    $    42,010     $    42,665     $    84,344     $    87,663
Merchandise costs .................................         34,606          35,885          69,572          73,684
                                                       -----------     -----------     -----------     -----------
Gross profit ......................................          7,404           6,780          14,772          13,979

Operating expenses:
     Store ........................................          5,371           5,606          10,668          11,094
     General and administrative ...................          1,543           1,509           3,140           3,057
     Store openings ...............................             20               2              48              12
                                                       -----------     -----------     -----------     -----------
Total operating expenses ..........................          6,934           7,117          13,856          14,163
                                                       -----------     -----------     -----------     -----------

Operating income (loss) ...........................            470            (337)            916            (184)

Other income (expense):
     Interest expense, net ........................           (112)           (109)           (205)           (203)
     Other ........................................            148             136             171             194
                                                       -----------     -----------     -----------     -----------
Income (loss) before income taxes .................            506            (310)            882            (193)

Income tax provision (benefit) ....................            200            (120)            350             (75)
                                                       -----------     -----------     -----------     -----------
Net income (loss) .................................    $       306     $      (190)    $       532     $      (118)
                                                       ===========     ===========     ===========     ===========

Earnings (loss) per common share:
     Basic ........................................    $      0.08     $     (0.05)    $      0.15     $     (0.03)
                                                       ===========     ===========     ===========     ===========
     Diluted ......................................    $      0.08     $     (0.05)    $      0.15     $     (0.03)
                                                       ===========     ===========     ===========     ===========

Weighted average common shares outstanding, basic .      3,606,376       3,606,376       3,606,376       3,606,376
                                                       ===========     ===========     ===========     ===========
Weighted average common shares outstanding, diluted      3,621,176       3,606,376       3,619,079       3,606,376
                                                       ===========     ===========     ===========     ===========
</TABLE>

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


                                       3
<PAGE>

                                COST-U-LESS, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                  June 29,   December 29,
                                                                    2003         2002
                                                                    ----         ----
                                     ASSETS
<S>                                                               <C>          <C>
Current assets:
     Cash and cash equivalents ...............................    $ 2,839      $ 2,383
     Insurance receivable ....................................        328        1,460
     Accounts receivable, net ................................      1,775        2,517
     Inventories, net ........................................     18,260       18,626
     Other current assets ....................................      1,520          911
                                                                  -------      -------
          Total current assets ...............................     24,722       25,897

Property and equipment, net ..................................     13,179       13,510
Deposits and other assets ....................................        771          783
                                                                  -------      -------

          Total assets .......................................    $38,672      $40,190
                                                                  =======      =======

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Line of credit ..........................................    $ 3,083      $ 2,367
     Accounts payable ........................................     12,799       15,449
     Accrued expenses and other liabilities ..................      3,236        3,107
     Current portion of long-term debt .......................        267          267
                                                                  -------      -------
          Total current liabilities ..........................     19,385       21,190

Other long-term liabilities ..................................        566          594
Long-term debt, less current portion .........................      2,677        2,811
                                                                  -------      -------
          Total liabilities ..................................     22,628       24,595

Commitments and contingencies

Shareholders' equity                                               16,044       15,595
                                                                  -------      -------

          Total liabilities and shareholders' equity .........    $38,672      $40,190
                                                                  =======      =======
</TABLE>

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


                                       4
<PAGE>

                                COST-U-LESS, INC.

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

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                    Accumulated
                                                     Common           Common                           Other
                                                     Stock--          Stock--        Retained      Comprehensive
                                                     Shares           Amount         Earnings           Loss             Total
                                                     ------           ------         --------           ----             -----
<S>                                                 <C>             <C>             <C>              <C>              <C>
Balance at December 30, 2001 ................       3,606,376       $   12,446      $    3,557       $     (662)      $   15,341
     Net loss ...............................              --               --            (118)              --             (118)
     Foreign currency translation adjustments              --               --              --              (34)             (34)
                                                                                                                      ----------
         Comprehensive income ...............                                                                               (152)
                                                                                                                      ----------

                                                   ----------       ----------      ----------       ----------       ----------
Balance at June 30, 2002 ....................       3,606,376       $   12,446      $    3,439       $     (696)      $   15,189
                                                   ==========       ==========      ==========       ==========       ==========

Balance at December 29, 2002 ................       3,606,376       $   12,446      $    3,842       $     (693)      $   15,595
     Net Income .............................              --               --             532               --              532
     Foreign currency translation adjustments              --               --              --              (83)             (83)
                                                                                                                      ----------
         Comprehensive income ...............                                                                                449
                                                                                                                      ----------

                                                   ----------       ----------      ----------       ----------       ----------
Balance at June 29, 2003 ....................       3,606,376       $   12,446      $    4,374       $     (776)      $   16,044
                                                   ==========       ==========      ==========       ==========       ==========
</TABLE>

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


                                       5
<PAGE>

                                COST-U-LESS, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                          26 Weeks Ended
                                                                          --------------
                                                                       June 29,    June 30,
                                                                         2003        2002
                                                                         ----        ----
<S>                                                                    <C>         <C>
OPERATING ACTIVITIES:
     Net income (loss) ............................................    $   532     $  (118)
     Adjustments to reconcile net income (loss) to net cash
        provided (used) by operating activities:
          Depreciation and amortization ...........................        844         941
          Loss of property and equipment ..........................          3          34
          Deferred tax benefit ....................................         --         (83)
     Changes in operating assets and liabilities:
          Insurance receivable ....................................      1,132          --
          Accounts receivables ....................................        742         130
          Inventories .............................................        366       1,038
          Other current assets ....................................       (609)       (329)
          Deposits and other assets ...............................         12          20
          Accounts payable ........................................     (2,650)     (3,627)
          Accrued expenses and other liabilities ..................        129      (1,310)
          Other long-term liabilities .............................        (28)         (6)
                                                                       -------     -------
               Net cash provided (used) by operating activities ...        473      (3,310)

INVESTING ACTIVITY:
     Cash used to purchase property and equipment .................       (462)       (339)

FINANCING ACTIVITIES:
     Net borrowings under line of credit ..........................        716       2,915
     Principal payments on long-term debt .........................       (134)       (133)
                                                                       -------     -------
               Net cash provided by financing activities ..........        582       2,782

     Foreign currency translation adjustments .....................       (137)        (34)
                                                                       -------     -------

Net increase (decrease) in cash and cash equivalents ..............        456        (901)

Cash and cash equivalents:
     Beginning of period ..........................................      2,383       2,660
                                                                       -------     -------
     End of period ................................................    $ 2,839     $ 1,759
                                                                       =======     =======

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid during the period for:
          Interest ................................................    $   198     $   203
          Income taxes ............................................    $   305     $   135
     Cash received during the period for:
          Income taxes ............................................    $    67          --
</TABLE>

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


                                       6
<PAGE>

                                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 the United States of America Territories ("U.S. Territories"), foreign
island countries in the Pacific and the Caribbean, the Hawaiian Islands and
Sonora, California. At June 29, 2003, the Company operated ten retail stores
with an eleventh store being rebuilt as follows: two stores in each of Hawaii
and Guam, and one store in each of St. Thomas, St. Croix, American Samoa, Fiji,
Curacao, St. Maarten and Sonora, California. On December 8, 2002, the Company's
two stores on the island of Guam suffered damage from Supertyphoon Pongsona,
resulting in the immediate closure of both stores. The Company's Tamuning store
lost its generator in the storm, but reopened shortly thereafter on December
12th. The Company's Dededo store, however, suffered more significant damage, and
has yet to reopen. The Company is currently working with its landlord to rebuild
this store with an expected reopening in the fourth quarter of 2003.

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 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 December 29, 2002 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 of America
have been condensed or omitted pursuant to SEC rules and regulations on
quarterly reporting. Operating results for the 13 and 26 weeks ended June 29,
2003, 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 April 11, 2003.

Fiscal Year

      The Company reports on a 52/53-week fiscal year, consisting of four
thirteen-week periods and ending on the Sunday nearest to the end of December.
Fiscal 2003, ending on December 28, 2003, and Fiscal 2002, which ended on
December 29, 2002, are 52-week years.

Principles of Consolidation

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

Foreign Currency Translations and Comprehensive Income

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


                                       7
<PAGE>

                                COST-U-LESS, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)

                                   (Unaudited)

Use of Estimates

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

Stock-Based Compensation

      In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock Based Compensation - Transition and Disclosure,"
which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148
requires expanded and more prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method on reported results. The Company
adopted SFAS No. 148 in the fiscal year ended December 29, 2002.

      The Company has elected to apply the disclosure-only provisions of
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation. Accordingly, the Company accounts for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations under APB No. 25, whereby compensation cost for stock
options is measured as the excess, if any, of the fair value of the Company's
common stock at the date of grant over the stock option exercise price. The
Company usually grants stock options at exercise prices equal to fair market
value on the date of grant; as a result, no compensation cost has been
recognized.

      Had the stock option compensation expense for the Company's stock option
plans been determined based on the fair value at the grant dates for options
granted in the 13 weeks and 26 weeks ended June 29, 2003 and June 30, 2002,
consistent with the fair value methods of SFAS No. 123, the Company's net income
and earnings per share amounts would have been reduced to these pro-forma
amounts (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                      13 Weeks Ended         26 Weeks Ended
                                                                      --------------         --------------
                                                                    June 29,   June 30,    June 29,   June 30,
                                                                      2003       2002        2003       2002
                                                                      ----       ----        ----       ----
<S>                                                                 <C>        <C>         <C>        <C>
Net income (loss) as reported ..................................    $   306    $  (190)    $   532    $  (118)
Less:  Total stock-based employee compensation expense
       determined under fair value method for all awards,
       net of tax ..............................................         18         32          36         59
                                                                    -------    -------     -------    -------
Net income (loss) pro forma ....................................    $   288    $  (222)    $   496    $  (177)
                                                                    =======    =======     =======    =======

Earnings (loss) per common share, basic as reported ............    $  0.08    $ (0.05)    $  0.15    $ (0.03)
Earnings (loss) per common share, basic pro forma ..............    $  0.08    $ (0.06)    $  0.15    $ (0.05)
Earnings (loss) per common share, diluted as reported ..........    $  0.08    $ (0.05)    $  0.15    $ (0.03)
Earnings (loss) per common share, diluted pro forma ............    $  0.08    $ (0.06)    $  0.14    $ (0.05)
</TABLE>


                                       8
<PAGE>

                                COST-U-LESS, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)

                                   (Unaudited)

Reclassifications

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

New Accounting Pronouncements

      During 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting for Asset
Retirement Obligations" and, during 2002, the FASB issued SFAS No.146,
"Accounting for Costs Associated with Exit and Disposal Activities". The
adoption of SFAS Nos. 143 and 146 during fiscal 2003 did not have a material
impact on the Company's consolidated financial statements.

      In November 2002, the Emerging Issues Task Force (EITF) released Issue No.
02-16, "Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor", applicable to the Company for
arrangements entered into beginning in fiscal 2003. The Company records vendor
allowances and discounts in the income statement when the purpose for which
those monies were designated is fulfilled. As such, the adoption of EITF No.
02-16 during fiscal 2003 did not have a material impact on the Company's
consolidated financial statements.

      In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The Company believes its adoption of this new accounting standard
will not have a material impact on the Company's results of operations or
financial position, as the Company does not have derivatives nor does it
participate in hedging activities.

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 (in thousands, except share and per share data):

<TABLE>
<CAPTION>
                                                                   13 Weeks Ended                 26 Weeks Ended
                                                                   --------------                 --------------
                                                               June 29,       June 30,        June 29,       June 30,
                                                                 2003           2002            2003           2002
                                                                 ----           ----            ----           ----
<S>                                                          <C>            <C>             <C>            <C>
Numerator:
     Net income (loss) ..................................    $       306    $      (190)    $       532    $      (118)
                                                             ===========    ===========     ===========    ===========
Denominator:
     Denominator for basic earnings per share--weighted
        average shares ..................................      3,606,376      3,606,376       3,606,376      3,606,376
Effect of dilutive common equivalent shares:
     Stock options and warrants .........................         14,800             --          12,703             --
                                                             -----------    -----------     -----------    -----------
     Denominator for diluted earnings per share--adjusted
        weighted average shares and assumed conversion of
        stock options and warrants ......................      3,621,176      3,606,376       3,619,079      3,606,376
                                                             ===========    ===========     ===========    ===========
Basic earnings (loss) per common share ..................    $      0.08    $     (0.05)    $      0.15    $     (0.03)
Diluted earnings (loss) per common share ................    $      0.08    $     (0.05)    $      0.15    $     (0.03)
</TABLE>

      Potentially dilutive shares in the amount of 25,379 and 14,146 for the 13
weeks and 26 weeks ended June 30, 2002, respectively, have been excluded from
the dilutive calculation, as their impact would be anti-dilutive.


                                       9
<PAGE>

                                COST-U-LESS, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)

                                   (Unaudited)

3. Insurance Receivable

      On December 8, 2002, the Company's two stores on the island of Guam
suffered damage from Supertyphoon Pongsona, resulting in the immediate closure
of both stores. The Company's Tamuning store lost its generator in the storm,
but reopened shortly thereafter on December 12th. The Company's Dededo store,
however, suffered more significant damage, and has yet to reopen. The Company is
currently working with its landlord to rebuild this store with an expected
reopening in the fourth quarter of 2003. The Company lost inventory, leasehold
improvements and equipment as a result of the supertyphoon. At December 29,
2002, the Company recorded a $1.5 million receivable for losses that it expects
to be recovered from insurance. The receivable represents $0.9 million for
inventory losses and $0.6 million for fixed asset losses. Additionally, the
Company recorded a loss of $0.4 million in Other Expense during fiscal 2002,
which represents the amount of inventory losses and other expenses that are not
expected to be recovered from insurance. As of June 29, 2003, the Company had
received $1.2 million of the receivable from its insurance companies.

4. Line of Credit

      On April 9, 2003, the Company entered into a line of credit with Wells
Fargo Business Credit that has a three year term, expiring on April 9, 2006. The
line of credit consists of a $6.0 million committed, secured revolving credit
line with a sublimit for letters of credit and bankers acceptances in the amount
up to $0.5 million. At June 29, 2003, there were $3.1 million in borrowings
outstanding on the line of credit, $0.3 million utilized for standby letters of
credit and $0.1 million set aside for other reserves.

      Borrowings are limited to the lesser of $6.0 million or the amount
calculated under the borrowing base. The borrowing base is equal to the lesser
of (a) $6,000,000 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. Borrowings under the new line of credit bear
interest at the financial institution's prime rate plus 1.5% (5.5% at June 29,
2003). A fee of 0.25% is charged on the unused portion of the line of credit.
The line of credit contains various covenants, including a requirement that the
Company maintain minimum pre-tax income and tangible net worth and limitations
on acquisitions, additional debt, change in control and capital expenditures. As
of June 29, 2003, the Company was in compliance with all such covenants.

      Prior to April 9, 2003, the Company maintained a $6.75 million line of
credit with a different commercial bank. This line of credit was satisfied and
terminated on April 10, 2003.

5. Commitments and Contingencies

      Legal Proceedings

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


                                       10
<PAGE>

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. Factors that could affect our actual results
include, but are not limited to: (i) competition; (ii) a decline in general
economic conditions, (iii) risks associated with a small store base; (iv)
fluctuations in foreign currency; (v) isolation of store operations from
corporate management; (vi) challenges associated with island and international
operations; (vii) dependence on, and uncertainties associated with, expansion
outside the U.S.; (viii) transportation difficulties; (ix) weather and other
risks associated with island operations; (x) implementation of growth strategy;
(xi) dependence on key personnel and local managers; (xii) ability to maintain
existing credit and obtain additional credit; (xiii) reliance on information and
communication systems provided by third-party vendors; and (xiv) ability to
utilize tax benefits. The September 11, 2001 terrorist attacks on the United
States of America, hostilities in the Middle East, other acts of war or
hostility, the effects on consumer demand, the financial markets, product supply
and distribution and other conditions increase the uncertainty inherent in
forward-looking statements. 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 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
year ended December 29, 2002, which was filed on April 11, 2003 with the
Securities 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 year ended December 29, 2002.

      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

      During the 26 weeks ended June 29, 2003, we operated ten retail stores
with an eleventh store being rebuilt as follows: two stores in each of Hawaii
and Guam, and one store in each of St. Thomas, St. Croix, American Samoa, Fiji,
Curacao, St. Maarten and Sonora, California. On December 8, 2002, our two stores
on the island of Guam suffered damage from Supertyphoon Pongsona, resulting in
the immediate closure of both stores. Our Tamuning store lost its generator in
the storm, but reopened shortly thereafter on December 12th. Our Dededo store,
however, suffered more significant damage, and has yet to reopen. We are in the
process of working with our landlord to rebuild this store with an expected
reopening in the fourth quarter of 2003.

      Our stores are patterned after the warehouse club concept, although the
stores (i) are smaller (averaging approximately 30,000 square feet vs. large
format warehouse clubs of approximately 115,000 square feet), (ii) generally
target niche markets, mainly U.S. Territories, U.S. island states and foreign
island countries, where demographics do not support large format warehouse
clubs, (iii) carry a wide assortment of local and ethnic food items, and (iv) do
not charge a membership fee. Although we do not have large seasonal fluctuations
in sales, the fourth quarter is typically the highest sales quarter due to
additional holiday sales.

      Our management focus relative to our core island store operations includes
reviewing our merchandising strategies, both those that apply to all stores and
those specific to each store in light of the different conditions in each
market. Currently, we have no plans to open new stores during 2003 other than
rebuilding our Dededo, Guam store, but we are in the process of analyzing
opportunities for future expansion. While we believe these actions can improve
profitability, there can be no assurance that these actions will be successful.


                                       11
<PAGE>

      We also continue to explore ways to maximize long-term value for our
shareholders, including focusing on efforts to increase earnings, responding to
competition, and improving same store sales and gross margins. We believe the
number of new island markets with the attributes for our existing growth
strategy is limited as a result of, among other things, changing market
conditions. We are currently evaluating alternative methods of implementing
future expansion.

      On June 24, 2003, we confirmed that we were engaged in preliminary
discussions with ASSI, Inc. regarding a potential transaction by which ASSI,
Inc. would acquire all outstanding shares of our common stock. On June 20, 2003,
ASSI, Inc. amended its Schedule 13D filing with the Securities and Exchange
Commission to disclose these preliminary discussions. We have not completed our
financial and legal due diligence relating to any such transaction, and we do
not believe ASSI has completed its financial and legal due diligence relating to
any such transaction.

Results of Operations

      We reported net income of $306,000 for the 13 weeks ended June 29, 2003,
compared to a net loss of ($190,000) for the same period in fiscal 2002. The
improvement in net income was primarily due to improved gross margin.

Comparison of the 13 Weeks and 26 Weeks Ended June 29, 2003 to the 13 Weeks and
26 Weeks Ended June 30, 2002:

      Net Sales: Net sales of $42.0 million for the 13 weeks ended June 29, 2003
declined 1.5%, or $0.7 million, compared with net sales of $42.7 million in the
same period in the prior year. For the 26 weeks ended June 30, 2002, net sales
of $84.3 million were 3.8% lower than the $87.7 million of sales for the same
period in the prior year. The decline in net sales was largely due to the
temporary closing of our Dededo store in Guam after it suffered significant
damage from Supertyphoon Pongsona that swept through the island on December 8,
2002. Sales lost due to the temporary closure of the Company's Dededo store in
Guam were partially offset by increases in most of our other stores. We are
currently working with our landlord to rebuild our Dededo store with an expected
reopening in the fourth quarter of 2003. The decline in net sales for the 26
weeks ended June 29, 2003 was also a result of a decrease in
business-to-business sales, which were uncharacteristically strong in the first
quarter of fiscal 2002.

      Comparable-store sales (stores open for a full 13 months) increased 4.0%
for the 13 weeks and 4.3% for the 26 weeks ended June 29, 2003. Comparable-store
sales are calculated on stores excluding the Guam market as our remaining store
in Tamuning, Guam is benefiting from the temporary closure of the Dededo store.
A majority of our stores experienced increased sales in the 13 weeks and 26
weeks ended June 29, 2003 as compared to the same periods in the prior year
primarily due to improved merchandising, including a better assortment of food
and general merchandise.

      Gross Profit: Gross profit of $7.4 million, or 17.6% of sales, for the 13
weeks ended June 29, 2003, increased as compared to gross profit of $6.8
million, or 16.0% of sales, in the same period in the prior year. Gross profit
increased to $14.8 million, or 17.5% of sales, for the 26 weeks ended June 29,
2003, as compared to gross profit of $14.0 million, or 15.9% of sales, in the
same period in the prior year. The improvement in gross profit is due primarily
to improved buying, mix of goods, and less markdowns.

      Store expenses: Store expenses decreased to $5.4 million for the 13 weeks
and $10.7 million for the 26 weeks ended June 29, 2003 as compared to $5.6
million and $11.1 million for the same periods in the prior year. As a
percentage of sales, store expenses also decreased to 12.8% of net sales for the
13 weeks and 12.6% of net sales for the 26 weeks ended June 29, 2003 as compared
to 13.1% and 12.7% for the comparable periods in the prior year. This decrease
in store expenses was primarily attributable to the temporary closure of our
Dededo store, which more than offset increases in insurance, utilities and
repairs/maintenance costs.

      General and administrative expenses: General and administrative expenses
of $1.5 million and $3.1 million for the 13 weeks and 26 weeks ended June 29,
2003, respectively, equaled the expenses for the 13 and 26 week periods in the
prior year. General and administrative expenses as a percent of sales increased
slightly to 3.7% of sales for the 13 weeks and 26 weeks ended June 29, 2003
compared to 3.5% the same periods in the prior year. The increase in general and
administrative expenses as a percentage of sales is primarily attributable to
the temporary closure of our Dededo store and transaction costs incurred in
connection with our preliminary discussions with ASSI, Inc. In the potential
transaction, ASSI, Inc. would acquire all outstanding shares of common stock of
Cost-U-Less, Inc.


                                       12
<PAGE>

      Store opening expenses: Store opening expenses were $20,000 and $48,000
for the 13 weeks and 26 weeks ended June 29, 2003, respectively, as compared to
$2,000 and $12,000 for the 13 and 26 week periods in the prior year. Store
opening expenses in both years relate to costs associated with the evaluation of
potential new store locations. We expect store opening expenses in fiscal 2003
to be slightly higher than those incurred in fiscal 2002 as we evaluate
alternative methods of implementing future expansion.

      Interest expense, net: Interest expense, net remained flat at $112,000 and
$205,000 for the 13 weeks and 26 weeks ended June 29, 2003, respectively, as
compared to $109,000 and $203,000 for the 13 and 26 week periods in the prior
year.

      Other income: Other income of $148,000 and $171,000 for the 13 weeks and
26 weeks ended June 29, 2003, respectively, as compared to expense of $136,000
and $194,000 for the 13 and 26 week periods in the prior year was primarily
attributable to gains and losses on foreign currency transactions, and
translation of intercompany balances for transactions that exceed the permanent
investments in those countries. The income in the 13 and 26 week periods in both
years is attributable to appreciation in the Fijian dollar as compared to the
U.S.

      Income tax provision: The tax provisions and benefits for the 13 and 26
week periods ended June 29, 2003 and June 30, 2002, primarily represent taxes
and tax benefits associated with income or losses generated in the U.S. and U.S.
Territories. Our effective tax rate is higher than the expected federal
statutory rate because no tax benefits were provided on 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.

      Net income (loss): We had net income of $306,000, or $0.08 per share, for
the 13 weeks ended June 29, 2003, compared to a net loss of ($190,000), or
($0.05) per share in the same period in the prior year. Our net income was
$532,000, or $0.15 per share, for the 26 weeks ended June 29, 2003, compared to
a net loss of ($118,000), or ($0.03) per share in the same period in the prior
year. The improvement in net income was primarily due to improved gross margin.

Liquidity and Capital Resources

      We currently finance our operations with proceeds from various credit
facilities, and internally generated funds. We generated $0.5 million of net
cash from operations during the 26 weeks ended June 29, 2003 as compared to
utilizing $3.3 million in the same period in the prior year. The increase in
cash provided by operations was primarily due to the receipt of $1.2 million of
the receivable from our insurance companies related to the damage our Guam
stores suffered from Supertyphoon Pongsona in December 2002 and the improvement
in net income.

      Net cash used in investing activities was $0.5 million for the 26 weeks
ended June 29, 2003 as compared to $0.3 million for the same period in the prior
year. We currently have no plans to open new stores during fiscal 2003, other
than rebuilding our Dededo, Guam store. However, we continue to analyze
opportunities for new stores in the future.

      Net cash provided by financing activities decreased to $0.6 million for
the 26 weeks ended June 29, 2003 as compared to $2.8 million in the same period
in the prior year. This decrease was due to a reduction in borrowings on our
line of credit to $3.1 million at June 29, 2003 as compared to $5.1 million at
June 30, 2002. As of June 29, 2003, our accounts payable had increased to 70% of
inventory as compared to 67% of inventory at June 30, 2002. Our current ratio
improved to 1.27 at June 29, 2003 as compared to 1.22 at December 29, 2002 and
1.14 at June 30, 2002.

      On April 9, 2003, we entered into a line of credit with Wells Fargo
Business Credit that has a three year term, expiring on April 9, 2006. The line
of credit consists of a $6.0 million committed, secured revolving credit line
with a sublimit for letters of credit and bankers acceptances in the amount up
to $0.5 million. At June 29, 2003, there were $3.1 million in borrowings
outstanding on the line of credit, $0.3 million utilized for standby letters of
credit and $0.1 million set aside for other reserves.

      Borrowings are limited to the lesser of $6.0 million or the amount
calculated under the borrowing base. The borrowing base is equal to the lesser
of (a) $6,000,000 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. Borrowings under the new line of credit bear
interest at the financial institution's prime rate plus 1.5% (5.5% at June 29,
2003). A fee of 0.25% is charged on the unused portion of the line of credit.
The line of credit contains various covenants, including a requirement that we
maintain minimum pre-tax income and tangible net worth and limitations on
acquisitions, additional debt, change in control and capital expenditures. We
believe that we are currently in compliance with all such covenants.


                                       13
<PAGE>

      Prior to April 9, 2003, we maintained a $6.75 million line of credit with
a different commercial bank. This line of credit was satisfied and terminated on
April 10, 2003.

      During the 26 weeks ended June 29, 2003, a significant portion of our cash
flow was generated by our operations. If our operating results deteriorate
during 2003, as a result of a decrease in customer demand or pricing pressures
from our customers or our competitors or for other reasons, our ability to
generate positive cash flow from operations may be jeopardized. We believe that
amounts available under our various credit facilities, existing cash available
for working capital purposes, and cash flow from operations will most likely be
sufficient to fund our operations through the next 12 months. 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.

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 year ended
December 29, 2002.

      The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America 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.

Foreign Currency Translation

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


                                       14
<PAGE>

Stock-Based Compensation

      We have elected to apply the disclosure-only provisions of Financial
Accounting Standards Board Statement No. 123, Accounting for Stock-Based
Compensation. Accordingly, we account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations under APB
No. 25, whereby compensation cost for stock options is measured as the excess,
if any, of the fair value of our common stock at the date of grant over the
stock option exercise price. We generally grant stock options at exercise prices
equal to fair market value on the date of grant, and as a result, no
compensation cost is recognized.

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.

Recent Accounting Pronouncements

      During 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting for Asset
Retirement Obligations" and, during 2002, the FASB issued SFAS No.146,
"Accounting for Costs Associated with Exit and Disposal Activities". The
adoption of SFAS Nos. 143 and 146 during fiscal 2003 did not have a material
impact on our consolidated financial statements.

      In November 2002, the Emerging Issues Task Force released Issue No. 02-16,
"Accounting by a Customer (including a Reseller) for Certain Consideration
Received from a Vendor", applicable to us for arrangements entered into
beginning in fiscal 2003. We record vendor allowances and discounts in the
income statement when the purpose for which those monies were designated is
fulfilled. As such, the adoption of EITF No. 02-16 during fiscal 2003 did not
have a material impact on our consolidated financial statements.

      In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The Company believes its adoption of this new accounting standard
will not have a material impact on the Company's results of operations or
financial position, as the Company does not have derivatives nor does it
participate in hedging activities.

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.

      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. We have historically faced significant competition from warehouse
clubs and discount retailers, such as Wal-Mart, and Costco in Hawaii, and from
Kmart in the U.S. Virgin Islands and Guam. Our competition also consists of
discount retailers and other national and international grocery store chains.
Some of our competitors have substantially greater resources, buying power and
name recognition than we have. The cost of doing business in island markets is
typically higher than on the U.S. mainland because of ocean freight and duty
costs and higher facility costs. While we expect that the size of many of the
markets in which we operate or expect to enter will delay or deter entry by many
of our larger competitors, there can be no assurance that our larger competitors
will not decide to enter these markets or that other competitors will not
compete effectively against us. Our gross margin and operating income are
generally lower for those stores in markets where traditional warehouse clubs
and discount retailers also operate stores, due to increased price competition
and reduced market share. We may be required to implement price reductions and
other actions in order to remain competitive in our markets.


                                       15
<PAGE>

      In May 2001, PriceSmart opened a store on St. Thomas, where we have an
established market share. To remain competitive in St. Thomas, among other
things, we implemented a customer rewards program, which presents customers with
merchandise certificates based on the achievement of specified levels of
customer purchases. Additionally, PriceSmart opened a store in Guam in March of
2002. In response, we remodeled our Dededo store and have increased our price
competitiveness and marketing activities in Guam. During 2002, we experienced a
decline in sales in Guam as a result of the new competitor. There is no
assurance that the steps taken in Guam will cause initial sales losses to
rebound. Additionally, on December 8, 2002, our two stores on the island of Guam
suffered damage from Supertyphoon Pongsona, resulting in the immediate closure
of both stores. Our Tamuning store lost its generator in the storm, but reopened
shortly thereafter on December 12th. Our Dededo store, however, suffered more
significant damage, and has yet to reopen. We are in the process of rebuilding
our Dededo store with an expected reopening in late 2003. As a result of the
temporary closure of our Dededo store, we expect sales in Guam to be negatively
impacted in 2003.

      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.

      A decline in the general economic condition in the United States of
America 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. 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 decline in the national or regional economies of the United
States of America and the U.S. Territories where we currently operate or any
foreign countries in which we currently or will operate could have a material
adverse effect on our business, financial condition and operating results.

      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 June 2003, and presently operate
ten stores due to the December 8, 2002 closure of our Dededo, Guam store as a
result of damage sustained from Supertyphoon Pongsona. We are in the process of
rebuilding our Dededo store. Our closure of the ten other stores has adversely
affected our operating results. Should (i) any new store be unprofitable, (ii)
any existing store experience a significant decline in profitability, or (iii)
our general and administrative expenses increase, the effect on our operating
results would be more significant than would be the case if we had a larger
store base, and could have a material adverse effect on our business, financial
condition and operating results. Although we intend to carefully plan for the
implementation of additional stores, there can be no assurance that such plans
can be executed as envisioned or that the implementation of those plans will not
have a material adverse effect on our business, financial condition and
operating results. In addition, our ability to acquire products at a lower cost
than competitors or obtain volume-based pricing can be adversely affected
because of our small store base.

      Terrorist acts and acts of war may seriously harm our business, revenues,
costs, expenses and financial condition. Terrorist acts or acts of war, wherever
located around the world, may cause damage or disruption to us, our employees,
facilities, suppliers and customers, which could significantly impact our
revenues, expenses and financial condition. The potential for future terrorist
attacks, the national and international responses to terrorist attacks,
hostilities in the Middle East, including Iraq and the Korean peninsula, and
other acts of war or hostility, have created economic and political
uncertainties, which could adversely affect our business and results of
operations in ways that cannot be predicted. In addition, we may encounter
disruption in the transportation of our products as a result of terrorist
attacks or the national and international responses to terrorist attacks, which
would significantly harm our business.

      Fluctuations in the value foreign currencies could result in losses. Our
revenues and expenses are generally denominated in U.S. Dollars, but our
revenues and expenses for our stores located in Fiji and Netherlands Antilles
are generally denominated in local foreign currencies. Fluctuations in exchange
rates between the U.S. Dollar and other currencies could have a material adverse
effect on our business, financial condition or results of operations, and
particularly on our operating margins. To date, we have not sought to hedge the
risks associated with fluctuations in exchange rates as foreign currency
translation gains and losses have not had an adverse effect on our business, but
we may undertake to do so in the future. Any hedging techniques we implement in
the future may not be successful. Exchange rate fluctuations could also make our
products more expensive than competitive products not subject to these
fluctuations, which could adversely affect our revenues and profitability.


                                       16
<PAGE>

      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 Preston,
Washington; 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:

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

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

      Our business could suffer if we are unable to manage the challenges
associated with island and international operations. Our net sales from island
operations represent approximately 89% of our total net sales. We expect that
our island and international operations together will continue to account for
nearly all of our total net sales. The distance, as well as the time-zone
differences, involved with island locations impose significant challenges to our
ability to manage our operations. Logistical challenges are presented by
operating individual store units in remote locations, whether in terms of
information flow or transportation of goods. Our inability to effectively manage
our island and international operations could have a significant adverse effect
on our business, results of operations and financial condition.

      We face a number of uncertainties associated with expansion outside U.S.
Territories. Our failure to adequately address these uncertainties could cause
our business to suffer. Currently, three of our stores are located outside the
U.S. Territories. Our future expansion plans may involve entry into additional
foreign countries, which may involve additional or heightened risks 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 of America and anti-American sentiment as a result of
political or military action. We do not currently engage in currency hedging
activities. On February 15, 2001, we closed one of the two stores we operated in
Fiji due primarily to the impact that the political turmoil in Fiji was having
on the tourist industry, with the resulting economic downturn severely impacting
our store in Nadi. Our remaining store in Fiji is located in the city of Suva,
which is the capital of Fiji and the primary population center. There can be no
assurance that further political and economic changes in Fiji, or political and
economic changes in other markets, will not have a material adverse effect on
our business, financial condition and operating results. The failure to
adequately address the additional challenges involved with international
operations could have a material adverse effect on our business, financial
condition and operating results.

      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:

      o     Substantial lags between the procurement and delivery of product,
            thus complicating merchandising and inventory control methods;
      o     Possible loss of product due to potential damage to, or destruction
            of, ships or containers delivering our goods;
      o     Tariff, customs and shipping regulation issues;
      o     Substantial ocean freight and duty costs; and
      o     Possible interruption in the delivery of product due to labor
            disruption, terrorist acts or acts of war or other hostilities.

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

      We are exposed to weather and other risks associated with island
operations, which could affect our business and results of our operations. Our
operations are primarily located on islands subject to volatile weather
conditions and natural disasters, which could result in delays in construction
or result in significant damage to, or destruction of, our stores. On December
8, 2002, our two stores on the island of Guam suffered damage from Supertyphoon
Pongsona, resulting in the immediate closure of both stores. Our Tamuning store
lost its generator in the storm but reopened shortly thereafter on December
12th. Our Dededo store, however, suffered more significant damage and has yet to
reopen. We are in the process of working with our landlord to rebuild this store
with an expected reopening in the fourth quarter of 2003. Losses from business
interruption may not be adequately compensated by insurance and could have a
material adverse impact affect on our business, financial condition and results
of operations.


                                       17
<PAGE>

      In addition to weather, island operations involve uncertainties arising
from such as:

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

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

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

      o     Operate our stores on a profitable basis;
      o     Expand our operations through the opening of new stores;
      o     Properly identify and enter new markets;
      o     Locate suitable store sites;
      o     Negotiate acceptable lease terms;
      o     Locate local developers to construct facilities to lease;
      o     Construct or refurbish sites; and
      o     Obtain necessary funds on acceptable terms.

      We have not opened stores in foreign island markets at a rapid pace. In
fact, since May of 2000, we have closed more stores than we have opened,
including the closure of two stores in New Zealand and one in Fiji. Currently,
we have no plans to open new stores during 2003, other than rebuilding our
Dededo, Guam store.

      We do not have operating experience in many of the markets in which we may
open new stores. For example, in June 2000, we closed the two stores that we had
opened in New Zealand in late 1999, due in part to competitive and merchandising
challenges that were different from our other stores. New markets may present
operational, competitive, regulatory and merchandising challenges that are
different from those we currently encounter. We will be required to hire, train
and retain skilled managers and personnel to support any growth, and may
experience difficulties locating store managers and employees who possess
interest in island life, the training and experience necessary to operate our
new stores, including our management information and communications systems,
particularly in island markets where language, education and cultural factors
may impose additional challenges. Further, we have encountered, and may continue
to encounter, substantial delays, increased expenses or loss of potential sites
due to the complexities, cultural differences, and local political issues
associated with the regulatory and permitting processes in the island markets in
which we may locate our stores. There can be no assurance that we will be able
to open new stores according to our business plans, that any new stores we may
open will be profitable, or that we will be able to continue to attract, develop
and retain the personnel necessary to pursue our growth strategy. Failure to do
so could have a material adverse effect on our business, financial condition and
operating results.

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

      o     Acceptance and demand for U.S. goods;
      o     Familiarity with the warehouse concept;
      o     Absence of large warehouse club competition;
      o     Stable political and regulatory environment; and
      o     Favorable pricing structure to provide adequate return on
            investment.


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<PAGE>

      We believe the number of new island markets with these attributes is
limited in number as a result of, among other things, the entry by many of our
larger competitors into these markets. If we are unable to expand into new
island markets ahead of large warehouse club competitors, our business,
financial condition and results of operations may be adversely affected.

      We believe that there may be a select number of domestic markets in which
expansion may be successful, but we believe that opening stores in these markets
would involve a high degree of risk. We have had limited operating success in
domestic markets and gradually abandoned our domestic strategy during the
mid-1990s. We believe that expansion in domestic markets would not leverage our
core competencies that we have attained by operating in foreign island markets.
Similarly, our ability to price our products at attractive gross margin levels
that are still lower than most local competitors in island locations might not
hold true in domestic markets where traditional warehouse clubs and discount
retailers also operate stores. We do not currently have sufficient capital to
pursue a rapid growth domestic strategy, so we believe any effort to pursue such
a strategy would require us to raise substantial capital. We believe that we
would at best be able to expand slowly and would initially find it difficult to
leverage synergies and economies of scale in advertising, transportation of
products, logistics and overhead costs across a broad base of domestic stores.
Our pursuit of a domestic growth strategy would involve a high degree of risk
and could adversely affect our business, results of operations and our financial
condition.

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

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

      If we cannot maintain our existing credit facility, our operations and
business would suffer. 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 or severe pricing pressures from our customers or our
competitors, our ability to generate positive cash flow from operations may be
jeopardized. If we are unable to maintain our existing credit facility, there
would be a material adverse effect on our business, financial condition and
results of operation. Additionally, there can be no assurance that we would be
able to obtain additional financing when needed, or that any available financing
will be on terms acceptable to us.

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

      If we are unable to manage our fluctuating comparable store sales or our
comparable store sales decline, our business and results of operations could
suffer. Historically, our comparable store sales have fluctuated significantly.
A variety of factors affect our comparable store sales, including, among others,
actions of competitors (including the opening of additional stores in our
markets), the retail sales environment, general economic conditions, weather
conditions and our ability to execute our business strategy effectively. In
addition, our future expansion may result in opening additional stores in
markets where we already do business. Historically, we have experienced a
reduction in sales at an existing store when we open a new store in the same
market. These factors may result in future comparable store sales declines.
Moreover, there can be no assurance that comparable store sales for any
particular period will not decrease in the future. If our comparable store sales
decline, our business, results of operations and financial condition would
suffer.

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


                                       19
<PAGE>

      A disruption of our information systems could cause our business and
results of operations to suffer. Our business is highly dependent on
communications and information systems, primarily systems provided by
third-party vendors. Although we have taken a number of precautions against
certain events that could disrupt the operation of our management information
systems, we may experience systems failures or interruptions, which could have a
material adverse effect on our business, financial condition and operating
results. Any failure or interruption of our systems or systems provided by
third-party vendors could cause delays or other problems in our operations,
which could have a material adverse effect on our business, financial condition
and operating results.

      We may not be able to utilize certain tax benefits, which could have a
material adverse effect on our results of operations. Utilization of Tax
Benefits. Our ability to utilize various tax benefits is dependent on our
ability to generate adequate taxable income in the United States of America and
in foreign jurisdictions. As of December 29, 2002, we had recognized an
aggregate foreign tax benefit of $2.6 million on foreign operating losses and a
corresponding valuation allowance of $2.4 million. Approximately one-half of the
Net Operating Losses ("NOL's") will begin expiring in the year 2006. The
remaining NOL's were generated in Curacao, St. Maarten and Australia and are not
subject to expiration time limits. Utilization of the tax benefit is dependent
on our generating future taxable income. There can be no assurance that we will
be able to produce adequate future taxable income to utilize this tax benefit,
and failure to generate such income may have a material adverse effect on our
business, financial condition and operating results.

      Certain provisions in our charter documents and otherwise may discourage
third parties from attempting to acquire control of our Company, which may have
an adverse effect on the price of our stock. Pursuant to our Restated Articles
of Incorporation, our Board of Directors has the authority, without 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 restated articles 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.

      On February 23, 1999, our Board of Directors declared a dividend
distribution of preferred share purchase rights (the "Rights") pursuant to a
Shareholder Rights Plan. The Rights initially trade with shares of our common
stock and have no impact upon the way in which shareholders can trade our common
stock. However, if the plan is not waived by our board of directors, ten days
after a person or group acquires 15% or more of our common stock, or such date,
if any, as the Board of Directors may designate after a person or group
commences or publicly announces its intention to commence a tender or exchange
offer which could result in that person or group owning 15% or more of the
common stock (even if no purchases actually occur), the Rights will become
exercisable and separate certificates representing the Rights will be
distributed. The Rights would then begin to trade independently from our shares
at that time. The Rights are designed to cause substantial dilution to a person
or group that attempts to acquire our company without approval of the Board of
Directors, and thereby make a hostile takeover attempt prohibitively expensive
for the potential acquirer. As of June 29, 2003, no rights have become
exercisable. 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.

      We are subject to various governmental regulations, which may have an
adverse effect on our business. Governmental regulations in foreign countries
where we plan to expand our operations might prevent or delay entry into the
market or prevent or delay the introduction, or require modification, of certain
of our operations. Additionally, our ability to compete may be adversely
affected by foreign governmental regulations that encourage or mandate the
employment of citizens of, or purchase of supplies from vendors in a particular
jurisdiction. We may also be subject to taxation in these foreign jurisdictions,
and the final determination of our tax liabilities may involve the
interpretation of the statutes and requirements of the various domestic and
foreign taxing authorities. We may also be subject to currency repatriation
restrictions. There can be no assurance that any of these risks will not have a
material adverse effect on our business, financial condition and operating
results.


                                       20
<PAGE>

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. cash 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 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 do not have any derivative financial instruments as of June 29, 2003.

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
evaluated the effectiveness 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 accounting officer concluded that our disclosure controls
and procedures were effective.


                                       21
<PAGE>

                           PART II - OTHER INFORMATION

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

      The annual meeting of our shareholders was held on May 13, 2003. The
following proposals were submitted to a vote:

      The election of two directors, each to hold office for a term as defined
in the proxy statement and until their successors are duly elected and
qualified. This proposal passed with the following number of votes:

                                                 Affirmative            Withheld
                                                 -----------            --------

J. Jeffrey Meder                                  3,021,889              94,960
George C. Textor                                  3,021,989              94,860

      The ratification of the appointment of Deloitte & Touche, LLP as our
independent auditors for fiscal year 2003. This proposal was approved with
3,071,532 shares voting for approval, 14,300 shares voting against approval, and
31,017 shares abstaining.

      On June 19, 2003, we formally dismissed Deloitte & Touche, LLP as our
independent auditors for the fiscal year ending December 28, 2003. On June 19,
2003, we engaged Grant Thornton LLP as our new independent auditors for the
fiscal year ending December 28, 2003.


                                       22
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

           Exhibit
             No.                        Description
             ---                        -----------

            3.1   Amended and Restated Bylaws as of July 30, 2003
            10.1  Form of Indemnification Agreement
            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

(b)   Reports on Form 8-K

            o     On April 1, 2003, we filed a current report on Form 8-K
                  regarding our March 24, 2003 press release, which announced
                  that we were working with a financial institution to secure a
                  replacement line of credit to meet our working capital needs
                  and that our current lender had indicated that it would not
                  renew our existing line of credit beyond its expiration date
                  of April 1, 2003, although it had stated that it would extend
                  the terms of the existing line of credit facility until such
                  time as we finalized our replacement credit facility. The
                  current report on Form 8-K also included information regarding
                  our Annual Meeting of Shareholders to be held on Tuesday, May
                  13, 2003 at the Doubletree Hotel (Lake Hills Room), 300 112th
                  Ave. S.E., Bellevue, Washington, at 10:00 a.m. local time. The
                  record date for the meeting was set at March 28, 2003.

            o     On April 11, 2003, we filed a current report on Form 8-K
                  regarding our April 10, 2003 press release, which announced
                  that we had established a $6 million working capital line of
                  credit with Wells Fargo Business Credit, Inc.

            o     On May 2, 2003, we filed a current report on Form 8-K
                  regarding our April 29, 2003 press release, which announced
                  our financial results for the quarter ended March 30, 2003.

            o     On June 24, 2003, we filed a current report on Form 8-K
                  regarding our June 19, 2003 dismissal of Deloitte & Touche,
                  LLP as our independent accountants and our engagement of Grant
                  Thornton LLP as our new independent accountants for the fiscal
                  year ending December 28, 2003.

            o     On June 26, 2003, we filed a current report on Form 8-K
                  regarding our June 24, 2003 press release, which announced
                  that we had engaged in preliminary discussions with ASSI, Inc.
                  regarding a potential transaction by which ASSI, Inc. would
                  acquire all outstanding shares of common stock of the Company.

            o     On July 8, 2003, we filed a current report on Form 8-K
                  regarding our July 2, 2003 press release, which announced an
                  increase of 4.0% in same store sales (stores open a full 13
                  months), for the fiscal quarter ending June 29, 2003.


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<PAGE>

                                   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.
                                                   (Registrant)


Date August 8, 2003                                /s/ J. Jeffrey Meder
     ----------------------                        -----------------------------
                                                   J. Jeffrey Meder
                                                   President and
                                                   Chief Executive Officer


Date August 8, 2003                                /s/ Martin P. Moore
     ----------------------                        -----------------------------
                                                   Martin P. Moore
                                                   Chief Financial Officer


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