# SECURITIES
AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 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 26, 2005
| | --------------------------------------------

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 ofincorporation or organization) |  | (I.R.S. Employer Identification No.) | 

3633 136th Place
SE, Suite 110Bellevue,
Washington 98006(Address of principal executive
office) (Zip Code)

(425) 945-0213
(Registrant's telephone number, including area code)

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

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

The registrant had
3,989,876 common shares, par value $0.001, outstanding at August 5, 2005.

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

|PART I. FINANCIAL INFORMATION
|-----------------------------
|Item
1.                      
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|Item
2.                      
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|Item
3.                      
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|Item
4.                      
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|PART II. OTHER INFORMATION   
|Item
4.                      
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|Item
6.                      
|                             
|SIGNATURES                   

2

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# PART I
 FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
(UNAUDITED)

COST-U-LESS, INC.

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

|                                                    | 13 Weeks Ended | 26 Weeks Ended 
|--------------------------------------------------- | -------------- | ---------------
|
|Net sales                                           |                | $      52,295  
|Merchandise costs                                   |                | 42,597         
|Gross profit                                        |                | 9,698          
|Operating expenses:                                 |               
|Store                                               |                | 6,978          
|General and administrative                          |                | 1,513          
|Store openings                                      |                | 233            
|Store closings                                      |                | 59             
|Total operating expenses                            |                | 8,783          
|Operating income                                    |                | 915            
|Other income (expense):                             |                |                
|Interest expense, net                               |                | (59            
|Other                                               |                | (34            
|Income before income taxes                          |                | 822            
|Income tax provision                                |                | 310            
|Net income                                          |                | $           512
|Earnings per common share:                          |                |                
|Basic                                               |                | $          0.13
|Diluted                                             |                | $          0.12
|Weighted average common shares outstanding, basic   |                | 3,981,856      
|Weighted average common shares outstanding, diluted |                | 4,228,017      

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

3

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COST-U-LESS, INC.

# CONDENSED
CONSOLIDATED BALANCE SHEETS(in thousands)(Unaudited)

|                                           | June 26,2005 | December 26,2004
|------------------------------------------ | ------------ | ----------------
|ASSETS                                     |              |                 
|Current assets:                            |             
|Cash and cash equivalents                  |              | $  4,144        
|Accounts receivable, net                   |              | 1,665           
|Inventories, net                           |              | 23,745          
|Other current assets                       |              | 1,515           
|Total current assets                       |              | 31,069          
|Buildings and equipment, net               |              | 18,163          
|Deposits and other assets                  |              | 772             
|Total assets                               |              | $50,004         
|                                           |              |                 
|LIABILITIES AND SHAREHOLDERS' EQUITY       |             
|Current liabilities:                       |              |                 
|Accounts payable                           |              | $15,578         
|Accrued expenses and other liabilities     |              | 4,717           
|Line of credit                             |              | 2,873           
|Current portion of long-term debt          |              | 267             
|Current portion of capital lease           |              | 163             
|Total current liabilities                  |              | 23,598          
|Other long-term liabilities                |              | 994             
|Long-term debt, less current portion       |              | 2,144           
|Capital lease, less current portion        |              | 996             
|Total liabilities                          |              | 27,732          
|Commitments and contingencies              |              |                
|Shareholders' equity                       |              | 22,272          
|Total liabilities and shareholders' equity |              | $50,004         

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

4

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COST-U-LESS, INC.

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

|                                                              | CommonStockShares | CommonStockAmount | RetainedEarnings | AccumulatedOtherComprehensiveLoss | Total
|------------------------------------------------------------- | ------------------ | ------------------ | ---------------- | --------------------------------- | -----
|Balance at December 28, 2003                                  |                    | 3,688,376          |                  | $12,597                           |      
|Net income                                                    |                    |                   |                  |                                  |      
|Foreign currency translation adjustments                      |                    |                   |                  |                                  |      
|Comprehensive income                                          |                    |                    |                  |                                   |      
|Compensation related to stock options                         |                    |                   |                  | 9                                 |      
|Exercise of common stock options including
income tax benefit |                    | 50,680             |                  | 157                               |      
|Balance at June 27, 2004                                      |                    | 3,739,056          |                  | $12,763                           |      
|                                                              |                    |                    |                  |                                   |      
|Balance at December 26, 2004                                  |                    | 3,751,306          |                  | $12,795                           |      
|Net income                                                    |                    |                   |                  |                                  |      
|Foreign currency translation adjustments                      |                    |                   |                  |                                  |      
|Comprehensive income                                          |                    |                    |                  |                                   |      
|Exercise of common stock options including income tax benefit |                    | 238,570            |                  | 1,111                             |      
|Balance at June 26, 2005                                      |                    | 3,989,876          |                  | $13,906                           |      

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

5

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COST-U-LESS, INC.

# CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)
(Unaudited)

|                                                                                         | 26 Weeks Ended
|---------------------------------------------------------------------------------------- | --------------
|
|OPERATING ACTIVITIES:                                                                    |               
|Net income                                                                               |               
|Adjustments to reconcile net income to net cash provided/(used by) operating activities: |               
|Depreciation and amortization                                                            |               
|Deferred tax provision                                                                   |               
|Loss/(gain) on disposition of equipment                                                  |               
|Stock option expense                                                                     |               
|Cash provided by/(used in) changes in operating assets and liabilities:                  |               
|Insurance receivable                                                                     |               
|Accounts receivable                                                                      |               
|Inventories                                                                              |               
|Other current assets                                                                     |               
|Deposits and other assets                                                                |               
|Accounts payable                                                                         |               
|Accrued expenses and other liabilities                                                   |               
|Other long-term liabilities                                                              |               
|Net cash provided/(used by) operating activities                                         |               
|                                                                                         |               
|INVESTING ACTIVITY:                                                                      |               
|Cash used to purchase property and equipment                                             |               
|Proceeds from sale of property and equipment                                             |               
|Proceeds from insurance settlement                                                       |               
|Net cash provided/(used by) investing activities                                         |               
|                                                                                         |               
|FINANCING ACTIVITIES:                                                                    |               
|Proceeds from exercise of common stock options                                           |               
|Proceeds from capital lease obligations                                                  |               
|Borrowings/(payments) on line of credit, net                                             |               
|Increase/(decrease) in bank checks outstanding                                           |               
|Principal payments on capital lease obligations                                          |               
|Principal payments on long-term debt                                                     |               
|Net cash provided/(used by) financing activities                                         |               
|                                                                                         |               
|Foreign currency translation adjustments                                                 |               
|                                                                                         |               
|Net decrease in cash and cash equivalents                                                |               
|                                                                                         |               
|Cash and cash equivalents:                                                               |               
|Beginning of period                                                                      |               
|End of period                                                                            |               
|                                                                                         |               
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                        |               
|Cash paid during the period for:                                                         |               
|Interest                                                                                 |               
|Income taxes                                                                             |               
|Cash received during the period for:                                                     |               
|Income taxes                                                                             |               

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

6

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# COST-U-LESS, INC.NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

1. Nature of Business and Summary
of Significant Accounting Policies

Nature
of Business

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

On
July 8, 2005, the Company announced that it had been granted approval from the
Cayman Islands Trade and Business Licensing Board to operate a retail and
wholesale business through a controlled subsidiary organized in the Cayman
Islands. This is the first in a series of steps that must be taken before a
store operating under the Cost-U-Less name could be opened in the Cayman
Islands. The Company does not have an approximate timing as to when a new store
would open in the Cayman Islands, but expects that it will take twelve to
eighteen months once the permitting, approval and lease process is complete.

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 26, 2004, has been derived from the audited financial
statements at that date. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to SEC rules and regulations on quarterly reporting. Operating
results for the 13 and 26 weeks ended June 26, 2005, are not necessarily
indicative of results that may be expected for the entire year. All quarterly
periods reported consist of 13 weeks. For further information, refer to the
financial statements and footnotes included in the Companys annual report
on Form 10-K filed with the SEC on March 23, 2005.

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 2005,
ending on January 1, 2006, is a 53-week fiscal year. Fiscal 2004, which ended on
December 26, 2004, was a 52-week year.

Principles
of Consolidation

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

7

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

Foreign
Currency Translations and Comprehensive Income

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

Use
of Estimates

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

Stock-Based
Compensation

The
Company has elected to apply the disclosure-only provisions of Financial
Accounting Standards Board Statement No. 123 (FAS 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 (APB 25), whereby
compensation cost for stock options is measured as the excess, if any, of the
fair value of the Companys common stock at the date of grant over the
stock option exercise price. The Company usually grants stock options at
exercise prices equal to fair market value on the date of grant; as a result, no
compensation cost has been recognized.

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

| | 
| | 

|                                                                                                                                | 13 Weeks Ended | 26 Weeks Ended
|------------------------------------------------------------------------------------------------------------------------------- | -------------- | --------------
|
|Net income as reported                                                                                                          |                | $ 512         
|Less:  Total stock-based employee compensation expense
determined            under fair value method for all awards, net of tax |                | 12            
|Net income pro forma                                                                                                            |                | $500          
|                                                                                                                                |                |               
|Earnings per common share, basic as reported                                                                                    |                | $ 0.13        
|Earnings per common share, basic pro forma                                                                                      |                | $ 0.13        
|Earnings per common share, diluted as reported                                                                                  |                | $ 0.12        
|Earnings per common share, diluted pro forma                                                                                    |                | $ 0.12        

8

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# 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

In
December 2004, the Financial Accounting Standards Board issued Statement 123
(revised 2004), Share-Based Payment (Statement 123(R)). 
Statement 123(R) requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements.  The cost will
be measured based on the fair value of the instruments issued.  Statement
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans.  Statement 123(R)
replaces Statement 123, Accounting for Stock-Based Compensation and
supersedes Opinion 25, Accounting for Stock Issued to
Employees.  As originally issued in 1995, Statement 123 established
as preferable the fair-value-based method of accounting for share-based payment
transactions with employees.  However, that Statement permitted entities
the option of continuing to apply the guidance in Opinion 25, as long as the
footnotes to the financial statements disclosed what net income would have been
had the preferable fair-value-based method been used.  The Company will be
required to apply Statement 123(R) as of the beginning of its fiscal year that
begins after June 15, 2005. The Company expects to use the modified-prospective
method effective with its first quarter of fiscal 2006.  The Company
believes that the adoption of this new accounting standard will not have a
material impact on the Companys results of operations or financial
position, as the Company has a limited amount of options available for issuance
in the future.

On
November 24, 2004, the FASB issued Statement No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4 (FAS 151) which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. FAS 151 requires that abnormal items be
recognized as current-period charges, as well as unallocated overheads
recognized in the period in which they are incurred. The provisions of this
statement are effective for inventory costs incurred during fiscal periods
beginning after June 15, 2005. The Companys adoption of FAS 151
is not expected to have a significant impact on the Companys results of
operations or financial position.

## 2. Earnings
Per Share

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

|                                                                                                                    | 13 Weeks Ended | 26 Weeks Ended
|------------------------------------------------------------------------------------------------------------------- | -------------- | --------------
|
|Numerator:                                                                                                          |                |               
|Net income                                                                                                          |                | $          512
|Denominator:                                                                                                        |                |               
|Denominator for basic earnings per shareweighted
average shares                                                    |                | 3,981,856     
|Effect of dilutive common equivalent shares:                                                                        |                |               
|Stock options                                                                                                       |                | 246,161       
|Denominator for diluted earnings per shareadjusted
weighted average shares and assumed conversion of stock options |                | 4,228,017     
|                                                                                                                    |                |               
|Basic earnings per common share                                                                                     |                | $         0.13
|Diluted earnings per common share                                                                                   |                | $         0.12

9

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

The
diluted share calculation for the 13 weeks ended June 27, 2004, excludes 70,042
stock options outstanding. The diluted share calculation for the 26 weeks ended
June 27, 2004, excludes 83,130 stock options outstanding. These options are
excluded due to their anti-dilutive effect.

## 3. Line of
Credit

On
May 26, 2005, the Company entered into the Fourth Amendment to Credit and
Security Agreement (the Fourth Amendment) as it relates to its current line of
credit. The Fourth Amendment provides for an extension of the maturity date of
the Companys line of credit from April 9, 2006, to May 18, 2007.
Additionally, the Fourth Amendment (1) reduces the interest rate to an annual
interest rate equal to the prime rate as defined by Wells Fargo Bank
National Association, (2) reduces the minimum interest charge to not less than
$25,000 per calendar year, (3) increases the unused line fee to a rate of
three-eighths of one percent (0.375%) per annum on the average daily unused line
and (4) eliminates the one day interest charge on all payments received on the
line of credit. Borrowings continue to be limited to the lesser of $6.0 million
or the amount calculated under the borrowing base. The borrowing base is equal
to the lesser of (a) $6.0 million or (b) the sum of 70% of eligible inventory in
the United States of America, plus 60% of eligible inventory in the U.S. Virgin
Islands and Guam, less specified reserves.

The
line of credit consists of a $6.0 million committed, secured revolving credit
line with a sublimit for letters of credit and bankers acceptances in the amount
up to $0.7 million. At June 26, 2005, there was $2.9 million outstanding on the
line of credit and an additional $0.1 million utilized for standby letters of
credit and $0.1 million set aside for other reserves. Borrowings under the
amended line of credit were charged interest at the financial institutions
prime rate plus 0.5% from the beginning of the fiscal year through May 17, 2005,
and at the prime rate from May 18, 2005, through June 26, 2005. At June 26,
2005, the rate charged by the financial institution was 6.0%.

The
line of credit contains various covenants, including a requirement that the
Company maintain minimum pre-tax income and tangible net worth and limitations
on acquisitions, additional debt, changes in control and capital expenditures.
The Company believes that it was in compliance with all such covenants as of
June 26, 2005.

## 4. 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

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

## Certain
Factors That May Affect Future Results of Operations

This
discussion and analysis should be read in conjunction with our unaudited
condensed consolidated financial statements and the related notes thereto
appearing in Item 1 of this report. In addition to historical information, this
quarterly report on Form 10-Q contains, and may incorporate by reference,
statements which may constitute forward-looking statements which involve known
and unknown risks, uncertainties and other factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements. Forward-looking statements may be identified by the
use of forward-looking terminology such as may, will,
expect, estimate, anticipate,
continue, or similar terms, variations of such terms or the negative
of those terms, but the absence of such terms does not mean that a statement is
not forward-looking. Forward looking statements reflect the expectations of our
management at the time that they are made and do not represent an opinion about
what may happen in the future. More information about factors that could affect
our financial results is included in the Risk Factors that May Affect
Future Results and Managements Discussion and Analysis of
Financial Condition and Results of Operations sections of our annual
report on Form 10-K for the fiscal year ended December 26, 2004, which was filed
on March 23, 2005, 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 fiscal year ended
December 26, 2004.

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

## Overview

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

Our
stores are patterned after the warehouse club concept, except our stores (i) are
smaller (averaging approximately 32,000 square feet vs. large format warehouse
clubs of approximately 115,000 square feet), (ii) generally target niche
markets, mainly U.S. Territories, U.S. island states and foreign island
countries, 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.

On
May 26, 2005, we moved our St. Croix store into a newly constructed building on
a parcel of land located closer to the main trade area in the center of the
island than our former store. The size of the new store is 38,000 square feet, a
45% increase in square footage over the previous store.

Our
management focus relative to our core island store operations includes reviewing
our merchandising strategies, both those that apply to all stores and those
specific to each store, in light of the different conditions in each market. We
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 are currently evaluating
methods of implementing future growth, including expansion opportunities in
selected markets and relocation opportunities for stores in existing markets
with leases expiring in the next few years, as we did with our St. Croix store.
Additionally, we believe that although there are a number of new island markets
that have the attributes necessary to support a growth strategy for our
business, licensing restrictions and political resistance to foreign retailers,
among other things, make it difficult for us to enter some of these markets.
While we believe these actions can improve profitability, there can be no
assurance that these actions will be successful.

On
July 8, 2005, we announced that we had been granted approval from the Cayman
Islands Trade and Business Licensing Board to operate a retail and wholesale
business through a controlled subsidiary organized in the Cayman Islands. This
is the first in a series of steps that must be taken before a store operating
under the Cost-U-Less name can be opened in the Cayman Islands. We do not have
an approximate timing as to when a new store would open in the Cayman Islands,
but expect that it will take twelve to eighteen months once the permitting,
approval and lease process is complete.

11

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## Results of
Operations

During
the 13 and 26 weeks ended June 26, 2005, we continued to experience increases in
comparable-store sales. These increases were offset by higher store expenses
caused by higher utility expenses and higher payroll expenses (the latter of
which remained constant as a percentage of store sales as compared to the prior
year). Additionally, we experienced store opening and closing costs associated
with the relocation of our St. Croix store on May 26, 2005. These factors
resulted in lower operating income in the 13 and 26 weeks ended June 26, 2005,
as compared to the same periods in the prior year. However, during the 26 weeks
ended June 26, 2005, we benefited from a non-recurring insurance reimbursement
recorded in other income and a reduction in interest expense as compared to the
same period in 2004 which, combined with a slightly lower effective tax rate,
resulted in higher net income.

Comparison of the 13 and 26
Weeks Ended June 26, 2005, to the 13 and 26 Weeks Ended June 27, 2004:

Net
Sales: Net sales of $52.3 million for the 13 weeks ended June 26, 2005,
increased 2.9% compared to net sales of $50.8 million for the same period in the
prior year. Net sales of $105.5 million for the 26 weeks ended June 26, 2005,
increased 4.6% compared to net sales of $100.9 million for the same period in
the prior year. The increase in net sales in the 13 and 26 weeks ended June 26,
2005, as compared to the same periods in the prior year was due to
comparable-store sales increases offset by a decline in business-to-business
sales as compared to the same period in the prior year. We expect the level of
business-to-business activity for fiscal 2005 to be lower than fiscal 2004, as
we de-emphasize these lower margin sales.

Comparable-store
sales (stores open for a full 13 months) increased 4.9% and 6.0% for the 13 and 26 weeks
ended  June 26, 2005, respectively, as compared to the same periods in the prior year.
Nine of our eleven stores  experienced increased sales in both the 13 and 26 weeks ended
June 26, 2005, as compared to the same periods in  the prior year, primarily due to
improvements in our assortment of goods, operating improvements including better
in-stock inventory levels, as well as general inflationary trends.

Gross
Profit: Gross profit of $9.7 million, or 18.5% of sales, for the 13 weeks ended
June 26, 2005, increased as compared to gross profit of $9.4 million, or 18.4%
of sales, in the same period in the prior year. Gross profit of $19.3 million,
or 18.3% of sales, for the 26 weeks ended June 26, 2005, increased as compared
to gross profit of $18.4 million, or 18.3% of sales, in the same period in the
prior year. The improvement in gross profit dollars in both the 13 and 26 weeks
ended June 26, 2005, was primarily due to our increased sales.

Store
expenses: Store expenses increased to $7.0 million and $13.7 million for the 13
and 26 weeks ended June 26, 2005, respectively, as compared to $6.4 million and
$12.7 million for the same periods in the prior year. As a percentage of sales,
store expenses were 13.3% and 13.0% of sales for the 13 and 26 weeks ended June
26, 2005, respectively, as compared to 12.6% for both periods in the prior year.
Approximately 30% of the dollar increase in store expenses for the 13 weeks
ended June 26, 2005, was attributable to higher volume-related expenses such as
payroll and related costs such as health care, and bankcard fees. The remainder
of the dollar increase for the 13 weeks ended June 26, 2005, was primarily
attributable to an 18% increase in energy (utility) expense, and a 5% increase
in rent expense as compared to the same period in the prior year. Approximately
40% of the dollar increase in store expenses for the 26 weeks ended June 26,
2005, was attributable to higher volume-related expenses such as payroll and
related costs such as health care, and bankcard fees. The remainder of the
dollar increase for the 26 weeks ended June 26, 2005, was primarily attributable
to a 13% increase in energy (utility) expense, a 7% increase in commercial
insurance expense and a 4% increase in rent expense as compared to the same
period in the prior year. Payroll and related costs, although higher due to
volume, remained comparable as a percent of store sales at 5.2% of sales for the
13 and 26 weeks in both fiscal 2005 and fiscal 2004.

General
and administrative expenses: General and administrative expenses decreased to
$1.5 million and $3.2 million for the 13 and 26 weeks ended June 26, 2005,
respectively, as compared to $1.7 million and $3.5 million for the same periods
in the prior year. As a percentage of sales, general and administrative expenses
were 2.9% and 3.0% of sales for the 13 and 26 weeks ended June 26, 2005,
respectively, as compared to 3.4% for both periods in the prior year, primarily
due to the leveraging of corporate expenses over increased store sales and
slightly lower payroll and related costs.

Store
opening expenses: Store opening expenses increased to $0.2 million and $0.3
million for the 13 and 26 weeks ended June 26, 2005, respectively, as compared
to $39,000 and $79,000 for the same periods in the prior year. Store opening
expenses in fiscal 2005 primarily relate to costs associated with the relocation
of our St. Croix store and the evaluation of potential new store locations.

12

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Store
closing expenses: Store closing expenses of $59,000 in both the 13 and 26 weeks
ended June 26, 2005, represent the costs incurred with closing our former St.
Croix location after we relocated our store on May 26, 2005.

Interest
expense, net: Interest expense, net decreased to $59,000 and $0.1 million for
the 13 and 26 weeks ended June 26, 2005, respectively, as compared to $0.1
million and $0.2 million for the same periods in the prior year. The decrease
was primarily attributable to the capitalization of approximately $40,000 and
$0.1 million of interest related to the construction of our new store in St.
Croix during the 13 and 26 weeks ended June 26, 2005, respectively.

Other
income/(expense): Other income/(expense) was ($34,000) for the 13 weeks ended
June 26, 2005, as compared to ($28,000) for the same period in the prior year.
Other income/(expense) was $82,000 for the 26 weeks ended June 26, 2005, as
compared to $1,000 for the same period in the prior year. The increase was
primarily due to the receipt of a $100,000 non-recurring insurance
reimbursement. All other amounts included in other income are attributable to
gains on foreign currency transactions and translation of intercompany balances
for transactions that exceed the permanent investments in those countries.

Income
tax provision: The tax provisions for the 13 and 26 week periods ended June 26,
2005, and June 27, 2004, primarily represent taxes associated with income
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: Net income was $0.5 million, or $0.12 per fully diluted share, for the
13 weeks ended June 26, 2005, as compared to a net income of $0.6 million, or
$0.16 per fully diluted share, in the same period in the prior year. Net income
was $1.2 million, or $0.30 per fully diluted share, for both the 26 week periods
in 2005 and 2004. The decrease in net income during the 13 weeks ended June 26,
2005, was primarily attributable to store opening and closing costs associated
with the relocation of our store in St. Croix.

## Liquidity and
Capital Resources

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

We
utilized $1.4 million of cash from operations during the 26 weeks ended June 26,
2005, as compared to $0.8 million generated in the same period in the prior
year. The $2.2 million decrease in cash provided by operations was primarily due
to a $1.2 million reduction in accrued expenses during the 26 weeks ended June
26, 2005, and the receipt during the 26 weeks ended June 27, 2004, of insurance
proceeds related to inventory damaged in 2002 by the supertyphoon in Guam.

Net
cash used in investing activities was $4.8 million for the 26 weeks ended June
26, 2005, as compared to $0.2 million of cash generated in the same period in
the prior year. The cash used in investing activities during the 26 weeks ended
June 26, 2005, was primarily due to costs associated with the construction of
the new building in St. Croix where we relocated our St. Croix store on May 26,
2005, and the costs associated with the purchase of equipment for the new
location (see below for a discussion of financing activities with regards to the
leasing of this equipment). We expect to incur an additional $0.5 to $1.0
million for the cost of site development, the new building and equipment in St.
Croix. The $0.7 million of proceeds received from our insurance settlement
during the 26 weeks ended June 27, 2004, relates to insurance reimbursements
received on fixed assets lost in the supertyphoon in Guam that we replaced in
2003. Although we currently have no plans to open stores in new markets during
fiscal 2005, in July 2005 we were granted approval from the Cayman Islands Trade
and Business Licensing Board to operate a retail and wholesale business through
a controlled subsidiary organized in the Cayman Islands. This is the first in a
series of steps that must be taken before a store operating under the
Cost-U-Less name can be opened in the Cayman Islands. We do not have an
approximate timing as to when a new store would open in the Cayman Islands, but
expect that it will take twelve to eighteen months once the permitting, approval
and lease process is complete. In addition to the Cayman Islands location, we
continue to explore expansion opportunities in selected markets and additional
relocation opportunities for stores in existing markets.

We
generated $4.3 million of cash for financing activities during the 26 weeks
ended June 26, 2005, as compared to $1.3 million utilized in the same period in
the prior year. The increase was primarily due to an increase in borrowings on
our line of credit, an increase in cash overdrafts and an increase in cash
received related to stock option exercises during the 26 weeks ended

13

---

June 26,  2005, as compared to the
same period in the prior year. Additionally, during the  26 weeks ended June 26, 2005, we
entered into a $0.5 million capital equipment  lease for a portion of the equipment
purchased for the new St. Croix location.  We anticipate leasing an additional $0.5
million of equipment at this location  in the third quarter of 2005.

On
May 26, 2005, we amended our current line of credit to extend the maturity date
from April 9, 2006, to May 18, 2007. The amendment also (1) reduces our interest
rate to an annual interest rate equal to the prime rate as defined
by Wells Fargo Bank National Association, (2) reduces our minimum interest
charge to not less than $25,000 per calendar year, (3) increases our unused line
fee to a rate of three-eighths of one percent (0.375%) per annum on the average
daily unused line, and (4) eliminates our one day interest charge on all
payments received on the line of credit. Borrowings continue to be limited to
the lesser of $6.0 million or the amount calculated under the borrowing base.
The borrowing base is equal to the lesser of (a) $6.0 million or (b) the sum of
70% of eligible inventory in the United States of America, plus 60% of eligible
inventory in the U.S. Virgin Islands and Guam, less specified reserves.

The
line of credit consists of a $6.0 million committed, secured revolving credit
line with a sublimit for letters of credit and bankers acceptances in the amount
up to $0.7 million. At June 26, 2005, there were borrowings of $2.9 million
outstanding on the line of credit and an additional $0.1 million utilized for
standby letters of credit and $0.1 million set aside for other reserves.
Borrowings under the amended line of credit were charged interest at the
financial institutions prime rate plus 0.5% from the beginning of the
fiscal year through May 17, 2005, and at the prime rate from May 18, 2005,
through June 26, 2005. At June 26, 2005, the rate charged by the financial
institution was 6.0%.

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, changes in control and capital expenditures. As
of June 26, 2005, we believe that we were in compliance with all such covenants.

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

## Contractual
Obligations

As
of June 26, 2005, our commitments to make future payments under long-term
contractual obligations were as follows (in thousands):

|                 | Payments Due by Period
|---------------- | ----------------------
|
|Long-term debt   |                       
|Operating Leases |                       
|Capital Lease    |                       
|Total            |                       

## 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 26, 2004.

The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. We base our estimates on historical experience and other
factors we believe to be reasonable under the

14

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circumstances, the results of  which
form the basis for making judgments about the carrying values of assets  and liabilities
that are not readily apparent from other sources. Actual results  could differ from those
estimates.

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

## Inventories

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

## Long Lived Assets

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

## Foreign Currency Translation

The
U.S. dollar is the functional currency for all our locations, except for Fiji
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). We recognize the cumulative translation
adjustment resulting from a net investment in a country as income or expense in
the period we substantially liquidated operations in that country.

## Income Taxes

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

# Accounting
Pronouncements

In
December 2004, the Financial Accounting Standards Board issued Statement 123
(revised 2004), Share-Based Payment (Statement 123(R)). 
Statement 123(R) requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements.  The cost will
be measured based on the fair value of the instruments issued.  Statement
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans.  Statement 123(R)
replaces Statement 123, Accounting for Stock-Based Compensation and
supersedes Opinion 25, Accounting for Stock Issued to
Employees.  As originally issued in 1995, Statement 123 established
as preferable the fair-value-based method of accounting for share-based payment
transactions with employees.  However, that Statement permitted entities
the option of continuing to apply the guidance in Opinion 25, as long as the
footnotes to the financial statements disclosed what net income would have been
had the preferable fair-value-based method been used.  We will be required
to apply Statement 123(R) as of the beginning of our fiscal year that begins
after June 15, 2005. We expect to use the modified-prospective method effective
with our first quarter of fiscal 2006.  We believe that the adoption of
this new accounting standard will not have a material impact on our results of
operations or financial

15

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position, as we have a limited
amount of options  available for issuance in the future.

On
November 24, 2004, the FASB issued Statement No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4 (FAS 151) which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. FAS 151 requires that abnormal items be
recognized as current-period charges, as well as unallocated overheads
recognized in the period in which they are incurred. The provisions of this
statement are effective for inventory costs incurred during fiscal periods
beginning after June 15, 2005. Our adoption of FAS 151 is not expected to
have a significant impact on our results of operations or financial position.

## 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 quarterly report. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that are currently deemed
immaterial also may impair our business operations or could cause actual results
to differ from historical results or those anticipated. If any of the following
risks actually occur, our business, financial condition and operating results
could be materially adversely affected.

Because
we have a small store base, adverse store performance or increased expenses will
have a more significant adverse impact on our operating and financial results
than if we had a larger store base. We opened our first store in 1989 and opened
a total of 21 stores through December 2004 and presently operate eleven stores.
Our closure of the ten other stores prior to March 2001 adversely affected our
operating results. Should any existing store experience a significant decline in
profitability or any new store be unprofitable, the negative effect on our
business would be more significant than would be the case if we had a larger
store base, and could have a material adverse effect on our business, financial
condition and operating results. In addition, if our general and administrative
expenses increase, the negative effect on our business and results of operations
would be more significant than if we had a larger store base. Although we intend
to carefully plan for the implementation of additional stores, there can be no
assurance that such plans can be executed as envisioned or that the
implementation of those plans will not have a material adverse effect on our
business, financial condition and operating results. In addition, our ability to
acquire products at a lower cost than competitors or obtain volume-based pricing
can be adversely affected because of our small store base.

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

We
are exposed to weather and other risks associated with island operations, which
could affect our business and results of our operations. Our operations are
primarily located on islands subject to volatile weather conditions and natural
disasters, such as tsunamis, hurricanes, floods, typhoons and earthquakes, which
could result in delays in construction or result in significant damage to, or
destruction of, our stores. On December 8, 2002, our two stores on the island of
Guam suffered damage from Supertyphoon Pongsona, resulting in the immediate
closure of both stores. Our Tamuning store lost its generator in the storm and
our Dededo store had to be closed for reconstruction. Additionally, we have four
stores in the Caribbean, which has experienced increased activity from several
hurricanes and tropical storms in the past few years.

While
we maintain property, casualty and business interruption insurance coverage in
amounts we consider adequate for these types of events, insurance payments
generally do not fully reimburse us for all of the damages and lost profits
caused by adverse weather events. If we were to experience a catastrophic loss,
we may exceed our policy limit and we may have difficulty obtaining similar
insurance coverage in the future. If our insurance coverage is not adequate to
cover the losses and business interruption caused by severe weather events or
natural disasters, we may be required to pay substantial amounts and our
financial condition and liquidity would suffer.

16

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

| |  | Changes in local labor markets, including unionization and inadequate labor pools;
|- |  | ----------------------------------------------------------------------------------

| |  | Local business practices,  language and cultural  considerations,  including the capacity or willingness of local business and
     government officials to provide necessary services;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Ability to acquire,  install and maintain  modern  capabilities  such as dependable  and  affordable  electricity,  telephone,
     computer, Internet and satellite connections often in undeveloped regions;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Political, military and trade tensions;
|- |  | ---------------------------------------

| |  | Currency exchange rate fluctuations and repatriation restrictions;
|- |  | ------------------------------------------------------------------

| |  | Local economic conditions;
|- |  | --------------------------

| |  | Difficulty enforcing agreements or protecting intellectual property;
|- |  | --------------------------------------------------------------------

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

| |  | Volatile island operating expenses, including utilities.
|- |  | --------------------------------------------------------

Our
net sales from island operations represented approximately 92.9% of our total
net sales for fiscal 2004. We expect that our island and international
operations together will continue to account for nearly all of our total net
sales. The distance, as well as the time-zone differences, involved with island
locations impose significant challenges to our ability to manage our operations.
Logistical challenges are presented by operating individual store units in
remote locations, whether in terms of information flow or transportation of
goods. Our inability to effectively manage our island and international
operations could have a significant adverse effect on our business, results of
operations and financial condition

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

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

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

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

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

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

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

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

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

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

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

We
have not opened stores in foreign island markets at a rapid pace. Currently, we
have no plans to open stores in new markets during 2005. However, in July 2005
we were granted approval from the Cayman Islands Trade and Business Licensing
Board to operate a retail and wholesale business through a controlled subsidiary
organized in the Cayman Islands. This is the first in a series of steps that
must be taken before a store operating under the Cost-U-Less name can be opened
in the Cayman Islands. We do not have an approximate timing as to when a new
store would open in the Cayman Islands, but expect that it will take twelve to
eighteen months once the permitting, approval and lease process is complete. In
addition to the Cayman Islands location, we continue to explore expansion
opportunities in selected markets and additional relocation opportunities for
stores in existing markets.

New
markets may present operational, competitive, regulatory and merchandising
challenges that are different from those we currently encounter. We do not have
operating experience in many of the markets in which we may consider opening new
stores. In fact, in June 2000, we closed the two stores that we had opened in
New Zealand in 1999, as they had performed below expectations, due in part to
competitive and merchandising challenges that are different from our other
stores. Additionally, in February 2001, we closed one of our two Fiji stores,
due primarily to the impact that political turmoil and the resulting economic
downturn in Fiji were having on the tourist industry. There can be no assurance
that we will be able to adapt our operations to support our future expansion
plans or that our new stores will be profitable. Any failure on our part to
manage our growth could have a material adverse effect on our business,
financial condition and operating results.

Additionally,
we rely significantly on the skill and expertise of our on-site store managers.
We will be required to hire, train and retain skilled managers and personnel to
support any growth, and may experience difficulties locating store managers and
employees who possess the training and experience necessary to operate our new
stores, including our management information and communications systems,
particularly in island markets where language, education and cultural factors
may impose

17

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additional challenges. We have
encountered, and may continue to  encounter, substantial delays, increased expenses or
loss of potential sites due  to the complexities, cultural differences, and local
political issues associated  with the regulatory and permitting processes in the island
markets in which we  may locate our stores. There can be no assurance that we will be
able to open  new stores, or that we will be able to continue to attract, develop and
retain  the personnel necessary to pursue our growth strategy. Failure to do so could
have a material adverse effect on our business, financial condition and  operating
results.

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

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

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

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

| |  | Size of population;
|- |  | -------------------

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

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

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

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

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

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. We do not carry key-man life
insurance on any of our personnel. 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 current or similar insurance coverage, our business and
results of operations could suffer. We utilize a combination of insurance
policies and self-insurance mechanisms to provide for the potential liabilities
for property insurance, general liability, director and officers
liability, workers compensation and employee health care insurance. The
costs related to obtaining our current insurance coverage have been increasing.
If the costs of maintaining this insurance coverage continue to increase
significantly, we would experience an associated increase in our store and
administrative expenses that may negatively impact our operating results. In
addition, if we are unable to maintain our current or similar insurance
coverage, or if an event were to occur that was not covered by our current
insurance policy coverage levels (including acts of terrorism, war and actions
such as government nationalizations), our business and results of operations
could suffer.

18

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If
our store employees decided to become unionized, we may experience increased
operating costs or other operation problems. None of our employees are currently
covered by a collective bargaining agreement. However, presently there is an
attempt to unionize our hourly employees in our St. Maarten store. Unionization
of any of our stores could result in higher employee compensation and
restrictive working condition demands that could increase our operating costs
and have a material adverse effect on our business, financial condition and
operating results.

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

If
we are unable to overcome challenges resulting from the isolation of store
operations from our corporate management and our increased dependence on local
managers, we may experience decreased productivity or other operational
problems. Our headquarters and administrative offices are located in Washington
state; however, ten of our eleven stores and a majority of our employees are
located on islands. Although we invest resources to hire and train our on-site
managers, the inability of our executives to be physically present at our
current and planned store sites on a regular basis may result in the following:

|  | 
|- | 
|
| | 
| | 
| | 
| | 

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

We
may encounter disruption in the transportation of our products, which would
significantly harm our business. Our island locales require the transportation
of products over great distances on water, which results in the following:

|  | 
|- | 
|
| | 
| | 
| | 
| | 
| | 

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

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

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

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

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## ITEM 3.  QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

We
did not have any derivative financial instruments as of June 26, 2005.

## ITEM 4.  CONTROLS AND
PROCEDURES

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

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# 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 11, 2005. The following
proposals were submitted to a vote:

The
election of three directors, to hold office for terms as defined in the proxy
statement and until their respective successors are duly elected and qualified.
The following nominees for election as director received the number of votes set
opposite each nominees name:

|                  | Affirmative | Withheld 
|----------------- | ----------- | ---------
|Robert C. Donegan |             | 3,465,759
|David A. Enger    |             | 3,464,011
|Gary W. Nettles   |             | 3,464,768

The
ratification of the appointment of Grant Thornton LLP as our independent
auditors for fiscal year 2005. This proposal was approved with 3,664,103 shares
voting for approval, 6,756 shares voting against approval, and 4,350 shares
abstaining.

## ITEM 6.  EXHIBITS

|ExhibitNo. | Description
|---------- | -----------
|10.1       |            
|31.1       |            
|31.2       |            
|32.1       |            
|32.2       |            

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# SIGNATURES

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

| | COST-U-LESS, INC.
| | -----------------

|Date: August 9, 2005 | /s/  J. Jeffrey MederJ. Jeffrey Meder
President andChief Executive Officer
|-------------------- | --------------------------------------------------------------------------

|Date: August 9, 2005 | /s/ Martin P. MooreMartin P. Moore
Chief Financial Officer
|-------------------- | ----------------------------------------------------------

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