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 MARCH 28, 2004

OR

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

FOR THE
TRANSITION PERIOD FROM _________  TO  ___________

COMMISSION
FILE NUMBER 0-24543

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

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

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

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

8160
304th Avenue SE, Building 3, Suite APreston,
Washington 98050(Former address of principal executive office)

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 3,736,556 common shares, par value $0.001, outstanding at May 7,
2004.

---

COST-U-LESS,
INC.

INDEX
TO FORM 10-Q

|                              |                                                                                       |   
|----------------------------- | ------------------------------------------------------------------------------------- | --
|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                            | 20
|Item 4.                       | Controls and Procedures                                                               | 20
|PART II. OTHER INFORMATION   
|Item 6.                       | Exhibits and Reports on Form 8-K                                                      | 21
|SIGNATURES                    |                                                                                       | 22

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 | 
|--------------------------------------------------- | -------------- | 
|
|Net sales                                           |                | 
|Merchandise costs                                   |                | 
|                                                    |                | 
|Gross profit                                        |                | 
|Operating expenses:                                 |                | 
|Store                                               |                | 
|General and administrative                          |                | 
|Store openings                                      |                | 
|                                                    |                | 
|Total operating expenses                            |                | 
|                                                    |                | 
|Operating income                                    |                | 
|Other income (expense):                             |                | 
|Interest expense, net                               |                | 
|Other                                               |                | 
|                                                    |                | 
|Income before income taxes                          |                | 
|Income tax provision                                |                | 
|                                                    |                | 
|Net income                                          |                | 
|                                                    |                | 
|Earnings per common share:                          |                | 
|Basic                                               |                | 
|                                                    |                | 
|Diluted                                             |                | 
|                                                    |                | 
|Weighted average common shares outstanding, basic   |                | 
|                                                    |                | 
|Weighted average common shares outstanding, diluted |                | 
|                                                    |                | 

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

3

---

COST-U-LESS,
INC.

CONDENSED
CONSOLIDATED BALANCE SHEETS(in
thousands)

(Unaudited)

|                                                | March 28,2004 |  | December 28,2003 |       
|----------------------------------------------- | ------------- |  | ---------------- | ------
|ASSETS                                          |               |  |                  |       
|Current assets:                                 |               | 
|Cash and cash equivalents                       |               |  | $                | 4,273 
|Insurance receivable                            |               |  |                  |      
|Accounts receivable, net                        |               |  |                  | 1,099 
|Inventories, net                                |               |  |                  | 23,055
|Other current assets                            |               |  |                  | 1,683 
|                                                |               |  |                  |       
|Total current assets                            |               |  |                  | 30,110
|Property and equipment, net                     |               |  |                  | 12,752
|Deposits and other assets                       |               |  |                  | 789   
|                                                |               |  |                  |       
|Total assets                                    |               |  | $                | 43,651
|                                                |               |  |                  |       
|LIABILITIES AND SHAREHOLDERS EQUITY            |               | 
|Current liabilities:                            |               | 
|Line of credit                                  |               |  | $                | 66    
|Accounts payable                                |               |  |                  | 17,662
|Accrued expenses and other liabilities          |               |  |                  | 3,999 
|Current portion of capital lease obligations    |               |  |                  | 97    
|Current portion of long-term debt               |               |  |                  | 267   
|                                                |               |  |                  |       
|Total current liabilities                       |               |  |                  | 22,091
|Other long-term liabilities                     |               |  |                  | 694   
|Capital lease obligations, less current portion |               |  |                  | 684   
|Long-term debt, less current portion            |               |  |                  | 2,477 
|                                                |               |  |                  |       
|Total liabilities                               |               |  |                  | 25,946
|Commitments and contingencies                   |               | 
|Shareholders equity                            |               |  |                  | 17,705
|                                                |               |  |                  |       
|Total liabilities and shareholders equity      |               |  | $                | 43,651
|                                                |               |  |                  |       

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

4

---

COST-U-LESS,
INC.

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

(Unaudited)

|                                         | CommonStockShares |  | CommonStockAmount |           | RetainedEarnings |   | AccumulatedOtherComprehensiveLoss |  | Total |      
|---------------------------------------- | ------------------ |  | ------------------ | --------- | ---------------- | - | --------------------------------- |  | ----- | -----
|Balance at December 29, 2002             |                    |  |                    | 3,606,376 |                  | $ | 12,446                            |  | $     | 3,842
|Net income                               |                    |  |                    |          |                  |   |                                  |  |       | 226  
|Foreign currency translation adjustments |                    |  |                    |          |                  |   |                                  |  |       |     
|                                         |                    |  |                    |           |                  |   |                                   |  |       |      
|Comprehensive income                     |                    |  |                    |           |                  |   |                                   |  |       |      
|                                         |                    |  |                    |           |                  |   |                                   |  |       |      
|Balance at March 30, 2003                |                    |  |                    | 3,606,376 |                  | $ | 12,446                            |  | $     | 4,068
|                                         |                    |  |                    |           |                  |   |                                   |  |       |      
|                                         |                    | 
|Balance at December 28, 2003             |                    |  |                    | 3,688,376 |                  | $ | 12,597                            |  | $     | 5,223
|Net income                               |                    |  |                    |          |                  |   |                                  |  |       | 537  
|Foreign currency translation adjustments |                    |  |                    |          |                  |   |                                  |  |       |     
|                                         |                    |  |                    |           |                  |   |                                   |  |       |      
|Comprehensive income                     |                    |  |                    |           |                  |   |                                   |  |       |      
|                                         |                    |  |                    |           |                  |   |                                   |  |       |      
|Compensation related to stock options    |                    |  |                    |          |                  |   | 9                                 |  |       |     
|Exercise of common stock options         |                    |  |                    | 48,180    |                  |   | 149                               |  |       |     
|                                         |                    |  |                    |           |                  |   |                                   |  |       |      
|Balance at March 28, 2004                |                    |  |                    | 3,736,556 |                  | $ | 12,755                            |  | $     | 5,760
|                                         |                    |  |                    |           |                  |   |                                   |  |       |      

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

5

---

COST-U-LESS,
INC.

CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS(in
thousands)

(Unaudited)

|                                                                        | March 28,2004 |  | March 30,2003 |       
|----------------------------------------------------------------------- | ------------- |  | ------------- | ------
|OPERATING ACTIVITIES:                                                   |               |  |               |       
|Net income                                                              |               |  | $             | 537   
|Adjustments to reconcile net income to net cash provided by/(used by)   |               | 
|operating activities:                                                   |               | 
|Depreciation and amortization                                           |               |  |               | 426   
|Gain on sale-leaseback of equipment                                     |               |  |               | (38   
|Stock option expense                                                    |               |  |               | 9     
|Cash provided by/(used in) changes in operating assets and liabilities: |               | 
|Insurance receivable                                                    |               |  |               | 1,135 
|Accounts receivable                                                     |               |  |               | 267   
|Inventories                                                             |               |  |               | (3,515
|Other current assets                                                    |               |  |               | (538  
|Deposits and other assets                                               |               |  |               | 10    
|Accounts payable                                                        |               |  |               | 2,422 
|Accrued expenses and other liabilities                                  |               |  |               | (246  
|Other long-term liabilities                                             |               |  |               | 10    
|                                                                        |               |  |               |       
|Net cash provided by/(used by) operating activities                     |               |  |               | 479   
|INVESTING ACTIVITY:                                                     |               | 
|Cash used to purchase property and equipment                            |               |  |               | (276  
|                                                                        |               | 
|FINANCING ACTIVITIES:                                                   |               | 
|Proceeds from exercise of common stock options                          |               |  |               | 149   
|Proceeds from capital lease obligations                                 |               |  |               | 805   
|Proceeds (payments) from (on) line of credit, net                       |               |  |               | (894  
|Principal payments on capital lease obligations                         |               |  |               | (24   
|Principal payments on long-term debt                                    |               |  |               | (67   
|                                                                        |               |  |               |       
|Net cash provided by/(used by) financing activities                     |               |  |               | (31   
|Foreign currency translation adjustments                                |               |  |               | 8     
|                                                                        |               |  |               |       
|Net increase/(decrease) in cash and cash equivalents                    |               |  |               | 180   
|Cash and cash equivalents:                                              |               | 
|Beginning of period                                                     |               |  |               | 4,093 
|                                                                        |               |  |               |       
|End of period                                                           |               |  | $             | 4,273 
|                                                                        |               |  |               |       
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                       |               | 
|Cash paid during the period for:                                        |               | 
|Interest                                                                |               |  | $             | 120   
|Income taxes                                                            |               |  | $             | 30    
|Cash received during the period for:                                    |               | 
|Income taxes                                                            |               |  | $             | 6     

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
the United States Territories (U.S. Territories), foreign island
countries in the Pacific and the Caribbean, the Hawaiian Islands and Sonora,
California. At March 28, 2004, 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 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 had to be closed for
reconstruction. The store was rebuilt and it reopened for business on October 3,
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 28, 2003 has been derived from the audited financial statements
at that date. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to SEC rules and regulations on quarterly reporting. Operating results for the
13 weeks ended March 28, 2004, 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 26, 2004.

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 2004,
ending on December 26, 2004, and Fiscal 2003, which ended on
December 28, 2003, 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

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

Reclassifications

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

8

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COST-U-LESS,
INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)

New
Accounting Pronouncements

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):

|                                                                                                                                 | 13 Weeks Ended | 
|-------------------------------------------------------------------------------------------------------------------------------- | -------------- | 
|
|Numerator:                                                                                                                       |                | 
|Net income (in thousands)                                                                                                        |                | 
|                                                                                                                                 |                | 
|Denominator:                                                                                                                     |                | 
|Denominator for basic earnings per shareweighted average shares                                                                 |                | 
|Effect of potentially dilutive shares:                                                                                           |                | 
|Stock options and warrants                                                                                                       |                | 
|                                                                                                                                 |                | 
|Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversion of stock options and warrants |                | 
|                                                                                                                                 |                | 
|Basic earnings per common share                                                                                                  |                | 
|Diluted earnings per common share                                                                                                |                | 

3. Insurance
Receivable

On
December 8, 2002, the Companys two stores on the island of Guam suffered
damage from the 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 had to be closed for
reconstruction. The store was rebuilt and it reopened for business on October 3,
2003.

The
Company lost inventory, leasehold improvements and equipment as a result of the
supertyphoon. At December 28, 2003, the Company had a $1.1 million receivable
balance remaining on its books for losses that it expected to be recovered from
insurance. In January 2004, the Company received payment for the entire
remaining $1.1 million of insurance receivable.

9

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COST-U-LESS,
INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)

4. Line of
Credit

On
April 9, 2003, the Company entered into a line of credit with Wells Fargo
Business Credit for 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 March 28, 2004, there were $0.1 million in borrowings
outstanding on the line of credit, $0.1 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. On March 2, 2004, the Company and Wells Fargo Business Credit entered
into the Second Amendment to Credit and Security Agreement. The amendment
provided for the following: (i) an immediate reduction in the interest rate on
the line of credit of one half of one percent (0.50%), (ii) a further reduction
in the interest rate of one half of one percent (0.50%) if we meet certain net
income levels from December 29, 2003, through June 27, 2004, and (iii) the
adoption of new measurement values for fiscal 2004. Borrowings under the amended
line of credit bear interest at the financial institutions prime rate plus
1.0% (5% at March 28, 2004). 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. The Company believes that it is currently 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

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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. 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 28, 2003, which was filed on
March 26, 2004, 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 28, 2003.

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

Overview

We
operate mid-sized  warehouse  club-style stores in the United States  Territories,
foreign island countries in the Pacific and  the  Caribbean,  the  Hawaiian  Islands  and
Sonora,  California.  Our  primary  strategy  is to operate in island  markets,  offering
predominately  U.S.  branded goods.  During the 13 weeks ended March 28, 2004, we
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
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 had to be closed for reconstruction. The store was rebuilt and it reopened
for business on October 3, 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. We  are currently in the
process of analyzing opportunities in selected markets and  relocation opportunities for
existing stores with leases expiring

11

---

in  the next
one to two years. While we believe these actions can improve profitability,  there can be
no assurance that these actions will be successful.

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, including
exploring expansion opportunities in selected markets and relocation
opportunities for existing stores with leases expiring in the next one to two
years.

Results of
Operations

During
the fiscal first quarter ended March 28, 2004, we continued to experience
improvements in comparable-store sales and gross margin, which resulted in
higher net income and EPS. These improvements were due to several factors
including better sourcing, pricing, merchandising and mix of goods in our
stores.

Our
total sales increase in the fiscal first quarter ended March 28, 2004, was due
in part to the successful reopening of our Dededo, Guam store in October 2003,
which had sufferered substantial damage from Supertyphoon Ponsonga on December
8, 2002, forcing it to close. The store was rebuilt and reopened on October 3,
2003. As a result of the reopening of our Dededo, Guam store, we expect our
fiscal 2004 sales to increase as compared to 2003.

We
reported net income of $537,000 for the fiscal first quarter ended March 28,
2004, compared to a net income of $226,000 for the same period in fiscal 2003.
The improvement in net income was primarily due to comparable-store sales
increases and improved gross margin.

Comparison
of the 13 Weeks Ended March 28, 2004 to the 13 Weeks Ended March 30, 2003

Net
Sales: Net sales of $50.1 million for the first quarter of fiscal 2004,
increased 18.3% as compared to net sales of $42.3 million for the first quarter
of fiscal 2003. Approximately 50% of the increase in sales was due to the
reopening of our Dededo store in Guam in October 2003 after it suffered
significant damage from Supertyphoon Pongsona that swept through the island on
December 8, 2002. The balance of the increase is due to comparable-store sales
increases offset by a 40% decline in business-to-business sales as compared to
fiscal 2003. Although lower than the sales in the same period in the prior year,
our business-to-business sales were comparable to those experienced in our third
and fourth quarters of fiscal 2003. We expect the level of business-to-business
activity for the remainder of fiscal 2004 to be consistent with current levels.

Comparable-store
sales (stores open for a full 13 months) increased 15.3% for the first quarter
of fiscal 2004 as compared to the first quarter of fiscal 2003. Comparable-store
sales are calculated on stores excluding the Guam market as our Dededo, Guam
store was closed during the first quarter of fiscal 2003. Most of our stores
experienced increased sales in the first quarter of 2004 as compared to 2003 due
to improvements in our assortment of food and general merchandise, and improved
economies from more tourism in some of our markets.

Gross
Profit:Gross profit of $9.1 million, or 18.1% of sales, for the first
quarter of fiscal 2004, increased as compared to gross profit of $7.4 million,
or 17.4% of sales, in the first quarter of fiscal 2003 due to a stronger mix of
retail store sales, with typically higher margins, as compared to
business-to-business sales, which generally provide a lower gross margin but are
executed at minimal direct expense, and improved sourcing, pricing and
merchandising in our stores.

Store
expenses:Store expenses of $6.3 million for the first quarter of fiscal
2004 increased $1.0 million compared to expenses of $5.3 million for the first
quarter of fiscal 2003. Approximately 60% of the increase in store expenses was
attributable to the increased expenses associated with operating two stores in
Guam in the first quarter of fiscal 2004 as compared to one store in the first
quarter of fiscal 2003. The remainder of the increase is primarily attributable
to higher volume-related payroll, insurance and utility expenses. As a
percentage of sales, store expenses remained flat at 12.6% of sales for the
first quarter of fiscal 2004 compared to 12.5% for the same period in the prior
year. Payroll costs declined and insurance costs increased as a percent of sales
in the first quarter of fiscal 2004 as compared to the first quarter of fiscal
2003.

General
and administrative expenses:General and administrative expenses for the
first quarter of fiscal 2004 remained flat at $1.7 million as compared to $1.6
million for the first quarter of fiscal 2003. As a percent of sales, general and
administrative expenses for the first quarter of fiscal 2004 decreased to 3.5%
as compared to 3.8% for the first quarter of fiscal 2003. The slight increase in
general and administrative expense dollars was primarily due to increased
personnel related costs and insurance costs, partially offset by a decrease in
consulting fees.

12

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Store
opening expenses:Store opening expenses were $40,000 in the first quarter
of fiscal 2004 compared to $28,000 in the first quarter of fiscal 2003. Store
opening expenses in both periods related to costs associated with the evaluation
of potential new store locations. We expect store opening expenses in fiscal
2004 to be slightly higher than those incurred in fiscal 2003 as we evaluate
alternative methods of implementing future expansion, including exploring
expansion opportunities in selected markets and relocation opportunities for
existing stores with leases expiring in the next one to two years.

Interest
expense, net: Interest expense, net increased to $126,000 in the first
quarter of fiscal 2004 as compared to $93,000 in the first quarter of fiscal
2003 primarily due to commitment fees associated with our new line of credit
entered into in April 2003 and interest expense associated with our equipment
lease entered into in January 2004.

Other
income: Other income in both the first quarter of fiscal 2004 and fiscal
2003 was primarily 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 first quarter of fiscal 2004 and
fiscal 2003, 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 $537,000, or $0.14 per fully diluted share, for the
first quarter of fiscal 2004 compared to a net income for the first quarter of
fiscal 2003 of $226,000, or $0.06 per fully diluted share. Weighted average
diluted common shares outstanding were 3,859,987 for first quarter of 2004 as
compared to 3,613,792 in the same period in the prior year.

Liquidity
and Capital Resources

We
currently finance our operations with proceeds from various credit facilities,
and internally generated funds. Net cash provided by operations was $0.5 million
for the first quarter of fiscal 2004 as compared to $1.3 million used by
operations for the first quarter of fiscal 2003. The increase in cash provided
by operations in the first quarter of fiscal 2004, as compared to the same
period in the prior year, was primarily due to an increase in accounts payable
and the receipt of insurance proceeds related to the inventory and equipment
damaged by the Supertyphoon on December 8, 2002, partially offset by a decrease
in payments received on other receivables as compared to the same period in the
prior year.

Net
cash used in investing activities was $0.3 million for the first quarter of
fiscal 2004 as compared to $0.1 million in the same period in the prior year. We
currently have no plans to open new stores during fiscal 2004, but we are in the
process of exploring expansion opportunities in selected markets and relocation
opportunities for existing stores with leases expiring in the next one to two
years.

We
utilized $31,000 of cash for financing activities in the first quarter of fiscal
2004, as compared to $1.2 million provided by financing activities in the first
quarter of fiscal 2003. The decrease was due to a reduction in borrowings under
our line of credit partially offset by funds received on the sale-leaseback of
equipment in Guam. Our current ratio has improved to 1.36 at March 28, 2004,
versus 1.25 at March 30, 2003.

On
April 9, 2003, we entered into a line of credit with Wells Fargo Business Credit
with 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
March 28, 2004, there were $0.1 million in borrowings outstanding on the line of
credit, $0.1 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. On March 2, 2004, we entered into the Second Amendment to Credit and
Security Agreement with Wells Fargo Business Credit. The amendment provided for
the following: (i) an immediate reduction in the interest rate on the line of
credit of one half of one percent (0.50%), (ii) a further reduction in the
interest rate of one half of one percent (0.50%) if we meet certain net income
levels from December 29, 2003, through June 27, 2004, and (iii) the adoption of
new measurement values for fiscal 2004. Borrowings under the amended line of
credit bear interest at the financial institutions prime rate plus 1.0%
(5% at March 28, 2004). 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

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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.

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. 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.

Contractual
Obligations

As
of March 28, 2004, 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 28, 2003.

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

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

Inventories

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

14

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Long
Lived Assets

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

Foreign
Currency Translation

The
U.S. dollar is the functional currency for all our locations, except for Fiji
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 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
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. We believe that our adoption of this new accounting standard will
not have a material impact on our results of operations or financial position,
as we do not have derivatives nor do we 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 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.

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.

15

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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 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 December 2003, 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.

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.

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.

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

| |  | Isolation
of store operations from corporate management and an increased dependence on store
managers;
| | - | ------------------------------------------------------------------------------------------------------

| |  | Diminished
ability to oversee employees, which may lead to decreased productivity or other
operational problems;
| | - | ----------------------------------------------------------------------------------------------------------------

| |  | Construction
delays or difficulties caused by inadequate supervision of the construction process; and
| | - | -----------------------------------------------------------------------------------------------------

| |  | Communication
challenges.
| | - | -------------------------

We
may need to invest significant resources to update and expand our communications
systems and information networks and to devote a substantial amount of time,
effort and expense to national and international travel in order to overcome
these challenges; failure to do so could have a material adverse effect on our
business, financial condition and 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  represented
approximately 90.6% of our total net sales for fiscal 2003. 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

16

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

| |  | Substantial
lags between the procurement  and delivery of product,  thus  complicating  merchandising
and inventory  control  methods;
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | Possible
loss of product due to potential damage to, or destruction of, ships or containers
delivering our goods;
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | Tariff,
customs and shipping regulation issues;
| | - | -----------------------------------------------

| |  | Substantial
ocean freight and duty costs; and
| | - | ---------------------------------------------

| |  | Interruption
in the delivery of product due to labor disruption.
| | - | ----------------------------------------------------------------

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 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 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
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 had to be closed for
reconstruction. The store was rebuilt and it reopened for business on October 3,
2003.

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

| |  | 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; and
| | - | ------------------------------------------------------------------------

| |  | 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 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

17

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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.

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 through the opening of 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; 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 new stores during 2004, but we are in the process of
exploring expansion opportunities in selected markets and relocation
opportunities for existing stores with leases expiring in the next one to two
years. We do not have operating experience in many of the markets in which we
may open 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 the political turmoil and resulting
economic downturn in Fiji were having on the tourist industry. New markets may
present operational, competitive, regulatory and merchandising challenges that
are different from those we currently encounter. 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 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, 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;
| | - | --------------------------------------------

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

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

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
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.

18

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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.

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.Our ability to utilize various
tax benefits is dependent on our ability to generate adequate taxable income in
the United States and in foreign jurisdictions. As of December 28, 2003, we had
recognized an aggregate foreign tax benefit of $2.3 million on foreign operating
losses and a corresponding valuation allowance of $2.2 million. Approximately
one-half of the Net Operating Losses, or NOLs, will begin expiring in the year
2006. The remaining NOLs were generated in Curacao and St. Maarten 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.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.

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.

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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. 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 March 28, 2004.

ITEM 4.
CONTROLS AND PROCEDURES

(a)
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 that 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.

(b)
There has been no significant change in our internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.

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PART
II  OTHER INFORMATION

ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

|ExhibitNo. |  | Description
|---------- |  | -----------

|10.1 |  | Second
Amendment,  dated as of March 2, 2004, to the Credit and Security  Agreement dated April
9, 2003, by  and between Cost-U-Less,  Inc., CULGUAM, Inc., CULNEV, Inc., CULUSVI, Inc.,
and Wells Fargo Business Credit,  Inc. (Incorporated by reference to Exhibit 10.9 to the
Company's Form 10-K filed on March 26, 2004)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Amendment
dated as of February 25, 2004, to Lease Agreement  between Tonko Reyes,  Inc., a Guam
corporation  and Cost-U-Less,  Inc., dated October 22, 2001  (Incorporated by reference
to Exhibit 10.29 to the Company's  Form 10-K filed on March 26, 2004)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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

| |  | On
January 9, 2004, we furnished a current report on Form 8-K regarding our  January 8,
2004, press release, which announced an increase of 13.8% in same  store sales (stores
open a full 13 months) for the fiscal quarter ending  December 28, 2003 and an increase
of 8.2% in same store sales for the fiscal  year ending December 28, 2003.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
February 27, 2004, we furnished a current report on Form 8-K regarding our  February 26,
2004, press release, which announced that we had generated net  income of $568,000 for
the fourth fiscal quarter of 2003, or $0.15 per fully  diluted share outstanding,
compared to net income of $196,000, or $0.05 per  fully diluted share outstanding for the
corresponding period last year.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
April 1, 2004, we furnished a current report on Form 8-K regarding our April  1, 2004,
press release, which announced an increase of 15.3% in same store sales  (stores open a
full 13 months) for the fiscal quarter ending March 28, 2004.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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: May 11, 2004 | /s/ J. Jeffrey Meder                                
|                   | J. Jeffrey MederPresident andChief Executive Officer
|
|Date: May 11, 2004 | /s/ Martin P. Moore                                 
|                   | Martin P. MooreChief Financial Officer              

22