# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

# FORM 10-Q

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

FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 25, 2005

COMMISSION FILE NUMBER
0-24543

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

|                                                 | 
|------------------------------------------------ | 
|Washington                                       | 
|(State or other jurisdiction of incorporation or | 
|organization)                                    | 

3633 136th Place SE, Suite 110
Bellevue, 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.    [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.

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  [   ] YES    [X] NO.

The registrant had 3,990,171 common
shares, par value $0.001, outstanding at November 7, 2005.

---

# COST-U-LESS, INC.

# INDEX TO FORM 10-Q

# PART I.  FINANCIAL INFORMATION

| |  |         | 
| |  | ------- | 
| |  | Item 1. | 
| |  |         | 
| |  |         | 
| |  |         | 
| |  |         | 
| |  |         | 
|
| |  | Item 2. | 
|
| |  | Item 3. | 
|
| |  | Item 4. | 

# PART II.  OTHER INFORMATION

|           |  |         | 
|---------- |  | ------- | 
|           |  | 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 |                 | 39 Weeks Ended |                
|--------------------------------------------------- | -------------- | --------------- | -------------- | ---------------
|
|Net sales                                           |                | $      53,011   |                | $      51,088  
|Merchandise costs                                   |                | 42,991          |                | 41,629         
|
|Gross profit                                        |                | 10,020          |                | 9,459          
|                                                   
|Operating expenses:                                 |               
|Store                                               |                | 7,084           |                | 6,764          
|General and administrative                          |                | 1,652           |                | 1,630          
|Store openings                                      |                | 63              |                | 58             
|Store closings                                      |                | 22              |                |               
|Total operating expenses                            |                | 8,821           |                | 8,452          
|                                                   
|Operating income                                    |                | 1,199           |                | 1,007          
|                                                   
|Other income (expense):                             |                |                 |                |                
|Interest expense, net                               |                | (121            | )              | (107           
|Other                                               |                | (14             | )              | 19             
|Income before income taxes                          |                | 1,064           |                | 919            
|Income tax provision                                |                | 425             |                | 365            
|Net income                                          |                | $           639 |                | $           554
|Earnings per common share:                          |               
|Basic                                               |                | $          0.16 |                | $          0.15
|Diluted                                             |                | $          0.15 |                | $          0.14
|Weighted average common shares outstanding, basic   |                | 3,989,876       |                | 3,742,053      
|Weighted average common shares outstanding, diluted |                | 4,207,219       |                | 4,012,797      

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)

|                                           | September 25,2005 |          | December 26,2004
|------------------------------------------ | ----------------- | -------- | ----------------
|
|
|Current assets:                            |                   |          |                 
|Cash and cash equivalents                  |                   | $  4,323 |                 
|Accounts receivable, net                   |                   | 1,171    |                 
|Inventories, net                           |                   | 24,577   |                 
|Other current assets                       |                   | 1,544    |                 
|Total current assets                       |                   | 31,615   |                 
|                                          
|Buildings and equipment, net               |                   | 18,455   |                 
|Deposits and other assets                  |                   | 778      |                 
|                                          
|Total assets                               |                   | $50,848  |                 
|                                          
|
|Current liabilities:                       |                   |          |                 
|Accounts payable                           |                   | $16,045  |                 
|Accrued expenses and other liabilities     |                   | 5,134    |                 
|Line of credit                             |                   | 1,703    |                 
|Current portion of long-term debt          |                   | 267      |                 
|Current portion of capital lease           |                   | 223      |                 
|Total current liabilities                  |                   | 23,372   |                 
|                                          
|Other long-term liabilities                |                   | 1,078    |                 
|Long-term debt, less current portion       |                   | 2,077    |                 
|Capital lease, less current portion        |                   | 1,387    |                 
|Total liabilities                          |                   | 27,914   |                 
|                                          
|Commitments and contingencies              |                   |         |                 
|                                          
|Shareholders equity                       |                   | 22,934   |                 
|                                          
|Total liabilities and shareholders equity |                   | $50,848  |                 

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)

|                                                 | Common
      Stock
      Shares |           | Common
      Stock
      Amount |         | Retained
      Earnings |        | Accumulated
      Other
      Comprehensive
      Loss |       | Total |        
|------------------------------------------------ | -------------------------------- | --------- | -------------------------------- | ------- | ----------------------- | ------ | ------------------------------------------------------ | ----- | ----- | -------
|Balance
      at December 28, 2003               |                                  | 3,688,376 |                                  | $12,597 |                         | $5,223 |                                                        | $(820 | )     | $17,000
|Net
      income                                 |                                  |          |                                  |        |                         | 1,728  |                                                        |      |       | 1,728  
|Foreign
      currency translation adjustments   |                                  |          |                                  |        |                         |       |                                                        | 1     |       | 1      
|Comprehensive
      income                       |                                  |           |                                  |         |                         |        |                                                        |       |       | 1,729  
|Compensation
      related to stock options      |                                  |          |                                  | 9       |                         |       |                                                        |      |       | 9      
|Exercise
      of common stock options including |                                  |           |                                  |         |                         |        |                                                        |       |       |        
|income
        tax benefit                       |                                  | 55,730    |                                  | 173     |                         |       |                                                        |      |       | 173    
|Balance
      at September 26, 2004              |                                  | 3,744,106 |                                  | $12,779 |                         | $6,951 |                                                        | $(819 | )     | $18,911
|                                                
|Balance at
      December 26, 2004               |                                  | 3,751,306 |                                  | $12,795 |                         | $7,911 |                                                        | $(773 | )     | $19,933
|Net
      income                                 |                                  |          |                                  |        |                         | 1,885  |                                                        |      |       | 1,885  
|Foreign
      currency translation adjustments   |                                  |          |                                  |        |                         |       |                                                        | (19   | )     | (19    
|Comprehensive
      income                       |                                  |           |                                  |         |                         |        |                                                        |       |       | 1,866  
|Compensation
      related to stock options      |                                  |          |                                  | 24      |                         |       |                                                        |      |       | 24     
|Exercise
      of common stock options including |                                  |           |                                  |         |                         |        |                                                        |       |       |        
|income
      tax benefit                         |                                  | 238,570   |                                  | 1,111   |                         |       |                                                        |      |       | 1,111  
|Balance at
      September 25, 2005              |                                  | 3,989,876 |                                  | $13,930 |                         | $9,796 |                                                        | $(792 | )     | $22,934

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)

|                                                                        | 39 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 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 used by investing activities                                   |               
|                                                                       
|FINANCING ACTIVITIES:                                                   |               
|Proceeds from exercise of common stock options                          |               
|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 increase/(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, net                                                       |               
|                                                                       
|Assets acquired under capital lease obligations                         |               

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 September 25,
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 can
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, if at all, but expects that it will
take at least twelve to eighteen months once the permitting, governmental 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 39 weeks
ended September 25, 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
condensed 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
condensed 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, compensation cost is
generally not 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 |  | 39 Weeks Ended
|----------------------------------------------------- | -------------- |  | --------------
|
|Net income as reported                                |                |  | $             
|Add: Stock-based compensation, as reported            |                |  |               
|Less: Total stock-based employee compensation expense |                | 
|determined under fair value method for all awards,    |                | 
|net of tax                                            |                |  |               
|Net income pro forma                                  |                |  | $             
|                                                     
|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          |                |  | $             

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 (the FASB) issued Statement 123
(revised 2004),Share-Based Payment (FAS 123(R)).  FAS 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.  FAS 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.  FAS 123(R) replaces FAS 123 and supersedes APB 25. As originally issued in
1995, FAS 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 APB 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
FAS 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 unvested options and options available
for issuance in the future.

On
November 24, 2004, the FASB issued Statement No. 151 (FAS 151), Inventory
Costs, an amendment of ARB No. 43, Chapter 4 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 in its first quarter of fiscal 2006 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 |                | 39 Weeks Ended |               
|--------------------------------------------------- | -------------- | -------------- | -------------- | --------------
|
|Numerator:                                          |                |                |                |               
|Net income                                          |                | $          639 |                | $          554
|
|Denominator:                                        |               
|Denominator for basic earnings per shareweighted   |                |                |                |               
|average shares                                      |                | 3,989,876      |                | 3,742,053     
|Effect of dilutive common equivalent shares:        |               
|Stock options                                       |                | 217,343        |                | 270,744       
|Denominator for diluted earnings per shareadjusted |                |                |                |               
|weighted average shares and assumed conversion of   |                |                |                |               
|stock options                                       |                | 4,207,219      |                | 4,012,797     
|Basic earnings per common share                     |                | $         0.16 |                | $         0.15
|
|Diluted earnings per common share                   |                | $         0.15 |                | $         0.14
|

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 September 25, 2005, excludes 4,000 stock
options outstanding. The diluted share calculation for the 13 and 39 weeks ended September
26, 2004, excludes 195,709 and 205,209 stock options outstanding, respectively. 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 an amount up to $0.7 million. At
September 25, 2005, there was $1.7 million outstanding on the line of credit and no
letters of credit outstanding. 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
September 25, 2005. At September 25, 2005, the rate charged by the financial institution
was 6.75%.

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 September 25, 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 operations.

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 and Exchange Commission.

The
following managements discussion and analysis of financial condition and results of
operations should be read in conjunction with managements discussion and analysis of
financial condition and results of operations included in our annual report on
Form 10-K for the fiscal year ended 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, if at all, but expect that it will take at least twelve to
eighteen months once the permitting, governmental approval and lease process is complete.

11

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# Results of Operations

During
the 13 and 39 weeks ended September 25, 2005, we continued to experience increases in
comparable-store sales. The corresponding increase in gross profit dollars was partially
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. Despite
experiencing higher expenses, the improvement in gross margin exceeded the expense
increases, which resulted in higher operating income in the 13 and 39 weeks ended
September 25, 2005, as compared to the same periods in the prior year. Additionally,
during the 39 weeks ended September 25, 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 and the
improved operating income, resulted in higher net income.

Comparison of the 13 and 39 Weeks
Ended September 25, 2005, to the 13 and 39 Weeks Ended September 26, 2004:

Net
Sales: Net sales of $53.0 million for the 13 weeks ended September 25, 2005, increased
3.8% compared to net sales of $51.1 million for the same period in the prior year. Net
sales of $158.5 million for the 39 weeks ended September 25, 2005, increased 4.3% compared
to net sales of $152.0 million for the same period in the prior year. The increase in net
sales in the 13 and 39 weeks ended September 25, 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
continue to de-emphasize these lower margin sales.

Comparable-store
sales (stores open for a full 13 months) increased 5.5% and 5.8% for the 13 and 39 weeks
ended September 25, 2005, respectively, as compared to the same periods in the prior year.
Ten of our eleven stores experienced increased sales in both the 13 and 39 weeks ended
September 25, 2005, as compared to the same periods in the prior year, primarily due to
the positive results from our annual anniversary sale. This promotion is estimated to have
increased store sales during the 13 weeks ended September 25, 2005, by approximately 2
percentage points compared to the corresponding period a year ago. Our anniversary sale
occurred during the month of September in 2005, but occurred during the month of October
in 2004. Because this promotion occurred during the third quarter in fiscal 2005, we
expect that our fourth quarter comparable-store sales will be negatively impacted by
approximately 2 percentage points as they will be compared to the fourth quarter of fiscal
2004 sales which included this promotion. In addition, improvements in our assortment of
goods, operating improvements including better in-stock inventory levels, as well as
general inflationary trends added to the improvement in comparable-store sales.

Gross
Profit:Gross profit of $10.0 million, or 18.9% of sales, for the 13 weeks ended
September 25, 2005, increased as compared to gross profit of $9.5 million, or 18.5% of
sales, for the same period in the prior year. Gross profit of $29.3 million, or 18.5% of
sales, for the 39 weeks ended September 25, 2005, increased as compared to gross profit of
$27.9 million, or 18.3% of sales, for the same period in the prior year. The improvement
in gross profit dollars for both the 13 and 39 weeks ended September 25, 2005, was
primarily due to the positive results from our anniversary sale discussed above and the
general increase in our net sales over the same periods in the prior year.

Store
expenses:Store expenses increased to $7.1 million and $20.8 million for the 13 and 39
weeks ended September 25, 2005, respectively, as compared to $6.8 million and $19.5
million for the same periods in the prior year. As a percentage of sales, store expenses
were 13.4% and 13.1% for the 13 and 39 weeks ended September 25, 2005, respectively, as
compared to 13.2% and 12.8% of sales for the same periods in the prior year. Approximately
50% of the dollar increase in store expenses for the 13 weeks ended September 25, 2005,
was attributable to increased energy (utility) expenses, which were 18% higher than the
same period in the prior year. The remainder of the dollar increase was primarily
attributable to higher volume-related expenses such as payroll and related costs such as
health care, and bankcard fees. For the 39 weeks ended September 25, 2005, approximately
33% of the dollar increase in store expenses was attributable to higher payroll and
related costs such as health care; approximately 30% was related to higher energy
(utility) expenses, which were 15% higher than the same period in the prior year; and
approximately 13% of the increase was attributable to higher volume-related bankcard fees.
Payroll and related costs, although higher due to volume, remained comparable as a
percentage of store sales at 5.3% for the13 week periods and 5.2% for the 39 week periods
in both years.

General
and administrative expenses:General and administrative expenses were $1.7 million and
$4.9 million for the 13 and 39 weeks ended September 25, 2005, respectively, as compared
to $1.6 million and $5.1 million, respectively, for the same periods in the prior year. As
a percentage of sales, general and administrative expenses were 3.1% for both the 13 and
39 weeks ended September 25, 2005, as compared to 3.2% and 3.4%, for the same periods in
the prior year. Both the 13-week and 39-week

12

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periods in fiscal 2005 benefited from the
leveraging of corporate expenses over increased store sales and slightly lower payroll and
related costs.

Store
opening expenses:Store opening expenses were relatively flat for the 13 weeks ended
September 25, 2005, when compared to the same period in the prior year, but increased to
$0.3 million for the 39 weeks ended September 25, 2005, as compared to $0.1 million for
the same period in the prior year. Store opening expenses in fiscal 2005 primarily related
to costs associated with the relocation of our St. Croix store, which opened on May 26,
2005, and the evaluation of potential new store locations.

Store
closing expenses:Store closing expenses of $22,000 and $81,000 in the 13 and 39 weeks
ended September 25, 2005, respectively, represented 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 was $121,000 and $231,000 for the 13 and 39 weeks
ended September 25, 2005, respectively, as compared to $107,000 and $331,000 for the same
periods in the prior year. The decrease during the 39 weeks ended September 25, 2005, was
primarily attributable to interest capitalization of approximately $104,000 related to the
St. Croix store, compared to $12,000 for the same period in the prior year.

Other
income (expense): Other income (expense) was ($14,000) for the 13 weeks ended
September 25, 2005, as compared to $19,000 for the same period in the prior year. Other
income (expense) was $68,000 for the 39 weeks ended September 25, 2005, as compared to
$18,000 for the same period in the prior year. The increase for the 39 weeks ended
September 25, 2005, 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 39 week periods ended September 25,
2005, and the same periods in the prior year, primarily represented 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 $0.6 million for both 13-week periods in 2005 and 2004,
resulting in net income per fully diluted share of $0.15 and $0.14, respectively. Net
income for the 39 weeks ended September 25, 2005, was $1.9 million, or $0.45 per fully
diluted share, as compared to a net income of $1.7 million, or $0.44 per fully diluted
share, in the same period in the prior year.

# Liquidity and Capital
Resources

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

We
generated $0.1 million of cash from operating activities during the 39 weeks ended
September 25, 2005, as compared to $2.3 million generated in the same period in the prior
year. Of the $2.2 million decrease, $1.7 million was due to the change in accrued expenses
during the 39 weeks ended September 25, 2005, compared to the same period in the prior
year. In addition, $0.4 million of the decrease was due to the receipt of insurance
proceeds during the 39 weeks ended September 26, 2004, related to inventory damaged in
2002 by the supertyphoon in Guam.

We
used $4.5 million of net cash in investing activities for the 39 weeks ended September 25,
2005, as compared to $0.4 million used in the same period in the prior year. The cash used
in investing activities during the 39 weeks ended September 25, 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. The $0.7 million of proceeds received from our
insurance settlement during the 39 weeks ended September 26, 2004, related 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

13

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when a new store would open in the Cayman
Islands, if at all, but expect that it will take at least twelve to eighteen months once
the permitting, governmental approval and lease process is complete. Additionally, over
the next 12 months we plan to expand the size of our store in St. Thomas by approximately
6,000 square feet (an increase of approximately 15%), which we anticipate will cost
approximately $0.7 to $0.9 million and we plan to replace our current point of sale system
with a new and improved version which we anticipate will cost approximately $0.7 to $1.0
million. In addition to these projects, we continue to explore expansion opportunities in
selected markets and additional relocation opportunities for stores in existing markets.

We
generated $2.7 million of cash from financing activities during the 39 weeks ended
September 25, 2005, as compared to $1.8 million utilized in the same period in the prior
year. The $4.5 million increase in cash generated 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 39 weeks ended September 25, 2005,
as compared to the same period in the prior year.

Additionally,
during the 39 weeks ended September 25, 2005, we entered into $1.0 million in capital
equipment leases for a portion of the equipment purchased for the new St. Croix location.
During the 39 weeks ended September 26, 2004, we entered into a $0.8 million capital
equipment lease for a portion of the equipment that was replaced in Guam related to
equipment damaged in 2002 by the supertyphoon.

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) reduced our interest rate to an annual
interest rate equal to the prime rate as defined by Wells Fargo Bank National
Association, (2) reduced our minimum interest charge to not less than $25,000 per calendar
year, (3) increased 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) eliminated 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 an amount up to $0.7 million. At
September 25, 2005, there were borrowings of $1.7 million outstanding on the line of
credit and no letters of credit outstanding. 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 September 25, 2005. At September 25, 2005, the rate charged by the financial
institution was 6.75%.

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 September 25, 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 September 25, 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            |                        | 

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# 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 condensed 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 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.

15

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# New Accounting
Pronouncements

In
December 2004, the Financial Accounting Standards Board (the FASB) issued Statement 123
(revised 2004),Share-Based Payment (FAS 123(R)).  FAS 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.  FAS 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.  FAS 123(R) replaces FAS 123 and supersedes APB 25. As originally issued in
1995, FAS 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 APB 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 FAS
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 position, as we have a limited
amount of unvested options and options available for issuance in the future.

On
November 24, 2004, the FASB issued Statement No. 151 (FAS 151), Inventory
Costs, an amendment of ARB No. 43, Chapter 4 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 in
our first quarter of fiscal 2006 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
results of operations. In addition, if our general and administrative expenses increase,
the negative effect on our business and results of operations would be more significant
than if we had a larger store base. Although we intend to carefully plan for the
implementation of additional stores, there can be no assurance that such plans can be
executed as envisioned or that the implementation of those plans will not have a material
adverse effect on our business, financial condition and results of operations. In
addition, our ability to acquire products at a lower cost than competitors or obtain
volume-based pricing can be adversely affected because of our small store base.

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

The
warehouse club and discount retail businesses are highly competitive. If we fail to
successfully respond to competitive pressures in this industry, or to effectively
implement our strategies to respond to these pressures, our operating results may be
negatively affected. Many of our competitors have substantially greater resources, buying
power and name recognition than we have. The cost of doing business in island markets is
typically higher than on the U.S. mainland because of ocean freight and duty costs and
higher facility costs. In addition, our gross margin and operating income are generally
lower for stores in markets where traditional warehouse clubs and discount retailers also
operate stores, due to increased price competition and reduced market share. We may be
required to implement price reductions and other actions in order to remain competitive in
our markets. 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.

16

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

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

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

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

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

Our
net sales from island operations represented approximately 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. In addition, island operations involve uncertainties arising from
items such as:

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

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

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

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

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

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

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

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

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

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

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

We have not opened stores in foreign
island markets at a rapid pace. Although we have no plans to open stores in new markets
during 2005, 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. We have encountered, and may
continue to encounter, substantial delays, increased expenses or loss of potential store
sites due to the complexities, cultural differences, and

17

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local political issues associated
with the regulatory and permitting processes in the island markets in which we may locate
our stores. There can be no assurance that we will be able to adapt our operations to
support our future expansion plans or that any new stores will be profitable. Any failure
on our part to manage our growth could have a material adverse effect on our business,
financial condition and results of operations.

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

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

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

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

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

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

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 results of operations 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.

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

Our business is highly dependent on
communications and information systems, primarily systems provided by third-party vendors.
Any failure or interruption of our systems or systems provided by third-party vendors
could cause delays or other problems in our operations, which could have a material
adverse effect on our business, financial condition and results of operations. In
addition, our point of sale information and transaction processing system may not be
adequate for our business if we experience rapid expansion in the number of our stores. If
our point of sale system is outgrown, we would need to develop and install a new point of
sale system in our stores, which could be expensive and time consuming and could cause our
results of operations to suffer.

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

Only our hourly employees in our St. Maarten
store are currently covered by a collective bargaining agreement. Unionization of any of
our stores could result in higher employee compensation and restrictive working condition
demands that could increase our operating costs and have a material adverse effect on our
business, financial condition and results of operations.

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

Governmental
regulations and licensing requirements in foreign countries where we plan to expand our
operations might prevent or delay entry into the market or prevent or delay the
introduction, or require modification, of certain of our operations. For example, in July
2005 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. However, 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, if at all, but we expect that it will take at least twelve to eighteen months
once the permitting, approval and lease process is complete. Additionally, our ability to
compete may be adversely affected by foreign governmental regulations and licensing
requirements that encourage or mandate the employment of citizens of, or purchase of
supplies from vendors, in a particular jurisdiction. We may also be subject to taxation in
these foreign jurisdictions, and the final determination of our tax liabilities may
involve the interpretation of the statutes and requirements of the various domestic and
foreign taxing authorities. We may also be subject to currency repatriation restrictions.
If governmental regulations or licensing requirements prevent or delay our entry into
market, require modification of our existing operations, or subject us to taxation or
currency repatriation issues, our business, financial condition and results of operations
could suffer.

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

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

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

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

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

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

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

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

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

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

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

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

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

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| |  | Interruption in the delivery of product due to labor disruption or weather
related issues.
|- |  | ------------------------------------------------------------------------------------------

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

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

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

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

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

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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 routinely remitted back to the U.S. bank account.

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 results of operations.
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 were to occur there could be a materially adverse effect on our
business, financial condition and results of operations.

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 September 25, 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 6. EXHIBITS

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

|10.1 |  | Shareholders
Agreement dated July 11, 2005 between Cost-U-Less Cayman Holdings, an  exempted company
incorporated under the laws of the Cayman Islands; Cayman Drug Limited, a  company
incorporated in the Cayman Islands; Cayman Cost-U-Less Limited, a company  incorporated
under the laws of the Cayman Islands; Naul Bodden of c/o NCB Consulting Ltd  in the
Cayman Islands; and Robert Bodden of c/o NCB Consulting Ltd in the Cayman Islands.  *
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Summary
of Cost-U-Less Non-Employee Director Compensation (incorporated by reference to  Exhibit
99.1 to the Companys current report on Form 8-K filed with the SEC on August 2,
2005) **
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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
|---- |  | ---------------------------------------------------------------------------------------------------

|
|
|

|
|
|

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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:  November 8, 2005 |  | /s/ J. Jeffrey Meder   
|                        |  | J. Jeffrey Meder       
|                        |  | President and          
|                        |  | Chief Executive Officer
|                        |  |                        
|                        |  |                        
|Date:  November 8, 2005 |  | /s/ Martin P. Moore    
|                        |  | Martin P. Moore        
|                        |  | Chief Financial Officer

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