<PAGE>
 
                      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 SEPTEMBER 27, 1998

                                      OR

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

          FOR THE TRANSITION PERIOD FROM _________    TO ___________

                       COMMISSION FILE NUMBER   0-24543

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

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

                            12410 SE 32/ND/ STREET
                          BELLEVUE, WASHINGTON  98005
             (Address of principal executive office)    (Zip Code)

                                (425) 644-4241
             (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.

     The registrant had 3,539,961 common shares, par value $0.001, outstanding
at September 27, 1998.
 
<PAGE>
 
                               COST-U-LESS, INC.

                              INDEX TO FORM 10-Q

<TABLE> 
<S>                                                                         <C>
                        PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS..............................................    1

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
         AND RESULTS OF OPERATIONS.........................................   11

                          PART 2 - OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.........................   17

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K..................................   17
</TABLE> 

                                      -i-
 
<PAGE>
 
                        PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

     Cost-U-Less, Inc.'s (the "Company" or "Cost-U-Less") unaudited condensed
consolidated balance sheet as of September 27, 1998, and the condensed
consolidated balance sheet as of December 28, 1997, unaudited condensed
consolidated statements of income for the 13 and 39 weeks ended September 27,
1998, and September 28, 1997 and the unaudited condensed consolidated statements
of cash flows for the 39 weeks then ended are included below. Also, included
below are notes to the unaudited condensed consolidated financial statements.

     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 1998 is a 52-week year with period four ending on December 27, 1998.

                                       1
<PAGE>
 
                               COST-U-LESS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                               September 27, December 28,
                                                                  1998          1997
                                                          ---------------------------------
                                                              (Unaudited) 
<S>                                                       <C>                <C> 
                      ASSETS 
Current assets:
 Cash and cash equivalents                                      $ 5,457      $ 1,028
 Receivables, net                                                 1,408        1,023
 Inventories, net                                                16,460       12,271
 Other current assets                                             1,236          987
                                                          ---------------------------------
  Total current assets                                           24,561       15,309

Property and equipment, net                                      11,455        6,847
Deposits and other assets                                           812          518
Deferred tax assets                                                 141          141
                                                          ---------------------------------
  Total assets                                                  $36,969      $22,815
                                                          =================================

      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 Accounts payable                                               $11,463      $ 8,953 
 Accrued expenses                                                 1,838        1,235 
 Income taxes payable                                                 0          141 
 Line of credit                                                       0          376 
 Current portion of long-term debt                                  633          384 
 Current portion of capital leases                                  422          406  
                                                          ---------------------------------
  Total current liabilities                                      14,356       11,495

Deferred rent                                                       524          481
Long-term debt, less current portion                              2,189            -
Capital lease obligations, less current portion                     854        1,169
                                                          ---------------------------------
  Total liabilities                                              17,923       13,145

Shareholders' equity:
 Preferred stock, $0.001 par value:
  Authorized shares - 2,000,000                            
   Issued and outstanding shares - none                               -            - 
 Common stock, $0.001 par value:                                                    
  Authorized shares - 25,000,000                                                                  
   Issued and outstanding shares - 3,539,961 and                                    
    1,999,961                                                    12,271        3,525 
 Retained earnings                                                6,841        6,165 
 Accumulated other comprehensive loss                               (66)         (20) 
                                                          ---------------------------------                             
  Total shareholders' equity                                     19,046        9,670
                                                          ---------------------------------
  Total liabilities and shareholders' equity                    $36,969      $22,815
                                                          =================================
</TABLE> 


   The accompanying notes are an integral part of these financial statements.

                                      -2-
<PAGE>
 
                               COST-U-LESS, INC.
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                              13 WEEKS ENDED                39 WEEKS ENDED

                                  -----------------------------------------------------------------------
                                      September 27,   September 28,   September 27,    September 28,
                                           1998            1997            1998            1997
                                  -----------------------------------------------------------------------
<S>                               <C>                 <C>             <C>             <C>
Net sales                                $   32,958      $   29,747      $   96,163       $   93,403
Merchandise costs                            27,501          24,870          80,211           78,221
                                  -----------------------------------------------------------------------
Gross profit                                  5,457           4,877          15,952           15,182

Operating expenses:
 Store                                        3,769           3,484          10,958           11,001
 General and administrative                   1,089             769           2,960            2,352
 Store opening                                   83             115             547              183
 Store closing                                    -               -             244            1,300
                                  -----------------------------------------------------------------------
Total operating expenses                      4,941           4,368          14,709           14,836
                                  -----------------------------------------------------------------------
Operating income                                516             509           1,243              346

Other income (expense):
 Other income (expense)                         (10)              -             (10)               -
 Interest income                                 57               -              57                -
 Interest expense                              (126)           (118)           (260)            (362)
                                  -----------------------------------------------------------------------
Income (loss) before income taxes               437             391           1,030              (16)

Income tax provision (benefit)                  149             127             354               (5)
                                  -----------------------------------------------------------------------
Net income (loss)                        $      288      $      264      $      676       $      (11)
                                  =======================================================================

Earnings (loss) per common share:
 Basic                                   $     0.09      $     0.13      $     0.28       $    (0.01)
 Diluted                                 $     0.09      $     0.12      $     0.27       $    (0.01)

Weighted average common shares
 outstanding                              3,116,884       1,999,961       2,372,269        1,999,961
                                  =======================================================================
Weighted average common shares
 outstanding, assuming dilution           3,226,655       2,137,693       2,501,252        1,999,961
                                  =======================================================================
</TABLE> 

   The accompanying notes are an integral part of these financial statements.

                                      -3-
<PAGE>
 
                               COST-U-LESS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)

                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                     39 WEEKS ENDED
                                                          ----------------------------------------
                                                                September 27,    September 28,
                                                                     1998            1997
                                                          ----------------------------------------
<S>                                                       <C>                    <C> 
Operating activities:
Net income (loss)                                                 $   676           $  (11)
Adjustments to reconcile net income (loss) to net
 cash provided by operating activities:                            
  Depreciation                                                        777              705 
  Writedown of property and equipment                                 203              637 
  Deferred tax (benefit) provision                                    (20)              71 
  Stock compensation                                                   75                - 
  Reserve for bad debts                                                89                1  
  Cash provided by (used in) changes in operating
   assets and liabilities:                                      
    Receivables                                                      (474)             (35)    
    Refundable income taxes                                           179             (327)    
    Inventories                                                    (4,189)           2,186     
    Prepaid expenses                                                 (408)            (150)    
    Deposits and other assets                                        (200)             (46)    
    Accounts payable                                                2,510             (608)    
    Accrued expenses                                                  603             (226)    
    Income tax payable                                               (141)               -     
    Deferred rent                                                      43              113      
                                                          ----------------------------------------
Net cash provided by (used in) operating activities                  (277)           2,310

Investing activity - purchases of property and equipment           (5,682)            (671)

Financing activities:
Net (repayments) borrowings under line of credit                     (376)             340
Proceeds from long-term debt                                        3,000                -
Principal payments on long-term debt                                 (562)            (925)
Payments on capital lease obligations                                (299)            (289)
Net proceeds from sale of common stock                              8,671                -
Unrealized foreign exchange loss                                      (46)             (18)
                                                          ----------------------------------------
Net cash provided by (used in) financing activities                10,388             (892)
                                                          ----------------------------------------
Net increase in cash and cash equivalents                           4,429              747

Cash and cash equivalents at beginning of year                      1,028               95
                                                          ----------------------------------------
Cash and cash equivalents at end of year                          $ 5,457           $  842
                                                          ========================================

Supplemental disclosure of cash flow information
Cash paid during the period for:                                  
 Interest                                                         $   241           $  363 
 Income taxes                                                     $   335           $  270
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                      -4-
<PAGE>
 
                               COST-U-LESS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

     Cost-U-Less, Inc. (the "Company") operates mid-sized warehouse club-style
stores in "island" markets in U.S. territories throughout the Pacific and
Caribbean. The Company currently operates eight island stores located in Hawaii,
U.S. Virgin Islands, Guam, American Samoa, Fiji, and one U.S. mainland store in
California.

     The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). The financial information includes all
adjustments (consisting only of normal recurring 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 balance
sheet at December 31, 1997 has been derived from the audited financial
statements at that date.  Certain information and footnote disclosure normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to SEC
rules and regulations. Operating results for the quarter ended September 27,
1998, 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 Registration Statement on Form S-1, including the related Prospectus
dated July 23, 1998, as filed with the SEC (the "Registration Statement").

PRINCIPLES OF CONSOLIDATION

     The Company operates wholly owned subsidiaries in Guam, U.S. Virgin
Islands, American Samoa, Nevada, Republic of Fiji, New Zealand, Vanuatu and
Curacao, Netherlands Antilles.  All significant intercompany balances and
transactions have been eliminated in consolidation.

     The U.S. dollar is the functional currency for all locations, except
for Fiji, New Zealand and Curacao, which uses those countries' local currency.

FISCAL YEAR

     The Company's fiscal year ends on the last Sunday in December.  The
year ended December 28, 1997 represents a 52-week fiscal year.

                                       5
<PAGE>
 
                               COST-U-LESS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

COMPREHENSIVE INCOME

     As of December 29, 1997, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholder's
equity. Statement No. 130 requires foreign currency translation adjustments,
which prior to adoption were reported separately in shareholder's equity to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement No. 130.

     For the 13 weeks ended September 27, 1998 and September 28, 1997, total
comprehensive income amounted to $261,000 and $246,000, respectively. For the 
39-weeks ended September 27, 1998 and the 39-weeks ended September 28, 1997,
total comprehensive income (loss) amounted to $630,000 and $(29,000),
respectively.

SEGMENT REPORTING

     Effective January 1, 1997, the Company adopted Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of Enterprise and Related Information. This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. Statement No. 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of this Statement did not affect results of operations
or financial position.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
 

                                      -6-
<PAGE>
 
                               COST-U-LESS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

2.   EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                        13 WEEKS ENDED                  39 WEEKS ENDED
                                                 ------------------------------  -----------------------------
                                                  SEPTEMBER 27,   SEPTEMBER 28,   SEPTEMBER 27,  SEPTEMBER 28,
                                                      1998           1997            1998           1997
                                                 ------------------------------  -----------------------------
                                                             (In thousands except per-share data)
<S>                                              <C>              <C>            <C>            <C> 
Numerator:
  Net income (loss)                               $      288      $      264     $      676     $      (11)
Denominator:
  Denominator for basic earnings per       
    share - weighted average shares                3,116,884       1,999,961      2,372,269      1,999,961
Effect of dilutive securities:
  Stock options and warrants                         109,771         137,732        128,983              -
Denominator for diluted earnings per
  share - adjusted weighted average
  shares and assumed conversion of stock
  options and warrants                             3,226,655       2,137,693      2,501,252      1,999,961

Basic earnings (loss) per common share            $     0.09      $     0.13     $     0.28     $    (0.01)
Diluted earnings (loss) per common share          $     0.09      $     0.12     $     0.27     $    (0.01)
</TABLE>

                                      -7-
<PAGE>
 
                               COST-U-LESS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

 
3.   SEGMENT INFORMATION

<TABLE>
<CAPTION>
                                          ISLAND     MAINLAND  
                                          STORES      STORES     OTHER   TOTALS
                                       ------------ ---------- -------- -------
                                                      (In Thousands)
39 WEEKS ENDED SEPTEMBER 27, 1998
<S>                                     <C>          <C>        <C>     <C> 
Net sales                                   
Contribution (loss)                           4,626        (59)    427   4,994
Store opening expense                           547          -       -     547
Store closing expense                           244          -       -     244
Operating profit (loss)                       3,835        (59)    427   4,203

Segment inventories                          11,356        771       -  12,127
Segment total assets                         23,019      1,327       -  24,346

39 WEEKS ENDED SEPTEMBER 28, 1997 
Net sales                                    82,819      8,984   1,600  93,403  
Contribution (loss)                           4,090       (149)    240   4,181
Store opening expense                           183          -       -     183
Store closing expense                             -      1,300       -   1,300
Operating profit (loss)                       3,907     (1,449)    240   2,698

Segment inventories                           9,571        826       -  10,397
Segment total assets                         16,370      1,412       -  17,782

13 WEEKS ENDED SEPTEMBER 27, 1998 
Net sales                                    30,926      1,756     276  32,958 
Contribution (loss)                           1,497        (17)    208   1,688
Store opening expense                            83          -       -      83
Store closing expense                             -          -       -       0
Operating profit (loss)                       1,414        (17)    208   1,605

13 WEEKS ENDED SEPTEMBER 28, 1997 
Net sales                                    27,183      1,868     696  29,747
Contribution (loss)                           1,252          4     137   1,393
Store opening expense                           115          -       -     115
Store closing expense                             -          -       -       0
Operating profit (loss)                       1,137          4     137   1,278
</TABLE> 

                                      -8-
<PAGE>
 
                               COST-U-LESS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

3.   SEGMENT INFORMATION (CONTINUED)

Reconciliation of Income Contribution to Consolidated Income before Tax

<TABLE>
<CAPTION>
                                                 39 WEEKS ENDED                13 WEEKS ENDED
                                        ------------------------------ ------------------------------ 
                                          SEPTEMBER 27,  SEPTEMBER 28,  SEPTEMBER 27,  SEPTEMBER 28,
                                             1998           1997           1998           1997
                                        -------------- --------------- -------------- ---------------
                                                               (In Thousands)
<S>                                     <C>            <C>             <C>            <C> 
Total contribution for reportable          $ 4,994       $ 4,181         $ 1,688         $1,393                            
  segments                                                                                                                 
Administrative expense not                                                                                                 
  allocated to segments                     (2,960)       (2,352)         (1,089)          (769)                           
Store opening/closing expenses                (791)       (1,483)            (83)          (115)                           
Other expense                                  (10)            -             (10)             -                            
Interest income                                 57             -              57              -                            
Interest expense                              (260)         (362)           (126)          (118)     
                                        -------------- --------------- -------------- ---------------                      
Consolidated income (loss) before tax      $ 1,030       $   (16)        $   437         $  391      
                                        ============== =============== ============== ===============                      
</TABLE> 

Reconciliation of Significant Items


<TABLE> 
<CAPTION> 
                                   SEGMENT                           CONSOLIDATED
                                   TOTALS           CORPORATE           TOTALS
                               ------------    ----------------    -----------------
                                                (In Thousands)
<S>                            <C>             <C>                 <C>  
SEPTEMBER 27, 1998
Inventories                        $12,127          $ 4,333            $16,460
Total assets                        24,346           12,623             36,969
</TABLE> 

 4.  DEBT

     The Company has a line of credit with a bank of $7,000,000 that expires on
May 1, 1999. Borrowings under the line of credit were paid off as of September
27, 1998. Borrowings under the line of credit as utilized bear interest at the
bank's prime rate (8.5% at September 27, 1998) or, at the Company's option, at
LIBOR index plus 1.5%, and are secured by various Company assets. The line of
credit contains certain restrictive covenants relating to working capital, debt
to equity ratios, minimum equity and payment of cash dividends and cash flow
coverage.

                                      -9-
<PAGE>
 
                               COST-U-LESS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

4.   DEBT (CONTINUED)

     The Company borrowed $3,000,000 from two banks in connection with the
construction of the new St. Thomas, USVI store that opened on June 25, 1998.
These loans include a $1,000,000 note payable in twenty-four monthly
installments plus interest at 7.77%, maturing on April 30, 2000 and a $2,000,000
note payable in 180 monthly installments plus interest at the bank's prime rate
plus 1.0% (9.5% at September 27, 1998) maturing on June 1, 2013.  The second
note is secured by a first priority leasehold mortgage on the new St. Thomas
store.  Each of these loan agreements contain certain restrictive covenants
relating to payment of cash dividends and other matters.  Amounts outstanding
under the two loan agreements totaled $2,822,000 as of September 27, 1998.

5.   INCOME TAX PROVISION

     The effective income tax rate for the first 39 weeks of fiscal 1998 was
34.4% compared to a 31.3% effective tax rate (benefit) for the first 39 weeks of
fiscal 1997. The fluctuation in rate was primarily due to state income tax
expense and varying profits in international locations where tax rates differ
from U.S. rates.

6.   STOCKHOLDERS' EQUITY

     On May 13, 1998, the Company effected a 1-for-3.38773 reverse split of its
common stock. All share and per-share information has been restated to reflect
this stock split.

     On July 23, 1998, the Company completed its initial public offering of
1,380,000 shares of common stock at $7.00 per share.  Concurrent with the sale
of shares to the public, the Company sold an additional 160,000 shares of common
stock at $7.00 per share in a private placement to the Kula Fund, an affiliate
of Commonwealth Development Corporation ("CDC"), in reliance on Regulation S
under the Securities Act of 1933, as amended.  To further develop its
relationship with CDC, the Company also issued warrants to the Kula Fund and
appointed a representative of CDC to the Board of Directors.  Net proceeds to
the Company aggregated $8,671,000.

                                      -10-
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     This discussion and analysis should be read in conjunction with the
Company's condensed consolidated financial statements and the related notes
thereto appearing in Item 1 of this report.  In addition to historical
information, this Form 10-Q contains and may incorporate by reference statements
which may constitute forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from
predicted results.  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 the Company's
actual results include, but are not limited to:  (i) transportation
difficulties; (ii) isolation of store operations from corporate management;
(iii) weather and other risks associated with island operations, (iv) dependence
on expansion outside the U.S.; (v) dependence on key personnel and local
managers; (iv) reliance on computer systems; (v) risks associated with
significant growth; and (vi) competition.  More information about factors that
could affect the Company's financial results is included in the "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections of the Company's final prospectus dated July 23, 1998,
included in the Company's Registration Statement on Form S-1 (No. 333-52459), as
filed with the Commission (the "Registration Statement").

OVERVIEW

     During the third quarter ended September 27, 1998, the Company operated
nine retail stores located in Guam (2), American Samoa (1), Hawaiian Islands
(2); U.S. Virgin Islands (2); Fiji (1) and California (1). Although the
Company's stores are patterned after the warehouse club concept, the stores (i)
are smaller (averaging 28,500 square feet vs. large format warehouse clubs of
approximately 130,000 square feet.), (ii) target niche markets, including
foreign island countries (and U.S. Territories and states) 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 the Company does not have large seasonal fluctuations in sales,
the fourth quarter is typically the highest sales quarter due to the additional
Christmas holiday sales. Operating profits have varied by quarter primarily as a
result of store opening and closing expenses. For the 13-weeks and 39-weeks
ended September 27, 1998, store opening and closing costs totaled $83,000 and
$791,000 respectively compared to $115,000 and $1,483,000 for the 13-weeks and
39-weeks ended September 28, 1997. For the remainder of 1998, the Company does
not expect any additional store closure costs as the Company has closed all non-
performing stores. Store opening costs will be higher for the fourth quarter due
to the new store opening in Suva, Fiji in November 1998 and in connection with
the Curacao, Netherlands Antilles store expected to open in the first quarter
1999. The company expenses store opening costs as incurred.

                                      -11-
<PAGE>
 
COMPARISON OF THE 13 WEEKS ENDED SEPTEMBER  27, 1998 AND SEPTEMBER 28, 1997
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE):

     Net Sales: Net sales for the third quarter of fiscal 1998 increased 11% to
$32,958 from $29,747 during the third quarter of fiscal 1997, primarily due to a
new store in Nadi, Fiji and a strong comparable-store sales increase of 10.4%
(stores open for a full 13 months). The increase in comparable-store sales was
primarily due to a successful store relocation in St. Thomas that opened June
25, 1998, the closure of a significant competitor in Guam in late August 1998
and strong sales in other stores attributable to improved merchandising and
demand for low cost, high quality merchandise.

     Gross Profit: Gross profit in the third quarter of fiscal 1998 increased to
$5,457 from $4,877 in the third quarter of fiscal 1997. Gross profit margin
increased to 16.6% in the third quarter of fiscal 1998 compared to 16.4% for the
third quarter of fiscal 1997, primarily from increased sales from higher margin
stores.

     Operating Expenses: Store expenses for the third quarter of fiscal 1998
increased 8.2% to $3,769 from $3,484 during the third quarter of fiscal 1997.
Store expenses decreased as a percentage of net sales to 11.4% for the third
quarter of fiscal 1998 compared to 11.7% for the third quarter of fiscal 1997.
The increase in expense was primarily related to the additional store in Nadi,
Fiji.

     General and administrative expenses increased $320, or 41.6%, to $1,089 for
the third quarter of fiscal 1998 from $769 for the third quarter of fiscal 1997.
General and administrative expenses increased as a percentage of net sales to
3.3% for the third quarter of fiscal 1998 compared to 2.6% for the fiscal year
1997. These increases were from costs associated with the Company's expansion
program and indirect costs associated with the Company's initial public
offering.

     Store opening expenses were $83 in the third quarter of fiscal 1998
compared to $115 in the third quarter of fiscal 1997. Store opening expenses are
expected to increase in the fourth quarter due to the new store in Suva, Fiji
and expenses incurred in advance of the Curacao store opening in the first
quarter of 1999. The Company did not incur any store closing expenses in the
third quarter of either fiscal year.

     Interest expense and Interest Income: Interest expense increased to $126
for the third quarter of fiscal 1998 from $118 in the third quarter of fiscal
1997 due to an increase in the Company's average outstanding borrowings that
resulted primarily from borrowings related to the St. Thomas building that
opened June 25, 1998. Interest income for the third quarter of fiscal 1998 of
$57 was generated from interest bearing deposits from the net proceeds from the
initial public offering completed on July 23, 1998. There was no interest income
for the prior year quarter.

     Income Tax Provision: The effective income tax rate in the third quarter of
fiscal 1998 was 34.1% compared to a 32.4% effective tax rate in the third
quarter of fiscal 1997. The fluctuation in rate was primarily due to state
income tax expense and varying profits in foreign subsidiaries (including U.S.
territories) where tax rates differ from different than U.S. tax rates.

     Net Income: Net income for the third quarter of fiscal 1998 increased to
$288 or $0.09 per share (diluted), compared to net income of $264 or $0.12 per
share (diluted), for the third quarter of fiscal 1997.

                                      -12-
<PAGE>
 
COMPARISON OF THE 39 WEEKS  ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE):

     Net Sales: Net sales increased 3.0% to $96,163 for the first 39 weeks of
fiscal 1998 from $93,403 during the first 39 weeks of fiscal 1997. The increase
was due to the new Nadi, Fiji store and same store sales growth partially
diluted by closure of two non-performing mainland stores in 1997. The combined
sales for these two stores for the first 39 weeks of fiscal 1997 totaled $3.4
million. Comparable-store sales increased to 6.7% for the first thirty-nine
weeks of fiscal 1998 compared to a 0.3% decrease for the same prior year period.

     Gross Profit: Gross profit increased to $15,952 for the first 39 weeks of
fiscal 1998 from $15,182 for the first 39 weeks of fiscal 1997. Gross profit
margin increased to 16.6% in the first 39 weeks of fiscal 1998 from 16.3% in the
first 39 weeks of fiscal 1997. The increase in gross margin was due primarily to
the closure of two lower-margin mainland stores, and sales increases in fiscal
1998 in higher margin stores.

     Operating Expenses: Store expenses decreased $43, or 0.4%, to $10,958 for
the first 39 weeks of fiscal 1998 from $11,001 for the first 39 weeks of fiscal
1997, and decreased as a percentage of net sales for the same periods to 11.4%
from 11.8%. The decrease was primarily due to a reduction in store expenses from
closed stores, offset by additional expenses from the new Nadi, Fiji store and
an increase in expenses related to comparable-store sales increases.

     General and administrative expenses increased $608, or 25.9%, to $2,960 for
the first 39 weeks of fiscal 1998 from $2,352 for the first 39 weeks of fiscal
1997, and increased as a percentage of net sales to 3.1% from 2.5%. These
increases were from costs associated with the Company's expansion program and
indirect costs associated with the initial public offering.

     The Company incurred store opening expenses of $547 in the first 39 weeks
of fiscal 1998 compared to $183 in the first 39 weeks of fiscal 1997. The
increase was due to the accelerated new store expansion program commencing in
1998.

     Store closing expenses decreased to $244 in fiscal 1998 from $1,300 in
fiscal 1997.  The store closing expenses in the first 39 weeks of fiscal 1998
resulted from the relocation of the St. Thomas store and the closure costs
associated with the existing store.  The store closing expenses in the first 39
weeks of fiscal 1997 were a result of closing two mainland stores.

     Interest Expense and Interest Income: Interest expense declined to $260 in
the first 39 weeks of fiscal 1998 compared to $362 in the first 39 weeks of
fiscal 1997 due to a decrease in the average outstanding borrowings during the
first 39 weeks of fiscal 1998. Interest income in the first 39 weeks of fiscal
1998 of $57 was generated from interest bearing deposits from the net proceeds
from the initial public offering completed on July 23, 1998. There was no
interest income for the same prior year period.

     Income Tax Provision: The effective income tax rate for the first 39 weeks
of fiscal 1998 was 34.4% compared to a 31.3% effective tax rate for the first 39
weeks of fiscal 1997. The fluctuation in rates was primarily due to state income
tax expense and varying profits in foreign subsidiaries (including U.S.
territories) where tax rates differ from U.S. tax rates.

                                      -13-
<PAGE>
 
     Net Income (Loss): Net income for the first 39 weeks of fiscal 1998
increased to $676, or $0.27 per share (diluted), compared to a loss of $11, or
$(0.01) per share (diluted), during the first 39 weeks of fiscal 1997.

     Ending shares outstanding on September 27, 1998 total 3,539,961 shares,
compared to 1,999,961 shares outstanding on September 28, 1997.

LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS, EXCEPT STOCK PRICE)

     The discussion below contains forward-looking statements that involve
risks and uncertainties, and should be read in conjunction with the disclosure
in the Registration Statement.  Actual results may differ materially.

     The Company's primary requirement for capital is the financing of equipment
and initial store opening costs for new stores. In addition, working capital
requirements, as well as the purchase of land and construction of store
facilities, determine capital needs.

     While there can be no assurance that current expectations will be realized,
and plans are subject to change upon further review, it is management's
intention to spend an aggregate of approximately $6,000 during fiscal 1998 on
construction, remodeling and equipment for three new stores (including the newly
relocated store in St. Thomas). Of this total, $3,300 was utilized on the new
St. Thomas store facility and equipment, which was financed through two term
loans. Management is actively seeking a sale-leaseback arrangement and, if
consummated, intends to retire the existing debt. In addition, approximately
$1,500 will be used to purchase equipment for the two new stores in Fiji (one
opened July 2, 1998 and the other is scheduled to open in the fourth quarter of
1998) and an additional $1,200 to purchase new computer equipment and to pay for
software development costs in connection with the central office and the New
Zealand buying offices system. Capital expenditures totaled $5,682 during the
first 39 weeks of fiscal 1998.

     When opening a new store, as well as on an on-going basis, the Company
expects to be able to finance a substantial portion of its merchandise inventory
cost by using a combination of vendor and bank financing.  However, there can be
no assurance that this level of financing will be available in the future on
terms acceptable to the Company.

     On May 1, 1998, the Company renewed and increased its line of credit with
Seafirst Bank to $7,000. The line expires May 1, 1999. Borrowings under the line
of credit were paid off as of September 27, 1998. Future borrowings under the
line of credit will bear interest at the bank's prime rate (8.5% at September
27, 1998). The borrowing collateral for the line of credit consists of
inventories, equipment and trade accounts receivable. The line of credit
contains certain restrictive covenants relating to working capital, debt to
equity ratios, minimum equity and payment of cash dividends and cash flow
coverage.

     The new St. Thomas store was opened on June 25, 1998 and was constructed by
the Company at a cost of $3,300, including new equipment. The Company obtained
$3,000 of construction financing from two banks for the new store. This is the
only store owned by the Company. The construction financing included a $1,000
note payable with interest at 7.77%, 

                                      -14-
<PAGE>
 
maturing on April 30, 2000. The construction financing also included a $2,000
note payable with interest at the bank's prime rate plus 1.0% (9.5% at September
27, 1998) maturing on June 1, 2013. The second note is secured by a first
priority leasehold mortgage on the new St. Thomas store. Each of these
agreements contains certain restrictive covenants relating to payment of cash
dividends and other matters. Amounts outstanding under the two loan agreements
totaled $2,822 as of September 27, 1998.

     The Company entered into its expansion program at an accelerated rate in
the first 39 weeks of fiscal 1998, spending $547 in working capital toward store
opening costs and $5,682 in equipment and building construction costs primarily
related to the new store in St. Thomas, equipment for two new stores in Fiji and
corporate office computer system upgrades. In connection with these new stores
and the upcoming holiday season, inventory levels increased $4,189 during the
first 39 weeks of fiscal 1998. Net cash provided by (used in) operations was
($277) and $2,310 for the first 39 weeks of fiscal 1998 and 1997, respectively.
In the first 39 weeks of fiscal 1998, operating cash flow was used primarily to
supply inventories for the new stores that opened in St. Thomas at the end of
the third quarter and Fiji that opened July 2, 1998. For the first 39 weeks of
fiscal 1997, the Company reduced inventories by $2,186, primarily as a result of
the closure of two mainland stores.

     Net cash used in investing activities was $5,682 for the first 39 weeks of
fiscal 1998 compared to $671 for the first 39 weeks of fiscal 1997. The increase
was primarily due to construction costs for the new St Thomas store, equipment
for new and existing stores and corporate computer system upgrades.

     Net cash provided by (used in) financing activities was $10,388 for the
first 39 weeks of fiscal 1998 and ($892) for the first 39 weeks of fiscal 1997.
The increase was primarily due to the proceeds of $3,000 related to the
construction loans for the new St. Thomas building and net proceeds from the
initial public offering as discussed below.

     The Company completed an initial public offering on July 28, 1998 selling
1,380,000 shares of common stock at $7.00 per share and concurrently selling
160,000 common shares in a Reg. S placement at $7.00 per share. The Common stock
sold in connection with the Reg. S. placement was to the Kula Fund, an
investment fund managed by Pacific Capital Partners Ltd. and affiliated with the
Commonwealth Development Corporation, a development finance institution of the
U.K. Government. Net proceeds, after selling commission and other expenses were
in the aggregate approximately $8,671 for the initial public offering and the
Reg. S sale of common stock.

YEAR 2000 COMPLIANCE

     The Year 2000 issue is the result of computer programs being written using
two digits, rather than four, to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. If not addressed,
the direct result of the Year 2000 issue could be a system failure or
miscalculations, causing disruption of operations, including a temporary
inability to process customer transactions, order merchandise, accurately track
inventory and revenue, or engage in similar normal business activities.

     The Company believes that all of its material systems are Year 2000-
compliant, and expects that its total costs to make all its systems Year 2000-
compliant will be immaterial. The Company has initiated a program to contact all
of it inventory suppliers plus other vendors and suppliers with which

                                      -15-
<PAGE>
 
its systems interface and exchange data or upon which it business depends, such
as banks, security alarm monitoring providers, refrigeration equipment suppliers
and maintenance providers and other service suppliers. These efforts are
designed to minimize the extent to which the Company's business will be
vulnerable in the event of the failure of these third parties to remedy their
own year 2000 issues.

     The Company's failure to implement its Year 2000 corrections in a timely
fashion or in accordance with its current cost estimates, or the failure of
third-party vendors to correct their Year 2000 problems, could have a material
adverse effect on the Company's business, financial condition and operating
results.

EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     As of December 29, 1997, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholder's
equity. Statement No. 130 requires foreign currency translation adjustments,
which prior to adoption were reported separately in shareholder's equity to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement No. 130.

     For the 13 weeks ended September 27, 1998 and September 28, 1997, total
comprehensive income amounted to $261,000 and $246,000, respectively. For the 
39-weeks ended September 27, 1998 and the 39-weeks ended September 28, 1997,
total comprehensive income (loss) amounted to $630,000 and $(29,000),
respectively.

     Effective January 1, 1997, the Company adopted Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of Enterprise and Related Information. This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. Statement No. 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of this Statement did not affect the Company's results
of operations or financial position.
 

                                      -16-
<PAGE>
 
                          PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     On July 23, 1998, the Commission declared effective the Company's
Registration Statement on Form S-1 (No. 333-52459) as filed with the Commission
in connection with the Company's initial public offering (the "Offering") of
common stock, par value $0.001 per share (the "Common Stock").  The date of
commencement of the Offering was July 23, 1998.  Of the $7,763,000 in net
proceeds received by the Company upon consummation of the Offering,
approximately $4 million was used to pay off the outstanding balance under the
Company's line of credit with Seafirst Bank.  The remaining net proceeds were
invested in a money market account with Bank of America.

     Concurrent with the Offering, the Company sold 160,000 shares of Common
Stock at $7.00 per share, in a placement to Kula Fund, an affiliate of
Commonwealth Development Corporation, in reliance on Regulation S under the
Securities Act of 1933, as amended (the "Concurrent Reg. S Placement"). As part
of the Concurrent Reg. S Placement, the Company also sold to Kula Fund a warrant
to purchase 117,000 shares of Common Stock at an exercise price equal to $8.40
per share (120% of the per share price in the Offering). The net proceeds of
approximately $908,000 from the Concurrent Reg. S Placement were invested in a
money market account with Bank of America.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

      11.1  Computation of Earnings Per Share*

      27.1  Financial Data Schedule

*  See Note 2 to the Unaudited Condensed Consolidated Financial Statements

                                      -17-
<PAGE>
 
                                  SIGNATURES

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

                                  COST-U-LESS, INC.
                                  (Registrant)


Date   11/9/98                    /s/  Michael J. Rose
     --------------------         -----------------------------------
                                  Michael J. Rose
                                  Chairman of the Board, President and
                                  Chief Executive Officer


Date   11/9/98                    /s/  Allan C. Youngberg
     --------------------         -----------------------------------
                                  Allan C. Youngberg
                                  Executive Vice President, Chief Financial
                                  Officer, Secretary and Treasurer

 

                                      -18-
<PAGE>
 
                                 EXHIBIT INDEX

Exhibit Number      Description
--------------      -----------
11.1                Computation of Earnings Per Share*
27.1                Financial Data Schedule

________________

*  See Note 2 to the Unaudited Condensed Consolidated Financial Statements
 

                                      -19-