---

---

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

| | xQUARTERLY REPORT PURSUANT TO SECTION 13 OR
  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
| | -------------------------------------------------------------------------------------------
| |                                                                                            
| | FOR THE
  QUARTERLY PERIOD ENDED JUNE 27, 2004                                             
| |                                                                                            
| | OR                                                                                         
| |                                                                                            
| | oTRANSITION REPORT PURSUANT TO SECTION 13
  OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
| |                                                                                            
| | FOR THE
  TRANSITION PERIOD FROM __________ TO __________                                  

COMMISSION FILE NUMBER    0-24543

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

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

3633 136th Place SE, Suite 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   o NO.

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

The
registrant had 3,744,106 common shares, par value $0.001, outstanding at August
6, 2004.

---

---

COST-U-LESS, INC.

INDEX TO FORM 10-Q

|PART I.    | FINANCIAL INFORMATION |                                                                                        
|---------- | --------------------- | ---------------------------------------------------------------------------------------
|           |                       |                                                                                        
|           | Item 1.               | Financial
  Statements (Unaudited)                                                     
|           |                       |                                                                                        
|           |                       | Condensed
  Consolidated Statements of Operations                                      
|           |                       |                                                                                        
|           |                       | Condensed
  Consolidated Balance Sheets                                                
|           |                       |                                                                                        
|           |                       | Condensed
  Consolidated Statements of Shareholders Equity                            
|           |                       |                                                                                        
|           |                       | Condensed
  Consolidated Statements of Cash Flows                                      
|           |                       |                                                                                        
|           |                       | Notes to
  Condensed Consolidated Financial Statements                                 
|           |                       |                                                                                        
|           | Item 2.               | Managements
  Discussion and Analysis of Financial Condition and Results of Operations
|           |                       |                                                                                        
|           | Item 3.               | Quantitative
  and Qualitative Disclosures About Market Risk                           
|           |                       |                                                                                        
|           | Item 4.               | Controls
  and Procedures                                                              
|           |                       |                                                                                        
|PART II.   | OTHER INFORMATION     |                                                                                        
|           |                       |                                                                                        
|           | Item 4.               | Submission
  of Matters to a Vote of Security Holders                                  
|           |                       |                                                                                        
|           | Item 5.               | Other
  Information                                                                    
|           |                       |                                                                                        
|           | Item 6.               | Exhibits
  and Reports on Form 8-K                                                     
|           |                       |                                                                                        
|SIGNATURES | 24                   

2

---

---

PART I  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL
STATEMENTS (UNAUDITED)

COST-U-LESS, INC.

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

(Unaudited)

|                                                      |  | 13 Weeks Ended |           | 26 Weeks Ended |  
|----------------------------------------------------- |  | -------------- | --------- | -------------- | -
|                                                      |  |                |           |                |  
|                                                      |  | June 27,2004   |           | June 29,2003   |  
|                                                      |  |                |           |                |  
|                                                      |  |                |           |                |  
|Net sales                                             |  | $              | 50,813    |                | $
|Merchandise costs                                     |  |                | 41,460    |                |  
|                                                      |  |                |           |                |  
|Gross profit                                          |  |                | 9,353     |                |  
|                                                      |  |                |           |                |  
|Operating expenses:                                   |  |                |           |                |  
|Store                                                 |  |                | 6,405     |                |  
|General
  and administrative                          |  |                | 1,721     |                |  
|Store
  openings                                      |  |                | 39        |                |  
|                                                      |  |                |           |                |  
|Total operating expenses                              |  |                | 8,165     |                |  
|                                                      |  |                |           |                |  
|                                                      |  |                |           |                |  
|Operating income                                      |  |                | 1,188     |                |  
|                                                      |  |                |           |                |  
|Other income (expense):                               |  |                |           |                |  
|Interest
  expense, net                               |  |                | (98       | )              |  
|Other                                                 |  |                | (28       | )              |  
|                                                      |  |                |           |                |  
|Income before income taxes                            |  |                | 1,062     |                |  
|                                                      |  |                |           |                |  
|Income tax provision                                  |  |                | 425       |                |  
|                                                      |  |                |           |                |  
|Net income                                            |  | $              | 637       |                | $
|                                                      |  |                |           |                |  
|                                                      |  |                |           |                |  
|Earnings per common share:                            |  |                |           |                |  
|Basic                                                 |  | $              | 0.17      |                | $
|                                                      |  |                |           |                |  
|Diluted                                               |  | $              | 0.16      |                | $
|                                                      |  |                |           |                |  
|                                                      |  |                |           |                |  
|Weighted average common
  shares outstanding, basic   |  |                | 3,737,737 |                |  
|                                                      |  |                |           |                |  
|Weighted average common
  shares outstanding, diluted |  |                | 3,984,114 |                |  
|                                                      |  |                |           |                |  

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

3

---

---

COST-U-LESS,
INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

(Unaudited)

|                                                |  | June
  27,
  2004 |   | December 28,
  2003 | 
|----------------------------------------------- |  | ----------------- | - | ------------------- | 
|                                                |  |                   |   |                     | 
|ASSETS                                          |  |                   |   |                     | 
|                                                |  |                   |   |                     | 
|Current assets:                                 |  |                   |   |                     | 
|Cash and cash
  equivalents                     |  |                   | $ | 3,770               | 
|Insurance receivable                            |  |                   |   |                    | 
|Accounts receivable,
  net                      |  |                   |   | 958                 | 
|Inventories, net                                |  |                   |   | 21,830              | 
|Other current assets                            |  |                   |   | 1,680               | 
|                                                |  |                   |   |                     | 
|Total
  current assets                          |  |                   |   | 28,238              | 
|                                                |  |                   |   |                     | 
|Property and equipment, net                     |  |                   |   | 12,550              | 
|Deposits and other assets                       |  |                   |   | 834                 | 
|                                                |  |                   |   |                     | 
|                                                |  |                   |   |                     | 
|Total
  assets                                  |  |                   | $ | 41,622              | 
|                                                |  |                   |   |                     | 
|                                                |  |                   |   |                     | 
|LIABILITIES
  AND SHAREHOLDERS EQUITY          |  |                   |   |                     | 
|                                                |  |                   |   |                     | 
|Current liabilities:                            |  |                   |   |                     | 
|Line of credit                                  |  |                   | $ | 0                   | 
|Accounts payable                                |  |                   |   | 14,752              | 
|Accrued expenses and
  other liabilities        |  |                   |   | 4,356               | 
|Current portion of
  capital lease obligations  |  |                   |   | 99                  | 
|Current portion of
  long-term debt             |  |                   |   | 267                 | 
|                                                |  |                   |   |                     | 
|Total
  current liabilities                     |  |                   |   | 19,474              | 
|                                                |  |                   |   |                     | 
|Other long-term liabilities                     |  |                   |   | 749                 | 
|Capital lease obligations, less current portion |  |                   |   | 659                 | 
|Long-term debt, less current portion            |  |                   |   | 2,411               | 
|                                                |  |                   |   |                     | 
|Total
  liabilities                             |  |                   |   | 23,293              | 
|                                                |  |                   |   |                     | 
|Commitments and contingencies                   |  |                   |   |                    | 
|                                                |  |                   |   |                     | 
|Shareholders equity                            |  |                   |   | 18,329              | 
|                                                |  |                   |   |                     | 
|                                                |  |                   |   |                     | 
|Total
  liabilities and shareholders equity    |  |                   | $ | 41,622              | 
|                                                |  |                   |   |                     | 

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

4

---

---

COST-U-LESS,
INC.

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

(Unaudited)

|                                           |  |  | Common
  Stock
  Shares |  | Common
  Stock
  Amount |   | Retained
  Earnings |  | Accumulated
  Other
  Comprehensive
  Loss |  | Total |      
|------------------------------------------ |  |  | ------------------------ |  | ------------------------ | - | ------------------- |  | ------------------------------------------ |  | ----- | -----
|                                           |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|                                           |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|Balance at December 29, 2002               |  |  | 3,606,376                |  |                          | $ | 12,446              |  |                                            |  | $     | 3,842
|Net income                                 |  |  |                         |  |                          |   |                    |  |                                            |  |       | 532  
|Foreign currency
  translation adjustments |  |  |                         |  |                          |   |                    |  |                                            |  |       |     
|                                           |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|Comprehensive
  income                     |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|                                           |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|                                           |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|Balance at June 29, 2003                   |  |  | 3,606,376                |  |                          | $ | 12,446              |  |                                            |  | $     | 4,374
|                                           |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|                                           |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|Balance at December 28, 2003               |  |  | 3,688,376                |  |                          | $ | 12,597              |  |                                            |  | $     | 5,223
|Net income                                 |  |  |                         |  |                          |   |                    |  |                                            |  |       | 1,174
|Foreign currency
  translation adjustments |  |  |                         |  |                          |   |                    |  |                                            |  |       |     
|                                           |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|Comprehensive
  income                     |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|                                           |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|Compensation related
  to stock options    |  |  |                         |  |                          |   | 9                   |  |                                            |  |       |     
|Exercise of common
  stock options         |  |  | 50,680                   |  |                          |   | 157                 |  |                                            |  |       |     
|                                           |  |  |                          |  |                          |   |                     |  |                                            |  |       |      
|Balance at June 27, 2004                   |  |  | 3,739,056                |  |                          | $ | 12,763              |  |                                            |  | $     | 6,397
|                                           |  |  |                          |  |                          |   |                     |  |                                            |  |       |      

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)

|                                                                                              |  | June 27,
  2004 |   | June 29,
  2003 |  
|--------------------------------------------------------------------------------------------- |  | --------------- | - | --------------- | -
|                                                                                              |  |                 |   |                 |  
|OPERATING ACTIVITIES:                                                                         |  |                 |   |                 |  
|Net income                                                                                    |  |                 | $ | 1,174           |  
|Adjustments to
  reconcile net income to net cash provided by
          operating activities: |  |                 |   |                 |  
|Depreciation
  and amortization                                                               |  |                 |   | 916             |  
|Loss/(gain)
  on property and equipment                                                       |  |                 |   | (38             | )
|Stock
  option expense                                                                        |  |                 |   | 9               |  
|Cash provided by
  changes in operating assets and
          liabilities:                     |  |                 |   |                 |  
|Insurance
  receivable                                                                        |  |                 |   | 1,135           |  
|Accounts
  receivable                                                                         |  |                 |   | 408             |  
|Inventories                                                                                   |  |                 |   | (2,290          | )
|Other
  current assets                                                                        |  |                 |   | (535            | )
|Deposits
  and other assets                                                                   |  |                 |   | (35             | )
|Accounts
  payable                                                                            |  |                 |   | (488            | )
|Accrued
  expenses and other liabilities                                                      |  |                 |   | 111             |  
|Other
  long-term liabilities                                                                 |  |                 |   | 65              |  
|                                                                                              |  |                 |   |                 |  
|Net
  cash provided by operating activities                                                   |  |                 |   | 432             |  
|                                                                                              |  |                 |   |                 |  
|INVESTING ACTIVITY:                                                                           |  |                 |   |                 |  
|Cash used to purchase
  property and equipment                                                |  |                 |   | (575            | )
|                                                                                              |  |                 |   |                 |  
|FINANCING ACTIVITIES:                                                                         |  |                 |   |                 |  
|Proceeds from exercise
  of common stock options                                              |  |                 |   | 157             |  
|Proceeds from capital
  lease obligations                                                     |  |                 |   | 805             |  
|Proceeds (payments)
  from (on) line of credit, net                                           |  |                 |   | (960            | )
|Principal payments on
  capital lease obligations                                             |  |                 |   | (47             | )
|Principal payments on
  long-term debt                                                        |  |                 |   | (133            | )
|                                                                                              |  |                 |   |                 |  
|Net
  cash provided by/(used by) financing activities                                         |  |                 |   | (178            | )
|                                                                                              |  |                 |   |                 |  
|Foreign currency
  translation adjustments                                                    |  |                 |   | (2              | )
|                                                                                              |  |                 |   |                 |  
|                                                                                              |  |                 |   |                 |  
|Net increase/(decrease) in cash and cash
  equivalents                                        |  |                 |   | (323            | )
|                                                                                              |  |                 |   |                 |  
|Cash and cash equivalents:                                                                    |  |                 |   |                 |  
|Beginning of period                                                                           |  |                 |   | 4,093           |  
|                                                                                              |  |                 |   |                 |  
|End of period                                                                                 |  |                 | $ | 3,770           |  
|                                                                                              |  |                 |   |                 |  
|                                                                                              |  |                 |   |                 |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                             |  |                 |   |                 |  
|Cash paid during the
  period for:                                                            |  |                 |   |                 |  
|Interest                                                                                      |  |                 | $ | 217             |  
|Income
  taxes                                                                                |  |                 | $ | 457             |  
|Cash received during
  the period for:                                                        |  |                 |   |                 |  
|Income
  taxes                                                                                |  |                 | $ | 9               |  



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

6

---

---

COST-U-LESS,
INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.       Nature
of Business and Summary of Significant Accounting Policies

Nature
of Business

Cost-U-Less,
Inc. (the Company) operates mid-sized warehouse club-style stores in the
United States Territories (U.S. Territories), foreign island countries in the
Pacific and the Caribbean, the Hawaiian Islands and Sonora, California.  At June 27, 2004, the Company operated
eleven retail stores as follows:  two
stores in each of Hawaii and Guam, and one store in each of St. Thomas, St.
Croix, American Samoa, Fiji, Curacao, St. Maarten and Sonora, California. On
December 8, 2002, the Companys two stores on the island of Guam suffered
damage from Supertyphoon Pongsona, resulting in the immediate closure of both
stores.  The Companys Tamuning store
reopened shortly thereafter, but the Companys Dededo store had to be rebuilt
and did not reopen for business until October 3, 2003.

Basis
of Presentation

The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting and pursuant to the
rules and regulations of the SEC. In the opinion of management, the financial
information includes all adjustments that the Company considers necessary for a
fair presentation of the financial position at such dates and the operations
and cash flows for the periods then ended. 
The condensed consolidated balance sheet at December 28, 2003, has
been derived from the audited financial statements at that date.  Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to SEC rules and regulations on quarterly
reporting. Operating results for the 13 and 26 weeks ended June 27, 2004, are
not necessarily indicative of results that may be expected for the entire year.  All quarterly periods reported consist of 13
weeks.  For further information, refer
to the financial statements and footnotes included in the Companys annual
report on Form 10-K filed with the SEC on March 26, 2004.

Fiscal
Year

The
Company reports on a 52/53-week fiscal year, consisting of four thirteen-week
periods and ending on the Sunday nearest to the end of December. Fiscal 2004,
ending on December 26, 2004, and Fiscal 2003, which ended on
December 28, 2003, are 52-week years.

Principles
of Consolidation

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

Foreign
Currency Translations and Comprehensive Income

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

7

---

---

COST-U-LESS,
INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)

Use
of Estimates

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

Stock-Based
Compensation

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

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

|                                                       |                                                                                                                              |  | 13
        Weeks Ended        |      | 26
        Weeks Ended       
|------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---- | -----------------------------
|                                                       |                                                                                                                              |  |                               |      |                              
|                                                       |                                                                                                                              |  | June
        27,
        2004 |      | June
        29,
        2003
|                                                       |                                                                                                                              |  |                               |      |                              
|                                                       |                                                                                                                              |  |                               |      |                              
|Net
        income as reported                         |                                                                                                                              |  | $                             | 637  |                              
|Less:                                                  | Total stock-based
        employee compensation expense determined under fair value method for all
        awards,net of tax |  |                               |      | 9                            
|                                                       |                                                                                                                              |  |                               |      |                              
|Net
        income pro forma                           |                                                                                                                              |  | $                             | 628  |                              
|                                                       |                                                                                                                              |  |                               |      |                              
|                                                       |                                                                                                                              |  |                               |      |                              
|Earnings
        per common share, basic as reported   |                                                                                                                              |  | $                             | 0.17 |                              
|Earnings
        per common share, basic pro forma     |                                                                                                                              |  | $                             | 0.17 |                              
|Earnings
        per common share, diluted as reported |                                                                                                                              |  | $                             | 0.16 |                              
|Earnings
        per common share, diluted pro forma   |                                                                                                                              |  | $                             | 0.16 |                              

Reclassifications

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

8

---

---

COST-U-LESS,
INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)

New Accounting Pronouncements

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

2.       Earnings
Per Share

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

The
following table sets forth the computation of basic and diluted earnings per
common share (in thousands, except share and per share data):

| |                                                                                                                                                                |  | 13
  Weeks Ended |           | 26
  Weeks Ended |  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | ---------------- | -
| |                                                                                                                                                                |  |                  |           |                  |  
| |                                                                                                                                                                |  | June 27,
  2004  |           | June 29,
  2003  |  
| |                                                                                                                                                                |  |                  |           |                  |  
| | Numerator:                                                                                                                                                     |  |                  |           |                  |  
| | Net income                                                                                                                                                     |  | $                | 637       |                  | $
| |                                                                                                                                                                |  |                  |           |                  |  
| | Denominator:                                                                                                                                                   |  |                  |           |                  |  
| | Denominator for basic
  earnings per shareweighted
            average shares                                                                                 |  |                  | 3,737,737 |                  |  
| | Effect of dilutive common equivalent shares:                                                                                                                   |  |                  |           |                  |  
| | Stock options and
  warrants                                                                                                                                   |  |                  | 246,377   |                  |  
| |                                                                                                                                                                |  |                  |           |                  |  
| | Denominator for
  diluted earnings per shareadjusted
            weighted average
  shares and assumed conversion of
            stock options and
  warrants |  |                  | 3,984,114 |                  |  
| |                                                                                                                                                                |  |                  |           |                  |  
| |                                                                                                                                                                |  |                  |           |                  |  
| | Basic earnings per common share                                                                                                                                |  | $                | 0.17      |                  | $
| | Diluted earnings per common share                                                                                                                              |  | $                | 0.16      |                  | $

3.       Insurance
Receivable

On
December 8, 2002, the Companys two stores on the island of Guam suffered
damage from the Supertyphoon Pongsona, resulting in the immediate closure of
both stores.  The Companys Tamuning
store lost its generator in the storm, but reopened shortly thereafter on
December 12th.  The Companys Dededo
store, however, suffered more significant damage, and had to be closed for
reconstruction.  The store was rebuilt
and it reopened for business on October 3, 2003.

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

9

---

---

COST-U-LESS,
INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)

4.       Line
of Credit

On
April 9, 2003, the Company entered into a line of credit with Wells Fargo Business
Credit for a three year term, expiring on April 9, 2006.  The line of credit consists of a $6.0
million committed, secured revolving credit line with a sublimit for letters of
credit and bankers acceptances in the amount up to $0.5 million.  At June 27, 2004, there were no borrowings
outstanding on the line of credit. 
There was $0.1 million utilized for standby letters of credit and $0.1
million set aside for other reserves.

Borrowings
are limited to the lesser of $6.0 million or the amount calculated under the
borrowing base.  The borrowing base is equal to the lesser of
(a) $6.0 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. On March 2, 2004, the Company and
Wells Fargo Business Credit entered into the Second Amendment to Credit and
Security Agreement. The amendment provided for the following: (i) an immediate
reduction in the interest rate on the line of credit of one half of one percent
(0.50%), (ii) a further reduction in the interest rate of one half of one
percent (0.50%) if the Company met certain net income levels from December 29,
2003, through June 27, 2004, and (iii) the adoption of new measurement values
for fiscal 2004. During the 26 weeks ended June 27, 2004, borrowings under the
amended line of credit were charged interest at the financial institutions
prime rate plus 1.0%  (5% at June 27, 2004).  As the Company met the certain net income
levels from December 29, 2003, through June 27, 2004, specified in the March 2,
2004, amendment, its interest rate will be reduced from August 1, 2004, forward
to the financial institutions prime rate plus 0.5%.

A
fee of 0.25% is charged on the unused portion of the line of credit.  The line of credit contains various
covenants, including a requirement that we maintain minimum pre-tax income and
tangible net worth and limitations on acquisitions, additional debt, changes in
control and capital expenditures.  The
Company believes that it is currently in compliance with all such covenants.

5.       Commitments
and Contingencies

Commitments

In
April 2004, the Company entered into a Real Estate Purchase and Sale Agreement
for a certain parcel of real property located in St. Croix, U.S. Virgin
Islands. During the first half of 2005, we intend to relocate our St. Croix
store to this new parcel of land, which is located closer to the main trade
area in the center of the island.  The
purchase of the land was finalized on July 13, 2004, at a cost of approximately
$0.9 million.

Legal
Proceedings

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

10

---

---

|ITEM 2. | MANAGEMENTS DISCUSSION AND
  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | ---------------------------------------------------------------------------------------

Certain
Factors That May Affect Future Results of Operations

This
discussion and analysis should be read in conjunction with our unaudited
condensed consolidated financial statements and the related notes thereto
appearing in Item 1 of this report.  In
addition to historical information, this quarterly report on Form 10-Q
contains, and may incorporate by reference, statements which may constitute
forward-looking statements which involve known and unknown risks, uncertainties
and other factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements. Forward-looking
statements may be identified by the use of forward-looking terminology such as
may, will, expect, estimate, anticipate, continue, or similar
terms, variations of such terms or the negative of those terms, but the absence
of such terms does not mean that a statement is not forward-looking.  Factors that could affect our actual results
include, but are not limited to:  (i)
risks associated with a small store base; (ii) implementation of growth strategy;
(iii) competition; (iv) a decline in general economic conditions; (v) fluctuations
in foreign currency; (vi) isolation of store operations from corporate
management; (vii) challenges associated with island and international
operations; (viii) transportation difficulties; (ix) dependence on, and
uncertainties associated with, expansion outside the U.S.; (x) weather and
other risks associated with island operations; 
(xi) ability to maintain existing credit and obtain additional credit;
(xii) dependence on key personnel and local managers; (xiii) reliance on
information and communication systems provided by third-party vendors;  and (xiv) ability to utilize tax benefits.
The September 11, 2001, terrorist attacks on the United States of America,
hostilities in the Middle East, other acts of war or hostility, the effects on
consumer demand, the financial markets, product supply and distribution and
other conditions increase the uncertainty inherent in forward-looking
statements.  Forward looking statements
reflect the expectations of our management at the time that they are made and do
not represent an opinion about what may happen in the future.

The
following managements discussion and analysis of financial condition and
results of operations should be read in conjunction with managements
discussion and analysis of financial condition and results of operations
included in our annual report on Form 10-K for the year ended
December 28, 2003.

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

Overview

We
operate mid-sized warehouse club-style stores in the United States Territories,
foreign island countries in the Pacific and the Caribbean, the Hawaiian Islands
and Sonora, California. Our primary strategy is to operate in island markets,
offering predominately U.S. branded goods. 
During the 26 weeks ended June 27, 2004, we operated eleven retail
stores as follows:  two stores in each of
Hawaii and Guam, and one store in each of St. Thomas, St. Croix, American
Samoa, Fiji, Curacao, St. Maarten and Sonora, California.

On
December 8, 2002, our two stores on the island of Guam suffered damage from
Supertyphoon Pongsona, resulting in the immediate closure of both stores.  Our Tamuning store reopened shortly
thereafter, but our Dededo store had to be rebuilt and did not reopen for
business on October 3, 2003.

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

Our
management focus relative to our core island store operations includes
reviewing our merchandising strategies, both those that apply to all stores and
those specific to each store in light of the different conditions in each
market.  We are currently in the process
of analyzing opportunities in selected markets and relocation opportunities for
existing stores with leases expiring in the next one to two years.  While we believe these actions can improve
profitability, there can be no assurance that these actions will be successful.

11

---

---

We
also continue to explore ways to maximize long-term value for our shareholders,
including focusing on efforts to increase earnings, responding to competition,
and improving same store sales and gross margins. We believe there is a limited
number of new island markets that have the attributes necessary to support a
growth strategy for our business. We are currently evaluating alternative
methods of implementing future growth, including expansion opportunities in
selected markets and relocation opportunities for stores in existing
markets.  For example, during the first
half of 2005, we intend to relocate our St. Croix store to a location closer to
the main trade area in the center of the island and to expand it by about 45%
to approximately 38,000 square feet.

Results
of Operations

During
the 13 and 26 weeks ended June 27, 2004, we continued to experience improvements in comparable-store sales (stores open for a full 13 months) and
gross margin, which resulted in higher net income and EPS.  These improvements were due to several
factors including better sourcing, pricing, merchandising and mix of goods in
our stores.

Our
total sales increase for the 13 and 26 weeks ended June 27, 2004, was
due to strong comparable-sales of 15.3% for both the 13 and 26 weeks ended June
27, 2004, and the successful reopening
of our Dededo, Guam store in October 2003. 
As a result of the reopening of our Dededo, Guam store, we expect
our fiscal 2004 sales to increase as compared to 2003.

We
reported net income of $0.6 million and $1.2 million for the 13 and 26 weeks
ended June 27, 2004, respectively, compared to net income of $0.3 million and
$0.5 million in the same periods in fiscal 2003. The improvement in net income
was primarily due to comparable-store sales increases and improved gross
margin.

Comparison of the 13 and 26 Weeks
Ended June 27, 2004, to the 13 and 26 Weeks Ended June 29, 2003:

Net
Sales: Net sales of $50.8 million for the 13 weeks ended June
27, 2004, increased 21.0%, as compared to net sales of $42.0 million in the
same period in the prior year. Net sales of $100.9 million for the 26 weeks
ended June 27, 2004, increased 19.6%, as compared to net sales of $84.3 million
in the same period in the prior year. 
Approximately 50% of the increase in sales in both the 13 and 26 week
periods was due to the reopening of our store in Dededo, Guam in October 2003.  The balance of the increase in both the 13
and 26 week periods was due to comparable-store sales increases offset by a
decline in business-to-business sales (approximately 30% decline for the 13
weeks and 35% decline for the 26 weeks) as compared to fiscal 2003.  Although lower than the sales in the same
periods in the prior year, our business-to-business sales during the 13 and 26
weeks ended June 27, 2004, were comparable to those experienced in our third
and fourth quarters of fiscal 2003.  We
expect the level of business-to-business activity for the remainder of fiscal
2004 to be consistent with current levels.

Comparable-store
sales increased 15.3% for both the 13 and 26 weeks ended June 27, 2004, as
compared to the same periods in the prior year.  Comparable-store sales for both the 13 and 26 weeks ended June
27, 2004, are calculated on stores excluding the Guam market as our Dededo,
Guam store was closed during the corresponding periods in the prior year and
during those periods our Tamuning, Guam store benefited from the temporary
closure of our Dededo store.  All of our
stores experienced increased sales in the 13 and 26 weeks ended June 27, 2004,
as compared to the prior year, primarily due to improvements in our assortment
of food and general merchandise, and improved economies from more tourism in
some of our markets.

Gross
Profit:Gross profit of $9.4 million, or 18.4% of sales, for
the 13 weeks ended June 27, 2004, increased as compared to gross profit of $7.4
million, or 17.6% of sales, in the same period in the prior year.  Gross profit of $18.4 million, or 18.3% of
sales, for the 26 weeks ended June 27, 2004, increased as compared to gross
profit of $14.8 million, or 17.5% of sales, in the same period in the prior
year. The improvement in gross profit in both the 13 and 26 weeks ended June
27, 2004, was primarily due to ongoing merchandising and operating improvements
across the chain, as well as a stronger mix of retail store sales, with
typically higher margins, as compared to business-to-business sales, which
generally provide a lower gross margin but are executed at minimal direct
expense.

Store
expenses:Store expenses increased to $6.4 million and $12.7
million for the 13 and 26 weeks ended June 27, 2004, respectively, as compared
to $5.4 million and $10.7 million for the same periods in the prior year.  Approximately 60% of the increase in store
expenses was attributable to the increased expenses associated with operating
eleven stores during the 13 and 26 weeks ended June 27, 2004, as compared to
ten stores in the 13 and 26 week periods in the prior year.  The remainder of the increase was primarily
attributable to higher volume-related payroll, insurance and utility expenses,
as well as accelerated depreciation related to the planned 2005 relocation of
our St. Croix store.  As a percentage of
sales, store expenses decreased to 12.6% of net sales for  the 13 weeks ended June 27, 2004, as
compared to 12.8% of net sales for the 13 weeks in the prior year primarily due
to the leveraging of fixed and semi-variable expense over increased store
sales.  As a percentage of sales, store
expenses were 12.6% of net sales for both the 26 weeks ended June 27, 2004, and
the same period in the prior year.

12

---

---

General
and administrative expenses:General and administrative
expenses were $1.7 million and $3.5 million for the 13 and 26 weeks ended June
27, 2004, respectively, as compared to $1.5 million and $3.1 million for the 13
and 26 week periods in the prior year. 
The increase in general and administrative expenses was primarily due to
increased personnel related costs and insurance costs, partially offset by
costs incurred in 2003 in connection with discussions with ASSI, Inc. regarding
a potential strategic business combination that did not occur.  General and administrative expenses as a
percent of sales decreased to 3.4% of sales for the 13 and 26 weeks ended June
27, 2004, compared to 3.7% for the same periods in the prior year, primarily
due to the leveraging of corporate expenses over increased store sales.

Store
opening expenses:Store opening expenses were $39,000 and
$79,000 for the 13 and 26 weeks ended June 27, 2004, respectively, as compared
to $20,000 and $48,000 for the same periods in the prior year.  Store opening expenses in both periods
related to costs associated with the evaluation of potential new store
locations and current store relocations.

Interest
expense, net: Interest expense, net was $98,000 and $224,000
for the 13 and 26 weeks ended June 27, 2004, respectively, as compared to
$112,000 and $205,000 for the same periods in the prior year.  Interest expense, net decreased for the 13
weeks ended June 27, 2004, as our borrowings on our line of credit decreased as
compared to the prior year.  Interest
expense, net increased during the 26 weeks ended June 27, 2004, primarily due
to commitment fees associated with our new line of credit entered into in April
2003 and interest expense associated with our equipment lease entered into in
January 2004, partially offset by lower borrowing levels.

Other
income (expense): Other income (expense) in both the 13 and
26 weeks ended June 27, 2004, and the same periods in the prior year, was
primarily attributable to gains and losses on foreign currency transactions,
and translation of intercompany balances for transactions that exceed the
permanent investments in those countries. The expense in the 13 and 26 week
periods ended June 27, 2004, was primarily attributable to depreciation in the
Fijian dollar as compared to the U.S. dollar. 
During the same periods in the prior year, the Fijian dollar appreciated
as compared to the U.S. dollar.

Income
tax provision: The tax provisions for the 13 and 26 week
periods ended June 27, 2004, and June 29, 2003, primarily represent taxes and
tax benefits associated with income or losses generated in the U.S. and U.S.
Territories.  Our effective tax rate is
higher than the expected federal statutory rate because no tax benefits were
provided on foreign losses, as we have no assurance that we will be able to
generate an adequate amount of taxable income in the future to utilize such
benefits.

Net
income: Net income was $0.6 million, or $0.16 per fully
diluted share, for the 13 weeks ended June 27, 2004, as compared to a net
income of $0.3 million, or $0.08 per fully diluted share, in the same period in
the prior year. Net income was $1.2 million, or $0.30 per fully diluted share,
for the 26 weeks ended June 27, 2004, as compared to net income of $0.5
million, or $0.15 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.  We
generated $0.4 million of net cash from operations during the 26 weeks ended
June 27, 2004, as compared to $0.5 million generated in the same period in the
prior year.  The decrease in cash
provided by operations was primarily due to an increase in the use of cash to
acquire inventory (net of an increase in accounts payable) due to the operation
of eleven stores during the 26 weeks ended June 27, 2004, as compared to ten
stores in the 26 week periods in the prior year, and a decrease in payments
received on other receivables as compared to the same period in the prior
year.  These decreases were largely
offset by an increase in net income.

Net
cash used in investing activities was $0.6 million for the 26 weeks ended June
27, 2004, as compared to $0.5 million used in the same period in the prior
year.  We currently have no plans to
open new stores during fiscal 2004, but we are in the process of exploring
expansion opportunities in selected markets and relocation opportunities for stores
in existing markets.  Additionally, we
intend to relocate our St. Croix store to a location closer to the main trade
area in the center of the island, and to expand it by about 45% to 38,000
square feet.  We purchased the land for
the site of the new building during July 2004 at a cost of approximately $0.9
million.  The lease for our existing St.
Croix store expires in November 2004, and we currently do not have an agreement
with our landlord to operate the store on a monthly basis until such time as
our new store opens in the first half of 2005. 
Although we believe that we will come to an agreement with our landlord
to continue operating our existing store until we relocate to our new building,
there can be no assurance that we will be able to obtain a lease extension on
terms that will be acceptable to us.

We
used $0.2 million of cash for financing activities during the 26 weeks ended
June 27, 2004, as compared to $0.6 million provided by financing activities in
the same period in the prior year.  The
decrease was due to a reduction in borrowings under our line of credit
partially offset by funds received on the sale-leaseback of equipment in
Guam.  Our current ratio has improved to
1.45 at June 27, 2004, as compared to 1.32 at December 28, 2003, and 1.27 at
June 29, 2003.

13

---

---

On
April 9, 2003, we entered into a line of credit with Wells Fargo Business
Credit with a three-year term, expiring on April 9, 2006.  The line of credit consists of a $6.0
million committed, secured revolving credit line with a sublimit for letters of
credit and bankers acceptances in the amount up to $0.5 million.  At June 27, 2004, there were no borrowings
outstanding on the line of credit. 
There was $0.1 million utilized for standby letters of credit and $0.1
million set aside for other reserves.

Borrowings
are limited to the lesser of $6.0 million or the amount calculated under the
borrowing base.  The borrowing base is equal to the lesser of
(a) $6.0 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. On March 2, 2004, we entered into the
Second Amendment to Credit and Security Agreement with Wells Fargo Business
Credit. The amendment provided for the following: (i) an immediate reduction in
the interest rate on the line of credit of one half of one percent (0.50%),
(ii) a further reduction in the interest rate of one half of one percent
(0.50%) if we met certain net income levels from December 29, 2003, through
June 27, 2004, and (iii) the adoption of new measurement values for fiscal
2004. During the 26 weeks ended June 27, 2004, borrowings under the amended
line of credit were charged interest at the financial institutions prime rate
plus 1.0% 
(5% at June 27, 2004).  As we met
the certain net income levels from December 29, 2003, through June 27, 2004,
specified in the March 2, 2004, amendment, our interest rate will be reduced
from August 1, 2004, forward to the financial institutions prime rate plus
0.5%.

A
fee of 0.25% is charged on the unused portion of the line of credit.  The line of credit contains various
covenants, including a requirement that we maintain minimum pre-tax income and
tangible net worth and limitations on acquisitions, additional debt, changes in
control and capital expenditures.  We
believe that we are currently 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 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 12 months.  There can be no assurance that we will be
able to obtain additional financing when needed, or that any available
financing will be on terms acceptable to us.

Contractual Obligations

As
of June 27, 2004, our commitments to make future payments under long-term
contractual obligations were as follows (in thousands):

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



14

---

---

Critical Accounting Policies

We
have chosen accounting policies that we believe are appropriate to report
accurately and fairly our operating results and financial position, and we
apply those accounting policies in a consistent manner. The significant
accounting policies are summarized in Note 1 to the consolidated financial
statements included in our annual report on Form 10-K for the year ended
December 28, 2003.

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

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

Inventories

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

Long Lived Assets

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

Foreign Currency Translation

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

Income Taxes

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

15

---

---

Accounting Pronouncements

In
April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133.  We believe that our
adoption of this new accounting standard will not have a material impact on our
results of operations or financial position, as we do not have derivatives nor
do we participate in hedging activities.

Risk Factors That May Affect Future Results

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

Because we
have a small store base, adverse store performance or increased expenses will
have a more significant adverse impact on our operating and financial results
than if we had a larger store base.We
opened our first store in 1989 and opened a total of 21 stores through December
2003, and presently operate eleven stores. Our closure of the ten other stores
prior to March 2001, adversely affected our operating results. Should any
existing store experience a significant decline in profitability or any new
store be unprofitable, the negative effect on our business would be more
significant than would be the case if we had a larger store base, and could
have a material adverse effect on our business, financial condition and
operating results.  In addition, if our
general and administrative expenses increase, the negative effect on our
business and results of operations would be more significant than if we had a
larger store base.  Although we intend
to carefully plan for the implementation of additional stores, there can be no
assurance that such plans can be executed as envisioned or that the
implementation of those plans will not have a material adverse effect on our
business, financial condition and operating results.   In addition, our ability to acquire products at a lower cost
than competitors or obtain volume-based pricing can be adversely affected
because of our small store base.

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

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

We
have not opened stores in foreign island markets at a rapid pace. Currently, we
have no plans to open new stores during 2004, but we are in the process of
exploring expansion opportunities in selected markets and relocation
opportunities for existing stores. 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 the political turmoil and resulting economic
downturn in Fiji were having on the tourist industry. New markets may present
operational, competitive, regulatory and merchandising challenges that are
different from those we currently encounter. There can be no assurance that we
will be able to adapt our operations to support our future expansion plans or
that our new stores will be profitable. 
Any failure on our part to manage our growth could have a material
adverse effect on our business, financial condition and operating results.

Additionally,
we rely significantly on the skill and expertise of our on-site store managers.
We will be required to hire, train and retain skilled managers and personnel to
support any growth, and may experience difficulties locating store managers and
employees who possess the training and experience necessary to operate our new
stores, including our management information and communications systems,
particularly in island markets where language, education and cultural factors
may impose additional challenges. Further, we have encountered, and may
continue to encounter, substantial delays, increased expenses or loss of
potential sites due to the complexities, cultural differences, and local
political issues associated with the regulatory and permitting processes in the
island markets in which we may locate our stores. There can be no assurance
that we will be able to open new stores according
to our business plans, or that we will be able to continue to attract, develop
and retain the personnel necessary to pursue our growth strategy. Failure to do
so could have a material adverse effect on our business, financial condition
and operating results.

16

---

---

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

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

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

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

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.

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

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

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

17

---

---

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

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

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

Our business
could suffer if we are unable to manage the challenges associated with island
and international operations. Our net sales from island operations
represented approximately 90.6% of our total net sales for fiscal 2003. We
expect that our island and international operations together will continue to
account for nearly all of our total net sales. The distance, as well as the
time-zone differences, involved with island locations impose significant challenges
to our ability to manage our operations. Logistical challenges are presented by
operating individual store units in remote locations, whether in terms of
information flow or transportation of goods. 
Our inability to effectively manage our island and international
operations could have a significant adverse effect on our business, results of
operations and financial condition

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

| |  | Substantial lags between the procurement and
  delivery of product, thus complicating merchandising and inventory control
  methods;
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | Possible loss of product due to potential damage to,
  or destruction of, ships or containers delivering our goods;                 
| |  | Tariff, customs and shipping regulation issues;                                                                                     
| |  | Substantial ocean freight and duty costs; and                                                                                       
| |  | Interruption in the delivery of product due to labor
  disruption.                                                                  

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

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

18

---

---

We are exposed
to weather and other risks associated with island operations, which could
affect our business and results of our operations. Our operations
are primarily located on islands subject to volatile weather conditions and
natural disasters, which could result in delays in construction or result in
significant damage to, or destruction of, our stores. On December 8, 2002, our
two stores on the island of Guam suffered damage from Supertyphoon Pongsona,
resulting in the immediate closure of both stores.  Our Tamuning store lost its generator in the storm but reopened
shortly thereafter on December 12th. 
Our Dededo store, however, suffered more significant damage and had to
be closed for reconstruction.  The store
was rebuilt and it reopened for business on October 3, 2003.

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

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

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

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

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

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

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

19

---

---

We may not
be able to utilize certain tax benefits, which could have a material adverse
effect on our results of operations. Our ability to utilize
various tax benefits is dependent on our ability to generate adequate taxable
income in the United States and in foreign jurisdictions. As of December 28,
2003, we had recognized an aggregate foreign tax benefit of $2.3 million on
foreign operating losses and a corresponding valuation allowance of $2.2
million. Approximately one-half of the Net Operating Losses, or NOLs, will
begin expiring in the year 2006.  The
remaining NOLs were generated in Curacao and St. Maarten and are not subject to
expiration time limits.  Utilization of
the tax benefit is dependent on our generating future taxable income.  There can be no assurance that we will be
able to produce adequate future taxable income to utilize this tax benefit, and
failure to generate such income may have a material adverse effect on our
business, financial condition and operating results.

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

20

---

---

ITEM 3. 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

We
do not have any derivative financial instruments as of June 27, 2004.

ITEM 4.  CONTROLS AND PROCEDURES

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

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

21

---

---

PART
II  OTHER INFORMATION

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

The
annual meeting of our shareholders was held on May 12, 2004.  The following proposals were submitted to a
vote:

The
election of one director, to hold office for a term as defined in the proxy
statement and until his successor is duly elected and qualified.  This proposal received the following number
of votes:

| |                  |  |  | Affirmative |  | Withheld | 
| | ---------------- |  |  | ----------- |  | -------- | 
| |                  |  |  |             |  |          | 
| |                  |  |  |             |  |          | 
| | J. Jeffrey Meder |  |  | 3,428,336   |  | 2,815    | 

The
ratification of the appointment of Grant Thornton LLP as our independent
auditors for fiscal year 2004.  This
proposal was approved with 3,422,201 shares voting for approval, 8,050 shares
voting against approval, and 900 shares abstaining.

ITEM
5.  OTHER INFORMATION

As
disclosed in the proxy statement for our annual meeting of shareholders filed
with the SEC on April 9, 2004, shareholders may nominate candidates for
election as directors if they follow the procedures and conform to the
deadlines specified in our bylaws. The complete description of the requirements
for shareholder nomination of director candidates is contained in our bylaws,
incorporated by reference in our annual report on Form 10-K for the fiscal year
ended December 28, 2003.  In summary, a
shareholder desiring to nominate one or more candidates for election at the
next annual meeting must submit written notice of such nomination to the
corporate secretary not less than 60 days and not more than 90 days prior to
the annual meeting. That deadline for submission of any director nominations by
shareholders for the next annual meeting is also set forth in the proxy
statement for each annual meeting.

Shareholders
nominating candidates for election as directors are also required to provide
the following information with respect to their nominees:

| |  | the shareholders name and address;                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                        
| |  | a representation that the shareholder is entitled to
  vote at the annual meeting and a statement of the number of shares
  beneficially owned by the shareholder;                                                                     
| |   |                                                                                                                                                                                                                                        
| |  | a representation that the shareholder intends to
  appear in person or by proxy at the annual meeting to nominate the person(s)
  specified in the notice;                                                                             
| |   |                                                                                                                                                                                                                                        
| |  | a description of all arrangements or understandings
  between the shareholder and each nominee and any other person or persons
  (naming such person or persons) pursuant to which the nominations are to be
  made by the shareholder;
| |   |                                                                                                                                                                                                                                        
| |  | any other information relating to each nominee that
  would be required to be disclosed in a proxy statement filed pursuant to the
  SECs proxy rules; and                                                                            
| |   |                                                                                                                                                                                                                                        
| |  | the consent of each nominee to serve as a director
  if so elected.                                                                                                                                                                    

Evaluation
of any recommendations by shareholders of director candidates is the
responsibility of the nominating and corporate governance committee under its
charter. Shareholders may submit in writing recommendations for consideration
by the nominating and corporate governance committee to the attention of our
corporate secretary at 3633 136th Place SE, Suite 110, Bellevue, Washington
98006. Recommendations should contain a detailed discussion of the qualifications
of each recommended candidate and any other material information the
shareholder wants the nominating and corporate governance committee to
consider.

22

---

---

ITEM
6.  EXHIBITS AND REPORTS ON FORM 8-K

|(a) | Exhibits
|--- | --------

| | Exhibit
  No. |  | Description                                                                                                            
| | ------------- |  | -----------------------------------------------------------------------------------------------------------------------
| |               |  |                                                                                                                        
| |               |  |                                                                                                                        
| | 10.1          |  | Real Estate Purchase and Sale Agreement dated April
  30, 2004, between Mint Capital, Gasco Inc., and Cost-U-Less, Inc.
| | 31.1          |  | Certification of Chief Executive Officer pursuant to
  Section 302 of the Sarbanes-Oxley Act of 2002                   
| | 31.2          |  | Certification of Chief Financial Officer pursuant to
  Section 302 of the Sarbanes-Oxley Act of 2002                   
| | 32.1          |  | Certification of Chief Executive Officer pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002                   
| | 32.2          |  | Certification of Chief Financial Officer pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002                   

|(b) | Reports on Form 8-K
|--- | -------------------

| |  | On April 1, 2004, we furnished a current report on
  Form 8-K regarding our April 1, 2004, press release, which announced an
  increase of 15.3% in same store sales (stores open a full 13 months) for the
  fiscal quarter ending March 28, 2004.                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | On May 6, 2004, we furnished a current report on
  Form 8-K regarding our May 5, 2004, press release, which announced that we
  had generated net income of $537,000 for the first fiscal quarter of 2004, or
  $0.14 per fully diluted share outstanding, compared to net income of
  $226,000, or $0.06 per fully diluted share outstanding for the corresponding
  period last year.                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | On June 22, 2004, we filed a current report on Form
  8-K regarding our June 18, 2004, press release, which announced the
  appointment of Bob Donegan to our Board of Directors.                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | On July 6, 2004, we furnished a current report on
  Form 8-K regarding our July 1, 2004, press release, which announced an
  increase of 15.3% in same store sales (stores open a full 13 months) for the
  fiscal quarter ending June 27, 2004.                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | On July 22, 2004, we filed a current report on Form
  8-K regarding our July 21, 2004, press release, which announced our intent to
  relocate our St. Croix store from the west end of the island to a location
  close to the main trade area in the center of the island.                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | On July 28, 2004, we furnished a current report on
  Form 8-K regarding our July 28, 2004, press release, which announced that we
  had generated net income of $637,000 for the second fiscal quarter ended June
  27, 2004, or $0.16 per fully diluted share outstanding, compared to net
  income of $306,000, or $0.08 per fully diluted share outstanding for the
  corresponding period last year.

23

---

---

SIGNATURES

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

|                        |  | COST-U-LESS, INC.      
|----------------------- |  | -----------------------
|                        |  |                        
|                        |  |                        
|Date:  August
  9, 2004 |  | /s/  J.
  Jeffrey Meder
|                        |  |                        
|                        |  | J. Jeffrey Meder       
|                        |  | President and          
|                        |  | Chief Executive Officer
|                        |  |                        
|Date:  August
  9, 2004 |  | /s/ Martin P. Moore    
|                        |  |                        
|                        |  | Martin P. Moore        
|                        |  | Chief Financial Officer

24

---

---