**SECURITIES
        AND EXCHANGE COMMISSION**
  **WASHINGTON,
        D.C. 20549**
  **FORM
        10-Q**
 
 x
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934.
  FOR
        THE
        QUARTERLY PERIOD ENDED APRIL 1, 2007
  OR
 
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
  FOR
        THE
        TRANSITION PERIOD FROM _________ TO ___________
  COMMISSION
        FILE NUMBER  0-24543
 
 
 **COST-U-LESS,
        INC.**
 (Exact
        name of registrant as specified in its charter)
 
 **Washington**
              **91-1615590**(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)
 
 **3633
        136** **th** **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 oNO.
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer (as
        defined in Rule 12b-2 of the Exchange Act) :
 
 Large
                  accelerated filero
              Accelerated
                  filero
              Non-accelerated
                  filer**x**
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in
        Rule 12b-2 of the Exchange Act).  o YES **x** NO.
 
 The
        registrant had 4,033,143 common shares, par value $0.001, outstanding at
        May 9,
        2007.
  *Table
            of Contents*
  **COST-U-LESS,
        INC.**
  **INDEX
        TO FORM 10-Q**
 
 
 **PART
                  I.**
              **FINANCIAL
                  INFORMATION**Item
                  1.
              Financial
                  Statements (Unaudited)Condensed
                  Consolidated Statements of Operations
              3Condensed
                  Consolidated Balance Sheets
              4Condensed
                  Consolidated Statements of Shareholders’
                  Equity
              5Condensed
                  Consolidated Statements of Cash Flows
              6Notes
                  to Condensed Consolidated Financial
                  Statements
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              12Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              16Item
                  4.
              Controls
                  and Procedures
              16**PART
                  II.**
              **OTHER
                  INFORMATION**Item
                  1A.
              Risk
                  Factors
              17Item
                  6.
              Exhibits
              21**SIGNATURES**
              
              22
 
  2
 *Table
            of Contents*
  **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****April
                  1,**
                **2007**
              
              **April
                  2,**
                **2006**Net
                  sales
              
              
              
              
              
              
              
              $
              55,628
              
              $
              54,692Merchandise
                  costs
              
              
              
              
              
              
              
              
              45,016
              
              
              44,493Gross
                  profit
              
              
              
              
              
              
              
              
              10,612
              
              
              10,199Operating
                  expenses:Store
              
              
              
              
              
              
              
              
              7,516
              
              
              7,216General
                  and administrative
              
              
              
              
              
              
              
              
              1,943
              
              
              1,663Store
                  openings
              
              
              
              
              
              
              
              
              113
              
              
              14Total
                  operating expenses
              
              
              
              
              
              
              
              
              9,572
              
              
              8,893Operating
                  income
              
              
              
              
              
              
              
              
              1,040
              
              
              1,306Other
                  expense:Interest
                  expense, net
              
              
              
              
              
              
              
              
              (46
              )
              
              (106
              )Other
              
              
              
              
              
              
              
              
              (2
              )
              
              (12
              )Income
                  before income taxes
              
              
              
              
              
              
              
              
              992
              
              
              1,188Income
                  tax provision
              
              
              
              
              
              
              
              
              345
              
              
              430Net
                  income
              
              
              
              
              
              
              
              $
              647
              
              $
              758Earnings
                  per common share:Basic
              
              
              
              
              
              
              
              $
              0.16
              
              $
              0.19Diluted
              
              
              
              
              
              
              
              $
              0.15
              
              $
              0.18Weighted
                  average common shares outstanding, basic.
              
              
              
              
              
              
              
              
              4,029,285
              
              
              3,997,839Weighted
                  average common shares outstanding, diluted
              
              
              
              
              
              
              
              
              4,265,241
              
              
              4,221,979
 
  The
        accompanying Notes to the Condensed Consolidated Financial Statements are
        an
        integral part of these statements.
  3
 *Table
            of Contents*
  **COST-U-LESS,
        INC.**
 
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **(in
        thousands)**
 
 **(Unaudited)**
 
 **April
                  1,**
                **2007**
              
              **December
                  31,**
                **2006****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              11,481
              
              $
              7,420Accounts
                  receivable, net
              
              
              897
              
              
              1,133Inventories,
                  net
              
              
              24,893
              
              
              22,829Other
                  current assets
              
              
              2,014
              
              
              1,049Total
                  current assets
              
              
              39,285
              
              
              32,431Buildings
                  and equipment, net
              
              
              16,658
              
              
              20,881Deposits
                  and other assets
              
              
              723
              
              
              723Total
                  assets
              
              $
              56,666
              
              $
              54,035**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              17,115
              
              $
              15,831Accrued
                  expenses and other liabilities
              
              
              6,438
              
              
              5,706Current
                  portion of long-term debt
              
              
              267
              
              
              267Current
                  portion of capital lease
              
              
              316
              
              
              311Total
                  current liabilities
              
              
              24,136
              
              
              22,115Other
                  long-term liabilities
              
              
              1,643
              
              
              1,576Long-term
                  debt, less current portion
              
              
              1,677
              
              
              1,744Capital
                  lease, less current portion
              
              
              1,523
              
              
              1,604Total
                  liabilities
              
              
              28,979
              
              
              27,039Commitments
                  and contingencies
              
              
              —
              
              
              —Shareholders’
                  equity
              
              
              27,687
              
              
              26,996Total
                  liabilities and shareholders’ equity
              
              $
              56,666
              
              $
              54,035
 
  The
        accompanying Notes to the Condensed Consolidated Financial Statements are
        an
        integral part of these statements.
  4
 *Table
            of Contents*
  **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 January 1, 2006
              
              3,990,171
              
              $
              13,931
              
              $
              10,926
              
              $
              (814
              )
              $
              24,043Net
                  income
              
              —
              
              
              —
              
              
              758
              
              
              —
              
              
              758Foreign
                  currency
                  translation adjustments
              
              —
              
              
              —
              
              
              —
              
              
              (24
              )
              
              (24
              )Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              734Exercise
                  of common
                  stock options including
                income
                  tax benefit
              
              29,852
              
              
              162
              
              
              —
              
              
              —
              
              
              162Balance
                  at April 2, 2006
              
              4,020,023
              
              $
              14,093
              
              $
              11,684
              
              $
              (838
              )
              $
              24,939Balance
                  at December 31, 2006
              
              4,028,718
              
              $
              14,172
              
              $
              13,594
              
              $
              (770
              )
              $
              26,996Net
                  income
              
              —
              
              
              —
              
              
              647
              
              
              —
              
              
              647Foreign
                  currency translation adjustments
              
              —
              
              
              —
              
              
              —
              
              
              13
              
              
              13Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              660Exercise
                  of common stock options including income tax benefit
              
              4,425
              
              
              31
              
              
              —
              
              
              —
              
              
              31Balance
                  at April 1, 2007
              
              4,033,143
              
              $
              14,203
              
              $
              14,241
              
              $
              (757
              )
              $
              27,687
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 The
        accompanying Notes to the Condensed Consolidated Financial Statements are
        an
        integral part of these statements.
  5
 *Table
            of Contents*
  **COST-U-LESS,
        INC.**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(in
        thousands)**
 
 **(Unaudited)**
 
 **13
                  Weeks Ended****April
                  1,**
                **2007**
              
              **April
                  2,**
                **2006**OPERATING
                  ACTIVITIES:Net
                  income
              $
              647
              
              $
              758Adjustments
                  to reconcile net income to net cash provided/(used) by operating
                  activities:Depreciation
                  and amortization
              
              671
              
              
              562Deferred
                  tax provision
              
              8
              
              
              101(Gain)/loss
                  on buildings and equipment
              
              2
              
              
              12Cash
                  provided by/(used in) changes in operating assets and
                  liabilities:Accounts
                  receivable
              
              236
              
              
              (81
              )Inventories
              
              (2,064
              )
              
              (1,875
              )Other
                  current assets
              
              (953
              )
              
              (456
              )Deposits
                  and other assets
              
              —
              
              
              5Accounts
                  payable
              
              2,162
              
              
              963Accrued
                  expenses and other liabilities
              
              496
              
              
              (154
              )Other
                  long-term liabilities
              
              47
              
              
              8Net
                  cash provided/(used) by operating activities
              
              1,252
              
              
              (157
              )INVESTING
                  ACTIVITY:Cash
                  used to purchase property and equipment
              
              (1,757
              )
              
              (949
              )Proceeds
                  from sale of buildings and equipment
              
              5,547
              
              
              8Net
                  cash provided/(used) by investing activities
              
              3,790
              
              
              (941
              )FINANCING
                  ACTIVITIES:Proceeds
                  from exercise of common stock options
              
              27
              
              
              118Tax
                  benefit from exercise of stock options
              
              4
              
              
              44Proceeds
                  from short term note payable
              
              —
              
              
              257Payments
                  on line of credit, net
              
              —
              
              
              (52
              )Increase/(decrease)
                  in bank checks outstanding
              
              (878
              )
              
              136Principal
                  payments on capital lease obligations
              
              (76
              )
              
              (55
              )Principal
                  payments on long-term debt
              
              (67
              )
              
              (67
              )Net
                  cash (used)/provided by financing activities
              
              (990
              )
              
              381Foreign
                  currency translation adjustments
              
              9
              
              
              (14
              )Net
                  increase/(decrease) in cash and cash equivalents
              
              4,061
              
              
              (731
              )Cash
                  and cash equivalents:Beginning
                  of period
              
              7,420
              
              
              5,304End
                  of period
              $
              11,481
              
              $
              4,573SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid during the period for:Interest.
              $
              95
              
              $
              115Income
                  taxes.
              $
              —
              
              $
              —Cash
                  received during the period for:Income
                  taxes.
              $
              —
              
              $
              45
 
  The
        accompanying Notes to the Condensed Consolidated Financial Statements are
        an
        integral part of these statements.
  6
 *Table
            of Contents*
  **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
        April
        1, 2007, 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. In July
        2005,
        the Cayman Islands Trade and Business Licensing Board granted the Company
        approval to operate a retail and wholesale business in the Cayman Islands
        through a controlled subsidiary organized in the Cayman Islands. On April
        25,
        2006, the Company entered into a long-term lease with the developer of
        Governor’s Square in Grand Cayman to lease land on which to construct and
        operate a store under the Cost-U-Less name. Construction on the new store
        began
        in late 2006 with a currently estimated completion date in the fourth fiscal
        quarter of 2007.
 
 
 *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 Securities and Exchange Commission (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 31, 2006, has
        been
        derived from the audited financial statements at that date. Certain information
        and footnote disclosures normally included in the financial statements prepared
        in accordance with accounting principles generally accepted in the United
        States
        have been condensed or omitted pursuant to SEC rules and regulations on
        quarterly reporting. Operating results for the 13 weeks ended April 1, 2007,
        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 28, 2007.
 
 
 *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 2007,
        ending on December 30, 2007, and Fiscal 2006, which ended on December 31,
        2006, 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, Cayman Islands,
        Netherlands Antilles, Guam, American Samoa, Nevada, Fiji and New Zealand.
        All
        significant inter-company accounts and transactions have been eliminated
        in
        consolidation.
  7
 *Table
            of Contents*
  **COST-U-LESS,
        INC.**
 
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)**
 
 **(Unaudited)**
 
 
 *Foreign
        Currency Translations and Comprehensive Income*
 
 The
        U.S.
        dollar is the functional currency for all locations, except for Fiji,
        Netherlands Antilles and the Cayman Islands, where the local currency is
        the
        functional currency. Assets and liabilities denominated in foreign currencies
        are translated at the applicable exchange rate on the balance sheet date.
        Net
        sales, costs and expenses are translated at the average rates of exchange
        prevailing during the period. Adjustments resulting from this process are
        reported, net of taxes, as Accumulated Other Comprehensive Income (Loss),
        a
        component of Shareholders’ Equity. Realized and unrealized gains on foreign
        currency transactions are included in Other Income (Expense). The cumulative
        translation adjustment resulting from a net investment in a country is
        recognized as income or expense in the period the Company has substantially
        liquidated operations in that country .
 
 
 *Use
        of Estimates*
 
 The
        preparation of financial statements in accordance with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and the disclosure of contingent assets and liabilities at the
        date
        of the financial statements, and the reported amounts of revenues and expenses
        during the reporting period. Estimates are used for, but not limited to:
        allowance for doubtful accounts; depreciable lives of assets; reserves for
        inventory; and deferred tax valuation allowances. Future events and their
        effects cannot be determined with certainty. Accordingly, the accounting
        estimates require the exercise of judgment. The accounting estimates used
        in the
        preparation of the consolidated financial statements may change as new events
        occur, as more experience is acquired, as additional information is obtained
        and
        as the Company's operating environment changes. Actual results could differ
        from
        those estimates.
 
 
 *Reclassifications*
 
 Certain
        reclassifications of prior period balances have been made for consistent
        presentation with the current period.
 
 
 *New
        Accounting Pronouncements*
 
 In
        July 2006, the Financial Accounting Standards Board issued Interpretation
        No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an
        interpretation of SFAS No. 109,” which seeks to reduce the diversity in
        practice associated with the accounting and reporting for uncertainty in
        income
        tax positions. FIN 48 prescribes a comprehensive model for the financial
        statement recognition, measurement, presentation and disclosure of uncertain
        tax
        positions taken or expected to be taken in income tax returns. FIN 48 is
        effective for fiscal years beginning after December 15, 2006. The Company
        adopted the new requirements in its fiscal first quarter of 2007. The adoption
        of FIN 48 did not have a significant impact on the Company’s results of
        operations or its financial position.
 
 
 **2.**
              **Earnings
                  Per Share**
 
 Basic
        earnings per share is computed using the weighted average number of common
        shares outstanding during the period and excludes any dilutive effects of
        stock
        options and warrants. Diluted earnings per share are computed using the weighted
        average number of common shares and potentially dilutive shares outstanding
        during the period. Potentially dilutive shares are excluded from the computation
        if their effect is anti-dilutive.
  8
 *Table
            of Contents*
  **COST-U-LESS,
        INC.**
 
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)**
 
 **(Unaudited)**
 
 
 The
        following table sets forth the computation of basic and diluted earnings
        per
        common share:
 
 **13
                  Weeks****Ended****April
                  1,**
                **2007**
              
              **April
                  2,**
                **2006**Numerator:Net
                  income
              
              $
              647
              
              $
              758Denominator:Denominator
                  for basic earnings per share—weighted average shares
              
              
              4,029,285
              
              
              3,997,839Effect
                  of dilutive common equivalent shares:Stock
                  options
              
              
              235,956
              
              
              224,140Denominator
                  for diluted earnings per share—adjusted weighted average shares and
                assumed
                  conversion of stock options
              
              
              4,265,241
              
              
              4,221,979Basic
                  earnings per common share
              
              $
              0.16
              
              $
              0.19Diluted
                  earnings per common share
              
              $
              0.15
              
              $
              0.18
 
 The
        diluted share calculation for the 13 weeks ended April 2, 2006, excludes
        4,000
        stock options outstanding. These options are excluded due to their anti-dilutive
        effect.
 
 
 **3.**
              **Line
                  of Credit**
 
 On
        March
        14, 2007, the
        Company replaced
        its $6.0 million asset based line of credit with Wells Fargo Business Credit
        with a working capital line of credit with Wells Fargo Bank. The new line
        of
        credit, which has a two-year term, consists of a $6.0 million credit line
        with a
        sublimit for letters of credit and bankers' acceptances in the amount up
        to $1.0
        million. Borrowings under the new line of credit bear interest at either
        Prime
        -0.25% or LIBOR +1.75%. A fee of 0.30% will be charged on the unused portion
        of
        the line of credit. The new line of credit contains various covenants, including
        a requirement that the Company maintain a minimum net profit, a minimum tangible
        net worth, and that the outstanding balances under the line of credit shall
        not
        exceed 30% of net inventory, excluding inventory in St. Maarten and the Cayman
        Islands. At April
        1, 2007, there were no borrowings outstanding on the line of credit and no
        letters of credit outstanding.
 
 T he
        line
        of credit contains various covenants, all of which the Company believes it
        was
        in compliance with as of April 1, 2007.
 
 
 **4.**
              **Commitments
                  and Contingencies**
 
 *Legal
        Proceedings*
 
 The
        Company may be
        subject to legal proceedings or claims, either asserted or unasserted, that
        arise in the ordinary course of business. While the outcome of these potential
        claims cannot be predicted with certainty, the
        Company does
        not
        believe that any pending legal matters will have a material adverse effect
        on
        it. However, any adverse outcome to future lawsuits against the
        Company may
        result in a material adverse affect on its financial condition.
 
 
  9
 *Table
            of Contents*
  **COST-U-LESS,
        INC.**
 
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)**
 
 **(Unaudited)**
 
 
 **5.**
              **Stock
                  Based Compensation**
 
 The
        Company maintains a stock incentive compensation plan that provides for the
        granting of various stock awards, including stock options and restricted
        stock,
        with a maximum of 1,000,000 shares of common stock available for issuance.
        Options issued under the plan vest at various terms ranging from immediately
        to
        five years and generally expire ten years from the date of grant. The options
        are generally granted at prices equal to the fair value on the date of grant.
        There were 357 shares available for future grant under the plan at April
        1,
        2007.
 
 Effective
        with the first fiscal quarter of fiscal 2006, the Company adopted the fair
        value
        recognition provisions of Statement of Financial Accounting Standards (SFAS)
        No. 123R, “Share-Based Payments,” which revises SFAS No. 123, “Accounting
        for Stock-Based Compensation.” Under SFAS 123R, stock-based compensation expense
        is recognized in the consolidated financial statements for stock options
        granted
        subsequent to January 1, 2006, based on the grant date fair value estimated
        in
        accordance with the provisions of SFAS
        123R .
        In
        addition, SFAS 123R requires the benefits of tax deductions in excess of
        the
        compensation cost recognized for those options to be classified as financing
        cash inflows on the consolidated statement of cash flows.
 
 The
        following table summarizes the stock option transactions during the 13 weeks
        ended April 1, 2007:
 
 **Options**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Weighted**
                **Average**
                **Contractual**
                **Life**
              
              **Aggregate**
                **Intrinsic**
                **Value
                  (a)**Outstanding
                  at December 31, 2006
              
              
              577,302
              
              $
              3.35
              
              
              —
              
              
              —Granted
                  at fair value
              
              
              —
              
              
              —
              
              
              —
              
              
              —Forfeited
              
              
              —
              
              
              —
              
              
              —
              
              
              —Exercised
              
              
              (4,425
              )
              
              6.13
              
              
              —
              
              
              —Outstanding
                  at April 1, 2007
              
              
              572,877
              
              
              3.33
              
              
              4.94
              
              $
              3,231,026Exercisable
                  at April 1, 2007
              
              
              572,877
              
              
              3.33
              
              
              4.94
              
              $
              3,231,026
 
 (a)
              The
                  intrinsic value of a stock option is the amount by which the market
                  value
                  of the underlying stock exceeds the exercise price of the
                  option.
 
 The
        Company did not recognize any compensation cost during the 13 weeks ended
        April
        1, 2007, as all outstanding options were fully vested as of December 31,
        2006,
        and the Company did not grant any options during the 13 weeks ended April
        1,
        2007.
 
 Cash
        proceeds, tax benefits and intrinsic value related to total stock options
        exercised during the first 13 weeks of fiscal 2007 and fiscal 2006 were as
        follows (in thousands):
 **13
                  Weeks Ended****April
                  1,**
                **2007**
              
              **April
                  2,**
                **2006**Proceeds
                  from stock options exercised
              
              $
              27
              
              $
              118Tax
                  benefit related to stock options exercised
              
              
              4
              
              
              44Intrinsic
                  value of stock options exercised
              
              
              13
              
              
              129
 
 
  10
 *Table
            of Contents*
  **COST-U-LESS,
        INC.**
 
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)**
 
 **(Unaudited)**
 
 
 **6.**
              **Income
                  Taxes**
 
 The
        Company adopted the provisions of FIN 48 on January 1, 2007. As a result
        of the
        implementation of FIN 48, the
        Company recognized no significant adjustment to the liability for unrecognized income
        tax benefits. At the adoption date of January 1, 2007, the
        Company had $0.1
        million of unrecognized tax benefits, all of which would affect its effective
        tax rate if recognized.
  The
        Company recognizes interest and penalties related to uncertain tax positions in income
        tax expense. As of April 1, 2007, the
        Company had approximately $30,000 of accrued interest related to uncertain tax
        positions.
  With
        few
        exceptions, the Company is no longer subject to U.S. Federal, state/local,
        or
        non-U.S. income tax examinations by tax authorities for years prior to
        2003.
  11
 *Table
            of Contents*
  **ITEM
        2.**  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
 
 
 **Certain
        Factors That May Affect Future Results of Operations**
 
 This
        discussion and analysis should be read in conjunction with our unaudited
        condensed consolidated financial statements and the related notes thereto
        appearing in Item 1 of this report. In addition to historical information,
        this
        quarterly report on Form 10-Q contains, and may incorporate by reference,
        statements which may constitute forward-looking statements which involve
        known
        and unknown risks, uncertainties and other factors that could cause actual
        results to differ materially from those expressed or implied by such
        forward-looking statements. Forward-looking statements may be identified
        by the
        use of forward-looking terminology such as "may," "will," "expect," "estimate,"
        "anticipate," "continue," or similar terms, variations of such terms or the
        negative of those terms, but the absence of such terms does not mean that
        a
        statement is not forward-looking. Forward-looking statements reflect the
        expectations of our management at the time that they are made and do not
        represent an opinion about what may happen in the future. More information
        about
        factors that could affect our financial results is included in Item 1A. of
        Part
        II of this report and in the "Risk Factors That May Affect Future Results"
        and
        "Management's Discussion and Analysis of Financial Condition and Results
        of
        Operations" sections of our annual report on Form 10-K for the fiscal year
        ended
        December 31, 2006, which was filed on March 28, 2007, with the Securities
        and
        Exchange Commission.
 
 The
        following management’s discussion and analysis of financial condition and
        results of operations should be read in conjunction with Management’s Discussion
        and Analysis of Financial Condition and Results of Operations included in
        our
        annual report on Form 10-K for the fiscal year ended December 31,
        2006.
 
 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 U.S. Territories, foreign
        island countries in the Pacific and the Caribbean, the Hawaiian Islands and
        Sonora, California. Our primary strategy is to operate in island markets,
        offering predominantly U.S. branded goods. We currently operate eleven retail
        stores as follows: two stores in each of Hawaii and Guam, and one store in
        each
        of St. Thomas, St. Croix, American Samoa, Fiji, Curacao, St. Maarten and
        Sonora,
        California.
 
 Our
        stores are patterned after the warehouse club concept, although our
        stores
  §
            are
                smaller (averaging approximately 32,500 square feet vs. large format
                warehouse clubs of approximately 130,000 square
                feet), §
            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, §
            carry
                a wide assortment of local and ethnic food items,
                and §
            do
                not charge a membership fee. 
 On
        August
        10, 2006, we completed the remodel and expansion of our store in St. Thomas.
        In
        addition to increasing the size of our store by approximately 6,400 square
        feet
        (an increase of approximately 18%), we also upgraded and replaced much of
        the
        store’s equipment, and added a new produce format and a rotisserie
        department.
 
 In
        late
        2006 we began construction on a new store in the Cayman Islands, but permitting
        delays experienced since that time have extended the estimated completion
        date
        to the fourth fiscal quarter of 2007.
  Our
        net
        sales increased for the 13 weeks ended April 1, 2007, as compared to the
        prior
        year, primarily due to increased sales in our U.S. Virgin Island stores,
        which
        more than offset a decrease in sales in our store in Kauai, Hawaii. The sales
        increase in the U.S. Virgin Islands was primarily due to the expansion of
        our
        St. Thomas store in August 2006 and improved market acceptance of our St.
        Croix
        store that was relocated in May of 2005. The
        decline in sales for our Kauai store was a result of increased competition
        and
        reduced market share, which has occurred as a consequence of Costco opening
        a
        new store in Kauai in October 2006.
 
  12
 *Table
            of Contents*
  
 We
        have
        experienced increasing energy and fuel surcharge costs over the last few
        years
        and have largely been able to pass these additional costs on to our customers
        with higher prices. For example, during the 13 weeks ended April 1, 2007,
        our
        store energy (utility) expenses were approximately 11% higher than during
        the
        same period in fiscal 2006. As these costs continue to rise, we anticipate
        that
        we will experience increasing difficulty in passing these additional costs
        on to
        our customers.
 
 
 **Results
        of Operations**
 
 *Comparison
        of the 13 Weeks Ended April 1, 2007, to the 13 Weeks Ended April 2,
        2006:*
 
 *Net
        Sales:* Net
        sales of $55.6 million for the first quarter of fiscal 2007 increased 1.7%
        compared to net sales of $54.7 million for the same period in the prior year.
        The 1.7% increase in net sales in the first quarter of fiscal 2007 as compared
        to the same period in the prior year, was primarily due
        to
        c omparable-store
        sales increases (stores open for a full 13 months), which increased 2.1%
        for the
        first quarter of fiscal 2007 as compared to the same period in the prior
        year.
        The comparable-store sales increase was primarily
        due to increased sales in our U.S. Virgin Island stores. These increases
        more
        than offset the decrease in sales in our store in Kauai, Hawaii.
 
 *Gross
        Profit:* Gross
        profit dollars increased to $10.6 million in the first quarter of fiscal
        2007
        from $10.2 million in the same period of the prior year. Gross profit as
        a
        percentage of sales was 19.1% for the first quarter of fiscal 2007 compared
        to
        18.6% in the same period of the prior year. The improvement in gross profit
        dollars in the first quarter of fiscal 2007 was due to improvements in
        merchandising, primarily enhanced sourcing and pricing strategies.
 
 *Store
        expenses:* Store
        expenses increased to $7.5 million, or 13.5% of sales, in the first quarter
        of
        fiscal 2007 from $7.2 million, or 13.2% of sales, in the same period of the
        prior year. Approximately 40% of the dollar increase in store expenses was
        attributable to higher energy (utility) expenses, which were 11% higher than
        in
        the same period of the prior year. Another 40% of the dollar increase was
        due to
        increased depreciation expense, primarily due to the expansion of our store
        in
        St. Thomas and new electronic point of sale equipment added to all of our
        stores
        during fiscal 2006. An additional 16% of the dollar increase was due to higher
        payroll and related costs, which were approximately 2% higher than in the
        same
        period of the prior year. Payroll and related costs, although higher due
        to
        volume, remained comparable as a percent of store sales at 5.2% of store
        sales
        for the first quarters of both fiscal 2007 and fiscal 2006.
 
 *General
        and administrative expenses:* General
        and administrative expenses increased to $1.9 million, or 3.5% of sales,
        in the
        first quarter of fiscal 2007 from $1.7 million, or 3.0% of sales, in the
        same
        period of the prior year. The increase was primarily due to an increase in
        professional service expenses related to our dealings with two shareholder
        groups in an effort to avoid the expense and distraction of a possible proxy
        contest, costs associated with the implementation of new tax strategies,
        and
        work performed pursuant to the adoption of FIN 48.
 
 *Store
        opening expenses:* Store
        opening expenses were $0.1 million in the first quarter of fiscal 2007 as
        compared to $14,000 for the same period of the prior year. Store opening
        expenses in the first quarter of fiscal 2007 include costs associated with
        our
        initial work on our store in the Cayman Islands, including rent expense
        associated with our land lease for that location. We expect store opening
        expenses in fiscal 2007 to be higher than those incurred in fiscal 2006 as
        we
        continue to develop our new store in the Cayman Islands in anticipation of
        a completion
        date in the fourth fiscal quarter of 2007.
 
 *Interest
        expense, net:* Interest
        expense, net decreased to $46,000 in the first quarter of fiscal 2007 as
        compared to $0.1 million for the same period of the prior year. The decrease
        in
        interest expense was primarily attributable to lower borrowings, the
        capitalization of $23,000 of interest related to the construction of our
        store
        in the Caymans and higher interest income in the first quarter of fiscal
        2007 as
        compared to the same period of the prior year.
 
 *Other
        expense:* Other
        expense represents losses on foreign currency transactions and translation
        of
        intercompany balances for transactions that exceeded our permanent investments
        in certain countries.
 
 *Income
        tax provision:* Our
        income tax provision for the first quarter of fiscal 2007 was $0.3 million,
        or
        35% of pre-tax income, as compared to $0.4 million, or 36% of pre-tax income,
        for the same period of the prior year. The decrease in our effective tax
        rate in
        fiscal 2007 was primarily due to the implementation of new tax strategies
        designed to offset expenses incurred in the Cayman Islands that are not tax
        deductible as there are no corporate taxes in the Cayman Islands.
 
 *Net
        income:* Net
        income was $0.6 million, or $0.15 per fully diluted share, for the first
        quarter
        of fiscal 2007 as compared to $0.8 million, or $0.18 per fully diluted share,
        in
        the same period of the prior year.
 13
 *Table
            of Contents*
 
 **Liquidity
        and Capital Resources**
 
 We
        currently finance our operations with proceeds from various credit facilities
        and internally generated funds. In fiscal 2005, we utilized existing working
        capital to finance the $5.6 million used to purchase the land and construct
        our
        new St. Croix store. In December 2006, we entered into an agreement providing
        for the sale and simultaneous leaseback of the store. The purchase agreement
        provided for the sale of the building and land to Series B, LLC, an Arizona
        limited liability company, for $6.2 million. On March 26, 2007, we closed
        the
        sale and simultaneous leaseback of the St. Croix store under the purchase
        agreement. The term of the lease is 15 years, and it contains two five-year
        options to extend the term of the lease.
 
 We
        hope
        to finance any future relocations and new stores, either through an operating
        lease, a sale-leaseback arrangement or long-term funding from a financial
        institution. We intend to continue leasing as many of our store locations
        as
        feasible. In those instances where a lease is not available on acceptable
        terms,
        we intend to finance our stores utilizing long-term funding from a financial
        institution (as we currently do for our St. Thomas and St. Maarten buildings).
 
 During
        the first quarter of fiscal 2007, we generated $1.3 million of net cash from
        operations, as compared to utilizing $0.2 million during the same period
        in the
        prior year. The increase in net cash provided from operations was primarily
        due
        to an increase in accounts payable. Accounts payable as a percent of inventory
        increased to 69% at April 1, 2007 as compared to 65% at April 2,
        2006.
 
 Net
        cash
        provided by investing activities was $3.8 million for the first quarter of
        fiscal 2007, as compared to the utilization of $0.9 million in the same period
        in the prior year. The cash provided by investing activities was primarily
        due
        to the net proceeds received on the sale and simultaneous leaseback of our
        St.
        Croix store of approximately $5.5 million. In addition, we have spent
        approximately $1.2 million on the construction of our store in the Cayman
        Islands and $0.4 million on the remodel of our St. Maarten store in order
        to add
        retail enhancements such as fresh produce by the pound. The cash used in
        investing activities in the first quarter of fiscal 2006 was primarily due
        to
        costs associated with renovating and expanding the size of our store in St.
        Thomas by approximately 6,400 square feet (an increase of approximately 18%)
        and
        the replacement of our point of sale system with a new and improved version.
 
 We
        began
        construction on a new store in the Cayman Islands in late 2006, with a currently
        estimated completion date in the fourth fiscal quarter of 2007. We anticipate
        spending approximately $10.0 million to $12.0 million on the building and
        land
        improvements during fiscal 2007.
 
 The
        expected costs associated with this new building exceed our experience of
        building stores in other markets, most recently St. Croix. This is due to
        the
        increased cost of materials, mainly steel; design and engineering costs;
        the
        addition of energy-efficient components; slab and foundation costs due to
        the
        soil types on the island of Grand Cayman; imported labor; higher supervision
        costs; import duties; and higher freight costs. In addition to the above
        we
        intend to spend approximately $2.5 million to $3.5 million for equipment
        for
        this new store during fiscal 2007. We are currently in discussion with a
        Caymanian Bank to finance the building and equipment related to this
        project.
 
 Although
        we currently have no plans to open additional stores in new markets during
        fiscal 2007, we are continuing to explore expansion opportunities in selected
        markets and additional relocation opportunities for stores in existing markets.
 
 We
        utilized $1.0 million of cash from financing activities during the first
        quarter
        of fiscal 2007, as compared to generating $0.4 million in the same period
        in the
        prior year. The $1.4 million decrease was primarily due to a decrease in
        bank
        checks outstanding during the first quarter of fiscal 2007 as compared to
        the
        same period in the prior year.
 
 In
        March
        2007, we replaced our asset based line of credit with a working capital line
        of
        credit with Wells Fargo Bank. The new line of credit, which has a two-year
        term,
        consists of a $6.0 million credit line with a sublimit for letters of credit
        and
        bankers’ acceptances in the amount up to $1.0 million. Borrowings under the new
        line of credit bear interest at either Prime -0.25% or LIBOR +1.75%. A fee
        of
        0.30% will be charged on the unused portion of the line of credit. At April
        1,
        2007, there were no borrowings outstanding on the line of credit and no letters
        of credit outstanding. The new line of credit contains various covenants,
        including a requirement that we maintain a minimum net profit, a minimum
        tangible net worth, and that the outstanding balances under the line of credit
        shall not exceed 30% of net inventory, excluding inventory in St. Maarten
        and
        the Cayman Islands. We believe that we are currently in compliance with all
        such
        covenants.
 14
 *Table
            of Contents*
 
 A
        significant portion of our cash flow is generated by our operations. If our
        operating results deteriorate as a result of a decrease in customer demand,
        declining economic conditions in the markets in which we have stores, energy
        related cost increases, or pricing pressures from our customers or our
        competitors, our ability to generate positive cash flow from operations may
        be
        jeopardized. We believe that amounts available under our various credit
        facilities, existing cash available for working capital purposes, and cash
        flow
        from operations will most likely be sufficient to fund our operations through
        the next twelve months. However, if such sources of liquidity are unavailable
        or
        insufficient to satisfy our liquidity requirements, we may need to issue
        equity
        or debt securities, obtain additional credit facilities or consider alternative
        financing arrangements. There can be no assurance that we will be able to
        obtain
        additional financing when needed, or that any available financing will be
        on
        terms acceptable to us.
 
 **Contractual
        Obligations**
 
 As
        of
        April 1, 2007, our commitments to make future payments under long-term
        contractual obligations were as follows (in thousands):
  **Payments
                  Due by Period****Contractual
                  Obligations**
              
              **Total**
              
              **Less
                  than****1 year**
              
              **1
                  to 3****years**
              
              **4
                  to 5****years**
              
              **After
                  5****years**Long-term
                  debt
              
              $
              1,944
              
              $
              267
              
              $
              534
              
              $
              534
              
              $
              609Operating
                  Leases (1)
              
              
              41,907
              
              
              5,546
              
              
              9,437
              
              
              5,725
              
              
              21,199Capital
                  Lease
              
              
              2,208
              
              
              434
              
              
              868
              
              
              693
              
              
              213Total
              
              $
              46,059
              
              $
              6,247
              
              $
              10,839
              
              $
              6,952
              
              $
              22,021
 
 (1)
            Includes
                the building and land lease for the St. Croix store entered into
                on March
                26, 2007. The lease is for a term of 15 years and provides for rental
                payments of $42,666.67 per month, with an increase of ten percent
                at the
                end of each five-year period. 
 
 
 **Accounting
        Pronouncements**
 
 In
        July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting
        for Uncertainty in Income Taxes, an interpretation of SFAS No. 109,” which
        seeks to reduce the diversity in practice associated with the accounting
        and
        reporting for uncertainty in income tax positions. FIN 48 prescribes a
        comprehensive model for the financial statement recognition, measurement,
        presentation and disclosure of uncertain tax positions taken or expected
        to be
        taken in income tax returns. FIN 48 is effective for fiscal years beginning
        after December 15, 2006. We adopted the new requirements in our fiscal
        first quarter of 2007. The adoption of FIN 48 did not have a significant
        impact
        on our results of operations or our financial position.
 
 
  15
 *Table
            of Contents*
  **ITEM
                  3.**
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK**
 
 We
        operate stores in foreign countries and have market risks associated with
        foreign currencies. However, sales are primarily made in U.S. dollars or
        foreign
        currencies with minimal trade credit extended and no borrowings exist in
        foreign
        currencies. Cash deposited from sales are remitted back to the U.S. bank
        account
        routinely.
 
 We
        record
        gains and losses on foreign currency transactions, and translation of
        intercompany balances for transactions that exceed the permanent investments
        in
        those countries in Other Income (Expense). Gains and losses are primarily
        attributable to appreciation and (depreciation) in the Fijian dollar as compared
        to the U.S. dollar.
 
 We
        operate in four foreign countries that function under currencies other than
        the
        US dollar. Two of the these foreign countries operate under the Netherlands
        Antilles Guilder and one of these foreign countries operates under the Caymans
        Island Dollar, both of which have historically had an exchange rate fixed
        to the
        U.S. dollar but there can be no assurance that this will continue. If the
        Netherlands Antilles Guilder and/or the Caymans Island Dollar is allowed
        to
        float this would lead to an increase in foreign exchange volatility and risk
        which could have a materially adverse effect on our business, financial
        condition and operating results. There is also the possibility these three
        foreign countries that function under currencies other than the U.S. dollar
        could devalue their currency against the U.S. dollar at any time and if this
        were to occur there could be a materially adverse effect on our business,
        financial condition and operating results.
 
 We
        have
        also assessed our vulnerability to interest rate risk associated with our
        financial instruments, including, cash and cash equivalents, lines of credit
        and
        long term debt. Due to the nature of these financial instruments, we believe
        that the risk associated with interest rate fluctuations is not material.
        Our
        line of credit and long-term debt can be expected to vary in the future as
        a
        result of future business requirements, market conditions and other
        factors.
 
 We
        did
        not have any derivative financial instruments as of April 1, 2007.
 
 
 **ITEM
                  4.**
              **CONTROLS
                  AND PROCEDURES**
 
 Under
        the
        supervision and with the participation of our management, including our
        principal executive officer and principal financial officer, we conducted
        an
        evaluation of our disclosure controls and procedures, as such term is defined
        under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
        as
        amended, as of April 1, 2007. Based on this evaluation, our principal executive
        officer and principal financial officer concluded that our disclosure controls
        and procedures were effective as of such date.
  16
 *Table
            of Contents*
  **PART
        II - OTHER INFORMATION**
  
 **ITEM
                  1A.**
              **RISK
                  FACTORS**
 
 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 March
        2007 and presently operate eleven stores. Our closure of the ten other stores
        prior to March 2001 adversely affected our operating results. Should any
        existing store experience a significant decline in profitability or any new
        store be unprofitable, the negative effect on our business would be more
        significant than would be the case if we had a larger store base, and could
        have
        a material adverse effect on our business, financial condition and results
        of
        operations. For example, in October 2006, Costco opened a new store in Kauai,
        Hawaii, which caused our sales, gross margin and operating results for our
        Kauai
        store to be significantly lower in fiscal 2007 than in prior years due to
        the
        increased competition and reduced market share. Although we have taken several
        actions to try to preserve our market position in Kauai, if the store continues
        to be unprofitable it will have a significant negative effect on our overall
        operating results and financial condition.
 
 In
        addition, if our general and administrative expenses increase, the negative
        effect on our business and results of operations would be more significant
        than
        if we had a larger store base. Although we intend to carefully plan for the
        implementation of additional stores, there can be no assurance that such
        plans
        can be executed as envisioned or that the implementation of those plans will
        not
        have a material adverse effect on our business, financial condition and results
        of operations. In addition, our ability to acquire products at a lower cost
        than
        competitors or obtain volume-based pricing can be adversely affected because
        of
        our small store base.
 
 *Our
        ability to operate profitably in existing markets and to expand into new
        markets
        may be adversely affected by competing warehouse clubs or discount
        retailers.* The
        warehouse club and discount retail businesses are highly competitive. If
        we fail
        to successfully respond to competitive pressures in this industry, or to
        effectively implement our strategies to respond to these pressures, our
        operating results may be negatively affected. Many of our competitors have
        substantially greater resources, buying power and name recognition. 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.
 
 In
        October 2006, Costco opened a new store in Kauai, Hawaii, which caused our
        sales, gross margin and operating results for our Kauai store to be
        significantly lower in fiscal 2007 than in prior years due to the increased
        competition and reduced market share. Prior to, and subsequent to, Costco’s
        opening, we have taken a number of steps in an effort to minimize the
        competitive impact on our position in the Kauai market, but we are unable
        to
        assure you that these efforts will succeed. If we are not successful in
        recapturing our market position in Kauai, then the profitability and longevity
        of this store will be in jeopardy.
 
 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.
 
 *If
        energy costs and fuel surcharges continue to rise, the profitability of our
        stores may decline and our business and financial condition could
        suffer.* We
        have
        experienced increasing energy and fuel surcharge costs over the last few
        years
        and have largely been able to pass these additional costs on to our customers
        through higher prices. For example, during fiscal 2006, our store energy
        (utility) expenses were approximately 17% higher than in fiscal 2005. If
        these
        costs continue to rise, we may not be able to continue the practice of passing
        on these additional costs to our customers. If we are unable to effectively
        pass
        these costs on to our customers in the future, it could have a significant
        adverse effect on our business, results of operations and financial condition.
        In addition, our customers may face higher energy costs in their households,
        which may result in less money available to spend in our stores.
 17
 *Table
            of Contents*
 
 *One
        or more of our stores may be damaged or destroyed by volatile weather conditions
        or natural disasters, which would severely harm our business and financial
        results.* Our
        stores are primarily located on islands subject to volatile weather conditions
        and natural disasters, such as tsunamis, hurricanes, floods, typhoons and
        earthquakes. If the islands on which any of our stores is located were to
        experience any of these or other severe weather conditions or natural disasters,
        one or more of our stores could be damaged significantly or destroyed. For
        example, in December 2002, our two stores on the island of Guam suffered
        damage
        from Supertyphoon Pongsona, resulting in the immediate closure of both stores.
        Our Tamuning store lost its generator in the storm and our Dededo store had
        to
        be closed for reconstruction. Additionally, we have four stores in the
        Caribbean, which has experienced increased activity from hurricanes and tropical
        storms in the past few years. The damage or destruction of one or more of
        our
        stores would materially harm our business, operating results and financial
        condition. We could also experience business interruptions, delays in shipping,
        delays in construction or loss of life as a result of severe weather conditions,
        any of which could materially affect our business.
 
 *If
        we
        were to experience a catastrophic loss as a result of severe weather conditions
        or otherwise, we may exceed our insurance policy limits and we may have
        difficulty obtaining similar insurance coverage in the future.* We
        maintain property, casualty and business interruption insurance coverage
        in
        amounts we consider customary in our industry for these types of events.
        However, insurance payments generally do not fully reimburse us for all of
        the
        damages and lost profits caused by adverse weather events. If any insurance
        reimbursement we receive does not fully cover the losses and business
        interruption caused by severe weather events or natural disasters, or if
        our
        insurance coverage is not adequate to cover such losses or we exceed our
        insurance policy limits, we may be required to pay substantial amounts and
        our
        financial condition and liquidity would suffer.
 
 Additionally,
        we utilize a combination of insurance policies and self-insurance mechanisms
        to
        provide for the potential liabilities for property, general liability, director
        and officers’ liability, workers’ compensation and employee health care
        insurance. The costs related to obtaining our current insurance coverage
        have
        been increasing. If the costs of maintaining this insurance coverage continue
        to
        increase significantly, we would experience an associated increase in our
        store
        and administrative expenses that may negatively impact our results of
        operations. In addition, there is no assurance as to how casualty insurance
        carriers may react to increasing weather related damages in areas where our
        stores are located. If we are unable to maintain our current or similar
        insurance coverage, or if an event were to occur that was not covered by
        our
        current insurance policy coverage levels (including acts of terrorism, war
        and
        actions such as government nationalizations), our business and results of
        operations could suffer.
 
 *If
        we
        fail to effectively manage the logistical and local operating challenges
        we face
        because our business primarily consists of island and international operations,
        our business and results of operations would suffer.* Our
        net
        sales from island operations represented approximately 96.6% of our total
        net
        sales for fiscal 2006. We expect that our island and international operations
        together will continue to account for nearly all of our total net sales.
        The
        distance, as well as the time-zone differences, involved with island locations
        impose significant challenges to our ability to manage our operations.
        Logistical challenges are presented by operating individual store units in
        remote locations, whether in terms of information flow or transportation
        of
        goods. In addition, island operations involve uncertainties arising from
        items
        such as:
 
 ·
            Changes
                in local labor markets, including unionization or inadequate labor
                pools, ·
            Local
                business practices, language and cultural considerations, including
                the
                capacity or willingness of local business and government officials
                to
                provide necessary services, ·
            Ability
                to acquire, install and maintain modern capabilities such as dependable
                and affordable electricity, telephone, computer, Internet and satellite
                connections, and other equipment, often in undeveloped regions, ·
            Currency
                exchange rate fluctuations and repatriation restrictions, ·
            Difficulty
                enforcing agreements or protecting intellectual property, ·
            Collection
                of debts and other obligations in foreign countries, and ·
            Volatile
                island operating expenses, including utilities. 
 Our
        inability to effectively manage these logistical challenges and local
        uncertainties inherent in our island and international operations could have
        a
        significant adverse effect on our business, results of operations and financial
        condition.
 
 *If
        shareholders cause distractions of governance or pursue a proxy challenge,
        our
        business could suffer.* In
        the
        past, shareholders have threatened to submit nominees for our board of directors
        and it is possible that we might receive shareholder nominations for our
        board
        at future annual meetings. If we do receive nominations, our Corporate
        Governance Committee determines that inclusion of those nominees as part
        of our
        recommended slate is not in the best interest of the Company or our
        shareholders, the Committee’s fiduciary duties would dictate that it oppose the
        election of those nominees. In that circumstance, we could face a proxy contest
        and management would be required to expend substantial time and energy, which
        may divert management’s attention from our operations. We could also incur
        significant additional costs, including legal and financial advisory fees,
        that
        would negatively impact our operating results. We could also experience
        management and employee distraction and may have difficulty attracting and
        retaining employees as a result of the uncertainty that often accompanies
        this
        type of event. Our inability to effectively manage these distractions could
        have
        a significant adverse effect on our business, results of operations and
        financial condition.
 18
 *Table
            of Contents*
 
 *If
        the countries in which we operate experience a decrease in foreign aid, our
        business could suffer.* Eight
        of
        our stores are located outside the United States. Some of those locations
        depend
        on foreign aid to support their local economies. A change in the level of
        foreign aid provided to these countries could have a material adverse effect
        on
        our business, financial condition and results of operations.
 
 *Acts
        of terrorism or political instability, globally or in countries where we
        operate, may cause periodic declines or a prolonged decrease in tourism and
        air
        travel, which could have an indirect but significant impact on our financial
        performance, operations and liquidity.* 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, weather conditions, 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
        do
        not have operating experience in many of the markets in which we may consider
        opening new stores. If we are unable to adapt our operations to support any
        future expansion plans or if any new stores we open are not profitable, our
        business and financial condition could suffer.* New
        markets such as the Cayman Islands and others we may enter may present
        operational, competitive, regulatory and merchandising challenges that are
        different from those we currently encounter. We do not have operating experience
        in many of the markets in which we may consider opening new stores. In fact,
        in
        June 2000, we closed the two stores that we had opened in New Zealand in
        1999,
        since they had performed below expectations, due in part to competitive and
        merchandising challenges that are different from our other stores. Additionally,
        in February 2001, we closed one of our two Fiji stores, due primarily to
        the
        impact that political turmoil and the resulting economic downturn in Fiji
        were
        having on the tourist industry. We have encountered, and may continue to
        encounter, substantial delays, increased expenses or loss of potential store
        sites due to the complexities, cultural differences, and local political
        issues
        associated with the regulatory and permitting processes in the island markets
        in
        which we may locate our stores. There can be no assurance that we will be
        able
        to adapt our operations to support our future expansion plans or that any
        new
        stores will be profitable. Any failure on our part to manage our growth could
        have a material adverse effect on our business, financial condition and results
        of operations *.*
 
 *Due
        to the nature of our business model, construction costs in future markets
        may
        not necessarily reflect historical construction costs.* Despite
        our best efforts to estimate future construction costs, there is uncertainty
        as
        to what these costs may finally be due to unforeseen exigencies in the
        construction environment pertaining to a particular market. We can estimate
        building construction costs based on our relocated St. Croix store but, as
        we
        have found with our Cayman store, the final cost may be much greater than
        initially estimated. Our inability to estimate future construction costs
        may
        have an adverse effect on our business, financial condition and results of
        operation.
 
 *A
        decline in the general economic condition in the United States or in island
        markets in which we operate could have a significant impact on our financial
        performance.* The
        success of our operations depends to a significant extent on a number of
        factors
        relating to discretionary consumer spending, including employment rates,
        business conditions, interest rates, inflation, population and gross domestic
        product levels in each of our island markets, taxation, consumer spending
        patterns and customer preferences. We cannot fully foresee the changes in
        business and economic conditions that may result from domestic or foreign
        factors. There can be no assurance that consumer spending in our markets
        will
        not be adversely affected by these factors, thereby affecting our growth,
        net
        sales and profitability. A downturn in tourism or a decline in the national
        or
        regional economies of the United States and the U.S. Territories or any foreign
        countries in which we currently or will operate, could have a material adverse
        effect on our business, financial condition and results of operations.
 
 *The
        loss of key personnel or our inability to successfully hire skilled store
        managers could harm our business and results of operations.* Our
        success depends in large part on the abilities and continued service of our
        executive officers and other key employees. Additionally, we rely significantly
        on the skill and expertise of our on-site store managers, particularly in
        island
        markets where language, education and cultural factors may impose additional
        challenges. We do not carry key-man life insurance on any of our personnel.
        There can be no assurance that we will be able to hire, train and retain
        skilled
        managers and personnel to support our existing business and any growth, or
        that
        we will be able to retain the services of our executive officers and other
        key
        employees, the loss of any of whom could have a material adverse effect on
        our
        business, financial condition and results of operations.
 
 *If
        our information systems are disrupted, our business and results of operations
        could suffer.* Our
        business depends on communications and information systems, primarily systems
        provided by third-party vendors. Any failure or interruption of our systems
        or
        systems provided by third-party vendors could cause delays or other problems
        in
        our operations, which could have a material adverse effect on our business,
        financial condition and results of operations.
 19
 *Table
            of Contents*
 
 *If
        our store employees decide to unionize, we may experience increased operating
        costs or other operation problems.* None
        of
        our employees is currently covered by a collective bargaining agreement.
        Unionization of any of our stores could result in higher employee compensation
        and restrictive working condition demands that could increase our operating
        costs and have a material adverse effect on our business, financial condition
        and results of operations.
 
 *We
        are subject to various governmental regulations and licensing requirements,
        which may have an adverse effect on our business.* Governmental
        regulations and licensing requirements in foreign countries where we plan
        to
        expand our operations might prevent or delay entry into the market or prevent
        or
        delay the introduction, or require modification, of certain of our operations.
        For example, construction on our new store in the Cayman Islands began in
        late
        2006 as anticipated, but permitting delays experienced since that time have
        extended the completion date beyond the first half of fiscal 2007 to a currently
        estimated completion date in the fourth fiscal quarter of 2007. Additionally,
        our ability to compete may be adversely affected by foreign governmental
        regulations and licensing requirements that encourage or mandate the employment
        of citizens of, or purchase of supplies from vendors, in a particular
        jurisdiction. We may also be subject to taxation in these foreign jurisdictions,
        and the final determination of our tax liabilities may involve the
        interpretation of the statutes and requirements of the various domestic and
        foreign taxing authorities. We may also be subject to currency repatriation
        restrictions. If governmental regulations or licensing requirements prevent
        or
        delay our entry into markets, require modification of our existing operations,
        or subject us to taxation or currency repatriation issues, our business,
        financial condition and results of operations could suffer.
 
 *If
        we
        are unable to overcome challenges resulting from the isolation of store
        operations from our corporate management and our increased dependence on
        local
        managers, we may experience decreased productivity or other operational
        problems.* Our
        headquarters and administrative offices are located in Washington State;
        however, ten of our eleven stores and a majority of our employees are located
        on
        islands. Although we invest resources to hire and train our on-site managers,
        the inability of our executives to be physically present at our current and
        planned store sites on a regular basis may result in the following:
 
 ·
            Isolation
                of store operations from corporate management and an increased dependence
                on store managers, ·
            Diminished
                ability to oversee employees, which may lead to decreased productivity
                or
                other operational problems, ·
            Construction
                delays or difficulties caused by inadequate supervision of the
                construction process, and ·
            Communication
                challenges. 
 We
        may
        need to invest significant resources to update and expand our communications
        systems and information networks and to devote a substantial amount of time,
        effort and expense to national and international travel in order to overcome
        these challenges; failure to do so could have a material adverse effect on
        our
        business, financial condition and results of operations.
 
 *We
        may encounter disruption in the transportation of our products, which would
        significantly harm our business.* Our
        island locales require the transportation of products over great distances
        on
        water, which results in the following:
 
 ·
            Substantial
                lags between the procurement and delivery of product, thus complicating
                merchandising and inventory control methods, ·
            Possible
                loss of product due to potential damage to, or destruction of, ships
                or
                containers delivering our goods, ·
            Tariff,
                customs and shipping regulation issues, ·
            Substantial
                ocean freight and duty costs, ·
            Port
                and container security issues, and ·
            Interruption
                in the delivery of product due to labor disruption or weather related
                issues. 
 Moreover,
        only a limited number of transportation companies service our regions, none
        of
        which has entered into a long-term contract with us. The inability or failure
        of
        one or more key transportation companies to provide transportation services
        to
        us, changes in the regulations that govern shipping tariffs or any other
        disruption in our ability to transport our merchandise could have a material
        adverse effect on our business, financial condition and results of operations.
 
 *Our
        failure to adequately address barriers and challenges associated with expansion
        outside of the United States or its territories could cause our business
        to
        suffer.* Three
        of
        our existing stores, as well as the store we are building in the Cayman Islands,
        are located outside the United States and its territories. Our future expansion
        plans may involve entry into additional foreign countries, which may involve
        additional or heightened barriers and challenges that are different from
        those
        we currently encounter, including risks associated with being further removed
        from the political and economic systems in the United States and anti-American
        sentiment as a result of political or military action. We do not currently
        engage in currency hedging activities. The failure to adequately address
        the
        additional challenges involved with international operations could have a
        material adverse effect on our business, financial condition and results
        of
        operations.
 20
 *Table
            of Contents*
 
 *Certain
        provisions in our charter documents and elsewhere may discourage third parties
        from attempting to acquire control of our Company, which may have an adverse
        effect on the price of our stock.* Our
        board of directors has the authority, without obtaining shareholder approval,
        to
        issue up to 2,000,000 shares of preferred stock and to fix the rights,
        preferences, privileges and restrictions of such shares without any further
        vote
        or action by our shareholders. Our articles of incorporation and bylaws also
        provide for a classified board, special advance notice provisions for proposed
        business at annual meetings and a requirement that a business combination
        be
        approved by holders of at least two-thirds of our outstanding common stock
        under
        certain circumstances. 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.
 
 
 
 **ITEM
                  6.**
              **EXHIBITS**
  
 **Exhibit**
                **No.**
              **Description**10.1
              Credit
                  agreement, dated March 14, 2007 between Cost-U-Less, Inc. and Wells
                  Fargo
                  Bank (Incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K
                  filed on March 16, 2007)10.2
              Amendment
                  No. 1 to the Purchase Agreement and Escrow Instructions between
                  Cost-U-Less, Inc., a Washington corporation, as seller, and Series
                  B, LLC,
                  as buyer, dated March 20, 200710.3
              Lease
                  Agreement betweenCole
                  CL St. Croix USVI, LLC, a Delaware limited liability companyand CULUSVI, Inc. d/b/a Cost-U-Less, a U.S. Virgin Islands corporation
                  dated March 26, 200710.4
              Executive
                  Compensation and Benefits Agreement between Cost-U-Less, Inc and
                  J.
                  Jeffrey Meder, dated March 26, 200731.1
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 200231.2
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 200232.1
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 200232.2
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002
  21
 *Table
            of Contents*
  **SIGNATURES**
  
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 
 COST-U-LESS,
                  INC.Date:
                  May 14, 2007
              /s/
                  J. Jeffrey MederJ.
                  Jeffrey MederPresident
                  and Chief Executive OfficerDate:
                  May 14, 2007
              /s/
                  Martin P. MooreMartin
                  P. MooreChief
                  Financial Officer
 
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