# SECURITIES
AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH
27, 2005

OR

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

FOR THE TRANSITION PERIOD FROM
_________  TO  ___________

COMMISSION FILE NUMBER 0-24543

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

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

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

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

Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.    x YES    o NO

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

The registrant had
3,989,876 common shares, par value $0.001, outstanding at May 5, 2005.

---

# COST-U-LESS, INC.

# INDEX TO FORM 10-Q

|                                                                             | 
|---------------------------------------------------------------------------- | 
|PART I. FINANCIAL INFORMATION                                                | 
|Item 1.      Financial Statements (Unaudited)                                | 
|Condensed Consolidated Statements of  Operations                             | 
|Condensed Consolidated Balance Sheets                                        | 
|Condensed Consolidated Statements of Shareholders' Equity                    | 
|Condensed Consolidated Statements of Cash Flows                              | 
|Notes to Condensed Consolidated Financial Statements                         | 
|Item 2.      Management's Discussion and Analysis of Financial Condition and | 
|Results of Operations                                                        | 
|Item 3.      Quantitative and Qualitative Disclosures About Market Risk      | 
|Item 4.      Controls and Procedures                                         | 
|PART II. OTHER INFORMATION                                                   | 
|Item 5.      Other Information                                               | 
|Item 6.      Exhibits                                                        | 
|SIGNATURES                                                                   | 

2

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# PART I  FINANCIAL INFORMATION

# ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

# COST-U-LESS, INC.

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

# (Unaudited)

|                                                          | 13
      Weeks Ended
|--------------------------------------------------------- | --------------------
|
|Net
      sales                                           | $                   
|Merchandise
      costs                                   |                     
|Gross
      profit                                        |                     
|Operating
      expenses:                                 |                     
|Store                                                     |                     
|General
      and administrative                          |                     
|Store
      openings                                      |                     
|Total
      operating expenses                            |                     
|Operating
      income                                    |                     
|Other
      income (expense):                             |                     
|Interest
      expense, net                               |                     
|Other                                                     |                     
|Income
      before income taxes                          |                     
|Income
      tax provision                                |                     
|Net
      income                                          | $                   
|                                                          |                     
|Earnings
      per common share:                          |                     
|Basic                                                     | $                   
|Diluted                                                   | $                   
|Weighted
      average common shares outstanding, basic   |                     
|Weighted
      average common shares outstanding, diluted |                     

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

3

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# COST-U-LESS, INC.

# CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

# (Unaudited)

|                                                 | March
      27,
      2005 |        | December
      26,
      2004
|------------------------------------------------ | -------------------------- | ------ | -----------------------------
|ASSETS                                           |                            |        |                              
|Current
      assets:                            |                           
|Cash
      and cash equivalents                  | $                          | 4,066  |                              
|Accounts
      receivable, net                   |                            | 1,060  |                              
|Inventories,
      net                           |                            | 23,105 |                              
|Other
      current assets                       |                            | 1,607  |                              
|Total
      current assets                       |                            | 29,838 |                              
|Buildings
      and equipment, net               |                            | 15,871 |                              
|Deposits
      and other assets                  |                            | 750    |                              
|Total
      assets                               | $                          | 46,459 |                              
|                                                 |                            |        |                              
|LIABILITIES
      AND SHAREHOLDERS' EQUITY       |                            |        |                              
|Current
      liabilities:                       |                           
|Accounts
      payable                           | $                          | 16,465 |                              
|Accrued
      expenses and other liabilities     |                            | 4,470  |                              
|Current
      portion of long-term debt          |                            | 267    |                              
|Current
      portion of capital leases          |                            | 103    |                              
|Total
      current liabilities                  |                            | 21,305 |                              
|Other
      long-term liabilities                |                            | 952    |                              
|Long-term
      debt, less current portion       |                            | 2,211  |                              
|Capital
      lease, less current portion        |                            | 581    |                              
|Total
      liabilities                          |                            | 25,049 |                              
|Commitments
      and contingencies              |                            |       |                              
|Shareholders'
      equity                       |                            | 21,410 |                              
|Total
      liabilities and shareholders' equity | $                          | 46,459 |                              

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

4

---

# COST-U-LESS, INC.

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

# (Unaudited)

|                                                                                                | Common
      Stock
      Shares | Common
      Stock
      Amount | Retained
      Earnings | Accumulated
      Other
      Comprehensive
      Loss | Total 
|----------------------------------------------------------------------------------------------- | -------------------------------- | -------------------------------- | ----------------------- | ------------------------------------------------------ | ------
|Balance
      at December 28, 2003                                                              |                                  | 3,688,376                        |                         | $                                                      | 12,597
|Net income                                                                                      |                                  |                                 |                         |                                                        |      
|Foreign currency translation
        adjustments                                                |                                  |                                 |                         |                                                        |      
|Comprehensive income                                                                            |                                  |                                  |                         |                                                        |       
|Compensation related
        to stock options                                                   |                                  |                                 |                         |                                                        | 9     
|Exercise of common stock
        options including income tax benefit                           |                                  | 48,180                           |                         |                                                        | 149   
|Balance
      at March 28, 2004                                                                 |                                  | 3,736,556                        |                         | $                                                      | 12,755
|                                                                                                |                                  |                                  |                         |                                                        |       
|Balance
      at December 26, 2004                                                              |                                  | 3,751,306                        |                         | $                                                      | 12,795
|Net income                                                                                      |                                  |                                 |                         |                                                        |      
|Foreign currency translation
        adjustments                                                |                                  |                                 |                         |                                                        |      
|Comprehensive income                                                                            |                                  |                                  |                         |                                                        |       
|Exercise of common stock
        options including
                  income tax
        benefit |                                  | 158,367                          |                         |                                                        | 745   
|Balance
      at March 27, 2005                                                                 |                                  | 3,909,673                        |                         | $                                                      | 13,540

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

5

---

# COST-U-LESS, INC.

# CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

# (Unaudited)

|                                                                                  | 13 Weeks Ended
|--------------------------------------------------------------------------------- | --------------
|
|OPERATING ACTIVITIES:                                                             |               
|Net income                                                                        | $             
|Adjustments to reconcile net income to net cash provided by operating activities: |               
|Depreciation and amortization                                                     |               
|Deferred tax provision                                                            |               
|Gain on sale-leaseback of equipment                                               |               
|Stock option expense                                                              |               
|Cash provided by/(used in) changes in operating assets and liabilities:           |               
|Insurance receivable                                                              |               
|Accounts receivable                                                               |               
|Inventories                                                                       |               
|Other current assets                                                              |               
|Deposits and other assets                                                         |               
|Accounts payable                                                                  |               
|Accrued expenses and other liabilities                                            |               
|Other long-term liabilities                                                       |               
|Net cash provided by operating activities                                         |               
|INVESTING ACTIVITY:                                                               |               
|Cash used to purchase property and equipment                                      |               
|Proceeds from insurance settlement                                                |               
|Net cash provided/(used by) investing activities                                  |               
|FINANCING ACTIVITIES:                                                             |               
|Proceeds from exercise of common stock options                                    |               
|Proceeds from capital lease obligations                                           |               
|Payments on line of credit, net                                                   |               
|Decrease in bank checks outstanding                                               |               
|Principal payments on capital lease obligations                                   |               
|Principal payments on long-term debt                                              |               
|Net cash used by financing activities                                             |               
|Foreign currency translation adjustments                                          |               
|Net increase/(decrease) in cash and cash equivalents                              |               
|Cash and cash equivalents:                                                        |               
|Beginning of period                                                               |               
|End of period                                                                     | $             
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                 |               
|Cash paid during the period for:                                                  |               
|Interest                                                                          | $             
|Income taxes                                                                      | $             
|Cash received during the period for:                                              |               
|Income taxes                                                                      | $             
|                                                                                  |               

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

6

---

# COST-U-LESS, INC.

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

# (Unaudited)

## 1.   Nature of Business and Summary of Significant Accounting Policies

Nature of Business

Cost-U-Less, Inc.
(the Company) operates mid-sized warehouse club-style stores in
various United States Territories (U.S. Territories), foreign island
countries in the Pacific and the Caribbean, the Hawaiian Islands and Sonora,
California. At March 27, 2005, the Company operated eleven retail stores as
follows: two stores in each of Hawaii and Guam, and one store in each of St.
Thomas, St. Croix, American Samoa, Fiji, Curacao, St. Maarten and Sonora,
California. The Company is in the process of building a new St. Croix store on a
parcel of land located closer to the main trade area in the center of the island
than its existing store.

Basis of Presentation

The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting and pursuant to the
rules and regulations of the SEC. In the opinion of management, the financial
information includes all adjustments that the Company considers necessary for a
fair presentation of the financial position at such dates and the operations and
cash flows for the periods then ended. The condensed consolidated balance sheet
at December 26, 2004 has been derived from the audited financial statements
at that date. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to SEC rules and regulations on quarterly reporting. Operating results for the
13 weeks ended March 27, 2005, are not necessarily indicative of results that
may be expected for the entire year. All quarterly periods reported consist of
13 weeks. For further information, refer to the financial statements and
footnotes included in the Companys annual report on Form 10-K filed with
the SEC on March 23, 2005.

Fiscal Year

The
Company reports on a 52/53-week fiscal year, consisting of four thirteen-week
periods and ending on the Sunday nearest to the end of December. Fiscal 2005,
ending on January 1, 2006, is a 53-week fiscal year. Fiscal 2004, which ended on
December 26, 2004, was a 52-week year.

Principles of Consolidation

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

Foreign Currency Translations and Comprehensive Income

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

7

---

# COST-U-LESS, INC.

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

# (Unaudited)

Use of Estimates

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

Stock-Based Compensation

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

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

|                                                                                                                                                                                        | 13
      Weeks Ended
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------
|
|Net
      income as reported (in thousands)                                                                                                                                             | $                   
|Less:  Total
      stock-based employee compensation expense
                 determined
      under fair value method for all awards,
                 net of
      tax (in thousands) |                     
|Net income
      pro forma (in thousands)                                                                                                                                               | $                   
|                                                                                                                                                                                        |                     
|Earnings
      per common share, basic as reported                                                                                                                                      | $                   
|Earnings
      per common share, basic pro forma                                                                                                                                        | $                   
|Earnings
      per common share, diluted as reported                                                                                                                                    | $                   
|Earnings
      per common share, diluted pro forma                                                                                                                                      | $                   

Reclassifications

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

---

8

# COST-U-LESS, INC.

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

# (Unaudited)

New Accounting Pronouncements

In
December 2004, the Financial Accounting Standards Board issued Statement 123
(revised 2004),Share-Based Payment (Statement 123(R)). 
Statement 123(R) requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements.  The cost will
be measured based on the fair value of the instruments issued.  Statement
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans.  Statement 123(R)
replaces Statement 123, Accounting for Stock-Based Compensation and
supersedes Opinion 25, Accounting for Stock Issued to
Employees.  As originally issued in 1995, Statement 123 established
as preferable the fair-value-based method of accounting for share-based payment
transactions with employees.  However, that Statement permitted entities
the option of continuing to apply the guidance in Opinion 25, as long as the
footnotes to the financial statements disclosed what net income would have been
had the preferable fair-value-based method been used.  The Company will be
required to apply Statement 123(R) as of the beginning of its fiscal year that
begins after June 15, 2005. The Company plans on using the modified-prospective
method effective with its first quarter of fiscal 2006.  The Company
believes that the adoption of this new accounting standard will not have a
material impact on the Companys results of operations or financial
position, as the Company has a limited amount of options available for issuance
in the future.

## 2.   Earnings Per Share

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

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

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

The
diluted share calculation for the 13 weeks ended March 28, 2004, excludes
132,916 stock options outstanding. These options are excluded due to their
anti-dilutive effect.

9

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# COST-U-LESS, INC.

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

# (Unaudited)

## 3.   Line of Credit

On
April 9, 2003, the Company entered into a line of credit with Wells Fargo
Business Credit that has a three year term, expiring on April 9, 2006. The line
of credit consists of a $6.0 million committed, secured revolving credit line
with a sublimit for letters of credit and bankers acceptances in the amount up
to $0.7 million. At March 27, 2005, there were no borrowings outstanding on the
line of credit. At March 27, 2005, there was $12,000 utilized for standby
letters of credit and $0.1 million set aside for other reserves.

Borrowings
are limited to the lesser of $6.0 million or the amount calculated under the
borrowing base. The borrowing base is equal to the lesser of (a) $6.0 million or
(b) the sum of 70% of eligible inventory in the United States of America, plus
60% of eligible inventory in the U.S. Virgin Islands and Guam, less specified
reserves. The line of credit, as amended, provided for the following: (i) an
immediate reduction in the interest rate on the line of credit of one half of
one percent (0.50%), (ii) a further reduction in the interest rate of one half
of one percent (0.50%) if the Company met certain net income levels from
December 29, 2003, through June 27, 2004, and (iii) the adoption of new
measurement values for fiscal 2004. As the Company met the certain net income
levels from December 29, 2003, through June 27, 2004, specified in the March 2,
2004, amendment, its interest rate was reduced from August 1, 2004, forward to
the financial institutions prime rate plus 0.5%. Borrowings under the
amended line of credit were charged interest at the financial institutions
prime rate plus (i) 1.5% in January and February, (ii) 1.0% in March through
July, and (iii) 0.5% in August 2004 through March 2005. At March 27, 2005, the
rate charged by the financial institution was 6.25%.

A
fee of 0.25% is charged on the unused portion of the line of credit. The line of
credit contains various covenants, including a requirement that the Company
maintain minimum pre-tax income and tangible net worth and limitations on
acquisitions, additional debt, changes in control and capital expenditures. As
of March 27, 2005, the Company believes that it was in compliance with all such
covenants.

## 4.   Commitments and Contingencies

Legal Proceedings

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

10

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## ITEM 2.   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

## Certain Factors That May Affect Future Results of Operations

This
discussion and analysis should be read in conjunction with our unaudited
condensed consolidated financial statements and the related notes thereto
appearing in Item 1 of this report. In addition to historical information, this
quarterly report on Form 10-Q contains, and may incorporate by reference,
statements which may constitute forward-looking statements which involve known
and unknown risks, uncertainties and other factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements. Forward-looking statements may be identified by the
use of forward-looking terminology such as may, will,
expect, estimate, anticipate,
continue, or similar terms, variations of such terms or the negative
of those terms, but the absence of such terms does not mean that a statement is
not forward-looking. Forward looking statements reflect the expectations of our
management at the time that they are made and do not represent an opinion about
what may happen in the future. More information about factors that could affect
our financial results is included in the Risk Factors that May Affect
Future Results and Managements Discussion and Analysis of
Financial Condition and Results of Operations sections of our annual
report on Form 10-K for the fiscal year ended December 26, 2004, which was filed
on March 23, 2005, with the Securities Exchange Commission.

The
following managements discussion and analysis of financial condition and
results of operations should be read in conjunction with managements
discussion and analysis of financial condition and results of operations
included in our annual report on Form 10-K for the fiscal year ended
December 26, 2004.

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

## Overview

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

Our
stores are patterned after the warehouse club concept, although the stores (i)
are smaller (averaging approximately 31,000 square feet vs. large format
warehouse clubs of approximately 115,000 square feet), (ii) generally target
niche markets, mainly U.S. Territories, U.S. island states and foreign island
countries, where demographics do not support large format warehouse clubs, (iii)
carry a wide assortment of local and ethnic food items, and (iv) do not charge a
membership fee. Although we do not have large seasonal fluctuations in sales,
the fourth quarter is typically the highest sales quarter due to additional
holiday sales.

We
are currently in the process of building a new St. Croix store on a parcel of
land located closer to the main trade area in the center of the island than our
existing store. This new building will expand the size of our St. Croix store by
about 45% to approximately 38,000 square feet. We expect this new store to open
on May 26, 2005. We are currently operating in our existing location under a
short-term lease with our current landlord until such time as we can move into
our new location.

Our management focus relative to our
core island store operations  includes  reviewing  our merchandising  strategies,  both
those  that apply to all stores and those  specific to each store,  in light of the
different  conditions in each market.  We also continue to  explore ways to maximize
long-term  value for our  shareholders,  including  focusing on efforts to increase
earnings,  responding to  competition,  and improving same store sales and gross margins.
We are currently  evaluating  methods of  implementing  future growth,  including
expansion  opportunities  in selected  markets and  relocation  opportunities  for stores
in  existing  markets  with leases  expiring in the next few years,  such as our St.
Croix store.  Additionally,  we believe that although there are a number of new island
markets that have the  attributes  necessary to support a growth  strategy  for our
business,  licensing  restrictions  and  political  resistance to foreign retailers,
among other things,  make it difficult for us to enter some of these markets.  While we
believe these  actions can improve profitability, there can be no assurance that these
actions will be successful.

11

---

## Results of Operations

During
the fiscal first quarter ended March 27, 2005, we continued to experience
improvements in comparable-store sales. Additionally, our store expenses as a
percentage of sales were in line with the first quarter of fiscal 2004 and our
corporate expenses, both in dollars and as a percentage of sales, were lower
than the first quarter of fiscal 2004. These factors resulted in higher
operating income in the first quarter of fiscal 2005 as compared to the same
period in the prior year. Additionally, during the fiscal first quarter ended
March 27, 2005, we benefited from non-recurring insurance reimbursement recorded
in other income and a reduction in interest expense as compared to the same
period in 2004, which combined with the improved operating income, resulted in
higher net income and EPS.

Comparison of the 13 Weeks Ended March 27, 2005 to the 13 Weeks Ended March 28, 2004:

Net
Sales: Net sales of $53.2 million for the first quarter of fiscal 2005
increased 6.3% compared to net sales of $50.1 million for the first quarter of
fiscal 2004. The increase in net sales in the first quarter of fiscal 2005 was
due to comparable-store sales increases offset by a decline in
business-to-business sales as compared to the same period in the prior year. We
expect the level of business-to-business activity for fiscal 2005 to be lower
than fiscal 2004, as we de-emphasize these lower margin sales.

Comparable-store
sales (stores open for a full 13 months) increased 7.1% for the first quarter of
fiscal 2005 compared to the first quarter of fiscal 2004. Ten of our eleven
stores experienced increased sales in the first quarter of fiscal 2005 as
compared to the same period in the prior year primarily due to improvements in
our assortment of food and general merchandise, operating improvements including
better in-stock inventory levels and improved economic conditions in some of our
markets.

Gross
Profit:Gross profit of $9.6 million, or 18.0% of sales, for the first
quarter of fiscal 2005 increased in dollars as compared to gross profit of $9.1
million, or 18.1% of sales, in the first quarter of fiscal 2004, primarily due
to our increased sales.

Store
expenses:Store expenses of $6.7 million for the first quarter of fiscal
2005 increased $0.4 million compared to expenses of $6.3 million for the first
quarter of fiscal 2004. Approximately 50% of the dollar increase in store
expenses was attributable to higher volume-related expenses such as payroll and
related costs such as health care, and bankcard fees. The remainder of the
dollar increase was primarily attributable to a 7% increase in energy (utility) expense, a 7% increase in commercial insurance expense and a
4% increase in rent expense as compared to the same period in the prior year, partially offset by a reduction in bad debt expense.

As
a percentage of sales, store expenses remained flat at 12.6% of sales for the
first quarters of both fiscal 2005 and fiscal 2004. Payroll and related costs,
although higher due to volume, remained comparable as a percent of store sales
at 5.2% of sales for the first quarters of both fiscal 2005 and fiscal 2004.

General
and administrative expenses:General and administrative expenses remained
flat at $1.7 million for the first quarters of both fiscal 2005 and fiscal 2004.
As a percent of sales, general and administrative expenses for the first quarter
of fiscal 2005 decreased to 3.2% as compared to 3.5% for the first quarter of
fiscal 2004, primarily due to the leveraging of corporate expenses over
increased store sales.

Store
opening expenses:Store opening expenses were $31,000 in the first quarter
of fiscal 2005 compared to $40,000 in the first quarter of fiscal 2004. Store
opening expenses in both periods primarily relate to costs associated with the
evaluation of potential new store locations. We expect store opening expenses in
fiscal 2005 to be higher than those incurred in fiscal 2004 as we relocate our
St. Croix store in the second quarter of fiscal 2005 and as we continue to
evaluate alternative methods of implementing future expansion, including exploring expansion opportunities in selected
markets and relocation opportunities for
existing stores with leases expiring in the next few years.

Interest expense, net:
Interest expense, net decreased to $51,000 in the first quarter of fiscal 2005 as compared to $126,000 in the
first quarter of fiscal 2004 as we capitalized approximately $64,000 of interest related to the construction of our new store in St.
Croix during the first quarter of fiscal 2005 and as borrowings on our line of credit decreased compared to the prior year.

Other
income: Other income increased to $116,000 in the first quarter of fiscal
2005 as compared to $27,000 in the first quarter of fiscal 2004 primarily due to
the receipt of a $0.1 million non-recurring insurance reimbursement. All other
amounts included in other income are attributable to gains on foreign currency
transactions and translation of intercompany balances for transactions that
exceed the permanent investments in those countries.

12

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Income
tax provision: The tax provision for the first quarters of fiscal 2005 and
fiscal 2004, represent taxes associated with income generated in the U.S. and
U.S. Territories. Our effective tax rate is higher than the expected federal
statutory rate because no tax benefits were provided on foreign losses, as we
have no assurance that we will be able to generate an adequate amount of taxable
income in the future to utilize such benefits.

Net
income: Net income was $734,000, or $0.18 per fully diluted share, for the
first quarter of fiscal 2005 compared to net income for the first quarter of
fiscal 2004 of $537,000, or $0.14 per fully diluted share. Weighted average
diluted common shares outstanding were 4,085,090 for first quarter of 2005 as
compared to 3,859,987 in the same period in the prior year.

## Liquidity and Capital Resources

We currently  finance our operations
with proceeds from various credit  facilities and internally  generated funds.  Although
we  are  currently  financing  the land and  construction  of our new St. Croix store
with existing  working  capital,  it is our intent to  eventually  finance the
relocation of our St. Croix store,  and any future  relocations  and new stores,  either
through an operating  lease, a sale-leaseback  arrangement or by obtaining 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 expect to finance  our  stores  utilizing  long-term  funding  from
a  financial  institution  (as we  currently  do for our St.  Thomas  and St.  Maarten
buildings).

We
generated $0.2 million and $0.3 million of net cash from operations during the
first quarter of fiscal 2005 and fiscal 2004, respectively. The slight decrease
in cash provided by operations in the first quarter of fiscal 2005, as compared
to the same period in the prior year, was primarily due to the receipt in the
first quarter of fiscal 2004 of insurance proceeds related to inventory damaged
by the supertyphoon on December 8, 2002, partially offset by an increase in net
income of $0.2 million in the first quarter of fiscal 2005 as compared to the
same period in the prior year, and the effect of working capital fluctuations.

Net cash used in  investing  activities  was $2.0  million for the first  quarter of fiscal 2005  compared to $0.4 million of cash
generated  in the first  quarter  of fiscal  2004.  The cash used in  investing  activities  in the first  quarter  of fiscal  2005 was
primarily  due to costs  associated  with the  construction  of the new  building in St.  Croix where we plan to relocate our St. Croix
store on May 26, 2005. We expect to incur an  additional  $1.5 to $2.5 million for the cost of site  development,  the new building and
equipment.  The $0.7  million of proceeds  received  from our  insurance  settlement  in the first  quarter of fiscal  2004  relates to
insurance  reimbursements  received on fixed assets lost in the  supertyphoon  in Guam that we replaced in 2003.  We currently  have no
plans to open stores in new markets  during fiscal 2005,  but we are in the process of exploring  expansion  opportunities  in selected
markets and additional relocation opportunities for stores in existing markets.

We
utilized $0.2 million of cash for financing activities in the first quarter of
fiscal 2005, as compared to $0.6 million provided by financing activities in the
first quarter of fiscal 2004. The decrease was primarily due to an increase of
$0.3 million of cash received related to stock option exercises in the first
quarter of fiscal 2005 as compared to the same period in the prior year.
Additionally, in the first quarter of fiscal 2004, we reduced our borrowings
under our line of credit by $0.9 million, which was offset by $0.8 million
received on a sale-leaseback arrangement on equipment in Guam.

We
have a line of credit with Wells Fargo Business Credit that has a three year
term, expiring on April 9, 2006. At March 27, 2005, there were no borrowings
outstanding on the line of credit. At March 27, 2005, there was $12,000 utilized
for standby letters of credit and $0.1 million set aside for other reserves.

The
line of credit consists of a $6.0 million committed, secured revolving credit
line with a sublimit for letters of credit and bankers acceptances in the amount
up to $0.7 million. Borrowings under the line of credit are limited to the
lesser of $6.0 million or the amount calculated under the borrowing base. The
borrowing base is equal to the lesser of (a) $6.0 million or (b) the sum of 70%
of eligible inventory in the United States of America, plus 60% of eligible
inventory in the U.S. Virgin Islands and Guam, less specified reserves. The
interest rate on borrowings under the line of credit is equal to Wells
Fargos prime rate plus 0.5%, which was 6.25% at March 27, 2005. A fee of
0.25% is charged on the unused portion of the line of credit and we are required
to pay Wells Fargo not less than $0.1 million of interest each calendar year.
The line of credit contains various covenants, including a requirement that we
maintain minimum pre-tax income and tangible net worth, as well as limitations
on acquisitions, additional debt, changes in control and capital expenditures.

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,  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

13

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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 March 27, 2005, our commitments to make future payments under long-term
contractual obligations were as follows (in thousands):

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

# Critical Accounting Policies

We have chosen  accounting  policies
that we believe are  appropriate to report  accurately and fairly our operating  results
and  financial position,  and we apply those accounting policies in a consistent manner.
The significant  accounting policies are summarized  in Note 1 to the consolidated
financial statements included in our annual report on Form 10-K for the year ended
December 26, 2004.

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

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

## Inventories

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

## Long Lived Assets

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

## Foreign Currency Translation

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

14

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## Income Taxes

Income tax expense  includes U.S.
and foreign  income taxes.  We account for income taxes under the  liability  method.
Under the  liability method,  deferred tax assets and liabilities are determined based on
differences  between  financial  reporting and tax basis realized, and valuation
allowances are established when necessary. Our effective tax rate is currently
higher than the expected federal statutory rate because valuation allowances
have been established against the tax benefits of foreign losses, as we have no
assurance that we will be able to generate an adequate amount of taxable income
in the future to utilize such benefits. We are developing and implementing
certain tax planning strategies, which may affect our ability to recognize some
of the deferred tax assets that are currently allowed for and may ultimately
change our estimate of the valuation allowance.

## Accounting Pronouncements

In  December 2004, the Financial
Accounting Standards Board issued Statement 123  (revised 2004), Share-Based Payment (Statement
123(R)). Statement 123(R) requires that the compensation cost relating to
share-based  payment transactions be recognized in financial statements. The cost
will  be measured based on the fair value of the instruments issued. Statement
123(R) covers a wide range of share-based compensation arrangements including  share
options, restricted share plans, performance-based awards, share  appreciation rights and
employee share purchase plans. Statement 123(R)  replaces Statement 123, Accounting
for Stock-Based Compensation and  supersedes Opinion 25, Accounting for Stock
Issued to  Employees. As originally issued in 1995, Statement 123 established
as preferable the fair-value-based method of accounting for share-based payment
transactions with employees.  However, that Statement permitted entities  the option
of continuing to apply the guidance in Opinion 25, as long as the  footnotes to the
financial statements disclosed what net income would have been  had the preferable
fair-value-based method been used. We will be required  to apply  Statement  123(R)
as of the  beginning  of our fiscal year that begins  after June 15,  2005.  We plan on
using the  modified-prospective  method  effective  with our first  quarter of fiscal
2006.  We believe that the adoption of this new  accounting  standard will not have
a material  impact on our results of operations or financial  position,  as we have a
limited  amount of options  available for issuance in the future.

# Risk Factors That May
Affect Future Results

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

Because
we have a small store base, adverse store performance or increased expenses will
have a more significant adverse impact on our operating and financial results
than if we had a larger store base.We opened our first store in 1989 and
opened a total of 21 stores through December 2004 and presently operate eleven
stores. Our closure of the ten other stores prior to March 2001 adversely  affected our operating  results.  Should any existing store  experience a significant  decline in  profitability  or any new
store be  unprofitable,  the negative effect on our business would be more  significant than would be the case if we had a larger store
base,  and could have a material  adverse  effect on our  business,  financial  condition and operating  results.  In addition,  if our
general and administrative  expenses increase,  the negative effect on our business and results of operations would be more significant
than if we had a larger store base.  Although we intend to carefully plan for the  implementation  of additional  stores,  there can be
no assurance that such plans can be executed as envisioned or that the  implementation  of those plans will not have a material adverse
effect on our business,  financial  condition  and  operating  results.  In addition,  our ability to acquire  products at a lower cost
than competitors or obtain volume-based pricing can be adversely affected because of our small store base.

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

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order to  remain competitive in our
markets. Furthermore, our ability to expand into and  operate profitably in new markets
may be adversely affected by the existence or  entry of competing warehouse clubs or
discount retailers. These factors could  result in reduced sales and margins or loss of
market share, any of which could  negatively affect our results of operations.

We
are exposed to weather and other risks associated with island operations, which
could affect our business and results of our operations. Our operations are
primarily located on islands subject to volatile weather conditions and natural
disasters, such as tsunamis, floods, typhoons and earthquakes, which could
result in delays in construction or result in significant damage to, or
destruction of, our stores. On December 8, 2002, our two stores on the island of
Guam suffered damage from Supertyphoon Pongsona, resulting in the immediate
closure of both stores. Our Tamuning store lost its generator in the storm and
our Dededo store had to be closed for reconstruction. Additionally, we have four
stores in the Caribbean, which has experienced increased activity from several
hurricanes and tropical storms in the past few years.

While
we maintain property, casualty and business interruption insurance coverage in
amounts we consider adequate for these types of events, insurance payments
generally do not fully reimburse us for all of the damages and lost profits
caused by adverse weather events. If we were to experience a catastrophic loss,
we may exceed our policy limit and we may have difficulty obtaining similar
insurance coverage in the future. If our insurance coverage is not adequate to
cover the losses and business interruption caused by severe weather events or
natural disasters, we may be required to pay substantial amounts and our
financial condition and liquidity would suffer.

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

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

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

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

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

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

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

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

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

Our net sales from island operations
represented  approximately  92.9% of our total net sales for fiscal 2004. We expect that
our  island and international  operations together will continue to account for nearly
all of our total net sales. The distance,  as well as  the time-zone  differences,
involved with island  locations  impose  significant  challenges to our ability to manage
our  operations.  Logistical  challenges are presented by operating  individual store
units in remote locations,  whether in terms of information flow or  transportation  of
goods.  Our  inability  to  effectively  manage our island and  international  operations
could have a  significant  adverse effect on our business, results of operations and
financial condition.

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

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

| |  | Operate our stores on a profitable basis;
|- |  | -----------------------------------------

| |  | Expand our operations by opening new stores;
|- |  | --------------------------------------------

| |  | Properly identify and enter new markets;
|- |  | ----------------------------------------

| |  | Locate suitable store sites;
|- |  | ----------------------------

| |  | Negotiate acceptable lease terms;
|- |  | ---------------------------------

| |  | Locate local developers to construct facilities to lease;
|- |  | ---------------------------------------------------------

| |  | Construct or refurbish sites;
|- |  | -----------------------------

| |  | Obtain local licenses and government permits; and
|- |  | -------------------------------------------------

| |  | Obtain necessary funds on acceptable terms.
|- |  | -------------------------------------------

We
have not opened stores in foreign island markets at a rapid pace. Currently, we
have no plans to open stores in new markets during 2005, but we are in the
process of exploring expansion opportunities in selected markets and relocation
opportunities for stores in existing markets, such as our St. Croix store.

16

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New
markets may present operational, competitive, regulatory and merchandising
challenges that are different from those we currently encounter. We do not have
operating experience in many of the markets in which we may consider opening new
stores. In fact, in June 2000, we closed the two stores that we had opened in
New Zealand in 1999, as they had performed below expectations, due in part to
competitive and merchandising challenges that are different from our other
stores. Additionally, in February 2001, we closed one of our two Fiji stores,
due primarily to the impact that political turmoil and the resulting economic
downturn in Fiji were having on the tourist industry. There can be no assurance
that we will be able to adapt our operations to support our future expansion
plans or that our new stores will be profitable. Any failure on our part to
manage our growth could have a material adverse effect on our business,
financial condition and operating results.

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

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

| |  | Acceptance and demand for U.S. goods;
|- |  | -------------------------------------

| |  | Familiarity with the warehouse concept;
|- |  | ---------------------------------------

| |  | Absence of large warehouse club competition;
|- |  | --------------------------------------------

| |  | Size of population;
|- |  | -------------------

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

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

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

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 operating results.

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

If
we cannot maintain our current or similar insurance coverage, our business and
results of operations could suffer. We utilize a combination of insurance
policies and self-insurance mechanisms to provide for the potential liabilities
for property insurance, general liability, director and officers
liability, workers compensation and employee health care insurance. The
costs related to obtaining our current insurance coverage have been increasing.
If the costs of maintaining this insurance coverage continue to increase
significantly, we would experience an associated increase in our store and
administrative expenses that may negatively impact our operating results. In
addition, if we are unable to maintain our current or similar insurance
coverage, or if

17

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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 our store employees decided to
become unionized, we may experience increased operating costs or other operation
problems. None of our employees are currently covered by a collective bargaining
agreement. However, presently there is an attempt to unionize our hourly employees in
our St. Maarten store. 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
operating results.

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. 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. There can be no assurance that any of these risks will not
have a material adverse effect on our business, financial condition and operating
results.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The
loss of key personnel could harm our business and results of operations. Our
success depends in large part on the abilities and continued service of our
executive officers and other key employees. We do not carry key-man life
insurance on any

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of our personnel. There can be no
assurance that we will be  able to retain the services of such executive officers and
other key employees,  the loss of any of whom could have a material adverse effect on our
business,  financial condition and operating results.

A disruption of our information systems could cause our business and results of
operations to suffer. Our business is highly dependent on communications and
information systems, primarily systems provided by third-party vendors. We may
experience systems failures or interruptions, which could have a material
adverse effect on our business, financial condition and operating results. Any
failure or interruption of our systems or systems provided by third-party
vendors could cause delays or other problems in our operations, which could have
a material adverse effect on our business, financial condition and operating
results.

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

19


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 three foreign countries that function under currencies other than the
U.S. dollar. Two of the these foreign countries operate under the Netherlands
Antilles Guilder that has historically had an exchange rate fixed to the U.S.
dollar, but there can be no assurance that this will continue. If the Netherlands
Antilles Guilder is allowed to float this would lead to an increase in foreign
exchange volatility and risk which could have a materially adverse effect on our
business, financial condition and operating results. There is also the
possibility that these three foreign countries that function under currencies
other than the U.S. dollar could devalue their currency against the U.S. dollar
at any time. If this was 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 does not pose a material risk. Our line of credit and long-term debt can be expected to
vary in the future as a result of future business requirements, market conditions and other factors.


We
did not have any derivative financial instruments as of March 27, 2005.


ITEM 4.   CONTROLS AND PROCEDURES


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

20



PART II  OTHER INFORMATION


ITEM 5.   OTHER INFORMATION


On
March 21, 2005, we entered into a short-term agreement with our existing St.
Croix landlord to extend our lease term to June 30, 2005 at a rate of $35,000
per month.


ITEM 6.   EXHIBITS

Exhibit No.
     

     Description10.1
     

     Lease Agreement between Haleck Enterprises Incorporated and Cost-U-Less,  Inc., dated February 3, 2005 (Incorporated
             by reference to Exhibit 99.1 to the Companys Form 8-K filed on February 9, 2005)10.2
     

     Addendum to Lease Agreement between Hassan Rahman and Cost-U-Less, Inc., dated March 21, 200531.1
     

     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


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 10, 2005



/s/ J. Jeffrey Meder
J. Jeffrey MederPresident andChief Executive Officer


Date: May 10, 2005



/s/ Martin P. Moore
Martin P. MooreChief Financial Officer


22