**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-K**
 **FOR
        ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
        THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
 
 x
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF 1934**
 
 **For
        the Fiscal Year Ended December 31, 2004**
 **OR**
 
 o
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES
                  EXCHANGE ACT OF 1934**
 
 Commission
        file number 1-11735
 
 **99¢
        Only Stores**
 
 (Exact
        name of registrant as specified in its charter)
 
 **California**
                (State
                  or other Jurisdiction of Incorporation or Organization)
              
              **95-2411605**
                (I.R.S.
                  Employer Identification No.)**4000
                  Union Pacific Avenue,**
                **City
                  of Commerce, California**
                (Address
                  of Principal Executive Offices)
              
              **90023**
                (zip
                  code)
 
 Registrant's
        telephone number, including area code: (323) 980-8145
 Securities
        registered pursuant to Section 12(b) of the Act:
 
 **Title
                  of Each Class**
              
              **Name
                  of Exchange****Common
                  Stock, no par value**
              
              **New
                  York Stock Exchange**
 
 Securities
        registered pursuant to Section 12(g) of the Act: None
 
 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 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 last 90 days. Yes  ̈ No x
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of Registrant's knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K.  ̈
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in
        Exchange Act Rule 12b-2) Yes x No  ̈
 
 The
        aggregate market value of Common Stock held by non-affiliates of the Registrant
        on June 30, 2005 was $594,853,585 based on a $12.71 closing price for the
        Common
        Stock on such date. For purposes of this computation, all executive officers
        and
        directors have been deemed to be affiliates. Such determination should not
        be
        deemed to be an admission that such executive officers and directors are,
        in
        fact, affiliates of the Registrant.
 
 Indicate
        the number of shares outstanding of each of the issuer's classes of stock
        as of
        the latest practicable date.
 Common
        Stock, No Par Value, 69,552,150 Shares as of August 31, 2005
  
  
  **Table
        of Contents**
 
 Part
                  I
              PageItem
                  1.
              Business
              3Item
                  2.
              Properties
              9Item
                  3.
              Legal
                  Proceedings
              10Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              10Part
                  IIItem
                  5.
              Market
                  for Registrant's Common Equity, Related Stockholder Matters and
                  Issuer
                  Purchases of Equity Securities
              11Item
                  6.
              Selected
                  Financial Data
              12Item
                  7.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              14Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              24Item
                  8.
              Financial
                  Statements and Supplementary Data
              25Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              46Item
                  9A.
              Controls
                  and Procedures
              46Item
                  9B.
              Other
                  Information
              54Part
                  IIIItem
                  10.
              Directors
                  and Executive Officers of the Registrant
              54Item
                  11.
              Executive
                  Compensation
              56Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              58Item
                  13.
              Certain
                  Relationships and Related Transactions
              59Item
                  14.
              Principal
                  Accountant Fees and Services
              59Part
                  IVItem
                  15.
              Exhibits,
                  Financial Statement Schedules
              60Signatures
              63Exhibit
                  Index
              61
 2
  **SPECIAL
        NOTE REGARDING FORWARD-LOOKING INFORMATION**
  This
        Report contains statements that constitute “forward-looking statements” within
        the meaning of Section 21E of the Exchange Act and Section 27A of the Securities
        Act. The words “expect,”“estimate,”“anticipate,”“predict,”“believe” and similar
        expressions and variations thereof are intended to identify forward-looking
        statements. Such statements appear in a number of places in this filing and
        include statements regarding the intent, belief or current expectations of
        99¢
Only Stores (the “Company”), its directors or officers with respect to, among
        other things, (a) trends affecting the financial condition or results of
        operations of the Company and (b) the business and growth strategies of the
        Company. The shareholders of the Company are cautioned not to put undue reliance
        on such forward-looking statements. Such forward-looking statements are not
        guarantees of future performance and involve risks and uncertainties, and
        actual
        results may differ materially from those projected in this Annual Report,
        for
        the reasons, among others, discussed in the Section “Management’s Discussion and
        Analysis of Financial Condition and Results of Operations” including but not
        limited to those discussed in the subsection titled “Risk Factors.” The Company
        undertakes no obligation to publicly revise these forward-looking statements
        to
        reflect events or circumstances that arise after the date hereof. Readers
        should
        carefully review the risk factors described in this Annual Report and other
        documents the Company files from time to time with the Securities and Exchange
        Commission, including the Quarterly Reports on Form 10-Q and any Current
        Reports
        on Form 8-K.
  **PART
        I**
  **Item
        1. Business**
  99¢
Only
        Stores (the “Company”) is a deep-discount retailer of consumable general
        merchandise with an emphasis on name-brand products. The Company’s stores offer
        a wide assortment of regularly available consumer goods as well as a broad
        variety of first-quality, closeout merchandise. Approximately one-half of
        the
        Company’s retail sales in 2004 were from closeout merchandise versus regularly
        available goods. As of August 31, 2005, the Company operated 225 retail stores
        with 159 in California, 36 in Texas, 19 in Arizona, and 11 in Nevada. These
        stores averaged approximately 22,200 gross square feet. In 2004, the Company’s
        stores open for the full year generated average net sales per estimated saleable
        square foot of $270, which the Company believes is among the highest in the
        deep
        discount retail industry, and average net sales per store of $4.6 million.
        The
        Company entered the Texas market in June 2003. In 2004, non-Texas stores
        open
        for the full year averaged net sales of $4.8 million per store and $293 per
        estimated saleable square foot and the 17 Texas stores open for the full
        year
        averaged net sales of $2.2 million per store and $101 per estimated saleable
        square foot.
  The
        Company competes in the deep-discount retail industry, which it believes
        is one
        of the fastest growing retail sectors in the United States. The Company opened
        its first 99¢ Only Stores in 1982 and believes that it operates the nation’s
        oldest existing single-price-point general merchandise chain. The Company
        has
        expanded its chain of 99¢ Only Stores from 78 stores and 1.1 million estimated
        saleable square feet at December 31, 1999 to 219 stores and 3.8 million
        estimated saleable square feet at December 31, 2004, representing compound
        annual growth rates (“CAGR”) of 23% and 28%, respectively. Through August 31,
        2005, the Company has opened 8 new stores, including three in Texas, relocated
        one smaller California store and moved/expanded one California store within
        the
        same shopping center. The Company intends to continue to expand in California
        and Arizona in 2005 with approximately 4 to 6 additional stores
        planned. For 2005 and 2006, the Company has slowed its planned new store
        growth
        rate to focus on the improvement of its systems infrastructure, business
        processes, and internal controls to better enable the Company to support
        its
        existing stores and establish a foundation for accelerated growth in 2007
        and
        beyond. Improving its Texas operation is also a top priority for the Company
        in
        2005 and 2006.
  The
        Company also sells merchandise through its Bargain Wholesale division at
        prices
        generally below normal wholesale levels to retailers, distributors and
        exporters. Bargain Wholesale complements the Company’s retail operations by
        allowing the Company to be exposed to a broader selection of opportunistic
        buys
        and to generate additional sales with relatively small incremental operating
        expenses. Bargain Wholesale represented 4.3% of the Company’s net sales in 2004.
  **Industry**
  The
        Company participates primarily in the deep-discount retail industry with
        its 99¢
Only Stores. Deep-discount retail is distinguished from other retail formats
        in
        that a substantial portion of purchases is typically acquired at closeouts
        and
        other special-situation merchandise is acquired at prices substantially below
        original wholesale cost. In addition, re-orderable merchandise is purchased
        below normal wholesale cost. Deep-discount retail is also distinguished by
        offering this merchandise to customers at prices significantly below regular
        retail. As a result, a substantial portion of the product mix is comprised
        of a
        frequently changing selection of specific brands and products.
  The
        Company considers closeout merchandise as any item that is not re-orderable
        on a
        regular basis. The purchase of closeout or special-situation merchandise
        develops in response to the need of manufacturers, wholesalers, and others
        to
        distribute merchandise outside their normal channels. Closeout or
        special-situation merchandise becomes available for a variety of reasons,
        including a manufacturer’s over-production, discontinuance due to a change in
        style, color, size, formulation or packaging, changes in nutritional label
        guidelines, the inability to move merchandise effectively through regular
        channels, reduction of excess seasonal inventory, discontinuation of
        test-marketed items, products close to their “best if used by” date, and the
        financial needs of the manufacturer.
  3
 
 Many
        deep-discount retailers also sell merchandise that can be purchased from
        a
        manufacturer or wholesaler on a regular basis. Although this merchandise
        can
        usually be purchased at less than original wholesale and sold below normal
        retail, the discount, if any, is generally less than with closeout merchandise.
        Deep-discount retailers sell regularly available merchandise to provide a
        degree
        of consistency in their product offerings and to establish themselves as
        a
        reliable source of basic goods.
  **Business
        Strategy**
  The
        Company strives to continue to provide significant value to its customers
        on a
        wide variety of consumable merchandise in an exciting store environment.
        The
        Company’s strategies to achieve this goal include the following:
  **Focus
        on “Name-Brand” Consumables** .
        The
        Company strives to exceed its customers’ expectations of the range and quality
        of name-brand consumable merchandise that can be purchased for 99 cents.
        During
        2004, the Company purchased merchandise from more than 999 suppliers, including
        3M, American Greetings, Colgate-Palmolive, Con Agra, Dole, Eveready Battery,
        General Mills, Georgia Pacific, Heinz, Hershey Foods, Johnson & Johnson,
        Kellogg’s, Kraft, Mattel, Nestle, Procter & Gamble, Revlon, and Unilever.
  **Broad
        Selection of Regularly Available Merchandise.** The
        Company offers consumer items in each of the following staple product
        categories: food (including frozen, refrigerated, and produce items), beverages,
        health and beauty care, household products (including cleaning supplies,
        paper
        goods, etc.), house-wares (including glassware, kitchen items, etc.), hardware,
        stationery and party goods, seasonal goods, baby products and toys, giftware,
        pet products, plants, and clothing. The Company carries name-brand merchandise,
        off-brands and its own private-label items. While the Company does not analyze
        revenues by the above categories, it believes that by consistently offering
        a
        wide selection of basic household consumable items, the Company encourages
        customers to shop at the stores for their everyday household needs, which
        the
        Company believes leads to an increased frequency of customer visits.
  **Attractively
        Merchandised and Well-Maintained Stores.** The
        Company strives to provide its customers an exciting shopping experience
        in
        customer-service-friendly stores that are attractively merchandised, brightly
        lit and well maintained. The Company’s stores are laid out with items in the
        same category grouped together. The shelves are restocked throughout the
        day.
        The Company believes that offering merchandise in an attractive, convenient
        and
        familiar environment creates stores appealing to a wide demographic of
        customers.
  **Strong
        Long-Term Supplier Relationships.** The
        Company believes that it has developed a reputation as a leading purchaser
        of
        name-brand, re-orderable, and closeout merchandise at discounted prices by
        its
        willingness to take on large volume purchases and take possession of merchandise
        immediately, its ability to pay cash or accept abbreviated credit terms,
        its
        commitment to honor all issued purchase orders, and its willingness to purchase
        goods close to a target season or out of season. The Company’s experienced
        buying staff, with the ability to make immediate buying decisions, also enhances
        its strong supplier relationships. The Company’s relationships with its
        suppliers is further enhanced by its ability to minimize channel conflict
        for
        the manufacturer by quickly selling name-brand merchandise without, if requested
        by the supplier, advertising or wholesaling the item. Additionally, the Company
        believes it has well-maintained, attractively merchandised stores that have
        contributed to a reputation among suppliers for protecting their brand image.
  **Complementary
        Bargain Wholesale Operation.** Bargain
        Wholesale complements the Company’s retail operations by allowing the Company to
        be exposed to a broader selection of opportunistic buys and to generate
        additional sales with relatively small incremental operating expense. Bargain
        Wholesale sells to local, regional, national, and international accounts.
        The
        Company maintains showrooms in Los Angeles, where it is based, as well as
        Houston, New York City, and Chicago.
  **Savvy
        Purchasing.** The
        Company purchases merchandise at substantially discounted prices as a result
        of
        its buyers’ knowledge, experience, negotiating ability and its established
        reputation among its suppliers. The Company applies this same approach to
        its
        relationships with all vendors and strives to maintain a lean operating
        environment focused on increasing net income.
  **Store
        Locations** .
        The
        Company’s 99¢ Only Stores are conveniently located in freestanding buildings,
        neighborhood shopping centers, regional shopping centers or downtown central
        business districts, all of which are locations where the Company believes
        consumers are likely to do their regular household shopping. As of August
        31,
        2005, the Company’s 225 existing 99¢ Only Stores average approximately 22,200
        gross square feet. From January 1, 2000 through December 31, 2004, the Company
        opened 145 new stores with an average of approximately 24,100 gross square
        feet
        and currently targets new store locations between 15,000 and 24,000 gross
        square
        feet. The Company believes its larger store size versus that of other typical
        “dollar store” chains allows it to more effectively display a wider assortment
        of merchandise, carry deeper stock positions, and provide customers with
        a more
        inviting environment that the Company believes encourages customers to shop
        longer and buy more. In the past, as part of its strategy to expand retail
        operations, the Company has at times opened larger new stores in close proximity
        to existing stores where the Company determined that the trade area could
        support a larger store. In some of these situations, the Company retained
        its
        existing store. While this strategy was designed to increase revenues and
        operating income, it has had a negative impact on comparable store net sales
        as
        some customers migrated from the existing store to the larger new store.
        The
        Company believes that this strategy has impacted its historical comparable
        sales
        growth.
  4
 
 **Experienced
        Management Team and Depth of Employee Option Grants.** 99¢ Only
        Stores’ management team has many years of retail experience. The Company’s
        management believes that employee ownership of the Company has helped build
        employee pride in its stores. Accordingly, all members of the Company’s
        management, board of directors (other than David Gold, Eric Schiffer, Jeff
        Gold,
        and Howard Gold), and almost all employees with tenure of more than six months
        with the Company receive an annual grant of stock options. As of December
        31,
        2004, the Company’s employees held options to purchase an aggregate of 5,179,170
        shares of Common Stock, or 7.5% of the outstanding shares of Common Stock.
  **Growth
        Strategy**
  Management
        believes that future growth, at least in the near term, will primarily result
        from new store openings in its existing territories.
  **Growth
        in Existing Territories.** By
        continuing to develop store growth in its current markets, the Company believes
        it can leverage its brand awareness in these regions and take advantage of
        its
        existing warehouse and distribution facilities, regional advertising and
        other
        management and operating efficiencies.
  **Expansion
        in Texas.** The
        Company opened its first Texas stores in June 2003. Its 741,000 square foot
        Houston-area distribution center facility, acquired in early 2003 for $23
        million in cash, came with warehouse racking, including an automated
        pick-to-belt conveyor system, and refrigerated and frozen storage space.
        The
        Company later installed the “High Jump” warehouse management system in this
        facility. As of August 31, 2005, the Company had opened a total of 25 stores
        in
        the Houston area and 11 in the Dallas Fort Worth Metroplex. The Texas stores
        average 20,425 saleable square feet, which is larger than the Company average
        of
        17,334 saleable square feet for 2004. The three Texas stores opened in 2005
        were
        committed to in the second half of 2004. For the balance of 2005, the Company
        does not anticipate opening any additional stores in Texas. The Company
        currently believes that there is potential for additional growth in Texas,
        but
        is evaluating its Texas strategy before commencing any material
        expansion.
  **Portable
        Format Facilitates Geographic Expansion.** ** Although
        the Company does not have any current plan to expand in areas outside its
        existing markets, the Company believes that its strategy of consistently
        offering a broad selection of name-brand consumables, at value pricing, in
        a
        convenient store format is portable to other densely populated areas of the
        country. In 1999, the Company opened its first 99¢ Only Stores outside the state
        of California in Las Vegas, Nevada and now has stores in California, Nevada,
        Arizona, and Texas.
  **Real
        Estate Acquisitions** *.* The
        Company considers both real estate lease and purchase opportunities and may
        make
        acquisitions of a chain, or chains, of retail stores in existing markets
        or
        other regions, primarily for the purpose of acquiring favorable locations.
  **Retail
        Operations**
  The
        Company’s stores offer customers a wide assortment of regularly available
        consumer goods, as well as a broad variety of first-quality, closeout
        merchandise, generally at a significant discount from standard retail prices.
        All merchandise sold in the Company’s 99¢ Only Stores sells for 99 cents per
        item or 99 cents for two or more items, except in Texas where items can sell
        from 9 cents up to 99 cents.
  The
        following table sets forth certain relevant information with respect to the
        operations of the Company’s 99¢ Only Stores (dollar amounts in thousands, except
        sales per square foot):
 
 **Year
                  Ended December 31,****2000**
              
              **2001**
              
              **2002**
              
              **2003**
              
              **2004**99¢
                  Only Stores net retail sales
              
              $
              402,071
              
              $
              522,019
              
              $
              663,983
              
              $
              816,348
              
              $
              929,89699¢
                  Only Stores annual net sales growth rate
              
              
              28.7
              %
              
              29.8
              %
              
              27.2
              %
              
              22.9
              %
              
              13.9
              %99¢
                  Only Stores store count at beginning of year
              
              
              78
              
              
              98
              
              
              123
              
              
              151
              
              
              189New
                  stores
              
              
              20
              
              
              26
              
              
              28
              
              
              38
              
              
              33Stores
                  closed
              
              
              -
              
              
              1
              
              
              -
              
              
              -
              
              
              3
                  (a
              )Total
                  store count at year-end
              
              
              98
              
              
              123
              
              
              151
              
              
              189
              
              
              219Average
                  99¢ Only Stores’ net sales per store open the full year
                  (b)
              
              $
              4,487
              
              $
              4,647
              
              $
              4,750
              
              $
              4,957
              
              $
              4,603Estimated
                  saleable square footage at year-end for 99¢ Only Stores
              
              
              1,424,280
              
              
              1,892,949
              
              
              2,428,681
              
              
              3,190,528
              
              
              3,796,153Average
                  net sales per estimated saleable square foot (b)
              
              $
              318
              
              $
              319
              
              $
              309
              
              $
              308
              
              $
              270
                  (c
              )Change
                  in comparable 99¢ Only Stores net sales (d)
              
              
              2.0
              %
              
              5.9
              %
              
              3.6
              %
              
              4.5
              %
              
              -1.8
              %
 5
  (a)
        Two
        smaller stores closed due to the presence of larger nearby 99¢ Only Stores, and
        one store closed due to eminent domain.
  (b)
        For
        stores open for the entire fiscal year.
  (c)
        Includes 17 Texas stores open for a full year. Texas stores open for the
        full
        year had average sales of $2.2 million per store for 2004 and average sales
        per
        saleable square foot of $101. All other stores open for the full year had
        average sales of $4.8 million per store and $293 of average sales per saleable
        square foot.
  (d)
        Change in comparable store net sales compares net sales for all stores open
        at
        least 15 months.
  **Merchandising.** ** All
        of
        the Company’s stores offer a broad variety of first-quality, name-brand and
        other closeout merchandise as well as a wide assortment of regularly available
        consumer goods. The Company also carries private-label consumer products
        made
        for the Company. The Company believes that the success of its 99¢ Only Stores
        concept arises in part from the value inherent in selling consumables items
        for
        only 99 cents per item or group of items, many of which are name-brands,
        and
        most of which typically retail elsewhere from $1.19 to $9.99.
  Approximately
        half of the merchandise purchased by the Company is available for reorder.
        The
        mix and the specific brands of merchandise frequently change, depending upon
        the
        availability of closeout and other special-situation merchandise at suitable
        prices. Since commencing its closeout purchasing strategy for its stores,
        which
        first opened in 1982, the Company has been able to obtain sufficient name-brand
        closeouts as well as re-orderable merchandise at attractive prices. Management
        believes that the frequent changes in specific name-brands and products found
        in
        its stores from one week to the next, encourages impulse and larger volume
        purchases, results in customers shopping more frequently, and helps to create
        a
        sense of urgency, fun and excitement. Unlike many discount retailers, the
        Company rarely imposes limitations on the quantity of specific items that
        may be
        purchased by a single consumer.
  The
        Company targets value-conscious consumers from a wide range of socio-economic
        backgrounds with diverse demographic characteristics. Purchases are by cash,
        credit card, debit card or EBT (electronic benefit transfers). The Company’s
        stores currently do not accept checks or manufacturer’s coupons. The Company’s
        stores are open every day except Christmas, with opening hours designed to
        meet
        the needs of family consumers.
  **Store
        Size, Layout and Locations.** The
        Company strives to provide stores that are attractively merchandised, brightly
        lit, well-maintained, “destination” locations. The layout of each of the
        Company’s stores is customized to the configuration of the individual location.
        The interior of each store is designed to reflect a generally uniform format,
        featuring attractively displayed products in windows, consistent merchandise
        display techniques, bright lighting, lower shelving height that allows
        visibility throughout the store, a distinctive color scheme, interior and
        exterior signage, price tags, shopping carts and shopping bags, and customized
        check-out counters. The Company emphasizes a strong visual presentation in
        all
        key traffic areas of the store. Merchandising displays are maintained throughout
        the day, changed frequently, and often incorporate seasonal themes. The Company
        believes that the frequently changing name-brands, convenient and inviting
        layout, and the lower shelving height, help encourage the typical customer
        to
        shop the whole store.
  **Advertising** .
        Advertising expenditures were $3.1 million, $3.8 million and $5.6 million
        for
        2002, 2003 and 2004, respectively, or 0.4%, 0.4% and 0.6% of net retail sales,
        respectively. The Company allocates the majority of its advertising budget
        to
        print advertising. The Company’s advertising strategy, which it manages without
        the assistance of an outside agency, emphasizes the offering of nationally
        recognized, name-brand merchandise at significant savings. The Company manages
        its advertising expenditures by an efficient implementation of its advertising
        program combined with word-of-mouth publicity, locations with good visibility,
        and efficient signage. Because of the Company’s distinctive grand opening
        promotional campaign, which usually includes the sale of nine televisions
        and
        other high value items for 99 cents each, grand openings often attract long
        lines of customers and receive media coverage.
  **Bargain
        Wholesale**
  The
        Company also sells wholesale merchandise, which is generally obtained through
        the same or shared opportunistic purchases of the retail operations. The
        Company
        maintains showrooms at the Company’s warehouse and distribution facility in
        California and, as of late 2004, from a showroom located at the Company’s
        distribution facility in Houston, Texas. Additionally, the Company has showrooms
        located in New York and Chicago. Advertising of wholesale merchandise is
        conducted primarily at trade shows and by mailings to past and potential
        customers. Wholesale customers include a wide and varied range of major national
        and regional retailers, as well as smaller retailers, distributors, and
        wholesalers.
 
 Wholesale
        sales are recognized in accordance with the shipping terms agreed upon on
        the
        sales order. Wholesale sales are recognized under FOB origin where title
        and
        risk of loss pass to the buyer when the merchandise leaves the Company’s
        distribution facility.
  **Purchasing**
  The
        Company believes a primary factor contributing to its success is its ability
        to
        identify and take advantage of opportunities to purchase merchandise with
        high
        customer interest at lower than regular wholesale prices. The Company purchases
        most merchandise directly from the manufacturer. Other sources of merchandise
        include wholesalers, manufacturers’ representatives, importers, barter
        companies, auctions, professional finders and other retailers. The Company
        develops new sources of merchandise primarily by attending industry trade
        shows,
        advertising, distributing marketing brochures, cold calling, and obtaining
        referrals.
  6
  The
        Company typically has no continuing contracts for the purchase of merchandise
        and must continuously seek out buying opportunities from both its existing
        suppliers and new sources. No single supplier accounted for more than 5.0%
        of
        the Company’s total purchases in 2004. During 2004, the Company purchased
        merchandise from more than 999 suppliers, including 3M, American Greetings,
        Colgate-Palmolive, Con Agra, Dole, Eveready Battery, General Mills, Georgia
        Pacific, Heinz, Hershey Foods, Johnson & Johnson, Kellogg’s, Kraft, Mattel,
        Nestle, Procter & Gamble, Revlon, and Unilever. Many of these companies have
        been supplying products to the Company for over twenty years.
 
 A
        significant portion of the merchandise purchased by the Company in 2004 was
        closeout or special-situation merchandise. The Company has developed strong
        relationships with many manufacturers and distributors who recognize that
        their
        special-situation merchandise can be moved quickly through the Company’s retail
        and wholesale distribution channels. The sale of closeout or special-situation
        merchandise results from the need of manufacturers, wholesalers, and others
        to
        distribute merchandise outside their normal channels. The Company’s buyers
        search continuously for closeout opportunities. The Company’s experience and
        expertise in buying merchandise has enabled it to develop relationships with
        many manufacturers that frequently offer some or all of their closeout
        merchandise to the Company prior to attempting to sell it through other
        channels. The key elements to these supplier relationships include the Company’s
        (i) ability to make immediate buy decisions, (ii) experienced buying staff,
        (iii) willingness to take on large volume purchases and take possession of
        merchandise immediately, (iv) ability to pay cash or accept abbreviated credit
        terms, (v) commitment to honor all issued purchase orders and (vi) willingness
        to purchase goods close to a target season or out of season. The Company
        believes the relationship with its suppliers is further enhanced by its ability
        to minimize channel conflict for the manufacturer by quickly selling name-brand
        merchandise without, if requested by the supplier, advertising or wholesaling
        the item.
 
 The
        Company’s strong relationships with many manufacturers and distributors, along
        with its ability to purchase in large volumes, also enable the Company to
        purchase re-orderable name-brand goods at discounted wholesale prices. The
        Company focuses its purchases of re-orderable merchandise on a limited number
        of
        SKUs per product category, which allows the Company to make purchases in
        large
        volumes.
  The
        Company develops new private label consumer products to broaden the assortment
        of merchandise that is consistently available. The Company also imports
        merchandise, especially in product categories which the Company believes
        are not
        brand sensitive to consumers, such as kitchen items, house-wares, toys, seasonal
        products, pet-care and hardware.
  **Warehousing
        and Distribution**
  An
        important aspect of the Company’s purchasing strategy involves its ability to
        warehouse and distribute merchandise quickly and with flexibility. The Company’s
        distribution centers are strategically located to enable quick turnaround
        of
        time-sensitive product as well as to provide long-term warehousing capabilities
        for one-time closeout purchases and seasonal or holiday items. The large
        majority of the merchandise sold by the Company is received, processed for
        retail sale if necessary, and then distributed to the retail locations from
        Company operated warehouse and distribution facilities.
 
 The
        Company utilizes its internal fleet, outside carriers, and contracted or
        owner
        operated trucks by both filling outbound trucks to capacity and frequently
        instituting a backhaul program. The Company uses only common carriers to
        deliver
        to stores outside of Southern California including its stores in Texas, Arizona
        and Nevada. The Company believes that its current California and Texas
        distribution facilities will be able to support its anticipated growth through
        2006. However, there can be no assurance that the Company’s existing warehouses
        will provide adequate storage space for the Company’s long-term storage needs or
        that the Company will not make changes, including capital expenditures, to
        expand or otherwise modify its warehousing and distribution operations.
 
 The
        Company arranges with vendors of certain merchandise (including perishable
        products such as ice cream and bread) to ship directly to its store locations.
        The Company's primary distribution practice, however, is to have merchandise
        delivered from its vendors to the Company's warehouses, where it is stored
        for
        eventual shipment to its store locations.
 
 Information
        pertaining to warehouse and distribution facilities is described under
        Item 2. Properties.
  7
 
 **Information
        Systems**
  In
        2004,
        the Company began the installation of HighJump Software’s “Warehouse Advantage”
Warehouse Management System in its primary Commerce, California distribution
        center. Testing of the HighJump receiving process began in the fourth quarter
        of
        2004 and by the end of the second quarter of 2005, the HighJump receiving
        module
        was in use for the receipt of nearly all merchandise received at that
        distribution center. The HighJump system, when fully implemented, will utilize
        radio frequency technology, including voice-directed picking from Voxware,
        which
        is designed to increase picking accuracy and help deliver near real time
        inventory data to the Company’s inventory system. The Company also purchased and
        began implementing Business Objects for its data warehousing needs. The first
        data marts (which are small data warehouse components) concentrating on Point
        of
        Sale System (“POS”) data were developed in the first quarter of 2005 and
        development of more data marts will continue throughout 2005. The Company
        currently operates financial, accounting, human resources, and payroll data
        processing using Lawson Software’s Financial and Human Resource Suites on an SQL
        server 2000 database running on a Windows advance server 2000 operating system.
        The Company also operates a separate IBM UNIX-based inventory control system
        developed in-house. The Company uses an in-house developed proprietary store
        ordering system, which utilizes radio frequency hand-held scanning devices
        in
        each store. This system is processed using a back office PC system at each
        store. The Company utilizes a Wide Area Network (WAN) for data communications
        among the stores, the warehouse and the administrative functions. The Company
        utilizes a POS barcode scanning system to record and process retail sales
        in
        each of its stores.
  **Competition**
  The
        Company faces competition in both the acquisition of inventory and sale of
        merchandise from other wholesalers, discount stores, single-price-point
        merchandisers, mass merchandisers, food markets, drug chains, club stores,
        wholesalers, and other retailers. Industry competitors for acquiring closeout
        merchandise also include a large number of retail and wholesale companies
        and
        individuals. In some instances these competitors are also customers of the
        Company’s Bargain Wholesale division. There is increasing competition with other
        wholesalers and retailers, including other deep-discount retailers for the
        purchase of quality closeout and other special-situation merchandise. Some
        of
        these competitors have substantially greater financial resources and buying
        power than the Company. The Company’s ability to compete will depend on many
        factors, including the success of its purchase and resale of such merchandise
        at
        lower prices than its competitors. In addition, the Company may face intense
        competition in the future from new entrants in the deep-discount retail industry
        that could have an adverse effect on the Company’s business and results of
        operations.
  **Employees**
  At
        December 31, 2004, the Company had 8,636 employees: 7,760 in its retail
        operation, 569 in its warehousing and distribution operation, 220 in its
        corporate offices and 87 in its Bargain Wholesale division. The Company
        considers relations with its employees to be good. The Company offers certain
        benefits, including health insurance, vacation benefits, an employee discount
        purchase plan, holiday premium pay, and a 401(k) plan to most of its employees
        as well as an executive-deferred compensation plan for highly compensated
        employees. All members of management and the Board of Directors (other than
        David Gold, Eric Schiffer, Jeff Gold, and Howard Gold) and almost all employees
        with tenure of six months have received an annual grant of stock
        options.
 
 None
        of
        the Company’s employees are party to a collective bargaining agreement. In 2004,
        the Teamsters were elected by the Company’s truck drivers and truck dispatchers
        (approximately 56 employees) to represent them, but in May 2005, pending
        a
        decertification vote with the NLRB, the Teamsters withdrew their representation
        and voluntarily declined to represent these employees. Currently the UFCW
        is
        attempting to organize certain groups of employees (primarily the store
        employees), however, the Company has not been advised that the UFCW
        has been successful in doing so.
  **Trademarks
        and Service Marks**
  “99¢
Only
        Stores,”“99¢,”“Rinso,” and “Halsa” are among the Company’s service marks and
        trademarks, and are listed on the United States Patent and Trademark Office
        Principal Register. “Bargain Wholesale” is among the fictitious business names
        used by the Company. Management believes that the Company’s trademarks, service
        marks, and fictitious business names are an important but not critical element
        of the Company’s merchandising strategy. The Company is involved in litigation
        against certain of those whom it believes are infringing upon its “99¢” family
        of marks, although simultaneous litigation against all persons everywhere
        whom
        the Company believes to be impermissibly infringing upon these marks is
        infeasible.
  **Environmental
        Matters**
  Under
        various federal, state, and local environmental laws and regulations, current
        or
        previous owners or occupants of property may face liability associated with
        hazardous substances. These laws and regulations often impose liability without
        regard to fault. In the future the Company may be required to incur substantial
        costs for preventive or remedial measures associated with hazardous materials.
        The Company has several storage tanks at its warehouse facilities, including:
        an
        aboveground and an underground diesel storage tank at the main Southern
        California warehouse; ammonia storage at the Southern California cold storage
        facility and the Texas warehouse; aboveground diesel and propane storage
        tanks
        at the Texas warehouse; an aboveground propane storage tank at the main Southern
        California warehouse; and an aboveground propane tank located at the warehouse
        the Company owns in Eagan, Minnesota. Although the Company has not been notified
        of, and is not aware of, any material current environmental liability, claim
        or
        non-compliance, the Company could incur costs in the future related to its
        owned
        properties, leased properties, storage tanks, or other business properties
        and/or activities. In the ordinary course of business, the Company handles
        or
        disposes of commonplace household products that are classified as hazardous
        materials under various environmental laws and regulations.
  8
 
 **Available
        Information**
  The
        Company makes available free of charge its annual report on Form 10-K, quarterly
        reports on Form 10-Q and current reports on Form 8-K through a hyperlink
        from
        the "Investor Relations" portion of its website, www.99only.com ,
        to the
        Securities and Exchange Commission's website, www.sec.gov . 
        Such reports are available on the same day that they are electronically filed
        with or furnished to the Securities and Exchange Commission by the
        Company.
  **Item
        2. Properties**
  As
        of
        August 31, 2005, the Company owned 35 stores and leased 190 of its 225 store
        locations. Additionally, as of August 31, 2005, the Company owns three parcels
        of land for potential store sites. The Company has an interest in a variable
        interest entity to develop a shopping center in La Quinta, California, featuring
        one of its stores, in which it will lease a store scheduled for opening in
        2005.
        The construction of this shopping center is planned for completion in 2005.
  The
        Company’s leases generally provide for a fixed minimum rental, and some leases
        require additional rental based on a percentage of sales once a minimum sales
        level has been reached. Management believes that the Company’s stable operating
        history, excellent credit record, and ability to generate substantial customer
        traffic give the Company leverage when negotiating lease terms. Certain leases
        include cash reimbursements from landlords for leasehold improvements and
        other
        cash payments received from landlords as lease incentives. The Company currently
        leases 13 store locations and a parking lot associated with one of these
        stores
        from the Gold family and their affiliates. The Company believes that these
        lease
        terms are no less favorable to the Company as they would be for an
        unrelated party. The Company enters into real estate transactions with
        affiliates only for the renewal or modification of existing leases, and on
        occasions where it determines that such transactions are in the Company’s best
        interests. Moreover, the independent members of the Board of Directors must
        unanimously approve all real estate transactions between the Company and
        its
        affiliates. They must also determine that such transactions are not less
        favorable to the Company than a negotiated arm’s-length transaction with a third
        party. The Company cannot guarantee that it will reach agreements with the
        Gold
        family on renewal terms for the properties the Company currently leases from
        them. In addition, even if the Company reaches agreement on such terms, it
        cannot be certain that the independent directors will approve them. If the
        Company fails to renew one of these leases, it would be forced to relocate
        or
        close the leased store.
  Prior
        to
        the sale of Universal in 2000, the Company guaranteed certain obligations
        under
        three leases in which Universal, or a subsidiary, was the lessee. 
Subsequent to the sale, Universal may have defaulted on these three lease
        agreements.  The Company may be contingently liable for lease payments
        totaling up to $1.1 million as of December 31, 2004, as well as additional
        costs
        for attorney fees, rent increases and common area maintenance
        charges.  As part of the Universal sale in 2000, David and Sherry Gold
        agreed to indemnify the Company for any and all attorney fees, costs, judgments,
        settlements or other payments that the Company may make under its guarantees
        of
        these leases. For further information see Note 7 “Related Party Transactions”
under notes to Consolidated Financial Statements, included in “Item 8. Financial
        Statements and Supplementary Data.” of this Form 10-K.
  The
        following table sets forth, as of August 31, 2005, information relating to
        the
        expiration dates of the Company’s current stores leases:
  **Expiring****2005**
              
              **Expiring****2006-2008**
              
              **Expiring****2009-2011**
              
              **Expiring****2012
                  and beyond**11(a)
              
              46
              
              87
              
              46
 
 (a)
              Includes
                  11 stores leased on a month-to-month
                  basis.
 
 The
        large
        majority of the Company’s store leases have multiple renewal options of
        typically five-years per option. Historically, the Company has exercised
        the
        large majority of the lease renewal options as they arise, and anticipates
        continuing to do so for the majority of leases for the foreseeable
        future.
  The
        Company purchased its main warehouse, distribution and executive office
        facility, located in the City of Commerce, California in 2000. The Company
        purchased an additional warehouse storage space adjacent to its main
        distribution facility for $9.7 million in the third quarter of 2005.
  In
        January 2003, the Company purchased a warehouse/distribution center in the
        Houston area to service its Texas operation. See “Growth Strategy - Continued
        Expansion into Texas.”
  In
        December 2003, the Company purchased a cold storage warehouse/distribution
        center located in the City of Commerce, California.
  9
  **Item
        3. Legal Proceedings**
 
 **Gillette
        Company vs. 99¢ Only Stores (Los Angeles Superior Court).** The
        trial in this matter resulted in a jury verdict of $0.5 million for Gillette
        on
        its complaint and $0.2 million for the Company on its cross-complaint. The
        lawsuit arose out of a dispute over the interpretation of an alleged contract
        between the parties, with Gillette alleging that the Company owed Gillette
        an
        additional principal sum of approximately $2.0 million (apart from approximately
        $1.0 million already paid to Gillette for product purchases). In post trial
        motions, the court vacated and ordered a new trial as to the $0.5 million
        verdict for Gillette on its complaint and dismissed the $0.2 million verdict
        for
        the Company on its cross complaint. Both parties have appealed from these
        post-trial rulings. The Company is unable to predict the likely outcome of
        this
        matter, but does not expect such outcome to have a material adverse effect
        on
        the Company’s results of operations or financial condition.
 
 **Melgoza
        vs. 99¢ Only Stores (Los Angeles Superior Court); Ramirez vs. 99¢ Only Stores
        (Los Angeles Superior Court).** These
        putative class actions, originally filed on May 7, 2003, and June 9, 2004,
        respectively, each alleged that the Company improperly classified Store Managers
        in the Company's California stores as exempt from overtime requirements,
        as well
        as meal/rest period and other wage and hour requirements imposed by California
        law. On December 29, 2004, the Court gave final approval to the settlement
        of
        these actions. The Company had provided a reserve of $6.0 million for these
        matters. However, based upon the claims filed and the fact that the period
        in
        which to file claims has ended, the Company ultimately paid approximately
        $4.9
        million. While there were a small number of individuals who opted out of
        the
        settlement, thereby preserving their ability to bring a claim against the
        Company with respect to these same allegations, management does not expect
        any
        future claims by these individuals to have a material adverse effect on the
        Company’s results of operations or financial condition.
 
 **Galvez
        and Zaidi vs. 99¢ Only Stores (Los Angeles Superior Court)** . 
        On August 9, 2004, Galvez and Zaidi filed a putative class action making
        substantially the same allegations as were made in the Melgoza complaint,
        plus
        an additional claim for unreimbursed mileage.   The parties have
        reached a settlement of this matter, which is subject to Court approval. 
Under this settlement, the Company will pay $0.006 million in settlement
        payments and attorney fees.  To the extent Court approval is not obtained,
        the Company is unable to predict the likely outcome in this matter, although
        the
        Company does not expect such outcome to have a material adverse effect on
        the
        Company’s results of operations or financial condition.
  **Ortiz
        and Perez vs. 99¢ Only Stores (U.S. District Court, Southern District of
        Texas)** .
        On July
        23, 2004, the plaintiffs filed a putative collective action under the federal
        Fair Labor Standards Act alleging that Store Managers and Assistant Managers
        in
        the Company’s Arizona, California, Nevada, and Texas stores were misclassified
        as exempt employees under federal law and seeking to recover allegedly unpaid
        overtime wages as well as penalties, interest and attorney fees for these
        employees. On March 15, 2005, the Company participated in a mediation that
        led
        to a tentative settlement of this matter. Under that settlement, which is
        subject to Court approval, the Company will pay a maximum of approximately
        $200,000 in settlement payments and attorney fees, subject to plaintiff opt
        in
        rates. The Company is currently working to finalize the settlement agreement
        and
        obtain Court approval. To the extent such approval is not obtained, the Company
        is unable to predict the likely outcome in this matter, although the Company
        does not expect such outcome to have a material adverse effect on the Company’s
        results of operations or financial condition. The Company established reserves
        for this matter at December 31, 2004 that it believes are sufficient.
  **Securities
        Class Action Lawsuits.** On June
        15, 2004, David Harkness filed a class action suit against the Company and
        certain of its executive officers in the United States District Court for
        the
        Central District of California. Harkness, who seeks to represent all who
        purchased shares of the Company's common stock between March 11 and June
        10,
        2004, alleges that the Company's public statements during the class period
        violated the Securities Exchange Act of 1934 by failing to adequately describe
        various aspects of the Company's operations and prospects. Soon thereafter,
        several other alleged shareholders filed complaints in the same court, making
        substantially the same allegations against the same defendants and seeking
        to
        represent the same putative class. Three such plaintiffs, Joseph Boodaie,
        Morgan
        Boodaie and Samuel Toovy, were designated “lead plaintiffs” pursuant to the
        Private Securities Class Action Reform Act (“PSLRA”), and filed a consolidated
        amended complaint that superceded the various complaints originally filed.
        The
        defendants moved to dismiss the consolidated amended complaint for failure
        to
        state a claim upon which relief can be granted, in particular by failing
        to
        satisfy the pleading standards of PSLRA. By order dated March 30, 2005, the
        Court granted the defendants’ motion to dismiss, and granted the plaintiffs
        leave to amend the complaint. The plaintiffs filed a second amended complaint
        on
        April 29, 2005. The defendants have moved to dismiss the second amended
        complaint. That motion has been fully briefed and is awaiting the court’s
        decision. The Company is unable to predict the likely outcome in this matter,
        and whether such outcome may have a material adverse effect on the Company’s
        results of operations or financial condition. On June 16, 2004, another alleged
        shareholder, Paul Doherty, filed a shareholder derivative suit in Los Angeles
        County Superior Court, repeating the allegations of the Harkness complaint
        and
        demanding, purportedly on behalf of the Company, damages and other relief
        against certain of the Company's executive officers and directors for alleged
        breaches of fiduciary and other duties. The defendants have moved to stay
        that
        action pending the resolution of the class action litigation described above.
        Plaintiffs have recently agreed to such a stay, and the parties are now in
        the
        process of documenting that stipulation for approval by the court.
  **Others.** The
        Company is named as a defendant in various other legal matters arising in
        the
        normal course of business. In management’s opinion, none of these
        matters are expected to have a material adverse effect on either the
        Company’s financial position, results of operations, or overall liquidity.
   **Item
        4. Submission of Matters to a Vote of Security Holders** ****
  None.
  10
  **PART
        II**
  **Item
        5.** **Market
        for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
        of Equity Securities**
  The
        Company’s Common Stock is traded on the New York Stock Exchange under the symbol
        “NDN.” The following table sets forth, for the calendar periods indicated, the
        high and low closing prices per share of the Common Stock as reported by
        the New
        York Stock Exchange.
  Price
                  RangeHigh
              
              Low**2003:**First
                  Quarter
              
              $
              28.48
              
              $
              20.83Second
                  Quarter
              
              
              35.09
              
              
              25.66Third
                  Quarter
              
              
              36.02
              
              
              31.74Fourth
                  Quarter
              
              
              33.79
              
              
              24.87**2004:**First
                  Quarter
              
              $
              29.65
              
              $
              23.43Second
                  Quarter
              
              
              24.80
              
              
              14.10Third
                  Quarter
              
              
              15.74
              
              
              12.17Fourth
                  Quarter
              
              
              16.36
              
              
              13.15**2005:**First
                  Quarter
              
              $
              16.45
              
              $
              12.95Second
                  Quarter
              
              
              13.32
              
              
              10.05
 
 As
        of
        August 31, 2005, the Company had 485 shareholders of record and approximately
        25,159 beneficial holders of the Common Stock.
 
 The
        Company has never paid any cash dividends with respect to its Common Stock
        since
        it became a pubic Company in 1996. The Company presently intends to retain
        future earnings to finance continued system improvements, store development,
        and
        other expansion and therefore does not anticipate the payment of any cash
        dividends for the foreseeable future. Payment of future dividends, if any,
        will
        depend upon future earnings and capital requirements of the Company and other
        factors, which the Board of Directors considers appropriate.
 
 The
        Company has one stock option plan (the 1996 Stock Option Plan, as amended).
        The
        plan is a fixed plan, which provides for the granting of non-qualified and
        incentive options to purchase up to 17,000,000 shares of common stock, of
        which
        4,440,000 are available as of December 31, 2004 for future option grants.
        Options may be granted to officers, employees, directors and consultants.
        All
        grants are made at fair market value at the date of grant. Options vest over
        a
        three-year period, one-third one year from the date of grant and one-third
        per
        year thereafter. Options expire ten years from the date of grant. The Company
        accounts for its stock option plan under APB Opinion No. 25 under which no
        compensation cost has been recognized in fiscal 2002, 2003 and 2004. The
        plan
        will expire in 2006.
  11
  **Securities
        Authorized for Issuance Under Equity Compensation Plans**
  The
        following table provides information as of December 31, 2004 about the Company’s
        Common Stock that may be issued upon the exercise of options granted to
        employees or members of our Board of Directors under the Company’s existing 1996
        Stock Option Plan.
  EQUITY
                  COMPENSATION
                  PLAN INFORMATIONPlan
                    category
                
                (a)
                  Number
                    of securities to be issued upon exercise of outstanding options,warrants
                    and rights
                
                (b)
                  Weighted-average
                    exercise price of outstandingoptions,
                    warrants and rights
                
                (c)
                  Number
                    of securities remaining available for future issuance under equity
                    compensation plans (excluding securitiesreflected
                    in column (a))Equity
                    compensation plans approved by security holders
                
                5,179,170
                
                $20.05
                
                4,440,000Equity
                    compensation plans not approved by security holders
                
                -
                
                -
                
                -Total
                
                5,179,170
                
                $20.05
                
                4,440,000
 
  **Item
        6. Selected Financial Data**
  The
        following table sets forth selected financial and operating data of the Company
        for the periods indicated. The data for the periods prior to fiscal year
        2004
        has been restated to reflect corrections as described in Note 2 “Restatement of
        Financial Statements” under Notes to Consolidated Financial Statements included
        in Item 8. “Financial Statements and Supplementary Data” of this Form 10-K. The
        data set forth below should be read in conjunction with the consolidated
        financial statements and notes thereto.
  **Year
                  Ended December 31,****(Amounts
                  in thousands, except per share and operating
                  data)****Statements
                  of Income Data:**
              
              **2000**
                **(As
                  restated (d, f))**
              
              **2001**
                **(As
                  restated (d, f))**
              
              **2002**
                **(As
                  restated (d))**
              
              **2003**
                **(As
                  restated (d))**
              
              **2004**Net
                  sales:99¢
                  Only Stores
              
              $
              402,071
              
              $
              522,019
              
              $
              663,983
              
              $
              816,348
              
              $
              929,896Bargain
                  Wholesale
              
              
              49,876
              
              
              56,250
              
              
              49,959
              
              
              46,112
              
              
              42,277Total
                  sales
              
              
              451,947
              
              
              578,269
              
              
              713,942
              
              
              862,460
              
              
              972,173Cost
                  of sales (excluding depreciation and amortization expense as shown
                  separately below)
              
              
              275,395
              
              
              350,421
              
              
              427,356
              
              
              516,686
              
              
              592,575Gross
                  profit
              
              
              176,552
              
              
              227,848
              
              
              286,586
              
              
              345,774
              
              
              379,598Selling,
                  general and administrative expenses:Operating
                  expenses
              
              
              108,353
              
              
              142,358
              
              
              178,561
              
              
              235,428
              
              
              312,263Depreciation
                  and amortization.
              
              
              7,134
              
              
              10,096
              
              
              14,481
              
              
              19,391
              
              
              28,246Total
                  operating expenses
              
              
              115,487
              
              
              152,454
              
              
              193,042
              
              
              254,819
              
              
              340,509Operating
                  income
              
              
              61,065
              
              
              75,394
              
              
              93,544
              
              
              90,955
              
              
              39,089Other
                  (income) net
              
              
              (3,617
              )
              
              (5,931
              )
              
              (4,847
              )
              
              (4,457
              )
              
              (3,263
              )Income
                  from continuing operations before provision for income
                  taxes
              
              
              64,682
              
              
              81,325
              
              
              98,391
              
              
              95,412
              
              
              42,352Provision
                  for income taxes
              
              
              25,114
              
              
              32,006
              
              
              37,659
              
              
              36,710
              
              
              14,521Income
                  from continuing operations
              
              $
              39,568
              
              $
              49,319
              
              $
              60,732
              
              $
              58,702
              
              $
              27,831Loss
                  from discontinued operations, net of income tax benefit of $700
              
              
              (1,050
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income
              
              $
              38,518
              
              $
              49,319
              
              $
              60,732
              
              $
              58,702
              
              $
              27,831Earnings
                  per common share from continuing operations:Basic
              
              $
              0.58
              
              $
              0.72
              
              $
              0.87
              
              $
              0.82
              
              $
              0.39Diluted
              
              $
              0.57
              
              $
              0.70
              
              $
              0.85
              
              $
              0.81
              
              $
              0.39(Loss)
                  per common share from discontinued operations:Basic
              
              
              ($0.02
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Diluted
              
              
              ($0.02
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Earnings
                  per common share:Basic
              
              $
              0.57
              
              $
              0.72
              
              $
              0.87
              
              $
              0.82
              
              $
              0.39Diluted
              
              $
              0.56
              
              $
              0.70
              
              $
              0.85
              
              $
              0.81
              
              $
              0.39Weighted
                  average number of common shares outstanding:Basic
              
              
              67,650
              
              
              68,815
              
              
              69,938
              
              
              71,348
              
              
              70,627Diluted
              
              
              68,945
              
              
              70,009
              
              
              71,181
              
              
              72,412
              
              
              71,016
 12
  **Company
                  Operating Data:**Sales
                  Growth99¢
                  Only Stores
              
              
              28.7
              %
              
              29.8
              %
              
              27.2
              %
              
              22.9
              %
              
              13.9
              %Bargain
                  Wholesale
              
              
              4.7
              %
              
              12.8
              %
              
              (11.2
              )%
              
              (7.7
              )%
              
              (8.3
              )%Total
                  Company sales
              
              
              25.6
              %
              
              28.0
              %
              
              23.5
              %
              
              20.8
              %
              
              12.7
              %Gross
                  margin
              
              
              39.1
              %
              
              39.4
              %
              
              40.1
              %
              
              40.1
              %
              
              39.0
              %Operating
                  margin
              
              
              13.5
              %
              
              13.0
              %
              
              13.1
              %
              
              10.6
              %
              
              4.0
              %Income
                  from continuing operations
              
              
              8.8
              %
              
              8.5
              %
              
              8.5
              %
              
              6.8
              %
              
              2.9
              %
 
 **Retail
                  Operating Data (a):**99¢
                  Only Stores at end of period
              
              
              98
              
              
              123
              
              
              151
              
              
              189
              
              
              219Change
                        in comparable stores net sales (b)
              
              
              2.0
              %
              
              5.9
              %
              
              3.6
              %
              
              4.5
              %
              
              -1.8
              %Average
                  net sales per store open the full year
              
              $
              4,487
              
              $
              4,647
              
              $
              4,750
              
              $
              4,957
              
              $
              4,603Average
                  net sales per estimated saleable square
                foot
                  (c)
              
              $
              318
              
              $
              319
              
              $
              309
              
              $
              308
              
              $
              270
                  (e
              )Estimated
                  saleable square footage at year end
              
              
              1,424,280
              
              
              1,892,949
              
              
              2,428,681
              
              
              3,190,528
              
              
              3,796,153Balance
                  Sheet Data:Working
                  capital
              
              $
              166,779
              
              $
              194,302
              
              $
              215,747
              
              $
              217,825
              
              $
              187,417Total
                  assets
              
              $
              280,695
              
              $
              357,517
              
              $
              450,078
              
              $
              563,714
              
              $
              600,204Capital
                  lease obligation, including current portion
              
              $
              -
              
              $
              1,677
              
              $
              1,637
              
              $
              1,593
              
              $
              811Total
                  shareholders’ equity
              
              $
              255,795
              
              $
              322,781
              
              $
              401,511
              
              $
              496,954
              
              $
              488,284
 
 
 (a)
              Includes
                  retail operating data solely for the Company’s 99¢ Only
                  Stores.
 (b)
              Change
                  in comparable stores net sales compares net sales for all stores
                  open at
                  least 15 months.
 (c)
              Computed
                  based upon estimated total saleable square footage of stores open
                  for the
                  entire period.
 (d)
              See
                  Note 2 to the Notes to the Consolidated Financial
                  Statements.
 (e)
              Includes
                  17 Texas stores open for a full year. Texas stores open for the
                  full year
                  had average sales of $2.2 million per store for 2004 and average
                  sales per
                  saleable square foot of $101. All other stores open for the full
                  year had
                  average sales of $4.8 million per store and $293 of average sales
                  per
                  saleable square foot.
 (f)
                The
                    financial statements were originally audited by Arthur Andersen
                    LLP, the
                    Company’s external auditor until 2002. The restated amounts for 2000
                    and
                    2001 have not been audited.
  13
  **Item
        7. Management’s Discussion and Analysis of Financial Condition and Results of
        Operations** **.**
  This
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations and the data included herein for the two years ending December
        31,
        2003 gives effect to the restatements to correct errors in the accounting
        for
        leases, depreciation and disclosure of cash flows pertaining to investments
        as
        further discussed in Note 2 “Restatement of Financial Statements” to the Notes
        to the Consolidated Financial Statements, and should be read in connection
        with
“Item 6. Selected Financial Data” and “Item 8. Financial Statements and
        Supplementary Data.” of this Form 10-K.
  **General**
  In
        2004,
        99¢ Only Stores had net sales of $972.2 million, operating income of $39.1
        million and net income of $27.8 million. Sales increased 12.7% over 2003
        primarily due to the 33 new store openings in 2004. Operating income and
        net
        income decreased 57.0% and 52.6% respectively from 2003. Average sales per
        store
        open the full year declined from $5.0 million in 2003 to $4.6 million, in
        2004.
        Average net sales per estimated saleable square foot (computed for 99¢ Only
        Stores open for the full year) declined from $308 per square foot at December
        31, 2003 to $270 per square foot at December 31, 2004. This trend reflects
        the
        Company’s opening of larger locations for new store development and the
        under-performance of the Texas stores. Existing stores at December 31, 2004
        average approximately 22,058 gross square feet. From January 1, 2002 through
        December 31, 2004, the Company opened new 99¢ stores that average approximately
        24,785 gross square feet. The Company had targeted new store locations between
        18,000 and 28,000 gross square feet during this period. The Company plans
        in
        2005 and 2006 to slow its store openings in Texas and to focus on improving
        the
        performance of its Texas stores by focusing on supply chain and store
        operations. For 2005 and 2006 the Company has slowed its overall new store
        growth rate to focus on the improvement of its systems infrastructure, business
        processes, and internal controls to better enable the Company to support
        its
        existing stores and establish a foundation for accelerated growth in 2007
        and
        beyond. In addition to the decline in average store sales and average net
        sales
        per estimated saleable square foot, operating income and net income were
        negatively impacted by certain operating expenses increasing proportionately
        more than revenues in 2004, as well as a decline in the gross profit margin.
  The
        Company’s management believes that near term growth will primarily result from
        new store openings in its existing territories.
  **Critical
        Accounting Policies and Estimates**
 
 The
        preparation of financial statements requires management to make estimates
        and
        assumptions that affect reported earnings. These estimates and assumptions
        are
        evaluated on an on-going basis and are based on historical experience and
        on
        other factors that management believes are reasonable. Estimates and assumptions
        include, but are not limited to, the areas of inventories, long-lived asset
        impairment, legal reserves, self-insurance reserves, leases, and
        taxes.
 
 The
        Company believes that the following represent the areas where more critical
        estimates and assumptions are used in the preparation of the financial
        statements:
  **Inventory
        valuation:** Inventories
        are valued at the lower of cost (first in, first out) or market. Valuation
        allowances for obsolete inventory and shrinkage/scrap are recorded to properly
        state inventory at the lower of cost or market. Shrinkage/scrap is estimated
        as
        a percentage of sales for the period from the last physical inventory date
        to
        the end of the applicable period. Such estimates are based on experience
        and the
        most recent physical inventory results. The valuation allowances require
        management judgments and estimates, such as the amount of obsolete inventory
        and
        shrinkage/scrap, which may impact the ending inventory valuation as well
        as
        gross margins. Additions to the inventory obsolescence reserve as a percentage
        of cost of sales have averaged approximately 0.2% for the three years ended
        December 31, 2004.
 
 **Long-lived
        asset impairment** :
        In
        accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets”, the Company
        assesses the impairment of long-lived assets when events or changes in
        circumstances indicate that the carrying value may not be recoverable.
        Recoverability is measured by comparing the carrying amount of an asset to
        expected future net cash flows generated by the asset. If the carrying amount
        of
        an asset exceeds its estimated undiscounted future cash flows, the carrying
        amount is compared to its fair value and an impairment charge is recognized
        to
        the extent of the difference. Factors that the Company considers important
        which
        could individually or in combination trigger an impairment review include
        the
        following: (1) significant underperformance relative to expected historical
        or
        projected future operating results; (2) significant changes in the manner
        of the
        Company’s use of the acquired assets or the strategy for the Company’s overall
        business; and (3) significant changes in our business strategies and/or negative
        industry or economic trends. On a quarterly basis, the Company assesses whether
        events or changes in circumstances occur that potentially indicate that the
        carrying value of long-lived assets may not be recoverable. The Company
        concluded that there were no such events or changes in circumstances during
        fiscal 2004, 2003, and 2002.
 
 **Legal
        reserves:** In
        the
        ordinary course of its business, the Company is subject to various legal
        actions
        and claims. In connection with such actions and claims, the Company must
        make
        estimates of potential future legal obligations and liabilities, which requires
        management’s judgment on the outcome of various issues. Management may also use
        outside legal counsel to assist in this process. The ultimate outcome of
        various
        legal issues could be materially different from management’s estimates and
        adjustments to income could be required. The assumptions used by management
        are
        based on the requirements of SFAS No. 5, “Accounting for Contingencies”. The
        Company will record, if material, a liability when it has determined that
        the
        occurrence of a loss contingency is probable and the loss amount can be
        reasonably estimated, and it will disclose the related facts in the notes
        to its
        financial statements. If the Company determines that the occurrence of a
        loss
        contingency is reasonably possible or that it is probable but the loss cannot
        be
        reasonably estimated, the Company will, if material, disclose the nature
        of the
        loss contingency and the estimated range of possible loss, or include a
        statement that no estimate of loss can be made.
  14
  **Self-insured
        workers’ compensation reserve** :
        The
        Company self-insures for workers’ compensation claims in California and Texas.
        The Company establishes reserves for losses of both estimated known and incurred
        but not reported insurance claims based on reported claims and actuarial
        valuations. Should an amount of claims greater than anticipated occur, the
        reserves recorded may not be sufficient and additional workers’ compensation
        costs, which may be significant, could be incurred. The Company does not
        discount the projected future cash outlays for the time value of money for
        claims and claim related costs when establishing its workers’ compensation
        reserves.
 
 **Operating
        leases:** The
        Company recognizes rent expense for operating leases on a straight-line basis
        (including the effect of reduced or free rent and rent escalations) over
        the
        lease term. The difference between the cash paid to the landlord and the
        amount
        recognized as rent expense on a straight-line basis is included in deferred
        rent. Cash reimbursements received from landlords for leasehold improvements
        and
        other cash payments received from landlords as lease incentives are recorded
        as
        deferred rent. Deferred rent related to landlord incentives is amortized
        using
        the straight-line method over the lease term as an offset to rent expense.
        The
        closing of stores in the future may result in the immediate write-off of
        associated deferred rent balances, if any.
 
 **Tax
        Valuation Allowances:** The
        Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
        for Income Taxes” ** (“SFAS
        No. 109”), which requires that deferred tax assets and liabilities be recognized
        using enacted tax rates for the effect of temporary differences between the
        book
        and tax bases of recorded assets and liabilities. SFAS No. 109 also requires
        that deferred tax assets be reduced by a valuation allowance if it is more
        likely than not that some portion or all of the net deferred tax asset will
        not
        be realized. The Company had approximately $20.9 million and $32.4 million
        in
        net deferred tax assets that are net of tax valuation allowances of $3.9
        million
        and $4.6 million at December 31, 2003 and 2004, respectively. Management
        evaluated the available positive and negative evidence in assessing the
        Company’s ability to realize the benefits of the net deferred tax assets at
        December 31, 2004 and concluded it is more likely than not that the Company
        will
        not realize a portion of its net deferred tax assets. The remaining balance
        of
        the net deferred tax assets should be realized through future operating results
        and the reversal of taxable temporary differences.
 
 
 **Results
        of Operations**
 
 The
        following discussion defines the components of the statement of income and
        should be read in conjunction with “Item 6. Selected Financial Data”.
  **Net
        Sales:** Revenue is recognized at the point of sale for retail sales.
        Bargain Wholesale sales revenue is recognized on the date shipped. Bargain
        Wholesale sales are shipped free on board shipping point.
 
 **Cost
        of Goods Sold** :
        Cost of
        goods sold includes the cost of inventory sold, net of discounts and allowances,
        freight in, inter-state warehouse transportation costs, obsolescence, spoilage
        and inventory shrinkage. The Company receives various cash discounts, allowances
        and rebates from its vendors. Such items are included as a reduction of cost
        of
        sales as merchandise is sold. The Company does not include purchasing, receiving
        and distribution warehouse costs in its cost of goods sold, which totaled
        $24.7
        million, $35.9 million, and $48.5 million as of December 31, 2002, 2003 and
        2004, respectively. Due to this classification, the Company's gross profit
        rates
        may not be comparable to those of other retailers that include costs related
        to
        their distribution network in cost of sales. **
  **Selling,
        General, and Administrative Expenses** :
        Selling, general, and administrative expenses include purchasing, receiving,
        inspection and warehouse costs, the costs of selling merchandise in stores
        (payroll and associated costs, occupancy and other store level costs),
        distribution costs (payroll and associated costs, occupancy, transportation
        to
        and from stores, and other distribution related costs), and corporate costs
        (payroll and associated costs, occupancy, advertising, professional fees,
        and
        other corporate administrative costs).
 
 **Other
        (Income) Expense:** Other
        (income) expense relates primarily to the interest income on the Company’s
        marketable securities, net of interest expense on the Company’s capitalized
        leases.
  15
  The
        following table sets forth for the periods indicated, certain selected income
        statement data, including such data as a percentage of net sales:
  **Years
                  Ended December 31**(Amounts
                  in thousands)**2002
                  (As restated (a))**
              
              **2003
                  (As restated (a))**
              
              **2004**Net
                  Sales:99¢
                  Only Stores
              
              $
              663,983
              
              
              93.0
              %
              $
              816,348
              
              
              94.7
              %
              $
              929,896
              
              
              95.7
              %Bargain
                  Wholesale
              
              
              49,959
              
              
              7.0
              
              
              46,112
              
              
              5.3
              
              
              42,277
              
              
              4.3Total
              
              
              713,942
              
              
              100.0
              
              
              862,460
              
              
              100.0
              
              
              972,173
              
              
              100.0Cost
                  of sales
              
              
              427,356
              
              
              59.9
              
              
              516,686
              
              
              59.9
              
              
              592,575
              
              
              61.0Gross
                  profit
              
              
              286,586
              
              
              40.1
              
              
              345,774
              
              
              40.1
              
              
              379,598
              
              
              39.0Selling,
                  general and administrative expenses:Operating
                  expenses
              
              
              178,561
              
              
              25.0
              
              
              235,428
              
              
              27.3
              
              
              312,263
              
              
              32.1Depreciation
                  and amortization
              
              
              14,481
              
              
              2.0
              
              
              19,391
              
              
              2.2
              
              
              28,246
              
              
              2.9Total
              
              
              193,042
              
              
              27.0
              
              
              254,819
              
              
              29.5
              
              
              340,509
              
              
              35.0Operating
                  income
              
              
              93,544
              
              
              13.1
              
              
              90,955
              
              
              10.6
              
              
              39,089
              
              
              4.0Other
                  (income) expense, net
              
              
              (4,847
              )
              
              (0.7
              )
              
              (4,457
              )
              
              (0.5
              )
              
              (3,263
              )
              
              (0.4
              )Income
                  before provision for income taxes
              
              
              98,391
              
              
              13.8
              
              
              95,412
              
              
              11.1
              
              
              42,352
              
              
              4.4Provision
                  for income taxes
              
              
              37,659
              
              
              5.3
              
              
              36,710
              
              
              4.3
              
              
              14,521
              
              
              1.5Net
                  income
              
              $
              60,732
              
              
              8.5
              %
              $
              58,702
              
              
              6.8
              %
              $
              27,831
              
              
              2.9
              %
 
 (a)
              See
                  Note 2 to the Notes to the Consolidated Financial
                  Statements.
 
 **Year
        Ended December 31, 2004 Compared to Year Ended December 31,
        2003**
  *Net
        sales.* Total
        net sales increased $109.7 million, or 12.7%, from $862.5 million in 2003
        to
        $972.2 million in 2004. 99¢ Only Stores’ net retail sales increased $113.5
        million, or 13.9%, from $816.3 million in 2003 to $929.9 million in 2004.
        Bargain Wholesale net sales decreased $3.8 million, or 8.3%, from $46.1 million
        in 2003 to $42.3 million in 2004. The effect of 33 new stores opened in 2004
        increased 99¢ Only Stores net retail sales by $70.9 million and the full year
        2004 effect of 38 net stores opened in 2003 increased sales by $67.7 million.
        However, comparable stores net sales for all stores open at least 15 months
        in
        2003 and 2004 decreased 1.8% in 2004 due to the underperformance of the Texas
        stores. In 2004, the Company added 33 stores and closed three stores; 16
        stores
        were opened in Texas, five in Arizona, one in Nevada and 11 in California.
        As of
        year-end 2004, the Company had 219 stores compared to 189 as of year-end
        2003.
        Gross retail square footage and estimated saleable square footage at the
        year-end 2004 was 4.8 million and 3.8 million, respectively. For 99¢ Only Stores
        open all of 2004, the average net sales per estimated saleable square foot
        was
        $270 and the average annual net sales per store were $4.6 million, including
        the
        Texas stores open for the full year. Non-Texas stores net sales averaged
        $4.8
        million per store and $293 per square foot. Texas stores open for a full
        year
        averaged net sales of $2.2 million per store and $101 per square
        foot **.** ****
  *Gross
        profit.* Gross
        profit increased $33.8 million, or 9.8%, from $345.8 million in 2003 to $379.6
        million in 2004. The increase in gross profit dollars was primarily due to
        higher retail net sales. As a percentage of net sales, overall gross profit
        decreased to 39.0% in 2004 from 40.1% in 2003. As a percentage of retail
        sales,
        gross profit for retail decreased to 39.9% in 2004 from 41.2% in 2003 in
        part
        due to the increase in product cost for retail from 55.5% in 2003 to 56.8%
        in
        2004, and in part due to product mix and increase in spoilage/shrink from
        3.0%
        in 2003 to 3.1% in 2004 (which the Company believes was caused by a variety
        of
        factors including an overcapacity situation in its Los Angeles distribution
        center and spoilage resulting from the initial introduction of its fresh
        produce
        offerings). The Bargain Wholesale margin remained relatively constant at
        19.9%
        in 2004 versus 19.8% in 2003. The remaining change was made up of increases
        and
        decreases in other less significant items included in cost of sales.
  *Operating
        expenses* .
        Operating expenses increased $76.8 million, or 32.6%, from $235.4 million
        in
        2003 to $312.3 million in 2004. The increase was primarily due to higher
        retail
        store operating expenses of $40.5 million between 2003 and 2004, primarily
        as a
        result of an increase in retail store labor costs of $22.6 million and an
        increase in rent costs of $11.3 million due to the opening of 33 new stores
        in
        2004 and the full year effect of 2003 store additions. The increase in operating
        expenses was also due to an increase in distribution and transportation costs
        of
        $12.6 million, primarily as a result of higher fuel costs, increased delivery
        costs, and additional handling of product due to added warehousing facilities
        (which were leased to support our store growth). Operating expenses also
        increased due to an increase in legal costs of $8.3 million due to payments
        of
        $6.2 million for legal settlements (including a $4.9 million legal settlement
        described under Item 3), and outside legal counsel fees of $2.1 million,
        primarily as a result of a greater number of personal injury lawsuits, class
        action lawsuits, and other employee related matters. Operating expenses also
        increased due to higher accounting and consulting fees of $1.8 million,
        primarily as a result of Sarbanes Oxley work for 2004. Finally, operating
        expenses increased due to an increase in the workers compensation expenses
        of
        $11.2 million, which was primarily driven by an increase in the number of
        claims
        and an increase in average costs per claim. The remaining change was made
        up of
        increases and decreases in other less significant items included in operating
        expenses.
  *Depreciation
        and amortization.* Depreciation
        increased $8.9 million, or 45.7%, from $19.4 million in 2003 to $28.2 million
        in
        2004 as a result of the net 30 new stores opened in 2004, the full year effect
        of 2003 store additions, and the purchase of the Commerce cold storage and
        Texas
        distribution centers in 2003.
  16
 
 *Operating
        income.* Operating income decreased $51.9 million, or 57.0%, from $91.0 million in
        2003
        to $39.1 million in 2004. Operating income as a percentage of net sales
        decreased from 10.6% in 2003 to 4.0 % in 2004 primarily due to the decrease
        in
        the gross margin percentage on sales and increases in operating expenses
        discussed above.
  *Other
        (income) expense, net.* Other
        income decreased $1.2 million, or 26.8%, from $4.5 million in 2003 to $3.3
        million in 2004. The decrease was primarily due to the expiration of a service
        and lease agreement with a related party in 2003, which eliminated the
        management fee and rent that the Company earned from the related party of
        $1.4
        million in 2003. Interest income earned on the Company’s investments was $3.3
        million in 2004 and $3.1 million in 2003. At December 31, 2004, the Company
        held
        $92.6 million in short-term investments and $50.8 million in long-term
        investments. Interest expense related to the capital lease was $0.1 million
        in
        both 2004 and 2003. The Company had no outstanding bank debt during 2004
        or
        2003.
  *Provision
        for income taxes.* The
        provision for income taxes in 2004 was $14.5 million compared to $36.7 million
        in 2003. The provision for income taxes had effective combined federal and
        state
        income rates of 34.3% and 38.5% in 2004 and 2003, respectively. The effective
        combined federal and state tax income rates are less than the statutory rates
        in
        each period and were calculated to reflect estimated income tax rates after
        giving effect for tax credits and the effect of certain revenues and/or expenses
        that are not subject to taxation.
  *Net
        income.* As
        a
        result of the items discussed above, net income decreased $30.9 million,
        or
        52.6%, from $58.7 million in 2003 to $27.8 million in 2004. Net income as
        a
        percentage of net sales declined from 6.8% in 2003 to 2.9% in 2004.
  **Year
        Ended December 31, 2003 Compared to Year Ended December 31,
        2002**
  *Net
        sales.* Total
        net sales increased $148.5 million, or 20.8%, from $713.9 million in 2002
        to
        $862.5 million in 2003. 99¢ Only Stores net sales increased $152.3 million, or
        22.9%, from $664.0 million in 2002 to $816.3 million in 2003. Bargain Wholesale
        net sales decreased $3.8 million, or 7.7%, from $50.0 million in 2002 to
        $46.1
        million in 2003. The net effect of 38 new stores opened in 2003 increased
        99¢
Only Stores net sales by $67.3 million and the full year effect of 28 net
        stores
        opened in 2002 increased sales by $56.0 million. Comparable stores net sales
        increased 4.8% in 2003. For 99¢ Only Stores open all of 2003, the average net
        sales per estimated saleable square foot was $308 and the average annual
        net
        sales per store was a record $5.0 million . **** T he
        decrease in Bargain Wholesale net sales was primarily attributed to the
        competitive pricing environment in the wholesale business, a decline in sales
        to
        export brokers and a greater focus on the growth of the Company’s retail
        business.
 
 *Gross
        profit.* Gross
        profit increased $59.2 million, or 20.7%, from $286.6 million in 2002 to
        $345.8
        million in 2003. The increase in gross profit dollars was primarily due to
        higher sales volume. As a percentage of net sales, gross profit was 40.1%
        in
        2003 and 2002. The retail gross margin decreased to 41.2% of sales in 2003
        versus 41.7% in 2002. This percentage variance was due primarily to a
        disproportionately high growth in grocery product sales, which have a lower
        margin than other product categories. Margins on closeouts vary widely depending
        on many factors, including the circumstances giving rise to product
        availability. See Risk Factors- “The Company depends on its relationships with
        suppliers and the availability of closeout and special-situation merchandise.”
The wholesale margin was 19.8% in 2003 versus 20.1% in 2002. Wholesale margin
        is
        generally driven by local competitive pricing factors, which results in lower
        sales prices.
  *Operating
        expenses.* Operating expenses increased $56.9 million, or 31.8%, from $178.6 million
        in
        2002 to $235.4 million in 2003. The 38 new store additions in 2003 increased
        operating expenses by $33.8 million. Distribution costs increased $11.6 million.
        This includes transportation costs, which increased $3.5 million due to the
        addition of new stores in Northern California, Nevada, Arizona and Texas.
        The
        addition of the new Texas distribution center increased distribution costs
        $2.0
        million and distributions costs increased $6.1 million due to an overall
        increase in labor cost. Administrative costs increased $11.6 million and
        included an increase in California workers' compensation expense of $7.9
        million
        based on store and labor growth in California. Start up costs in Texas increased
        $1.1 million and other administrative expenses increased $4.0 million.
        Additional administrative staff positions were filled in information systems,
        real estate, distribution, human resources, finance, strategic planning and
        buying. Administrative costs were offset by $1.4 million in management fees
        from
        a related party. The remaining change was made up of increases and decreases
        in
        other less significant items included in operating expenses.
  *Depreciation
        and amortization.* Depreciation
        increased $4.9 million, or 33.9%, from $14.5 million in 2002 to $19.4 million
        in
        2003. The 38 new store additions increased depreciation by $4.1 million and
        the
        new Texas distribution center increased depreciation by $0.5 million. Other
        increases result from amortization of information systems costs and depreciation
        costs of the Commerce distribution center.
  *Operating
        income.* Operating income decreased $2.6 million, or 2.8%, from $93.5 million in 2002
        to
        $91.0 million in 2003. Operating income as a percentage of net sales decreased
        to 10.6% in 2003 from 13.1% in 2002 primarily due to the increase in the
        operating costs as discussed above.
  *Other
        (income) expense, net.* Other
        (income) expense, net relates primarily to the interest income on the Company’s
        marketable securities, net of interest expense on the Company’s capitalized
        leases. Interest expense was $0.1 million in 2002 and in 2003. The Company
        had
        no bank debt during 2002 or 2003. Interest income earned on the Company’s
        marketable securities was $3.1 million in 2003 and $3.5 million in 2002.
        At
        December 31, 2003, the Company held $145.7 million in short-term investments
        and
        $52.8 million in long-term investments. Also included in both 2003 and 2002
        is
        $1.4 million of income under a service and lease agreement with a related
        party
        for a distribution facility. This agreement ended on December 15, 2003. See
        Note
        7 of “Notes to Consolidated Financial Statements”.
  17
 
 *Provision
        for income taxes.* The
        provision for income taxes in 2003 was $36.7 million compared to $37.7 million
        in 2002. The provision for income taxes had effective combined federal and
        state
        rates of 38.5% and 38.3% in 2003 and 2002, respectively. The effective combined
        federal and state income tax rates are less than the statutory rates in each
        period and were calculated to reflect estimated tax rates after giving effect
        for tax credits and the effect of certain revenues and/or expenses that are
        not
        subject to taxation.
  *Net
        income.* As
        a
        result of the items discussed above, net income decreased $2.0 million, or
        3.3%,
        from $60.7 million in 2002 to $58.7 million in 2003. Net income as a percentage
        of net sales was 6.8% in 2003 and 8.5% in 2002.
  **Liquidity
        and Capital Resources**
  Since
        inception, the Company has funded its operations principally from cash provided
        by operations and has not generally relied upon external sources of financing.
        The Company’s capital requirements result primarily from purchases of inventory,
        expenditures related to new store openings, and working capital requirements
        for
        new and existing stores. The Company takes advantage of closeout and other
        special-situation opportunities, which frequently result in large volume
        purchases, and as a consequence its cash requirements are not constant or
        predictable during the year and can be affected by the timing and size of
        its
        purchases. The Company does not maintain any credit facilities with any
        financial institution.
  Net
        cash
        provided by operating activities in 2002, 2003, and 2004 was $36.5 million,
        $65.3 million, and $94.4 million, respectively, consisting primarily of $75.5
        million, $86.6 million, and $45.8 million of net income respectively, adjusted
        for depreciation and other non-cash items. Net cash used in working capital
        activities primarily reflects the increases in inventories, net of increases
        in
        accounts payable and workers’ compensation. Cash used for growth in inventories
        was $16.6 million, $24.2 million and $48.4 million in 2002, 2003, and 2004,
        respectively. The Company used $3.5 million, $7.2 million and $5.8 million
        in
        working capital in 2002, 2003, and 2004, respectively. Cash provided by other
        working capital activities included increases in workers’ compensation of $2.2
        million, $8.6 million, and $20.1 million in 2002, 2003, and 2004, respectively.
        In 2002 and 2003, the Company invested $36.0 million and $14.4 million,
        respectively in investments. In 2004, the Company sold $55.1 million of its
        investments and used the funds for the repurchase of its shares and other
        working capital needs.
 
 Net
        cash
        used in investing activities during 2002, 2003 and 2004 was $41.7 million,
        $98.6
        million, and $57.2 million respectively. In 2002, 2003, and 2004 the Company
        used $41.8 million, $98.8 million and $57.2 million for the purchase of property
        and equipment due to the opening of 28, 38, and 33 new stores during the
        respective years.
  Net
        cash
        provided by financing activities during 2002 and 2003 was $12.9 million and
        $25.7 million, respectively, which partially represents the proceeds from
        the
        exercise of non-qualified stock options in both years compared to cash used
        in
        financing activities of $36.6 million in 2004. Cash used in financing activities
        increased significantly in 2004 due to the repurchase of 2.6 million shares
        of
        the Company’s common stock (valued at $38.2 million) under its stock repurchase
        program.
  During
        2005, the Company currently plans to open a total of approximately 12 to
        14 new
        stores (including one relocation) and has purchased one
        warehouse/distribution facility, a portion of which was
        previously leased by the Company. In addition, the Company may purchase
        additional properties during 2005 for future store expansion during 2006
        or
        beyond. The Company intends to fund its liquidity requirements in 2005 out
        of
        net cash provided by operations, short-term investments, and cash on
        hand.
 
 **Contractual
        Obligations**
 
 The
        following table summarizes the Company’s consolidated contractual obligations
        (in thousands) as of December 31, 2004.
 
 Contractual
                  obligations
              
              Total
              
              Less
                  than
                1
                  Year
              
              1-3
                Years
              
              3-5
                Years
              
              More
                  than
                5
                  YearsCapital
                  lease obligations
              
              $
              811
              
              $
              37
              
              $
              80
              
              $
              120
              
              $
              574Operating
                  lease obligations
              
              
              177,877
              
              
              32,551
              
              
              55,697
              
              
              43,283
              
              
              46,346Other
                  long-term liabilities reflected on the Company’s balance sheet under
                  generally accepted accounting principles
              
              
              2,847
              
              
              -
              
              
              -
              
              
              -
              
              
              2,847Total
              
              $
              181,535
              
              $
              32,588
              
              $
              55,777
              
              $
              43,403
              
              $
              49,767
 18
  **Lease
        Commitments**
  The
        Company leases various facilities under operating leases (except for one
        location that is classified as a capital lease), which will expire at various
        dates through 2019. Most of the lease agreements contain renewal options
        and/or
        provide for rent escalations or increases based on the Consumer Price Index.
        Total minimum lease payments under each of these lease agreements, including
        scheduled increases, are charged to operations on a straight-line basis over
        the
        term of each respective lease. Most leases require the payment of property
        taxes, maintenance and insurance. Rental expense charged to operations in
        2002,
        2003, and 2004 was approximately $25.1 million, $32.9 million, and $43.4
        million, respectively. The Company typically seeks leases with a five-year
        to
        ten-year term and with multiple five-year renewal options. See “Item 2.
        Properties.” The large majority of the Company’s leases have multiple renewal
        periods, which are typically five years and occasionally longer.
  **Off-Balance
        Sheet Arrangements**
 
 At
        December 31, 2004, the Company had an interest in a variable interest
        entity to develop a shopping center in La Quinta, California, featuring one
        of
        its stores, in which it will lease a store for opening in 2005. The construction
        of this shopping center is planned for completion in 2005. As of December
        31,
        2004, the LLC did not have any assets or liabilities. As of December 31,
        2003,
        the Company accounted for two partnerships under the equity method, which
        the
        Company consolidated at December 31, 2004 as a result of FIN 46R, “Consolidation
        of Variable Interest Entities - an Interpretation of ARB No. 51, Consolidated
        Financial Statements *”* .
        The
        assets of the partnerships consisted of real estate with a carrying value
        of
        approximately $3.0 million and there is no mortgage debt or other significant
        liabilities associated with the entities, other than notes payable to the
        Company. The balance sheet effect of consolidating these entities at December
        31, 2004 is a $3.0 million reclassification from investments to property
        and
        equipment with no corresponding impact on the Company’s recorded
        liabilities.
  **Seasonality
        and Quarterly Fluctuations**
  The
        Company has historically experienced and expects to continue to experience
        some
        seasonal fluctuations in its net sales, operating income, and net income.
        The
        highest sales periods for the Company are the Easter, Halloween, and Christmas
        seasons. A proportionately greater amount of the Company’s net sales and
        operating and net income is generally realized during the fourth quarter.
        The
        Company’s quarterly results of operations may also fluctuate significantly as a
        result of a variety of other factors, including the timing of certain holidays
        (e.g., Easter), the timing of new store openings and the merchandise mix.
  **New
        Authoritative Pronouncements**
  In
        January 2003, the Financial Accounting Standards Board (“FASB”) issued FIN 46.
        This interpretation addresses consolidation by business enterprises of entities
        in which equity investors do not have the characteristics of a controlling
        financial interest or do not have sufficient equity at risk for the entity
        to
        finance its activities without additional subordinated financial support
        from
        other parties. Variable interest entities are required to be consolidated
        by
        their primary beneficiaries if they do not effectively disperse risks among
        the
        parties involved. The primary beneficiary of a variable interest entity is
        the
        party that absorbs a majority of the entity’s expected losses or receives a
        majority of its expected residual returns. In December 2003, the FASB amended
        FIN 46 (“FIN 46R”). The requirements of FIN 46R were effective no later than the
        end of the first reporting period that ends after March 15, 2004. Additionally,
        certain new disclosure requirements apply to all financial statements issued
        after December 31, 2003. The Company is involved with certain variable interest
        entities. The Company adopted the provisions of this Interpretation in fiscal
        2004, which resulted in the consolidation of two partnership
        investments.
  In
        November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of
        ARB No. 43, Chapter 4,” (“SFAS No. 151”) which amends the guidance in ARB No.
        43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal
        amounts of idle facility expense, freight, handling costs, and spoilage.
        SFAS
        No. 151 requires that these costs be expensed as current period charges.
        In
        addition, SFAS No. 151 requires that the allocation of fixed production overhead
        to the costs of conversion be based on normal capacity of the production
        facilities. The provisions of SFAS No. 151 are effective for inventory costs
        incurred during fiscal years beginning after June 15, 2005. The Company does
        not
        currently believe this statement will have any material impact on the Company’s
        financial position or results of operations.
 
 In
        December 2004, the FASB issued SFAS No. 123(R), ** “Share-Based
        Payment,” (“SFAS No. 123(R)”) a revision to SFAS No. 123, ** “Accounting
        for Stock-Based Compensation.” This statement supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” SFAS No. 123(R) establishes
        standards for the accounting for transactions in which an entity exchanges
        its
        equity instruments for goods or services.  Examples include stock options
        and awards of restricted stock in which an employer receives employee services
        in exchange for equity securities of the company or liabilities that are
        based
        on the fair value of the company’s equity securities.  SFAS No. 123(R)
        requires that the cost of share-based payment transactions be recorded as
        an
        expense at their fair value determined by applying a fair value measurement
        method at the date of the grant, with limited exceptions.  Costs will be
        recognized over the period in which the goods or services are received. 
The provisions of SFAS No. 123(R) are effective as of the first annual reporting
        period beginning after June 15, 2005.  The
        Company is currently evaluating the provisions of SFAS No. 123(R) and the
        impact
        on its consolidated financial position and results of operations.
 19
  In
        December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”
(“SFAS No. 153”), which is an amendment of APB Opinion No. 29, “Accounting for
        Nonmonetary Transactions,” (“APB No. 29”). This statement addresses the
        measurement of exchanges of nonmonetary assets, and eliminates the exception
        from fair value measurement for nonmonetary exchanges of similar productive
        assets as defined in paragraph 21(b) of APB No. 29, and replaces it with
        an
        exception for exchanges that do not have commercial substance. This statement
        specifies that a nonmonetary exchange has commercial substance if the future
        cash flows of the entity are expected to change significantly as a result
        of the
        exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring
        in
        fiscal periods beginning after June 15, 2005. The Company believes the adoption
        of SFAS No.153 will not have a material impact on its consolidated financial
        position or results of operations.
  In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”). SFAS No. 154 is a replacement of APB No. 20 and FASB Statement
        No. 3. SFAS No. 154 provides guidance on the accounting for and reporting
        of
        accounting changes and error corrections. It establishes retrospective
        application as the required method for reporting a voluntary change in
        accounting principle. SFAS No. 154 provides guidance for determining whether
        retrospective application of a change in accounting principle is impracticable
        and for reporting a change when retrospective application is impracticable.
        SFAS
        No. 154 also addresses the reporting of a correction of an error by restating
        previously issued financial statements. SFAS No. 154 is effective for accounting
        changes and corrections of errors made in fiscal years beginning after December
        15, 2005. The Company will adopt this pronouncement beginning in fiscal year
        2006.
 
 **RISK
        FACTORS**
  **Inflation
        may affect the Company’s ability to sell merchandise at the 99 cents price
        point**
  The
        Company’s ability to provide quality merchandise for profitable resale within
        the 99 cents price point is subject to certain economic factors, which are
        beyond the Company’s control. Inflation could have a material adverse effect on
        the Company’s business and results of operations, especially given the
        constraints on the Company’s ability to pass on incremental costs due to price
        increases or other factors. A sustained trend of significantly increased
        inflationary pressure could require the Company to abandon its 99 cent price
        point, which could have a material adverse effect on its business and results
        of
        operations. See also “ The
        Company is vulnerable to uncertain economic factors, changes in the minimum
        wage, and increased workers’ compensation and healthcare costs ” for a
        discussion of additional risks attendant to inflationary conditions.
  **The
        Company has identified material weaknesses in internal controls over financial
        reporting** ******
  The
        Company has received an adverse opinion on the effectiveness of its internal
        control over financial reporting because of material weaknesses identified
        in
        management’s assessment of the effectiveness of such controls as of December 31,
        2004. These material weaknesses, if not remediated, create increased risk
        of
        misstatement of the Company’s financial results, which, if material, may require
        future restatement thereof.  The
        Company may determine that other material weaknesses exist that have not
        yet
        been identified, as described under “Item 9A. Controls and Procedures.” In
        addition, a failure to implement improved internal controls, or difficulties
        encountered in their implementation, could cause the Company future delays
        in
        its reporting obligations and could have a negative effect on the Company
        and
        the trading price of the Company’s common stock. See “Item 9A Controls and
        Procedures,” for more information on our internal controls.
  **The
        Company is dependent primarily on new store openings for future
        growth**
  The
        Company’s ability to generate growth in sales and operating income depends
        largely on its ability to successfully open and operate new stores outside
        of
        its traditional core market of Southern California and to manage future growth
        profitably. The Company’s strategy depends on many factors, including its
        ability to identify suitable markets and sites for new stores, negotiate
        leases
        or real estate purchases with acceptable terms, refurbish stores, successfully
        compete against local competition, upgrade its financial and management
        information systems and controls, and manage operating expenses. In addition,
        the Company must be able to hire, train, motivate, and retain competent managers
        and store personnel at increasing distances from the Company’s headquarters.
        Many of these factors are beyond the Company’s control. As a result, the Company
        cannot assure that it will be able to achieve its goals with respect to growth.
        Any failure by the Company to achieve these goals on a timely basis, obtain
        acceptance in markets in which it currently has limited or no presence, attract
        and retain management and other qualified personnel, appropriately upgrade
        its
        financial and management information systems and controls, and manage operating
        expenses could adversely affect its future operating results and its ability
        to
        execute the Company’s business strategy.
  A
        variety
        of factors, including store location, store size, local demographics, rental
        terms, competition, the level of store sales, and the level of initial
        advertising influence if and when a store becomes profitable. Assuming that
        planned expansion occurs as anticipated, the store base will include a
        relatively high proportion of stores with relatively short operating histories.
        New stores may not achieve the sales per estimated saleable square foot and
        store-level operating margins historically achieved at existing stores. If
        new
        stores on average fail to achieve these results, planned expansion could
        produce
        a further decrease in overall sales per estimated saleable square foot and
        store-level operating margins. Increases in the level of advertising and
        pre-opening expenses associated with the opening of new stores could also
        contribute to a decrease in operating margins. The opening of new stores
        in
        existing and in new markets has in the past and may in the future be less
        profitable than in its core Southern California market and/or may reduce
        retail
        sales of existing stores, negatively affecting comparable store sales.
  20
  **The
        Company’s operations are concentrated in California**
  As
        of
        December 31 2004, all but 63 of the 219 stores were located in California
        (with
        11 stores in Nevada, 19 stores in Arizona and 33 stores in Texas). The Company
        expects that it will continue to open additional stores in California, as
        well
        as in other states. For the foreseeable future, the Company’s results of
        operations will depend significantly on trends in the California economy.
        If
        retail spending declines due to an economic slow-down or recession in
        California, the Company’s operations and profitability may be negatively
        impacted.
  In
        addition, California historically has been vulnerable to certain natural
        disasters and other risks, such as earthquakes, fires, floods, and civil
        disturbances. At times, these events have disrupted the local economy. These
        events could also pose physical risks to the Company’s California based
        properties. California has also historically enacted minimum wages that exceed
        federal standards, and it typically has other factors making compliance,
        litigation and workers’ compensation claims more prevalent and
        costly.
  **The
        Company could experience disruptions in receiving and
        distribution**
  The
        Company’s success depends upon whether receiving and shipment schedules are
        organized and well managed. As the Company continues to grow, it may face
        increased or unexpected demands on warehouse operations, as well as unexpected
        demands on its transportation network. Such demands could cause delays in
        delivery of merchandise to or from warehouses and/or to stores. A fire,
        earthquake, or other disaster at its warehouses could also hurt the business,
        financial condition and results of operations, particularly because much
        of the
        merchandise consists of closeouts and other irreplaceable products. The Company
        also faces the possibility of future labor unrest.
  **The
        Company could be exposed to product liability claims**
  The
        Company purchases many products on a closeout basis, some of which are of
        an
        unknown origin and/or are manufactured or distributed by overseas entities.
        The
        closeout nature of many of the products may limit the Company’s opportunity to
        conduct diligence as to these products. The Company is not always listed
        as an
        additional insured by product vendors, and general insurance may not provide
        full coverage in certain instances. This could result in unanticipated future
        losses from product liability claims.
  **The
        Company depends upon its relationships with suppliers and the availability
        of
        closeout and special-situation merchandise**
  The
        Company’s success depends in large part on its ability to locate and purchase
        quality closeout and special-situation merchandise at attractive prices.
        This
        results in a mix of name-brand and other merchandise at the 99 cents price
        point. The Company cannot be certain that such merchandise will continue
        to be
        available in the future at prices consistent with historical costs. Further,
        the
        Company may not be able to find and purchase merchandise in quantities necessary
        to accommodate its growth. Additionally, suppliers sometimes restrict the
        advertising, promotion and method of distribution of their merchandise. These
        restrictions in turn may make it more difficult for the Company to quickly
        sell
        these items from inventory. Although the Company believes its relationships
        with
        suppliers are good, the Company typically does not have long-term agreements
        with any suppliers. As a result, the Company must continuously seek out buying
        opportunities from existing suppliers and from new sources. There is increasing
        competition for these opportunities with other wholesalers and retailers,
        discount and deep-discount stores, mass merchandisers, food markets, drug
        chains, club stores, and various other companies and individuals as the deep
        discount retail segment continues to expand outside and within existing retail
        channels. There is also a growth in consolidation among vendors and suppliers
        of
        merchandise targeted by the Company. A disruption in the availability of
        merchandise at attractive prices could impair our business.
  **The
        Company purchases in large volumes and its inventory is highly
        concentrated**
  To
        obtain
        inventory at attractive prices, the Company takes advantage of large volume
        purchases, closeouts and other special situations. As a result, inventory
        levels
        are generally higher than other discount retailers and from time to time
        this
        can result in an over-capacity situation in the warehouses and place stress
        on
        the Company’s warehouse and distribution operations. The Company’s store and
        warehouse inventory approximated $155.8 million and $107.4 million at December
        31, 2004 and 2003, respectively. The Company periodically reviews the net
        realizable value of its inventory and makes adjustments to its carrying value
        when appropriate. The current carrying value of inventory reflects the Company’s
        belief that it will realize the net values recorded on the balance sheet.
        However, the Company may not do so. If the Company sells large portions of
        inventory at amounts less than their carrying value or if it writes down
        or
        otherwise disposes of a significant part of inventory, the cost of sales,
        gross
        profit, operating income, and net income could decline significantly during
        the
        period in which such event or events occur. Margins could also be negatively
        affected should the grocery category sales become a larger percentage of
        total
        sales in the future, and by increases in shrinkage and spoilage from
        produce.
  21
  **The
        Company faces strong competition**
  The
        Company competes in both the acquisition of inventory and sale of merchandise
        with other wholesalers and retailers, discount and deep-discount stores,
        single
        price point merchandisers, mass merchandisers, food markets, drug chains,
        club
        stores and other retailers. In the future, new companies may also enter the
        deep-discount retail industry. It is also becoming more common for superstores
        to sell products competitive with our own. Additionally, the Company currently
        faces increasing competition for the purchase of quality closeout and other
        special-situation merchandise. Some of the Company’s competitors have
        substantially greater financial resources and buying power than the Company
        does, as well as nationwide name-recognition and organization. The Company’s
        capability to compete will depend on many factors including the ability to
        successfully purchase and resell merchandise at lower prices than competitors.
        The Company also faces competition from other retailers with similar or
        confusing names, which are becoming more commonplace. The Company cannot
        assure
        it will be able to compete successfully against current and future competitors
        in both the acquisition of inventory and the sale of merchandise.
  **The
        Company is vulnerable to uncertain economic factors, changes in the minimum
        wage, and increased workers’ compensation and healthcare
        costs**
  The
        Company’s future results of operations and ability to provide quality
        merchandise at the 99 cents price point could be hindered by certain economic
        factors beyond its control, including but not limited to:
  -
        inflation and an increases in the rate of inflation, both in the United States
        as well as in other countries in which the products it sells are
        manufactured;
 -
        increases in employee health benefits cost;
 -
        increases in minimum and prevailing wage levels, as well as “living wage”
pressures;
 -
        increases in government regulatory compliance costs;
 -
        decreases in consumer confidence levels;
 -
        increases in transportation and fuel costs as the Company ships over longer
        distances and the price of petroleum, gasoline and energy rises;
 -
        increases in unionization, including a broad based and ongoing organizing
        campaign at the store and warehouse level;
 -
        increases in workers’ compensation benefits and self-insured workers’
compensation reserves due to increased claims costs
  **The
        Company faces risks associated with international sales and
        purchases**
  Although
        international sales historically have not been important to the Company’s
        overall net sales, some of the inventory is manufactured outside the United
        States. There are many risks associated with doing business internationally.
        International transactions may be subject to risks such as:
  -
        political instability;
 -
        currency fluctuations;
 -
        lack of
        knowledge by foreign manufacturers of United States and California product,
        content, packaging and other laws, rules and regulations;
 -
        exchange rate fluctuations;
 -
        changes
        in import and export regulations; and
 -
        changes
        in tariff and freight rates
  The
        United States and other countries have at times proposed various forms of
        protectionist trade legislation. Any resulting changes in current tariff
        structures or other trade policies could result in increases in the cost
        of
        and/or reduction in the availability of certain merchandise and could adversely
        affect the Company’s ability to purchase such merchandise.
  **The
        Company could encounter risks related to transactions with
        affiliates**
  As
        of
        August 31, 2005, the Company leases 13 of its stores and a parking lot for
        one
        of those stores from the Gold family and their affiliates. The Company believes
        that the lease terms on these properties are no less favorable to the Company
        than they would be for an unrelated party. Under current policy, the Company
        enters into real estate transactions with affiliates only for the renewal
        or
        modification of existing leases and on occasions where it determines that
        such
        transactions are in the Company’s best interests. Moreover, the independent
        members of the Board of Directors must unanimously approve all real estate
        transactions between the Company and affiliates. They must also determine
        that
        such transactions are equivalent to a negotiated arm’s-length transaction with a
        third party. The Company cannot guarantee that it will reach agreements with
        the
        Gold family on renewal terms for the properties it currently leases from
        them.
        Also, even if the Company agrees to such terms, it cannot be certain that
        the
        independent directors will approve them. If the Company fails to renew one
        or
        more of these leases, it would be forced to relocate or close the leased
        stores.
        Any relocations or closures could potentially result in significant closure
        expense and could adversely affect net sales and operating results.
  22
  **The
        Company relies heavily on its executive management team and is transitioning
        to
        new leadership**
  David
        Gold, who served as the Company’s Chief Executive Officer since it commenced
        operations, retired as CEO effective December 31, 2004. Although he remains
        Chairman of its Board of Directors, this is nevertheless a substantial change
        for the Company and its management team. Effective January 1, 2005, Eric
        Schiffer, formerly the Company’s President, became Chief Executive Officer, and
        he is establishing a new and different management style. In addition, Howard
        Gold, who for many years has been in charge of the Company’s distribution
        operations, moved to the newly created position of Executive Vice President
        of
        Special Projects. Michael Zelkind, the Company’s Executive Vice President of
        Supply Chain and Merchandising and formerly a Vice President of Inventory
        Management and Supply Chain Systems for a division of ConAgra Foods, is
        responsible for purchasing as well as receiving, warehousing, distribution,
        and
        other supply chain functions as well as marketing and the Company’s Bargain
        Wholesale operation. This, too, could result in a change in management style.
        Jeff Gold, formerly Senior Vice President of Real Estate and Information
        Systems, assumed broader duties as President and Chief Operating Offer, and
        now
        also oversees the Company’s retail operations and human resources. The Company
        hired an interim Chief Financial Officer in March 2005 and is conducting
        a
        search with the assistance of a leading retained search firm to hire a permanent
        Chief Financial Officer. In addition, the Company has recently hired an
        experienced Vice President of Human Resources.
  These
        are
        very significant changes, implemented over a relatively short period of time.
        These executives are untested in their new positions, and their success is
        not
        assured. The Company also relies on the continued service of other officers
        and
        key managers. The Company has not entered into employment agreements with
        any of
        its officers and does not maintain key person life insurance on them. The
        Company’s future success will depend on its ability to identify, attract, hire,
        train, retain and motivate other highly skilled management personnel.
        Competition for such personnel is intense, and the Company may not successfully
        attract, assimilate or sufficiently retain the necessary number of qualified
        candidates.
  **The
        Company’s operating results may fluctuate and may be affected by seasonal buying
        patterns**
  Historically,
        the Company’s highest net sales and operating income have occurred during the
        fourth quarter, which includes the Christmas and Halloween selling seasons.
        During 2003 and 2004, the Company generated approximately 28.7% and 27.4%,
        respectively, of its net sales and approximately 26.2% and 26.4%, respectively,
        of its operating income during the fourth quarter. If for any reason the
        Company’s net sales were to fall below norms during the fourth quarter, it could
        have an adverse impact on profitability and impair the results of operations
        for
        the entire year. Transportation scheduling, warehouse capacity constraints,
        supply chain disruptions, adverse weather conditions, labor disruptions or
        other
        disruptions during the peak holiday season could also affect net sales and
        profitability for the year.
  In
        addition to seasonality, many other factors may cause the results of operations
        to vary significantly from quarter to quarter. Some of these factors are
        beyond
        the Company’s control, and include the following:
  -
        the
        number and location of new stores and timing of new store openings;
 -
        the
        level of advertising and pre-opening expenses associated with new
        stores;
 -
        the
        integration of new stores into operations;
 -
        general
        economic health of the deep-discount retail industry;
 -
        changes
        in the mix of products sold;
 -
        increases in fuel and shipping costs;
 -
        ability
        to successfully manage inventory levels;
 -
        changes
        in personnel;
 -
        expansion by competitors into geographic markets in which they have not
        historically had a strong presence;
 -
        fluctuations in the amount of consumer spending; and
 -
        the
        amount and timing of operating costs and capital expenditures relating to
        the
        growth of the business and the Company’s ability to uniformly
        capture such costs.
  **The
        Company is subject to environmental regulations**
  Under
        various federal, state and local environmental laws and regulations, current
        or
        previous owners or occupants of property may face liability associated with
        hazardous substances. These laws and regulations often impose liability without
        regard to fault. In the future the Company may be required to incur substantial
        costs for preventive or remedial measures associated with hazardous materials.
        The Company has several storage tanks at its warehouse facilities, including:
        an
        aboveground and an underground diesel storage tank at the main Southern
        California warehouse; ammonia storage at the Southern California cold storage
        facility and the Texas warehouse; aboveground diesel and propane storage
        tanks
        at the Texas warehouse; an aboveground propane storage tank at the main Southern
        California warehouse; and an aboveground propane tank located at the warehouse
        the Company owns in Egan, Minnesota. Although the Company has not been notified
        of, and is not aware of, any material current environmental liability, claim
        or
        non-compliance, it could incur costs in the future related to owned properties,
        leased properties, storage tanks, or other business properties and/or
        activities. In the ordinary course of business, the Company sometimes handles
        or
        disposes of commonplace household products that are classified as hazardous
        materials under various environmental laws and regulations. The Company has
        adopted policies regarding the handling and disposal of these products, and
        trains employees on how to handle and dispose of them, but the Company cannot
        be
        assured that its policies and training are consistently followed, nor that
        they
        will successfully help the Company avoid potential liabilities or violations
        of
        these environmental laws and regulations in the future even if consistently
        followed.
  23
 
 **Anti-takeover
        effect; Concentration of ownership by existing officers and principal
        stockholders**
  In
        addition to some governing provisions in the Company’s Articles of Incorporation
        and Bylaws, the Company is also subject to certain California laws and
        regulations which could delay, discourage or prevent others from initiating
        a
        potential merger, takeover or other change in control, even if such actions
        would benefit both the Company and its shareholders. Moreover, David Gold,
        the
        Chairman of the Board of Directors and members of his immediate family and
        certain of their affiliates beneficially own as of August 31, 2005, 23,035,646,
        or 33.1%, of the Company’s outstanding common shares. As a result, they have the
        ability to influence the Company’s policies and matters requiring a shareholder
        vote, including the election of directors and other corporate action, and
        potentially to prevent a change in control. This could adversely affect the
        voting and other rights of other shareholders and could depress the market
        price
        of the Company’s common stock.
  **The
        Company’s common stock price could decrease and fluctuate
        widely**
  Trading
        prices for the Company’s common stock could decrease and fluctuate significantly
        due to many factors, including:
 -
        the
        depth of the market for common stock;
 -
        changes
        in expectations of future financial performance, including financial estimates
        by securities analysts and investors;
 -
        variations in operating results;
 -
        conditions or trends in the industry or industries of any significant vendors
        or
        other stakeholders;
 -
        the
        conditions of the market generally or the deep-discount or retail
        industries;
 -
        additions or departures of key personnel;
 -
        future
        sales of common stock;
 -
        government regulation affecting the business;
 -
        increased competition;
 -
        consolidation of consumer product companies;
 -
        municipal regulation of “Dollar” stores;
 -
        future
        determinations of compliance or noncompliance with Sarbanes Oxley and related
        requirements; and
 -
        other
        risk factors as disclosed herein.
  **Item
        7A.**  **Quantitative
        and Qualitative Disclosures About Market Risk**
  The
        Company is exposed to interest rate risk for its investments in marketable
        securities but management believes the risk is not material. At December
        31,
        2004, the Company had $143.4 million in securities maturing at various dates
        through June 2018, with approximately 65 percent maturing within one year.
        The
        Company’s investments are comprised primarily of investment grade federal and
        municipal bonds, commercial paper and corporate securities. Because the Company
        generally invests in securities with terms of two years or less, the Company
        generally holds investments until maturity, and therefore should not bear
        any
        interest risk due to early disposition. The Company does not enter into any
        derivative or interest rate hedging transactions. At December 31, 2004, the
        fair
        value of investments approximated the carrying value. Based on the investments
        outstanding at December 31, 2004 a 1% increase in interest rates would reduce
        the fair value of the Company’s total investment portfolio by $2.3 million or
        1.6%.
 24
  **Item
        8. Financial Statements and Supplementary Data**
  **INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
        SCHEDULE**
  **99¢
        Only Stores**
   PageReport
                  of Independent Registered Public Accounting Firm, Deloitte & Touche
                  LLP
              26Reports
                  of Independent Registered Public Accounting Firm, PricewaterhouseCoopers
                  LLP
              27Consolidated
                  Balance Sheets as of December 31, 2003 (as restated) and
                  2004
              28Consolidated
                  Statements of Income for the years ended December 31, 2002 (as
                  restated),
                  2003 (as restated) and 2004
              30Consolidated
                  Statements of Shareholders’ Equity for the years ended December 31, 2002
                  (as restated), 2003 (as restated) and 2004
              31Consolidated
                  Statements of Cash Flows for the years ended December 31, 2002
                  (as
                  restated), 2003 (as restated) and 2004
              32Notes
                  to Consolidated Financial Statements
              33Schedule
                  II - Valuation and Qualifying Accounts
              60
 25
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Shareholders of 99¢ Only Stores
 City
        of
        Commerce, California
 
 We
        have
        audited the accompanying consolidated balance sheet of 99¢ Only Stores (the
“Company”) as of December 31, 2004, and the related consolidated statements of
        income, shareholders’ equity, and cash flows for the year then ended. Our audit
        also included the financial statement schedule listed in the Index to
        Consolidated Financial Statements and Financial Statement Schedule. These
        financial statements and the financial statement schedule are the responsibility
        of the Company’s management. Our responsibility is to express an opinion on
        these financial statements and the financial statement schedule based on
        our
        audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
  In
        our
        opinion, such 2004 consolidated financial statements present fairly, in all
        material respects, the financial position of the Company as of December 31,
        2004, and the results of its operations and its cash flows for the year then
        ended in conformity with accounting principles generally accepted in the
        United
        States of America. Also in our opinion, such financial statement schedule,
        when
        considered in relation to the basic consolidated financial statements taken
        as a
        whole, presents fairly, in all material respects, the information set forth
        therein.
 
 We
        were
        engaged to audit, in accordance with the standards of the Public Company
        Accounting Oversight Board (United States), the effectiveness of the Company's
        internal control over financial reporting as of December 31, 2004, and our
        report dated August 30, 2005 disclaimed an opinion on management's assessment
        of
        the effectiveness of the Company's internal control over financial reporting
        because of a scope limitation and expressed an adverse opinion on the
        effectiveness of the Company's internal control over financial reporting
        because
        of material weaknesses and the effects of a scope limitation.
 
 Deloitte
        & Touche LLP
 Los
        Angeles, California
 August
        30, 2005
  26
  **Report
        of Independent Registered Public Accounting Firm**
  
 To
        the
        Board of Directors and Shareholders of 99¢ Only Stores:
 
 In
        our
        opinion, the consolidated financial statements listed in the accompanying
        index
        present fairly, in all material respects, the consolidated financial position
        of
        99¢ Only Stores and its subsidiary at December 31, 2003 and the results of its
        operations and its cash flows for each of the two years in the period ended
        December 31, 2003 in conformity with accounting principles generally accepted
        in
        the United States of America. These financial statements are the responsibility
        of the Company's management; our responsibility is to express an opinion
        on
        these financial statements based on our audits. We conducted our audits of
        these
        statements in accordance with the standards of the Public Company Accounting
        Oversight Board (United States). Those standards require that we plan and
        perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements, assessing the accounting principles used and significant estimates
        made by management, and evaluating the overall financial statement presentation.
        We believe that our audits provide a reasonable basis for our opinion.
 
 As
        discussed in Note 2 to the consolidated financial statements, the Company
        has
        restated its consolidated balance sheet at December 31, 2003 and related
        consolidated statements of income, shareholders’ equity and cash flows for each
        of the two years in the period ended December 31, 2003.
 
 PricewaterhouseCoopers
        LLP
 Los
        Angeles, California
 February
        27, 2004, except for Note 2
 as
        to
        which the date is July 18, 2005
 
  **Report
        of Independent Registered Public Accounting Firm**
 **On**
 **Financial
        Statement Schedule**
  
 To
        the
        Board of Directors Of 99 Cents Only Stores:
 
 Our
        audits of the consolidated financial statements referred to in our report
        dated
        February 27, 2004, except for Note 2 as to which the date is July 18, 2005,
        appearing in this Annual Report on Form 10-K, also included an audit of the
        financial statement schedule listed in Item 15 of this Form 10-K. In our
        opinion, this financial statement schedule presents fairly, in all material
        respects, the information set forth therein when read in conjunction with
        the
        related consolidated financial statements.
 
 PricewaterhouseCoopers
        LLP
 Los
        Angeles, CA
 February
        27, 2004
  27
  **99¢
        Only Stores**
 **CONSOLIDATED
        BALANCE SHEETS**
 **AS
        OF DECEMBER 31, 2003 AND 2004**
 **(Amounts
        In Thousands, Except Share Data)**
 
 **ASSETS**
  **2003**
              
              **2004****(As
                  Restated,****see
                  Note 2)**CURRENT
                  ASSETS:Cash
              
              $
              318
              
              $
              884Short-term
                  investments
              
              
              145,670
              
              
              92,645Accounts
                  receivable, net of allowance for doubtful accounts of $143 and
                  $268 as of
                  December 31, 2003 and 2004, respectively
              
              
              2,245
              
              
              3,463Income
                  tax receivable
              
              
              841
              
              
              -Deferred
                  income taxes
              
              
              15,850
              
              
              28,845Inventories
              
              
              107,409
              
              
              155,836Other
              
              
              2,717
              
              
              5,946Total
                  current assets
              
              
              275,050
              
              
              287,619PROPERTY
                  AND EQUIPMENT, at cost:Land
              
              
              35,680
              
              
              41,240Building
              
              
              53,590
              
              
              68,833Building
                  improvements
              
              
              23,946
              
              
              28,587Leasehold
                  improvements
              
              
              78,139
              
              
              106,482Fixtures
                  and equipment
              
              
              56,124
              
              
              71,577Transportation
                  equipment
              
              
              3,217
              
              
              3,847Construction
                  in progress
              
              
              35,279
              
              
              22,835Total
                  property and equipment
              
              
              285,975
              
              
              343,401Accumulated
                  depreciation and amortization
              
              
              (68,207
              )
              
              (95,482
              )Total
                  net property and equipment
              
              
              217,768
              
              
              247,919OTHER
                  ASSETS:Long-term
                  deferred income taxes
              
              
              5,067
              
              
              3,574Long-term
                  investments in marketable securities
              
              
              52,789
              
              
              50,764Long-term
                  investments in partnerships
              
              
              4,366
              
              
              -Deposits
                  and other assets
              
              
              8,674
              
              
              10,328Total
                  other assets
              
              
              70,896
              
              
              64,666TOTAL
                  ASSETS
              
              $
              563,714
              
              $
              600,204
 
 **The
        accompanying notes are an integral part of these financial
        statements.**
  28
  **99¢
        Only Stores**
 **CONSOLIDATED
        BALANCE SHEETS**
 **AS
        OF DECEMBER 31, 2003 AND 2004**
 **(Amounts
        In Thousands, Except Share Data)**
 
 **LIABILITIES
        AND SHAREHOLDERS’ EQUITY**
 
 **2003**
              
              **2004****(As
                  Restated,****see
                  Note 2)**CURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              27,903
              
              $
              39,094Accrued
                  expenses:Payroll
                  and payroll-related
              
              
              3,592
              
              
              4,959Sales
                  tax
              
              
              4,749
              
              
              5,098Other
              
              
              4,622
              
              
              12,074Workers’
                  compensation
              
              
              16,319
              
              
              36,445Income
                  tax payable
              
              
              -
              
              
              2,495Current
                  portion of capital lease obligation
              
              
              40
              
              
              37Total
                  current liabilities
              
              
              57,225
              
              
              100,202LONG-TERM
                  LIABILITIES:Deferred
                  rent
              
              
              5,868
              
              
              8,097Deferred
                  compensation liability
              
              
              2,114
              
              
              2,847Capital
                  lease obligation, net of current portion
              
              
              1,553
              
              
              774Total
                  non-current liabilities
              
              
              9,535
              
              
              11,718COMMITMENTS
                  AND CONTINGENCIES: (Note 8)
              
              
              -
              
              
              -SHAREHOLDERS’
                  EQUITY:Preferred
                  stock, no par valueAuthorized
                  - 1,000,000 sharesIssued
                  and outstanding - none
              
              
              -
              
              
              -Common
                  stock, no par valueAuthorized
                  - 200,000,000 sharesIssued
                  and outstanding - 72,032,788 shares at December 31, 2003 and 69,517,185
                  shares at December 31, 2004
              
              
              210,893
              
              
              212,606Retained
                  earnings
              
              
              286,061
              
              
              275,678Total
                  shareholders’ equity
              
              
              496,954
              
              
              488,284Total
                  liabilities and shareholders’ equity
              
              $
              563,714
              
              $
              600,204
 
 **The
        accompanying notes are an integral part of these financial
        statements.**
  29
  **99¢
        Only Stores**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 **YEARS
        ENDED DECEMBER 31, 2002, 2003 AND 2004**
 **(Amounts
        In Thousands, Except Per Share Data)**
 
 **2002**
              
              **2003**
              
              **2004****(As
                  Restated, see Note 2)**
              
              **(As
                  Restated, see Note 2)**NET
                  SALES:99¢
                  Only Stores
              
              $
              663,983
              
              $
              816,348
              
              $
              929,896Bargain
                  Wholesale
              
              
              49,959
              
              
              46,112
              
              
              42,277Total
                  sales
              
              
              713,942
              
              
              862,460
              
              
              972,173COST
                  OF SALES (excluding depreciation and amortization expense as shown
                  separately below)
              
              
              427,356
              
              
              516,686
              
              
              592,575Gross
                  profit
              
              
              286,586
              
              
              345,774
              
              
              379,598SELLING,
                  GENERAL, AND ADMINISTRATIVE EXPENSES:Operating
                  expenses
              
              
              178,561
              
              
              235,428
              
              
              312,263Depreciation
                  and amortization
              
              
              14,481
              
              
              19,391
              
              
              28,246Total
                  Selling, General and Administrative
              
              
              193,042
              
              
              254,819
              
              
              340,509Operating
                  income
              
              
              93,544
              
              
              90,955
              
              
              39,089OTHER
                  (INCOME) EXPENSE:Interest
                  income
              
              
              (3,535
              )
              
              (3,105
              )
              
              (3,326
              )Interest
                  expense
              
              
              128
              
              
              125
              
              
              63Other
              
              
              (1,440
              )
              
              (1,477
              )
              
              -Total
                  other (income)
              
              
              (4,847
              )
              
              (4,457
              )
              
              (3,263
              )Income
                  before provision for income tax
              
              
              98,391
              
              
              95,412
              
              
              42,352Provision
                  for income taxes
              
              
              37,659
              
              
              36,710
              
              
              14,521NET
                  INCOME
              
              $
              60,732
              
              $
              58,702
              
              $
              27,831EARNINGS
                  PER COMMON SHARE:Basic
              
              $
              0.87
              
              $
              0.82
              
              $
              0.39Diluted
              
              $
              0.85
              
              $
              0.81
              
              $
              0.39WEIGHTED
                  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:Basic
              
              
              69,938
              
              
              71,348
              
              
              70,627Diluted
              
              
              71,181
              
              
              72,412
              
              
              71,016
  **The
        accompanying notes are an integral part of these financial
        statements.**
 30
  **99¢
        Only Stores**
 **STATEMENTS
        OF SHAREHOLDERS’ EQUITY**
 **YEARS
        ENDED DECEMBER 31, 2002, 2003 AND 2004**
 **(Amounts
        in Thousands)**
 
 **Common Stock**
              
              **Retained****Shares**
              
              **Amount**
              
              **Earnings**BALANCE,
                  December 31, 2001 (as previously reported)
              
              
              69,506
              
              $
              156,154
              
              $
              163,489Prior
                  period restatement adjustment (see Note 2)
              
              
              
              
              
              
              
              
              3,138BALANCE,
                  December 31, 2001 (as restated, see Note 2)
              
              
              69,506
              
              
              156,154
              
              
              166,627Net
                  income (as restated, see Note 2)
              
              
              -
              
              
              -
              
              
              60,732Tax
                  benefit from exercise of stock options
              
              
              -
              
              
              5,053
              
              
              -Proceeds
                  from exercise of stock options
              
              
              863
              
              
              12,945
              
              
              -BALANCE,
                  December 31, 2002 (as restated, see Note 2)
              
              
              70,369
              
              
              174,152
              
              
              227,359Net
                  income (as restated, see Note 2)
              
              
              -
              
              
              -
              
              
              58,702Tax
                  benefit from exercise of stock options
              
              
              -
              
              
              11,041
              
              
              -Proceeds
                  from exercise of stock options
              
              
              1,664
              
              
              25,700
              
              
              -BALANCE,
                  December 31, 2003 (as restated, see Note 2)
              
              
              72,033
              
              
              210,893
              
              
              286,061Net
                  income
              
              
              -
              
              
              -
              
              
              27,831Tax
                  benefit from exercise of stock options
              
              
              -
              
              
              40
              
              
              -Repurchase
                  of common stock
              
              
              (2,594
              )
              
              -
              
              
              (38,214
              )Proceeds
                  from exercise of stock options
              
              
              78
              
              
              1,673
              
              
              -BALANCE,
                  December 31, 2004
              
              
              69,517
              
              $
              212,606
              
              $
              275,678
  **The
        accompanying notes are an integral part of these financial
        statements.**
  31
  **99¢
        Only Stores**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **YEARS
        ENDED DECEMBER 31, 2002, 2003 AND 2004**
 **(Amounts
        in Thousands)**
 
 **2002**
              
              **2003**
              
              **2004****(As
                  Restated, see Note 2)**
              
              **(As
                  Restated, see Note 2)**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              60,732
              
              $
              58,702
              
              $
              27,831Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              14,481
              
              
              19,391
              
              
              28,246Loss
                  on disposal of fixed assets
              
              
              -
              
              
              -
              
              
              1,152Tax
                  benefit from exercise of non qualified employee stock
                  options
              
              
              5,053
              
              
              11,041
              
              
              40Deferred
                  income taxes
              
              
              (4,771
              )
              
              (2,503
              )
              
              (11,502
              )Changes
                  in asset and liabilities associated with operating
                  activities:(Purchases)
                  sales of investments, net
              
              
              (35,981
              )
              
              (14,378
              )
              
              55,050Accounts
                  receivable
              
              
              770
              
              
              507
              
              
              (1,218
              )Inventories
              
              
              (16,648
              )
              
              (24,233
              )
              
              (48,427
              )Other
                  assets
              
              
              134
              
              
              (777
              )
              
              (2,750
              )Deposits
              
              
              (150
              )
              
              (89
              )
              
              (74
              )Due
                  to shareholders
              
              
              (2,887
              )
              
              1,232
              
              
              -Accounts
                  payable
              
              
              3,538
              
              
              10,956
              
              
              11,191Accrued
                  expenses
              
              
              1,977
              
              
              2,808
              
              
              9,168Accrued
                  workers’ compensation
              
              
              2,191
              
              
              8,594
              
              
              20,126Income
                  taxes
              
              
              7,567
              
              
              (7,025
              )
              
              3,336Deferred
                  rent
              
              
              534
              
              
              1,052
              
              
              2,229Net
                  cash provided by operating activities
              
              
              36,540
              
              
              65,278
              
              
              94,398CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchases
                  of property and equipment
              
              
              (41,829
              )
              
              (98,768
              )
              
              (57,248
              )Investments
                  in partnerships
              
              
              137
              
              
              166
              
              
              -Net
                  cash used in investing activities
              
              
              (41,692
              )
              
              (98,602
              )
              
              (57,248
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Payments
                  of capital lease obligation
              
              
              (40
              )
              
              (44
              )
              
              (43
              )Proceeds
                  from exercise of stock options
              
              
              12,945
              
              
              25,701
              
              
              1,673Repurchases
                  of Company stock
              
              
              -
              
              
              -
              
              
              (38,214
              )Net
                  cash provided (used in) by financing activities
              
              
              12,905
              
              
              25,657
              
              
              (36,584
              )NET
                  INCREASE (DECREASE) IN CASH
              
              
              7,753
              
              
              (7,667
              )
              
              566CASH,
                  beginning of year
              
              
              232
              
              
              7,985
              
              
              318CASH,
                  end of year
              
              $
              7,985
              
              $
              318
              
              $
              884
  **The
        accompanying notes are an integral part of these financial
        statements.**
  32
 
 **99¢
        Only Stores**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **Fiscal
        Years Ended December 31, 2002 (as restated), 2003 (as restated) and 2004**
 
 **1.**
              **Basis
                  of Presentation and Summary of Significant Accounting
                  Policies**
  **Nature
        of Business**
  99¢
Only
        Stores (“the Company”) is incorporated in the State of California. The Company’s
        primary business is the sale of various consumable products through its retail
        stores. As of December 31, 2004, the Company operated 219 stores with 156,
        33,
        19, and 11 in California, Texas, Arizona, and Nevada, respectively. The Company
        is also a wholesale distributor of various consumable products.
  **Principles
        of Consolidation**
  The
        consolidated financial statements include the accounts of the Company and
        its
        subsidiaries and/or variable interest entities required to be consolidated
        in
        accordance with accounting principles generally accepted in the United States
        of
        America (“GAAP”). Intercompany accounts and transactions between the
        consolidated companies have been eliminated in consolidation.
  **Use
        of Estimates**
  The
        preparation of the financial statements in conformity with GAAP requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and 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. Actual results could differ from those
        estimates.
  **Cash**
  For
        purposes of reporting cash flows, cash includes cash on hand and at the stores
        and cash in financial institutions. At times, cash balances held at financial
        institutions are in excess of federally insured limits. The Company places
        its
        temporary cash investments with high credit, quality financial institutions
        and
        limits the amount of credit exposure to any one financial institution. The
        Company believes no significant concentration of credit risk exists with
        respect
        to these cash investments.
  **Investments**
  Investments
        in debt and equity securities are recorded as required by Statement of Financial
        Accounting Standards No. 115, "Accounting for Certain Investments in Debt
        and
        Equity Securities" (“SFAS No. 115”) as trading securities. The Company's
        investments are comprised primarily of investment grade federal and municipal
        bonds and commercial paper. Trading investments are recorded at fair value,
        with
        any changes in fair value recorded in net income. At December 31, 2002, 2003,
        and 2004, such gains and losses were not material.
  **Inventories**
  Inventories
        are valued at the lower of cost (first in, first out) or market. Valuation
        allowances are recorded to properly state inventory at the lower of cost
        or
        market.
  **Depreciation
        and Amortization**
  Property
        and equipment are depreciated on a straight-line basis over the following
        useful
        lives:
  Owned
                  buildings
              
              30
                  yearsOwned
                  building improvements
              
              Lesser
                  of the estimated useful life of the improvement or 30
                  yearsLeasehold
                  improvements
              
              Lesser
                  of the estimated useful life of the improvement or remaining lease
                  termFixtures
                  and equipment
              
              3-5
                  yearsTransportation
                  equipment
              
              3
                  years
  The
        Company’s policy is to capitalize expenditures that materially increase asset
        lives and expense ordinary repairs and maintenance as incurred.
  33
 
 **Long-Lived
        Assets**
  In
        accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
        Long-lived Assets”, the Company assesses the impairment of long-lived assets
        when events or changes in circumstances indicate that the carrying value
        may not
        be recoverable. Recoverability is measured by comparing the carrying amount
        of
        an asset to expected future net cash flows generated by the asset. If the
        carrying amount of an asset exceeds its estimated undiscounted future cash
        flows, the carrying amount is compared to its fair value and an impairment
        charge is recognized to the extent of the difference. Factors that the Company
        considers important which could individually or in combination trigger an
        impairment review include the following: (1) significant underperformance
        relative to expected historical or projected future operating results; (2)
        significant changes in the manner of the Company’s use of the acquired assets or
        the strategy for the Company’s overall business; and (3) significant changes in
        our business strategies and/or negative industry or economic trends. On a
        quarterly basis, the Company assesses whether events or changes in circumstances
        occur that potentially indicate that the carrying value of long-lived assets
        may
        not be recoverable. The Company concluded that there were no such events
        or
        changes in circumstances during fiscal 2004, 2003, and 2002.
  **Lease
        Acquisition Costs**
  The
        Company follows the policy of capitalizing expenditures that relate to the
        acquisition and signing of its retail store leases. These costs are amortized
        on
        a straight-line basis over the term of the lease, which is usually five to
        ten
        years.
  **Income
        Taxes**
  The
        Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
        for Income Taxes,” (“SFAS No. 109”) which requires that deferred tax assets and
        liabilities be recognized using enacted tax rates for the effect of temporary
        differences between the book and tax bases of recorded assets and liabilities.
        SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
        allowance if it is more likely than not that some portion or all of the net
        deferred tax asset will not be realized. The Company’s ability to realize
        deferred tax assets is assessed throughout the year and a valuation allowance
        is
        established accordingly.
  **Earnings
        per share**
  “Basic”
        earnings per share are computed by dividing net income by the weighted average
        number of shares outstanding for the year. “Diluted” earnings per share is
        computed by dividing net income by the total of the weighted average number
        of
        shares outstanding plus the dilutive effect of outstanding stock options
        (applying the treasury stock method).
  A
        reconciliation of the basic and diluted weighted average number of shares
        outstanding for each of the three years in the period ended December 31,
        2004
        follows:
  **Year
                  Ended December 31,****2002**
              
              **2003**
              
              **2004**(Amounts
                  in thousands)Weighted
                  average number of common shares outstanding-basic
              
              
              69,938
              
              
              71,348
              
              
              70,627Dilutive
                  effect of outstanding stock options
              
              
              1,243
              
              
              1,064
              
              
              389Weighted
                  average number of common shares outstanding-diluted
              
              
              71,181
              
              
              72,412
              
              
              71,016
 
 Potentially
        dilutive stock options of 1.0 million, 1.9 million, and 4.3 million shares
        for
        the years ended December 31, 2002, 2003, and 2004, respectively, were excluded
        from the calculation of the weighted average number of common shares outstanding
        because they were anti-dilutive.
  34
 
 **Stock-Based
        Compensation**
  The
        Company has elected to continue to measure compensation costs associated
        with
        its stock option plan under APB 25, “Accounting for Stock Issued to Employees.”
Under SFAS No. 123 “Accounting for Stock-Based Compensation,” had the Company
        applied the fair value based method of accounting, which is not required,
        to all
        grants of stock options, the Company would have recorded additional compensation
        expense and pro forma net income and earnings per share amounts as follows
        for
        the years ended December 31, 2002, 2003, and 2004 (amounts in thousands,
        except
        for per share data):
  **December
                  31,****Amounts
                  in thousands except per share data****2002**
              
              **2003**
              
              **2004****(As
                  restated, see Note 2)**Net
                  income, as reported
              
              $
              60,732
              
              $
              58,702
              
              $
              27,831Deduct:Total
                  stock-based employee compensation expense determined under fair
                  value
                  based method for all awards, net of related tax effects
              
              
              8,427
              
              
              8,931
              
              
              7,480Pro
                  forma net income
              
              $
              52,305
              
              $
              49,771
              
              $
              20,351Earnings
                  per share:Basic-as
                  reported
              
              $
              0.87
              
              $
              0.82
              
              $
              0.39Basic-pro
                  forma
              
              $
              0.75
              
              $
              0.70
              
              $
              0.29Diluted-as
                  reported
              
              $
              0.85
              
              $
              0.81
              
              $
              0.39Diluted-pro
                  forma
              
              $
              0.73
              
              $
              0.69
              
              $
              0.29
 
  These
        pro
        forma amounts were determined by estimating the fair value of each option
        on its
        grant date using the Black-Scholes option-pricing model with the following
        assumptions:
  **December
                      31,****2002**
                  
                  **2003**
                  
                  **2004**Risk
                      free interest rate
                  
                  
                  1.90
                  %
                  
                  3.37
                  %
                  
                  3.90
                  %Expected
                      life
                  
                  
                  10
                      Years
                  
                  
                  5.2
                      Years
                  
                  
                  5.4
                      YearsExpected
                      stock price volatility
                  
                  
                  51
                  %
                  
                  51
                  %
                  
                  50
                  %Expected
                      dividend yield
                  
                  
                  None
                  
                  
                  None
                  
                  
                  None
  **Cost
        of Sales**
  Cost
        of
        sales includes the cost of inventory sold, net of discounts and allowances,
        freight in, inter-state warehouse transportation costs, obsolescence, spoilage
        and inventory shrinkage. The Company receives various cash discounts, allowances
        and rebates from its vendors. Such items are included as reductions of cost
        of
        sales as merchandise is sold. The Company does not include purchasing,
        receiving, and distribution warehouse costs in its cost of goods
        sold.
  **Operating
        Expenses**
  Selling,
        general, and administrative expenses includes purchasing, receiving, inspection
        and warehouse costs, the costs of selling merchandise in stores (payroll
        and
        associated costs, occupancy and other store level costs), distribution costs
        (payroll and associated costs, occupancy, transportation to and from stores,
        and
        other distribution related costs), and corporate costs (payroll and associated
        costs, occupancy, advertising, professional fees and other corporate
        administrative costs).
  **Leases**
  The
        Company recognizes rent expense for operating leases on a straight-line basis
        (including the effect of reduced or free rent and contractually obligated
        rent
        escalations) over the lease term. The difference between the cash paid to
        the
        landlord and the amount recognized as rent expense on a straight-line basis
        is
        included in deferred rent on the consolidated balance sheets. Cash
        reimbursements received from landlords for leasehold improvements and other
        cash
        payments received from landlords as lease incentives are recorded as deferred
        rent. Deferred rent related to landlord incentives is amortized using the
        straight-line method over the lease term as an offset to rent
        expense.
  35
  **Revenue
        Recognition**
  The
        Company recognizes retail sales in its store at the time the customer takes
        possession of merchandise. All sales are net of discounts and returns and
        exclude sales tax. Wholesale sales are recognized in accordance with the
        shipping terms agreed upon on the purchase order. Wholesale sales are
        recognized free on board ("FOB") origin where title and risk of loss pass
        to the
        buyer when the merchandise leaves the Company's distribution facility.
  **Pre-Opening
        Costs**
  The
        Company expenses, as incurred, all pre-opening costs related to the opening
        of
        new retail stores.
  **Advertising**
  The
        Company expenses advertising costs as incurred. Advertising expenses were
        $3.1
        million, $3.8 million, and $5.6 million for the fiscal years ended December
        31,
        2002, 2003 and 2004, respectively.
  **Statements
        of Cash Flows**
  Cash
        payments for income taxes were $29,852,000, $35,200,000, and $22,028,000
        in
        2002, 2003 and 2004, respectively. Interest payments totaled approximately
        $128,000, $125,000 and $122,000 for the fiscal years ended December 31, 2002,
        2003, and 2004, respectively.
  **Fair
        Value of Financial Instruments**
  Management
        believes the carrying amounts of cash, accounts receivables and accounts
        payable
        approximate fair value due to their short-term nature. Short-term and long-term
        investments are carried at fair value.
  **New
        Authoritative Pronouncements**
  In
        January 2003, the Financial Accounting Standards Board (“FASB”) issued FIN 46,
“Consolidation of Variable Interest Entities - an Interpretation of ARB No.
        51,
        Consolidated Financial Statements. *”* This
        interpretation addresses consolidation by business enterprises of entities
        in
        which equity investors do not have the characteristics of a controlling
        financial interest or do not have sufficient equity at risk for the entity
        to
        finance its activities without additional subordinated financial support
        from
        other parties. Variable interest entities are required to be consolidated
        by
        their primary beneficiaries if they do not effectively disperse risks among
        the
        parties involved. The primary beneficiary of a variable interest entity is
        the
        party that absorbs a majority of the entity’s expected losses or receives a
        majority of its expected residual returns. In December 2003, the FASB amended
        FIN 46 (“FIN 46R”). The requirements of FIN 46R were effective no later than the
        end of the first reporting period that ended after March 15, 2004. Additionally,
        certain new disclosure requirements applied to all financial statements issued
        after December 31, 2003. The Company is involved with certain variable interest
        entities. The Company adopted the provisions of this Interpretation in fiscal
        2004, which resulted in the consolidation of two partnership investments
        (see
        Note 4).
  In
        November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of
        ARB No. 43, Chapter 4,” (“SFAS No. 151”) which amends the guidance in ARB No.
        43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal
        amounts of idle facility expense, freight, handling costs and spoilage. SFAS
        No.
        151 requires that these costs be expensed as current period charges. In
        addition, SFAS No. 151 requires that the allocation of fixed production overhead
        to the costs of conversion be based on normal capacity of the production
        facilities. The provisions of SFAS No. 151 are effective for inventory costs
        incurred during fiscal years beginning after June 15, 2005. The Company does
        not
        currently believe this statement will have any significant impact on the
        Company’s financial position or results of operations.
  In
        December 2004, the FASB issued SFAS No. 123(R), ** “Share-Based
        Payment,” (“SFAS No. 123(R)”) a revision to SFAS No. 123, ** “Accounting
        for Stock-Based Compensation.” This statement supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” SFAS No. 123(R) establishes
        standards for the accounting for transactions in which an entity exchanges
        its
        equity instruments for goods or services.  Examples include stock options
        and awards of restricted stock in which an employer receives employee services
        in exchange for equity securities of the company or liabilities that are
        based
        on the fair value of the company’s equity securities.  SFAS No. 123(R)
        requires that the cost of share-based payment transactions be recorded as
        an
        expense at their fair value determined by applying a fair value measurement
        method at the date of the grant, with limited exceptions.  Costs will be
        recognized over the period in which the goods or services are received. 
The provisions of SFAS No. 123(R) are effective as of the first annual reporting
        period beginning after June 15, 2005.  The
        Company is currently evaluating the provisions of SFAS No. 123 (R) and the
        impact on its consolidated financial position and results of
        operations.
 36
  In
        December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”
(“SFAS No. 153”), which is an amendment of APB Opinion No. 29, “Accounting for
        Nonmonetary Transactions,” (“APB No. 29”). This statement addresses the
        measurement of exchanges of nonmonetary assets, and eliminates the exception
        from fair value measurement for nonmonetary exchanges of similar productive
        assets as defined in paragraph 21(b) of APB No. 29, and replaces it with
        an
        exception for exchanges that do not have commercial substance. This statement
        specifies that a nonmonetary exchange has commercial substance if the future
        cash flows of the entity are expected to change significantly as a result
        of the
        exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring
        in
        fiscal periods beginning after June 15, 2005. The Company believes the adoption
        of SFAS No.153 will not have a material impact on its consolidated financial
        position or results of operations.
 
 In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”). SFAS No. 154 is a replacement of APB No. 20 and FASB Statement
        No. 3. SFAS No. 154 provides guidance on the accounting for and reporting
        of
        accounting changes and error corrections. It establishes retrospective
        application as the required method for reporting a voluntary change in
        accounting principle. SFAS No. 154 provides guidance for determining whether
        retrospective application of a change in accounting principle is impracticable
        and for reporting a change when retrospective application is impracticable.
        SFAS
        No. 154 also addresses the reporting of a correction of an error by restating
        previously issued financial statements. SFAS No. 154 is effective for accounting
        changes and corrections of errors made in fiscal years beginning after December
        15, 2005. The Company will adopt this pronouncement beginning in fiscal year
        2006.
 
 **2.**
              **Restatement
                  of Financial Statements**
  Accounting
        for Leases **
  On
        February 7, 2005, the Office of the Chief Accountant of the Securities and
        Exchange Commission (“SEC”) issued a letter to the American Institute of
        Certified Public Accountants expressing its views regarding certain operating
        lease accounting issues and their application under GAAP. In light of this
        letter, the Company re-evaluated its lease accounting practices and determined
        that certain of its lease accounting methods for tenant improvement allowances
        and rent holiday periods were not in accordance with GAAP, as described below.
  *Tenant
        Improvement Allowances*
  The
        Company had historically accounted for tenant improvement allowances as
        reductions to the related store leasehold improvement instead of as a deferred
        liability in the consolidated balance sheets. As a result, the Company amortized
        the tenant improvement allowances over the asset life instead of over the
        lease
        term and reflected the amortization as a reduction to depreciation expense
        instead of as a reduction to rent expense. The Company also recorded tenant
        improvement allowances as a reduction of capital expenditures within investing
        activities instead of a change in operating activities in the consolidated
        statements of cash flows. The Company reassessed its accounting for tenant
        improvement allowances and has corrected its accounting policy to treat these
        allowances received as a deferred liability which is amortized, as a reduction
        of rent expense, over the lease term.
  *Rent
        Holiday Periods*
  Under
        the
        requirements of FASB Technical Bulletin 85-3, “Accounting for Operating Leases
        with Scheduled Rent Increases,” rent expense should be amortized on a
        straight-line basis over the term of the lease. Historically, the Company
        recognized rent holiday periods on a straight-line basis over the lease term
        commencing with the date the store opened. The Company re-evaluated its
        accounting for rent holidays and determined that the recognition of rent
        expense
        should commence on the date the Company takes possession of the leased space
        for
        construction purposes, which has historically been three to four months prior
        to
        a store opening date. This correction in accounting affects the recognition
        of
        rent expense and the deferred rent liabilities balance.
 
 Depreciation
 
 Previously,
        the Company depreciated building improvements made on both owned and leased
        store locations over five years. The Company has determined that a five-year
        depreciation period for such building improvements does not reflect an accurate
        estimate of the useful life of such assets. The Company has determined that
        a
        more accurate estimate of the depreciation period for each building improvement
        should be the shorter of the economic life of the improvement or the life
        of the
        building for owned building improvements, or the remaining life of the lease
        for
        leased building improvements. The effect of this restatement is to depreciate
        such assets over longer periods than the initially assigned five years. This
        correction in accounting affects depreciation expense and accumulated
        depreciation.
 
 Cash
        flow
        classification of trading investment activity
 
 The
        Company has determined that the presentation of net purchases and sales of
        trading investments in the consolidated statements of cash flows should be
        shown
        in the operating activities category rather than shown in the investing
        activities category as was previously reported. Accordingly, the Company
        has
        corrected the classification of net purchases and sales of investments of
        $36.0
        million and $14.4 million for the years ended December 31, 2002 and 2003,
        respectively to the appropriate cash flow categories for those years.
 37
  As
        a
        result of the above, the Company has restated the accompanying consolidated
        balance sheet as of December 31, 2003, and the consolidated statements of
        income
        and the consolidated statements of cash flows for the years ended December
        31,
        2002 and 2003. The following is a summary of the corrections described above
        (in
        thousands, except per share data):
 
 **As
                  of December 31, 2003**
              
              **Consolidated
                  Balance Sheet****As
                  Previously Reported**
              
              **Adjustments**
              
              **As
                  Restated**Current
                  deferred income taxes
              
              $
              15,927
              
              $
              (77
              )
              $
              15,850Total
                  current assets
              
              
              275,127
              
              
              (77
              )
              
              275,050Building
                  improvements
              
              
              -
              
              
              23,946
              
              
              23,946Leasehold
                  improvements
              
              
              100,666
              
              
              (22,527
              )
              
              78,139Total
                  properties, fixtures and equipment
              
              
              284,556
              
              
              1,419
              
              
              285,975Accumulated
                  depreciation and amortization
              
              
              (81,991
              )
              
              13,784
              
              
              (68,207
              )Total
                  net property and equipment
              
              
              202,565
              
              
              15,203
              
              
              217,768Long-term
                  deferred income taxes
              
              
              9,717
              
              
              (4,650
              )
              
              5,067Total
                  other assets
              
              
              75,546
              
              
              (4,650
              )
              
              70,896Total
                  assets
              
              
              553,
                  238
              
              
              10,476
              
              
              563,714Deferred
                  rent
              
              
              2,460
              
              
              3,408
              
              
              5,868Total
                  non-current liabilities
              
              
              6,127
              
              
              3,408
              
              
              9,535Retained
                  earnings
              
              
              278,993
              
              
              7,068
              
              
              286,061Total
                  shareholders’ equity
              
              
              489,886
              
              
              7,068
              
              
              496,954Total
                  liabilities and shareholders’ equity
              
              $
              553,238
              
              $
              10,476
              
              $
              563,714
 
 
 **Consolidated
                  Statement of Income****Fiscal
                  year ended December 31, 2002**
              
              **As
                  Previously Reported**
              
              **Adjustments**
              
              **As
                  Restated**Operating
                  expenses
              
              $
              178,374
              
              $
              187
              
              $
              178,561Depreciation
                  and amortization
              
              
              17,711
              
              
              (3,230
              )
              
              14,481Total
                  Selling, General and Administrative
              
              
              196,085
              
              
              (3,043
              )
              
              193,042Operating
                  income
              
              
              90,501
              
              
              3,043
              
              
              93,544Income
                  before provision for income tax
              
              
              95,348
              
              
              3,043
              
              
              98,391Provision
                  for income taxes
              
              
              36,374
              
              
              1,285
              
              
              37,659Net
                  Income
              
              $
              58,974
              
              $
              1,758
              
              $
              60,732EARNINGS
                  PER COMMON SHARE:Basic
              
              $
              0.84
              
              $
              0.03
              
              $
              0.87Diluted
              
              $
              0.83
              
              $
              0.02
              
              $
              0.85
 
 
 **Consolidated
                  Statement of Income****Fiscal
                  year ended December 31, 2003**
              
              **As
                  Previously Reported**
              
              **Adjustments**
              
              **As
                  Restated**Operating
                  expenses
              
              $
              234,626
              
              $
              802
              
              $
              235,428Depreciation
                  and amortization
              
              
              23,763
              
              
              (4,372
              )
              
              19,391Total
                  Selling, General and Administrative
              
              
              258,389
              
              
              (3,570
              )
              
              254,819Operating
                  income
              
              
              87,385
              
              
              3,570
              
              
              90,955Income
                  before provision for income tax
              
              
              91,842
              
              
              3,570
              
              
              95,412Provision
                  for income taxes
              
              
              35,313
              
              
              1,397
              
              
              36,710Net
                  Income
              
              $
              56,529
              
              $
              2,173
              
              $
              58,702EARNINGS
                  PER COMMON SHARE:Basic
              
              $
              0.79
              
              $
              0.03
              
              $
              0.82Diluted
              
              $
              0.78
              
              $
              0.03
              
              $
              0.81
 38
 
 **Consolidated
                  Statement Of Cash Flows****Fiscal
                  year ended December 31, 2002**
              
              **As
                  Previously Reported**
              
              **Adjustments**
              
              **As
                  Restated**Net
                  cash provided by operating activities
              
              $
              72,323
              
              $
              (35,783
              )
              $
              36,540Net
                  cash used in investing activities
              
              $
              (77,475
              )
              $
              35,783
              
              $
              (41,692
              )
 
 **Consolidated
                  Statement Of Cash Flows****Fiscal
                  year ended December 31, 2003**
              
              **As
                  Previously Reported**
              
              **Adjustments**
              
              **As
                  Restated**Net
                  cash provided by operating activities
              
              $
              79,536
              
              $
              (14,258
              )
              $
              65,278Net
                  cash used in investing activities
              
              $
              (112,860
              )
              $
              14,258
              
              $
              (98,602
              )
 
 **3.**
              **Investments**
  Investments
        in debt and equity securities are recorded as required by SFAS No. 115,
        "Accounting for Certain Investments in Debt and Equity Securities" as trading
        securities. The Company's investments are comprised primarily of investment
        grade federal and municipal bonds and commercial paper. Trading investments
        are
        recorded at fair value. The portion of trading gains and (losses) for the
        period
        that relates to trading securities still held at December 31, 2002, 2003
        and
        2004 were $85,000, $24,000, and $(453,000), respectively.
   **4.**
              **Variable
                  Interest Entities**
  The
        Company formed long-term partnerships in two instances for the purpose of
        acquiring and managing particular store sites, which were in turn leased
        to the
        Company. Previously, the Company accounted for these partnerships under the
        equity method with an initial investment of approximately $3.0 million. In
        fiscal 2004, these partnerships were consolidated pursuant to the requirements
        of FIN 46R because the Company is the only partner in these partnerships
        that
        has capital at risk and therefore is the primary beneficiary. The assets
        of the
        partnership consist only of real estate with a carrying value of approximately
        $3.0 million and there is no mortgage debt or other significant liabilities
        associated with the entities. The income statement impact of consolidation
        versus equity accounting is not significant. No such arrangements exist in
        any
        of the other store locations currently owned or leased by the Company.
  At
        December 31, 2004, the Company had an interest in a variable interest
        entity to develop a shopping center in La Quinta, California, featuring one
        of
        its stores, in which it will lease a store for opening in 2005. The construction
        of this shopping center is planned for completion in 2005. As of December
        31,
        2004, this entity did not have any assets or liabilities.
  **5.**
              **Purchase
                  of Distribution Facilities**
  In
        2003,
        the Company purchased two distributions centers. On January 28, 2003, the
        Company completed the purchase of a distribution center in Houston to service
        its Texas store operations. The facility was acquired for $23.0 million in
        cash
        and contains built in refrigerated and frozen storage space. On December
        30,
        2003, the Company completed the purchase of a refrigerated distribution center
        in the City of Commerce. The facility was acquired for $8.4 million in
        cash.
  **6.**
              **Income
                  Tax Provision**
  The
        provision for income taxes for the three years ended December 31, 2004 are
        as
        follows:
   **Years
                  Ended December 31,**(Amounts
                  in thousands)**2002**
              
              **2003**
              
              **2004**Current:
              
              (Restated)
              
              (Restated)Federal
              
              $
              30,430
              
              $
              32,428
              
              $
              19,739State
              
              
              7,335
              
              
              6,786
              
              
              6,30637,765
              
              
              39,214
              
              
              26,045Deferred
                  federal and state
              
              
              (106
              )
              
              (2,504
              )
              
              (11,524
              )Provision
                  for income tax
              
              $
              37,659
              
              $
              36,710
              
              $
              14,521
 
 39
  Differences
        between the provision for income taxes and income taxes at the statutory
        federal
        income tax rate for the three years ended December 31, 2004 are as follows:
  **Year
                  Ended December 31,**(Amounts
                  in thousands)**2002**
              
              **2003**
              
              **2004****(As
                  Restated, see Note 2)**
              
              **(As
                      Restated, see Note 2)****Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**Income
                  tax at statutory federal rate
              
              $
              34,437
              
              
              35.0
              %
              $
              33,394
              
              
              35.0
              %
              $
              14,825
              
              
              35.0
              %State
                  income taxes, net of federal income tax effect
              
              
              5,372
              
              
              5.5
              
              
              4,840
              
              
              5.1
              
              
              1,281
              
              
              3.0Effect
                  of permanent differences
              
              
              (631
              )
              
              (0.6
              )
              
              (418
              )
              
              (0.4
              )
              
              (984
              )
              
              (2.3
              )Valuation
                  allowance
              
              
              (640
              )
              
              (0.7
              )
              
              -
              
              
              -
              
              
              706
              
              
              1.7Other
              
              
              (506
              )
              
              (0.5
              )
              
              (848
              )
              
              (0.9
              )
              
              (1,182
              )
              
              (2.8
              )Welfare
                  to work, LARZ, and other job credits
              
              
              (373
              )
              
              (0.4
              )
              
              (258
              )
              
              (0.3
              )
              
              (125
              )
              
              (0.3
              )$
              37,659
              
              
              38.3
              %
              $
              36,710
              
              
              38.5
              %
              $
              14,521
              
              
              34.3
              %
 
  A
        detail
        of the Company’s net deferred tax assets as of December 31, 2003 and 2004 is as
        follows:
  **Year
                  Ended December 31,**(Amounts
                  in thousands)**2003**
              
              **2004****(As
                  Restated, see Note 2)**CURRENT
                ASSETS (LIABILITIES)Inventory
              
              $
              733
              
              $
              2,147Uniform
                  inventory capitalization
              
              
              3,120
              
              
              4,687Prepaid
                  Expenses
              
              
              -
              
              
              (1,068
              )Liability
                  for accrued expenses
              
              
              935
              
              
              3,387Workers’
                  compensation
              
              
              6,985
              
              
              15,597Deferred
                  rent
              
              
              1,904
              
              
              2,639State
                  taxes
              
              
              2,197
              
              
              2,215Other,
                  net
              
              
              (24
              )
              
              (696
              )Valuation
                  Allowance
              
              
              -
              
              
              (63
              )TOTAL
                  CURRENT ASSETS (LIABILITIES)
              
              
              15,850
              
              
              28,845NON-CURRENT
                  ASSETS (LIABILITIES)Depreciation
                  and amortization
              
              
              1,903
              
              
              533Net
                  operating loss carry- forwards
              
              
              7,329
              
              
              7,727Other,
                  net
              
              
              (265
              )
              
              (142
              )Valuation
                  allowance
              
              
              (3,900
              )
              
              (4,544
              )TOTAL
                  NON-CURRENT ASSETS (LIABILITIES)
              
              
              5,067
              
              
              3,574NET
                  DEFERRED TAX ASSETS
              
              $
              20,917
              
              $
              32,419
  As
        of
        December 31, 2004, the Company had federal and state net operating loss
        carryforwards of approximately $19.7 million and $17.0 million, respectively,
        which can be used to offset future taxable income.  The utilization of
        these net operating loss carryforwards is limited and the carryforwards expire
        at various dates through 2018.  The Company also has approximately $1.2
        million of California Enterprise Zone credits that can be carried forward
        indefinitely.  The Company maintains a valuation allowance to reduce
        certain deferred tax assets to amounts that are, in management’s estimation,
        more likely than not to be realized.  This allowance primarily relates to
        the deferred tax assets acquired in the acquisition of Universal International,
        Inc. (see Note 7) and for certain state net operating loss carry-forwards.
  At
        December 31, 2004 and 2003, the Company had approximately $0.5 million and
        $1.5
        million, respectively, of tax contingency reserves for probable income tax
        contingencies not yet resolved with federal and state tax authorities.  The
        Company believes it has accrued sufficient amounts for estimated income tax
        liabilities.
  40
 
 **7.**
              **Related-Party
                  Transactions**
  The
        Company leases certain retail facilities from its significant shareholders
        and
        their affiliates. Rental expense for these facilities was approximately $2.2
        million, $2.1 million, and $2.1 million in 2002, 2003, and 2004, respectively.
        In addition, one of the Company’s directors, who resigned in the first quarter
        of 2005 was a trustee of a trust that owns a property on which a single 99¢ Only
        Stores is located. Rent expense on this store amounted to $0.3 million in
        2002,
        2003, and 2004.
  Effective
        September 30, 2000, the Company sold its discontinued operation, Universal
        International, Inc. (“Universal”) to a company owned 100% by David and Sherry
        Gold, both significant shareholders of 99¢ Only Stores. Mr. Gold was and still
        is Chairman of the Company's Board of Directors.  The sale price consisted
        of $33.9 million in cash and was collected at closing. These proceeds were
        invested in the Company’s investment accounts. In connection with this sale, a
        management services and lease agreement was entered into between Universal
        and
        the Company. The service agreement provided for the Company to render certain
        administrative services to Universal, including information technology support,
        accounting, buying and human resource functions. The Company charged Universal
        management fees for these services. The lease agreement involved the property
        that served as Universal’s primary warehouse and distribution facility. The
        lease was structured on a triple net basis and provided for rental payments
        of
        $120,000 per month. Universal ended its service agreement and lease arrangement
        with the Company in December 2003.
  The
        following is a summary of the transactions between the Company and Universal
        for
        2002 and 2003 and a reconciliation of amounts due to/from shareholder resulting
        from such transactions (amounts in thousands):
 **Year**
                
                **Management
                    Fees**
                
                **Rental
                    Income**
                
                **Inventory
                    Sales To Universal**
                
                **Inventory
                    Purchases From Universal**
                
                **Payments
                    Received**
                
                **Balance
                    (To) From Shareholder End of Period**2002
                
                $
                1,500
                
                $
                1,440
                
                
                -
                
                $
                (460
                )
                $
                407
                
                $
                1,2322003
                
                $
                1,440
                
                $
                1,380
                
                
                -
                
                
                -
                
                $
                (4,052
                )
                
                -2004
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
  **8.**
              **Commitments
                  and Contingencies**
  **Credit
        Facilities**
  The
        Company does not maintain any credit facilities with any financial
        institutions.
  **Lease
        Commitments**
  The
        Company leases various facilities under operating leases (except for one
        location which is classified as a capital lease) expiring at various dates
        through 2019. Some of the lease agreements contain renewal options and/or
        provide for rent escalations or increases based on the Consumer Price Index.
        Total minimum lease payments under each of these lease agreements, including
        scheduled increases, are charged to operations on a straight-line basis over
        the
        term of each respective lease. Certain leases require the payment of property
        taxes, maintenance and insurance. Rental expense charged to operations in
        2002,
        2003, and 2004 was approximately $25.1 million, $32.9 million, and $43.4
        million
        of which $0.2 million, $0.1 million, and $0.1 million was paid as percentage
        rent based on sales volume, for each of the years then ended, respectively.
        Sub-lease income earned in 2002, 2003 and 2004 was approximately $0.5 million,
        $0.7 million and $0.8 million. As of December 31, 2004, the minimum annual
        rentals payable and future minimum sub-lease income under all non-cancelable
        operating leases were as follows: (amounts in thousands):
  **Year
                  ending December 31:**
              
              **Operating
                  leases**
              
              **Capital
                  leases**
              
              **Future
                  Minimum Sub-lease Income**2005
              
              $
              32,551
              
              $
              106
              
              $
              6852006
              
              
              29,846
              
              
              106
              
              
              4392007
              
              
              25,851
              
              
              106
              
              
              4122008
              
              
              24,358
              
              
              107
              
              
              3322009
              
              
              18,925
              
              
              107
              
              
              191Thereafter
              
              
              46,346
              
              
              674
              
              
              264Future
                  minimum lease payments
              
              $
              177,877
              
              $
              1,206
              
              $
              2,323Less
                  amount representing interest
              
              
              
              
              
              (395
              )Present
                  value of future lease payments
              
              
              
              
              $
              811
 
 The
        gross
        asset amount recorded under the capital lease is $957,000 with $234,000 of
        accumulated depreciation.
 
 41
  Prior
          to
          the sale of Universal in 2000, the Company guaranteed certain obligations
          under
          three leases in which Universal, or a subsidiary, was the lessee. 
Subsequent to the sale, Universal may have defaulted on these three lease
          agreements.  The Company may be contingently liable for lease payments
          totaling up to $1.1 million as of December 31, 2004, as well as additional
          costs
          for attorney fees, rent increases and common area maintenance
          charges.  As part of the Universal sale in 2000, David and Sherry Gold
          agreed to indemnify the Company for any and all attorney fees, costs, judgments,
          settlements or other payments that the Company may make under its guarantees
          of
          these leases.
 **Workers’
        Compensation**
  Effective
        August 11, 1993, the Company became self-insured as to workers' compensation
        claims. The Company provides for losses of estimated known and incurred but
        not
        reported insurance claims. At December 31, 2003 and 2004, the Company had
        established reserves of approximately $16.3 million and $36.4 million,
        respectively, for estimated workers’ compensation claims. The Company recorded
        an adjustment in the fourth quarter of 2003 and 2004 in the amount of $7.9
        million and $10.1 million, respectively, to adjust its accrued workers'
        compensation reserve to the amount determined by its most recent actuarial
        study.
 
  **Legal
        Matters**
  **Gillette
        Company vs. 99¢ Only Stores (Los Angeles Superior Court).** The
        trial in this matter resulted in a jury verdict of $0.5 million for Gillette
        on
        its complaint and $0.2 million for the Company on its cross-complaint. The
        lawsuit arose out of a dispute over the interpretation of an alleged contract
        between the parties, with Gillette alleging that the Company owed Gillette
        an
        additional principal sum of approximately $2.0 million (apart from approximately
        $1.0 million already paid to Gillette for product purchases). In post trial
        motions, the court vacated and ordered a new trial as to the $0.5 million
        verdict for Gillette on its complaint and dismissed the $0.2 million verdict
        for
        the Company on its cross complaint. Both parties have appealed from these
        post
        trial rulings. The Company is unable to predict the likely outcome of this
        matter, but does not expect such outcome to have a material adverse effect
        on
        the Company’s results of operations or financial condition.
 
 **Melgoza
        vs. 99¢ Only Stores (Los Angeles Superior Court); Ramirez vs. 99¢ Only Stores
        (Los Angeles Superior Court).** These
        putative class actions, originally filed on May 7, 2003, and June 9, 2004,
        respectively, each alleged that the Company improperly classified Store Managers
        in the Company's California stores as exempt from overtime requirements,
        as well
        as meal/rest period and other wage and hour requirements imposed by California
        law. On December 29, 2004, the Court gave final approval to the settlement
        of
        these actions. The Company had provided a reserve of $6.0 million for these
        matters. However, based upon the claims filed and the fact that the period
        in
        which to file claims has ended, the Company ultimately paid approximately
        $4.9
        million. While there were a small number of individuals who opted out of
        the
        settlement, thereby preserving their ability to bring a claim against the
        Company with respect to these same allegations, management does not expect
        any
        future claims by these individuals to have a material adverse effect on the
        Company’s results of operations or financial condition.
 
 **Galvez
        and Zaidi vs. 99¢ Only Stores (Los Angeles Superior Court)** . 
        On August 9, 2004, Galvez and Zaidi filed a putative class action making
        substantially the same allegations as were made in the Melgoza complaint,
        plus
        an additional claim for unreimbursed mileage.   The parties have
        reached a settlement of this matter, which is subject to Court approval. 
Under this settlement, the Company will pay $0.006 million in settlement
        payments and attorney fees.  To the extent Court approval is not obtained,
        the Company is unable to predict the likely outcome in this matter, although
        the
        Company does not expect such outcome to have a material adverse effect on
        the
        Company’s results of operations or financial condition.
  **Ortiz
        and Perez vs. 99¢ Only Stores (U.S. District Court, Southern District of
        Texas)** .
        On July
        23, 2004, the plaintiffs filed a putative collective action under the federal
        Fair Labor Standards Act alleging that Store Managers and Assistant Managers
        in
        the Company’s Arizona, California, Nevada and Texas stores were misclassified as
        exempt employees under federal law and seeking to recover allegedly unpaid
        overtime wages as well as penalties, interest and attorney fees for these
        employees. On March 15, 2005, the Company participated in a mediation that
        led
        to a tentative settlement of this matter. Under that settlement, which is
        subject to Court approval, the Company will pay a maximum of approximately
        $200,000 in settlement payments and attorney fees, subject to plaintiff opt
        in
        rates. The Company is currently working to finalize the settlement agreement
        and
        obtain Court approval. To the extent such approval is not obtained, the Company
        is unable to predict the likely outcome in this matter, although the Company
        does not expect such outcome to have a material adverse effect on the Company’s
        results of operations or financial condition. The Company established reserves
        for this matter at December 31, 2004 that it believes are sufficient.
  42
 
 **Securities
        Class Action Lawsuits.** On June
        15, 2004, David Harkness filed a class action suit against the Company and
        certain of its executive officers in the United States District Court for
        the
        Central District of California. Harkness, who seeks to represent all who
        purchased shares of the Company's common stock between March 11 and June
        10,
        2004, alleges that the Company's public statements during the class period
        violated the Securities Exchange Act of 1934 by failing to adequately describe
        various aspects of the Company's operations and prospects. Soon thereafter,
        several other alleged shareholders filed complaints in the same court, making
        substantially the same allegations against the same defendants and seeking
        to
        represent the same putative class. Three such plaintiffs, Joseph Boodaie,
        Morgan
        Boodaie and Samuel Toovy, were designated “lead plaintiffs” pursuant to the
        Private Securities Class Action Reform Act (“PSLRA”), and filed a consolidated
        amended complaint that superceded the various complaints originally filed.
        The
        defendants moved to dismiss the consolidated amended complaint for failure
        to
        state a claim upon which relief can be granted, in particular by failing
        to
        satisfy the pleading standards of PSLRA. By order dated March 30, 2005, the
        Court granted the defendants’ motion to dismiss, and granted the plaintiffs
        leave to amend the complaint. The plaintiffs filed a second amended complaint
        on
        April 29, 2005. The defendants have moved to dismiss the second amended
        complaint. That motion has been fully briefed and is awaiting the court’s
        decision. The Company is unable to predict the likely outcome in this matter,
        and whether such outcome may have a material adverse effect on the Company’s
        results of operations or financial condition. On June 16, 2004, another alleged
        shareholder, Paul Doherty, filed a shareholder derivative suit in Los Angeles
        County Superior Court, repeating the allegations of the Harkness complaint
        and
        demanding, purportedly on behalf of the Company, damages and other relief
        against certain of the Company's executive officers and directors for alleged
        breaches of fiduciary and other duties. The defendants have moved to stay
        that
        action pending the resolution of the class action litigation described above.
        Plaintiffs have recently agreed to such a stay, and the parties are now in
        the
        process of documenting that stipulation for approval by the court.
  **Others.** The
        Company is named as a defendant in various other legal matters arising in
        the
        normal course of business. In management’s opinion, none of these
        matters are expected to have a material adverse effect on either the
        Company’s financial position, results of operations, or overall
        liquidity.
  
 **9.**
              **Stock-Based
                  Compensation Plans**
  The
        Company has one stock option plan (the 1996 Stock Option Plan, as amended).
        The
        plan is a fixed plan, which provides for the granting of non-qualified and
        incentive options to purchase up to 17,000,000 shares of common stock, of
        which
        4,440,000 are available as of December 31, 2004 for future option grants.
        Options may be granted to officers, employees, directors and consultants.
        All
        grants are made at fair market value at the date of grant or at a price
        determined by the compensation committee, which consists of four independent
        members of the Board of Directors. Options vest over a three-year period,
        one-third one year from the date of grant and one-third per year thereafter.
        Options expire ten years from the date of grant. The Company accounts for
        its
        stock option plan under APB Opinion No. 25 under which no compensation cost
        has
        been recognized in fiscal 2002, 2003, and 2004. The plan will expire in 2006.
        The following table summarizes stock options available for grant:
  **Year
                  Ended December 31,****2002**
              
              **2003**
              
              **2004**Beginning
                  balance
              
              
              2,463,061
              
              
              6,199,566
              
              
              5,268,045Authorized
              
              
              4,665,633
              
              
              -
              
              
              -Granted
              
              
              (1,030,521
              )
              
              (1,074,579
              )
              
              (1,268,991
              )Cancelled
              
              
              101,393
              
              
              143,058
              
              
              440,946Available
                  for future grant
              
              
              6,199,566
              
              
              5,268,045
              
              
              4,440,000
 
  A
        summary
        of the status of the Company’s stock option plan at December 31, 2002, 2003, and
        2004 and changes during the years then ended is presented in the table and
        narrative below:
  **Year
                  Ended December 31,****2002**
              
              **2003**
              
              **2004****Shares**
              
              **Weighted****Average****Exercise
                  Price**
              
              **Shares**
              
              **Weighted****Average****E****xercise
                  Price**
              
              **Shares**
              
              **Weighted****Average****Exercise
                  Price**Outstanding
                  at the beginning of the year
              
              
              5,194,729
              
              $
              15.00
              
              
              5,260,782
              
              $
              17.86
              
              
              4,428,672
              
              $
              21.12Granted
              
              
              1,030,521
              
              $
              29.60
              
              
              1,074,579
              
              $
              29.37
              
              
              1,268,991
              
              $
              17.63Exercised
              
              
              (863,075
              )
              $
              14.50
              
              
              (1,763,631
              )
              $
              15.47
              
              
              (77,547
              )
              $
              14.38Cancelled
              
              
              (101,393
              )
              $
              19.87
              
              
              (143,058
              )
              $
              26.20
              
              
              (440,946
              )
              $
              25.85Outstanding
                  at the end of the year
              
              
              5,260,782
              
              $
              17.86
              
              
              4,428,672
              
              $
              21.12
              
              
              5,179,170
              
              $
              20.05Exercisable
                  at the end of the year
              
              
              3,046,933
              
              $
              13.44
              
              
              2,467,004
              
              $
              15.68
              
              
              3,076,396
              
              $
              18.43Weighted
                  average fair value of options granted
              
              
              
              
              $
              17.86
              
              
              
              
              $
              21.12
              
              
              
              
              $
              20.05
 43
  The
        following table summarized information about stock options outstanding at
        December 31, 2004:
  **Range
                  of****Exercise
                  Prices**
              
              **Options****Outstanding**
              
              **Weighted
                  Average Remaining****Contractual
                  life**
              
              **Weighted
                  Average Exercise****Price**
              
              **Options****Exercisable**
              
              **Weighted
                  Average Exercise****Price**$2.64
                  - $5.50
              
              
              482,809
              
              
              1.9
              
              $
              4.12
              
              
              482,861
              
              $
              4.12$5.51
                  - $8.70
              
              
              1,300
              
              
              2.5
              
              $
              6.53
              
              
              1,300
              
              $
              6.53$8.71
                  - $15.75
              
              
              392,051
              
              
              3.9
              
              $
              12.03
              
              
              287,643
              
              $
              11.31$15.76
                  - $22.50
              
              
              2,658,143
              
              
              6.9
              
              $
              18.29
              
              
              1,516,604
              
              $
              18.58$22.51
                  - $35.00
              
              
              1,644,867
              
              
              7.6
              
              $
              29.49
              
              
              787,988
              
              $
              29.555,179,170
              
              
              6.4
              
              $
              20.05
              
              
              3,076,396
              
              $
              18.43
 
  **10.**
              **Operating
                  Segments**
  The
        Company has two business segments: retail operations and wholesale distribution.
        The product offerings emphasize recognized brand-name consumable
        merchandise. The wholesale segment, Bargain Wholesale, sells primarily the
        same
        merchandise as the retail segment at prices generally below normal wholesale
        levels to local, regional and national distributors and exporters.
  The
        accounting policies of the segments are the same as those described above
        in the
        summary of significant accounting policies. The Company evaluates segment
        performance based on the net sales and gross profit of each segment. Management
        does not track segment data or evaluate segment performance on additional
        financial information. As such, there are no separately identifiable segment
        assets or separately identifiable statements of income data (below gross
        profit)
        to be disclosed. The Company accounts for inter-segment transfers at cost
        through its inventory accounts.
  The
        Company had no customers representing more than 10 percent of net sales.
        Substantially all of the Company’s net sales were to customers located in the
        United States. Reportable segment information for the years ended December
        31,
        2002, 2003, and 2004 follows (amounts in thousands):
  **Retail**
              
              **Wholesale**
              
              **Total**2002
                  (As restated)Net
                  sales
              
              $
              663,983
              
              $
              49,959
              
              $
              713,942Gross
                  profit
              
              
              276,560
              
              
              10,026
              
              
              286,5862003
                  (As restated)Net
                  sales
              
              $
              816,348
              
              $
              46,112
              
              $
              862,460Gross
                  profit
              
              
              336,642
              
              
              9,132
              
              
              345,7742004Net
                  sales
              
              $
              929,896
              
              $
              42,277
              
              $
              972,173Gross
                  profit
              
              
              371,180
              
              
              8,418
              
              
              379,598
 
  **11.**
              **Employee
                  Benefit Plans**
  **401(k)
        Plan**
  In
        1998
        the Company adopted a 401(k) Plan (the “Plan”). All full-time employees are
        eligible to participate in the Plan after one year of service. The Company
        may
        elect to match employee contributions or make a discretionary contribution
        to
        the Plan, but historically has elected not to do so. For the years ended
        December 31, 2002, 2003, and 2004, no matching or discretionary
        contributions were made.
  44
 
 **Compensation
        Deferral Plan**
  Effective
        January 1, 2000, the Company adopted a deferred compensation plan to provide
        certain key management employees the ability to defer a portion of their
        base
        compensation and/or bonuses. The plan is an unfunded nonqualified plan. The
        deferred amounts and earnings thereon are payable to participants, or designated
        beneficiaries, at specified future dates, upon retirement or death. The Company
        does not make contributions to this plan or guarantee earnings. Funds in
        the
        plan are held in a rabbi trust. In accordance with EITF No. 97-14, “Accounting
        for Deferred Compensation Arrangements Where Amounts Earned are Held in a
        Rabbi
        Trust,” the assets and liabilities of a rabbi trust must be accounted for as if
        they are assets and liabilities of the Company. The assets held in the rabbi
        trust are not available for general corporate purposes. In addition, all
        earnings and expenses of the rabbi trust are reported in the Company’s
        consolidated statement of income. The rabbi trust is subject to creditor
        claims
        in the event of insolvency. The deferred compensation liability and related
        long-term asset was $2.1 million and $2.8 million as of December 31, 2003
        and
        2004, respectively.
  **12.**
              **Stock
                  Split**
  On
        March
        9, 2002, the Company’s Board of Directors approved a four-for-three stock split
        distributed on April 3, 2002 to shareholders of record on March 25, 2002.
        All
        share and per share data has been restated to reflect these stock
        splits.
  **13.**
              **Unaudited
                  Quarterly Financial
                  Information**
  The
        following table sets forth certain unaudited results of operations for each
        quarter during 2003 and 2004 (as restated - see Note 2). The unaudited
        information has been prepared on the same basis as the audited financial
        statements and includes all adjustments which management considers necessary
        for
        a fair presentation of the financial data shown. The operating results for
        any
        quarter are not necessarily indicative of the results to be attained for
        any
        future period.
  **For
                  Quarter Ended 2003****(Amounts
                  in thousands except per share data)****1st
                  Quarter**
              
              **2nd
                  Quarter**
              
              **3rd
                  Quarter**
              
              **4th
                  Quarter****As
                  Previously Reported**
              
              **As
                  restated**
              
              **As
                  Previously Reported**
              
              **As
                  restated**
              
              **As
                  Previously Reported**
              
              **As
                  restated**
              
              **As
                  Previously Reported**
              
              **As
                  restated****Net
                  sales:**99¢
                  Only Stores
              
              $
              184,713
              
              $
              184,713
              
              $
              195,052
              
              $
              195,052
              
              $
              200,567
              
              $
              200,567
              
              $
              236,016
              
              $
              236,016Bargain
                  Wholesale
              
              
              11,710
              
              
              11,710
              
              
              11,981
              
              
              11,981
              
              
              10,969
              
              
              10,969
              
              
              11,452
              
              
              11,452Total
              
              
              196,423
              
              
              196,423
              
              
              207,033
              
              
              207,033
              
              
              211,536
              
              
              211,536
              
              
              247,468
              
              
              247,468Gross
                  profit
              
              
              79,398
              
              
              79,398
              
              
              82,803
              
              
              82,803
              
              
              82,877
              
              
              82,877
              
              
              100,695
              
              
              100,696Operating
                  income
              
              
              22,915
              
              
              24,069
              
              
              23,069
              
              
              24,087
              
              
              18,123
              
              
              18,991
              
              
              23,278
              
              
              23,808Net
                  income
              
              $
              14,609
              
              $
              15,307
              
              $
              14,836
              
              $
              15,452
              
              $
              12,102
              
              $
              12,627
              
              $
              14,982
              
              $
              15,316**Earnings
                  per common share:**Basic
              
              $
              0.21
              
              $
              0.22
              
              $
              0.21
              
              $
              0.22
              
              $
              0.17
              
              $
              0.18
              
              $
              0.21
              
              $
              0.21Diluted
              
              $
              0.20
              
              $
              0.21
              
              $
              0.21
              
              $
              0.21
              
              $
              0.17
              
              $
              0.17
              
              $
              0.21
              
              $
              0.21Shares
                  outstanding:Basic
              
              
              70,469
              
              
              70,469
              
              
              71,038
              
              
              71,038
              
              
              71,929
              
              
              71,929
              
              
              72,044
              
              
              72,044Diluted
              
              
              71,536
              
              
              71,536
              
              
              72,346
              
              
              72,346
              
              
              73,033
              
              
              73,033
              
              
              72,779
              
              
              72,779
 45
  **For
                  Quarter Ended 2004****(Amounts
                  in thousands except per share data)****1stQuarter**
              
              **2nd
                  Quarter**
              
              **3rd
                  Quarter**
              
              **4th
                  Quarter****As
                  Previously Reported**
              
              **As
                  restated**
              
              **As
                  Previously Reported**
              
              **As
                  restated**
              
              **As
                  Previously Reported**
              
              **As
                  restated****Net
                  sales:**99¢
                  Only Stores
              
              $
              218,812
              
              $
              218,812
              
              $
              226,931
              
              $
              226,931
              
              $
              229,064
              
              $
              229,064
              
              $
              255,089Bargain
                  Wholesale
              
              
              11,238
              
              
              11,238
              
              
              10,335
              
              
              10,335
              
              
              9,881
              
              
              9,881
              
              
              10,823Total
              
              
              230,050
              
              
              230,050
              
              
              237,266
              
              
              237,266
              
              
              238,945
              
              
              238,945
              
              
              265,912Gross
                  profit
              
              
              91,633
              
              
              92,229
              
              
              85,867
              
              
              86,539
              
              
              91,080
              
              
              91,734
              
              
              109,096Operating
                  income
              
              
              13,662
              
              
              15,169
              
              
              4,410
              
              
              5,859
              
              
              6,521
              
              
              7,821
              
              
              10,240Net
                  income
              
              $
              9,285
              
              $
              10,204
              
              $
              2,580
              
              $
              3,463
              
              $
              4,716
              
              $
              5,506
              
              $
              8,658**Earnings
                  per common share:**Basic
              
              $
              0.13
              
              $
              0.14
              
              $
              0.04
              
              $
              0.05
              
              $
              0.07
              
              $
              0.08
              
              $
              0.12Diluted
              
              $
              0.13
              
              $
              0.14
              
              $
              0.04
              
              $
              0.05
              
              $
              0.07
              
              $
              0.08
              
              $
              0.12Shares
                  outstanding:Basic
              
              
              72,064
              
              
              72,064
              
              
              71,437
              
              
              71,437
              
              
              69,500
              
              
              69,500
              
              
              69,507Diluted
              
              
              72,717
              
              
              72,717
              
              
              71,828
              
              
              71,828
              
              
              69,746
              
              
              69,746
              
              
              69,778
  **Item
        9. Changes in and Disagreements with Accountants on Accounting
        and** **Financial Disclosure**
 
 On
        April
        6, 2004, the Company’s audit committee dismissed PricewaterhouseCoopers LLP
        (“PWC”) as the Company’s independent registered public accounting firm but
        retained them for tax services. The decision to change independent registered
        public accounting firms was not the result of any disagreement between the
        Company and PWC on any matters of accounting principles or practices, financial
        statement disclosure, or auditing scope or procedure. The audit reports of
        PWC
        with respect to the consolidated financial statements as of and for the fiscal
        years ended December 31, 2003 and 2002 did not contain any adverse opinion
        or
        disclaimer of opinion, nor were they qualified or modified as to uncertainty
        or
        audit scope.
 
 On
        April
        19, 2004, the Company’s audit committee engaged Deloitte & Touche LLP
        (“D&T”) as its independent registered public accounting firm to audit its
        financial statements for the year ended December 31, 2004. During the Company’s
        two most recent years ended December 31, 2003 and subsequent interim period
        through April 19, 2004, the Company did not consult with D&T with respect to
        the application of accounting principles to a specified transaction, either
        completed or proposed, or the type of audit opinion that might be rendered
        on
        the Company’s consolidated financial statements or any other matters or
        reportable events as set forth in Items 304 (a) (2) (i) and (ii) of Regulation
        S-K.
  **Item
        9A . Controls and Procedures**
  **Evaluation
        of Disclosure Controls and Procedures**
  We
        evaluated the design and operating effectiveness of our disclosure controls
        and
        procedures as of December 31, 2004, under the supervision and with the
        participation of our management, pursuant to Rule 13a-15(b) of the Securities
        Exchange Act of 1934, as amended (the "Securities Exchange Act"). Based on
        this
        evaluation, our Chief Executive Officer and Interim Chief Financial Officer
        concluded that, because of the deficiencies in our internal control over
        financial reporting described below, our disclosure controls and procedures
        as
        defined in Rule 13a-15(e) were not effective in ensuring that information
        required to be included in our periodic SEC filings is recorded, processed,
        summarized and reported within the time periods specified. Notwithstanding
        management's assessment that our internal control over financial reporting
        as of December 31, 2004 was ineffective and the material weaknesses
        described below, we believe that the consolidated financial statements contained
        in our Annual Report on Form 10-K for 2004 present our financial condition,
        results of operations and cash flows for the fiscal years covered thereby
        in all
        material respects, and we received unqualified audit reports from our
        independent registered public accounting firms on these consolidated
        financial statements.
  46
 
 **Management’s
        Report on Internal Control Over Financial Reporting**
  Management
        is responsible for establishing and maintaining an adequate system of internal
        control over financial reporting, pursuant to Rule 13a-15(c) of the Securities
        Exchange Act. This system is intended to provide reasonable assurance regarding
        the reliability of financial reporting and the preparation of financial
        statements for external purposes in accordance with accounting principles
        generally accepted in the United States.
  A
        company’s internal control over financial reporting includes policies and
        procedures that: (i) pertain to the maintenance of records that, in reasonable
        detail, accurately and fairly reflect the transactions and dispositions of
        the
        assets of the company, (ii) provide reasonable assurance that transactions
        are
        recorded as necessary to permit preparation of financial statements in
        accordance with accounting principles generally accepted in the United States,
        and that receipts and expenditures of the company are being made only in
        accordance with authorizations of management and directors of the company,
        and
        (iii) provide reasonable assurance regarding prevention or timely detection
        of
        unauthorized acquisition, use or disposition of the company’s assets that could
        have a material effect on the financial statements.
  In
        2004, management selected the framework in *Internal
        Control - Integrated Framework* ,
        issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway
        Commission, to conduct an evaluation of the effectiveness of the Company’s
        internal control over financial reporting. The
        COSO
        framework summarizes each of the components of a company’s internal control
        system, including the: (i) control environment, (ii) risk assessment, (iii)
        information and communication, and (iv) monitoring (collectively, the
“entity-level controls”), as well as a company’s control activities
        (“process-level controls”). In
        addition to utilizing substantial internal resources, management also engaged
        an
        outside consulting firm to assist in various aspects of its evaluation and
        compliance efforts.
  In
        2004, management substantially completed its documentation and evaluation
        of the
        design of our internal control over financial reporting. Management then
        commenced testing to evaluate the operating effectiveness of controls in
        the
        following areas: (a) treasury, (b) inventory management, (c) fixed assets,
        (d)
        revenue, (e) expenditures, (f) human resources/payroll, (g) information
        technology, and (h) income taxes. However, the entity-level controls and
        certain
        process-level controls were not tested due to: (i) material weaknesses in
        the
        design and operating effectiveness of various processes and controls described
        more fully below, and (ii) management’s need to focus its available time and
        resources on remediating the internal control design and operating deficiencies
        that had been identified.
  Due
        to
        these factors, management did not fully complete its evaluation of the overall
        design and operating effectiveness of the Company’s internal control over
        financial reporting for the year ended December 31, 2004. Additionally,
        b ased
        on: (i) the material weaknesses noted in the evaluation of the internal control
        design, and (ii) the material weaknesses noted in the operating effectiveness
        of
        the internal controls as a result of the testing that was performed, management
        concluded that the Company’s internal control over financial reporting was not
        effective as of December 31, 2004.
  Management’s
        evaluation of the design and operating effectiveness of our internal control
        over financial reporting identified material weaknesses resulting from design
        and operating deficiencies in the internal control system. A "material weakness"
        is defined as a significant deficiency, or combination of significant
        deficiencies, that results in more than a remote likelihood that a material
        misstatement of the annual or interim financial statements will not be prevented
        or detected. A “significant deficiency” is defined as a control deficiency, or
        combination of control deficiencies, that adversely affects the Company’s
        ability to initiate, authorize, record, process, or report external financial
        data reliably in accordance with generally accepted accounting principles
        such
        that there is more than a remote likelihood that a misstatement of the Company’s
        annual or interim financial statements that is more than inconsequential
        will
        not be prevented or detected.
 
 Management
        identified the following material weaknesses in our internal control over
        financial reporting as of December 31, 2004:
 
 ***Material
                  weaknesses related to the control environment.***Management
                  concluded that it did not maintain a control environment that fully
                  emphasized the establishment of, adherence to, or adequate communication
                  regarding appropriate internal control for all aspects of its operations.
                  Specifically, management concluded that the Company did not have
                  adequate
                  controls in the following areas for the purposes of establishing,
                  maintaining and communicating its control environment: (i) a
                  sufficient number of or appropriate depth of experience for its
                  accounting
                  and finance, inventory management, real estate management, information
                  technology, or internal audit personnel, (ii) a robust risk
                  assessment or adequate compliance function, (iii) adequate segregation
                  of
                  duties, supervisory controls or information system controls in
                  certain
                  departments, (iv) adequate records storage and retention in the
                  accounts
                  payable, fixed assets, human resources, inventory pick ticketing,
                  and real
                  estate departments, where some records were missing or lost, (v)
                  an
                  adequate process to identify, record and disclose all appropriate
                  and
                  significant financial information and transactions, or (vi) an
                  adequate
                  monitoring program, including full testing of its internal control
                  systems
                  and a comprehensive internal audit function. These weaknesses increased
                  the likelihood of potential material errors in our financial
                  reporting.
 
 ***Material
        weaknesses related to the identification, evaluation, design, documentation
        and
        application of accounting policies and procedures.*** During
        the year, the Company identified the following significant deficiencies,
        which
        were considered a material weakness when aggregated. Management identified
        areas
        where internal control was missing, including inadequate documentation of
        accounting policies and procedures, inadequate cutoff procedures and a lack
        of
        properly documented management review controls. Management also concluded
        that
        its policies and procedures for the summarization and resolution of unusual
        or
        complex accounting matters were not adequate. These deficiencies increased
        the
        likelihood of potential material errors in our financial reporting.
 47
  During
        the 2004 year-end financial closing and reporting process, management also
        discovered that certain of the Company’s accounting policies and procedures were
        not applied properly. The Company did not calculate depreciation of building
        improvements for its owned and leased stores in accordance with appropriate
        economic lives or its disclosed accounting policies. Also, for certain store
        leasing transactions, the Company did not properly account for rent holidays
        and
        tenant improvement allowances. Additionally, the Company determined that
        its
        presentation of cash flows from the purchase and sale of investments in the
        consolidated statements of cash flows should be presented as operating cash
        flows rather than investing cash flows as was previously reported. These
        material weaknesses resulted in restatement of the Company’s prior annual and
        quarterly financial statements, and adjustments to present the Company’s
        financial statements for the year ended December 31, 2004 in accordance with
        generally accepted accounting principles. The impact of the restatements
        on
        previously issued financial statements is described in Note 2 to the
        consolidated financial statements.
 
 ***Material
        weakness related to preparation of account analyses, account summaries and
        account reconciliations*** *.* During
        the 2004 year-end closing and financial reporting process, the Company
        identified the following significant deficiencies, which were considered
        a
        material weakness when aggregated. In some cases, inaccurate or incomplete
        account analyses, account summaries and account reconciliations were prepared
        during the year-end financial closing and reporting process in the areas
        of
        accounts receivable, inventory, other current assets, fixed assets, other
        assets, accrued expenses, deferred rent and stock options. These deficiencies
        increased the likelihood of potential material errors in our financial
        reporting.
  ***Material
        weakness related to significant deficiencies in merchandise inventory
        management.*** **** During
        the year, the Company identified the following significant deficiencies,
        which
        were considered a material weakness when aggregated. Formal buying limits
        and
        purchase approval thresholds were not finalized or implemented for merchandise
        purchasing. Merchandise shipped from the warehouses to the stores was not
        adequately spot checked. Also, the store inventory transfer reports and
        inventory scrap reports were not consistently utilized. Additionally, there
        was
        no formal review of certain processes associated with the corporate inventory
        management system. Specifically, there was: (i) no formal review of input
        of new
        product data, including merchandise costs and retail selling prices, (ii)
        no
        formal review of certain changes to the inventory master data file, and (iii)
        no
        periodic review of the inventory master data file. Furthermore, the warehouse
        perpetual inventory records in the inventory master data file were not
        reconciled to the general ledger. These deficiencies increased the likelihood
        of
        potential material errors in our financial reporting.
 
 ***Material
        weakness related to merchandise inventory costing and valuation procedures.*** During
        the 2004 year-end financial closing and reporting process, management concluded
        that certain merchandise inventory costs were not accurate due to inventory
        master file data not being updated or lack of proper inventory pricing data
        review. Consequently, due to these inventory costing errors, the Company
        materially increased cost of sales and reduced the inventory balance.
        Additionally, as of December 31, 2004, the Company’s inadequately supported
        inventory shrinkage allowance and book-to-physical inventory reserves had
        to be
        adjusted, resulting in a material increase in the inventory balance and a
        corresponding reduction in cost of sales.
 
 ***Material
        weakness related to significant deficiencies in property and equipment
        management.*** **** During
        the year, the Company identified the following significant deficiencies,
        which
        were considered a material weakness when aggregated. There was no formal
        purchasing system or asset disposal system to help manage property and
        equipment. Additionally, there was no formal review of certain processes
        associated with the corporate fixed asset management system. Specifically,
        there
        was: (i) no review of input of new acquisitions of property and equipment,
        (ii)
        no review of changes to the fixed asset master data file, and (iii) no periodic
        review of the fixed asset master data file. Furthermore, certain leases were
        not
        evaluated properly for capital or operating lease treatment, and there was
        no
        comprehensive impairment calculation prepared for all long-term assets. These
        deficiencies increased the likelihood of potential material errors in our
        financial reporting.
 
 ***Material
        weakness related to recording and classification of property and equipment.*** During
        the 2004 year-end financial closing and reporting process, a material weakness
        was identified regarding the improper recording and classification of certain
        property and equipment, including year-end purchasing cutoff errors and
        inappropriate classification of certain assets. During this process, certain
        fixed assets had to be recorded that were purchased prior to the end of the
        year, and were not previously recorded as of December 31, 2004. Also, a
        significant amount of acquired property and equipment was identified that
        was
        improperly classified as prepaid escrow deposits as of December 31, 2004.
        Upon
        discovery, this amount was reclassified primarily to land and buildings.
        Additionally, certain construction in progress had to be reclassified to
        other
        categories of property and equipment because the assets had been placed in
        service and depreciation expense had to be recorded.
 
 ***Material
        weakness related to significant deficiencies in management information systems
        and information technology*** .
        During
        the year, the Company identified the following significant deficiencies,
        which
        were considered a material weakness when aggregated. Management concluded
        that
        the Company’s management information systems and information technology internal
        control design was deficient because the potential for unauthorized access
        to
        certain information systems and software applications existed during 2004
        in
        several departments, including corporate accounting, accounts payable, fixed
        assets, human resources, inventory management, payroll and the retail stores.
        Additionally, certain key controls for maintaining the overall integrity
        of
        systems and data processing were not properly designed and operating
        effectively. These deficiencies increased the likelihood of potential material
        errors in our financial reporting.
  48
  Since
        management was unable to fully complete the evaluation of the design and
        testing
        of the operation of our internal control over financial reporting, additional
        material weaknesses not described above may exist in those areas that were
        not
        fully evaluated or tested. To the extent that management subsequently identifies
        a material weakness in our internal control over financial reporting, it
        will be
        disclosed as required in the appropriate Form 10-Q or Form 10-K, once it
        is
        identified.
  As
        described in this Annual Report, Deloitte & Touche LLP, the Company’s
        independent registered public accounting firm, audited our consolidated
        financial statements for the year ended December 31, 2004, and has issued
        its
        report thereon, which expressed an unqualified opinion. Additionally, Deloitte
        & Touche LLP issued its attestation report on management’s assessment of the
        effectiveness of the Company’s internal control over financial reporting, which
        disclaimed an opinion on management’s assessment of the effectiveness of the
        Company’s internal control over financial reporting because of a scope
        limitation, and expressed an adverse opinion on the effectiveness of the
        Company’s internal control over financial reporting because of material
        weaknesses and the effects of a scope limitation.
  **Changes
        in Internal Control Over Financial Reporting**
  During
        the fourth quarter of 2004, the Company took certain steps that materially
        affected or are reasonably likely to materially affect our internal control
        over
        financial reporting, as described below. The Company believes that these
        steps
        improved the effectiveness of our internal control over financial
        reporting:
  (i)
              In
                  October 2004, the Company appointed a new Chief Executive Officer,
                  and a
                  new President and Chief Operating Officer, each of whom had been
                  longstanding executives with the Company and started in their new
                  positions on January 1, 2005. In November 2004, the Company also
                  hired a
                  new Executive Vice President of Supply Chain and Merchandising,
                  which is a
                  newly-created position, and moved a longstanding Senior Vice President
                  to
                  the newly-created position of Executive Vice President, Special
                  Projects.
 
 (ii)
              In
                  October 2004, the Company formallyestablished
                  a Disclosure Committee, consisting of senior executives from the
                  Company's
                  operating, accounting and legal departments, that had been meeting
                  informally for several years. The Disclosure Committee was formed
                  to
                  assist in the review and administration of disclosure controls
                  and
                  procedures regarding the Company's public disclosures, including
                  its SEC
                  filings.
 
 (iii)
              In
                  October 2004,the
                  Company fully implemented a new internal online system module to
                  process
                  requests for new hires and employee terminations at the stores.
                  Additionally,the
                  Company set up a new weekly procedure to review the status of its
                  non-active employees in the employee master data file, to ensure
                  that
                  terminated employees were removed from the employee master data
                  file on a
                  timely basis. In November 2004, the Company set up an exception
                  reporting
                  and review mechanism to review new employee information, start
                  dates and
                  compensation, and identify significant potential errors made in
                  the hiring
                  and payroll set-up processes. In December 2004, the Company started
                  reviewing new store employee packets at corporate headquarters
                  to ensure
                  that all required information was obtained and included in the
                  store
                  employees’ personnel files.
 
 (iv)
              During
                  the fourth quarter of 2004, the Company increased the number of
                  store
                  physical inventories to 84 from zero in the fourth quarter of 2003.
                  In
                  November 2004, the Company engaged an outside consulting firm to
                  review
                  and document selected inventory processes and controls in five
                  of its
                  Southern California stores, which was substantially completed in
                  December
                  2004. This inventory control report was utilized to help develop
                  part of
                  the Company’s inventory-related remediation
                  plans.
 
 (v)
              In
                  October 2004, the Company implemented a new internal online system
                  module
                  to process requests for network and system user access. The Company
                  also
                  improved its network security by implementing a new password aging
                  system
                  and utilizing “strong” passwords. In November 2004, the Company enhanced
                  its network security procedures by setting certain user access
                  limitations. In December 2004, the Company prepared an organization
                  chart
                  and job descriptions for each of the employees in the Information
                  Technology Department. Additionally, the Company implemented a
                  remote
                  monitoring system for its network servers.
 
 Prior
        to
        the fourth quarter of 2004 and in 2005, the Company took certain additional
        steps and developed certain plans that it believes: (i) improved the
        effectiveness of our internal control over financial reporting, (ii) addressed
        existing and potential material weaknesses in internal control, and (iii)
        are
        reasonably likely to further improve our internal control over financial
        reporting. These additional steps and plans are described below:
 
  Control
        Environment.
  (i)
              In
                  March 2005, the Company engaged a new Interim Chief Financial Officer.
                  In
                  May 2005, the Company engaged a new Interim Assistant Controller.
                  In July
                  2005, the Company engaged a new Interim Controller. Each of these
                  interim
                  positions was staffed with temporary personnel. Additionally, in
                  June
                  2005, the Company hired a new Vice President, Human
                  Resources.
 49
  (ii)
                Throughout
                    2005, management has been and will continue developing and improving
                    the
                    following areas affecting the Company’s control environment:
                    (i) adequately staffing its accounting and finance, inventory
                    management, real estate management, information technology and
                    internal
                    audit departments, (ii) developing a comprehensive risk assessment
                    and adequate compliance function, (iii) improving segregation
                    of duties,
                    supervisory controls and information system controls in certain
                    departments, (iv) improving its records storage and retention
                    programs in
                    various departments, (v) improving the processes to identify,
                    record and
                    disclose all appropriate and significant financial information
                    and
                    transactions, and (vi) developing an adequate monitoring program,
                    including full testing of its internal control systems and a
                    comprehensive
                    internal audit function. In addition, a Company education program
                    has also
                    been undertaken to educate all departmental management on the
                    top priority
                    and importance of effective internal controls and compliance
                    with such
                    controls.
 
 Accounting
        Policies/Financial Operations/Closing and Reporting Processes.
  (i)
              In
                  Q2 and Q3 2004, the Company improved the organizational structure
                  and work
                  flow in the Accounts Payable Department by segregating the invoice
                  processing and check preparation duties and responsibilities between
                  invoice batch processors, invoice input clerks, invoice processing
                  reviewers, check preparers, supervisors and the Accounts Payable
                  Director,
                  as well as providing the related
                  training.
 
 (ii)
              In
                  September 2004, the Company changed the authorized user access
                  protocol
                  for the accounts payable system module by implementing six levels
                  of user
                  access.
 
 (iii)
              In
                  September 2004, the Company began utilizing a more comprehensive
                  financial
                  reporting calendar and a closing sign-off schedule to improve the
                  administration of its quarterly closing and reporting processes.
                  Additionally, the Company also enhanced the documentation of approvals
                  of
                  financial transactions, account summaries and accounting entries
                  by
                  requiring Accounting and Finance Department senior management to
                  sign-off
                  financial transactions, account analysis, accounting schedules,
                  and
                  journal entries to mitigate the risk of any one employee being
                  able to
                  manipulate financial transactions or the entry, approval or reconciliation
                  of accounting records.
 
 (iv)
              In
                  April 2005, the Company engaged a temporary consultant to serve
                  as a Fixed
                  Assets Project Manager. In May 2005, the Company hired a Director
                  of
                  Financial Reporting, and engaged a temporary consultant to serve
                  as an
                  Accounts Payable Project Manager. Each of these positions was
                  newly-created.
 
 (v)
              In
                  2005, the Company plans to: (i) develop a comprehensive accounting
                  policies and procedures manual, (ii) improve its documentation
                  of
                  management review controls, (iii) improve its documentation of
                  unusual or
                  complex accounting matters, and (iv) prepare more accurate and
                  complete
                  account analyses, account summaries and account
                  reconciliations.
 
  Merchandise
        Inventory Management.
  (i)
              In
                  June 2004, the Company engaged an outside consulting firm to review
                  and
                  document selected inventory processes and controls in its Southern
                  California warehouses. This project was substantially completed
                  in October
                  2004, and theinventory control report was utilized to help develop part of the
                  Company’s inventory-related remediation plans.
 
 (ii)
              In
                  July 2004, the Company improved the methodology surrounding the
                  computation of its monthly cost of sales. At that time, the Company
                  started using scanned store sales data and weighted average product
                  cost
                  data from 64 product groups to compute the largest component of
                  its
                  monthly cost of sales.
 
 (iii)
              In
                  August 2004, the Company directed the district managers and store
                  managers
                  to more fully utilize the existing systems for recording intra-company
                  merchandise transfers and scrapping damaged goods. Additionally,
                  the
                  Company significantly improved the procedures surrounding the physical
                  inventory counts of store merchandise located in the “back-room” storage
                  areas by improving the organization of these areas, and updating
                  and
                  implementing the written procedures.
 
 (iv)
              In
                  September 2004, the Company improved its monthly cutoff procedures
                  for
                  processing merchandise inventory receipts in the Los Angeles and
                  Texas
                  warehouses. At that time, the Company: (i) improved its receiving
                  logs for
                  all types of merchandise receipts, including unopened domestic
                  and
                  international containers, (ii) commenced a detailed review of each
                  item on
                  the receiving logs to ensure it was recorded in the proper period,
                  and
                  (iii) commenced a detailed review of each item in prior months’
                  merchandise accruals to ensure that they were reversed or carried
                  forward.
 
 (v)
              In
                  January 2005, the Company hired a Director ofSupply
                  Chain Strategy and Network Design and Execution, as well as a Director
                  of
                  Reorderables, Consumer Insights and Category Management, both ofwhich
                  are newly-created positions.
                  During this period, the Company also conducted physical inventories
                  in its
                  Los Angeles warehouses and 28 of its stores, compared to zero physical
                  inventories at these locations in January
                  2004.
  50
  (vi)
              In
                  February 2005, the Company hired a new Senior Director of Distribution
                  and
                  Transportation, and a Director ofQuality
                  Management,which
                  is a newly-created position. The Company also implemented a new
                  HighJump
                  receiving system module in most of its main Los Angeles
                  warehouse.
 
 (vii)
              In
                  March 2005, the Company engaged a new outside consulting firm to
                  assist
                  with the evaluation, design and implementation of a more comprehensive
                  merchandise purchasing system as well as inventory/supply chain
                  management
                  systems.
 
 (viii)
              In
                  May 2005, the Company engaged a temporary consultant to serve as
                  an
                  Inventory Project Manager, which is a newly-created position.
                  Additionally, the Company implemented authorized buying limits
                  and
                  purchase approval thresholds for its merchandise-related purchase
                  orders.
 
 (ix)
              In
                  August 2005, the Company engaged an additional temporary consultant
                  to
                  serve as an Inventory Project Manager, which is a newly-created
                  position.
 
 
 Real
        Estate/Fixed Assets Management.
  (i)
              In
                  January 2005, the Company established a Real Estate Committee that
                  reviews, approves, and documents all new store sites and the related
                  operating plans. New store information that is reviewed and approved
                  includes: (i) area market studies, including population demographics
                  and
                  trends, (ii) terms of new store acquisitions and leases, and (iii)
                  new
                  store budgets and financial projections, including projected construction
                  costs, sales and operating
                  expenses.
  (ii)
              In
                  May 2005, the Company hired a Real Estate Accountant, which is
                  a
                  newly-created position.
 
 (iii)
              In
                  2005, the Company plans to implement more comprehensive purchasing,
                  tracking and reporting systems for its real estate and fixed
                  assets.
 
 
 Management
        Information Systems and Information Technology.
  (i)
              In
                  March 2004, the Company implemented a new internal online system
                  module to
                  process requests for purchases of employee hardware and
                  software.
 
 (ii)
              In
                  June 2004, the Company hired a Director of Applications Development
                  and
                  Project Management, which is a newly-created position. Once this
                  Director
                  was hired, the staff in the Applications and Project Management
                  group
                  gradually was increased from six to twelve. Additionally, in Q4
                  2004 and
                  in 2005, the Company hired five additional staff in the Network
                  Infrastructure group.
 
 (iii)
              In
                  June 2004, the Company also engaged an outside consulting firm,
                  to assist
                  in the development and documentation of certain information technology
                  policies and procedures as well as help with the information
                  technology-related Sarbanes-Oxley evaluation and compliance
                  efforts.
 
 (iv)
              In
                  July and August 2004, the Information Technology Department and
                  the
                  consulting firm worked collaboratively in the development and
                  documentation of new information technology policies and procedures
                  for
                  the following areas: (i) application management, (ii) logical access
                  controls, (iii) management reporting, (iv) problem reporting and
                  tracking,
                  (v) a department operations manual, (vi) network security, (vii)
                  software
                  development lifecycle, and (viii) change
                  management.
 
 (v)
              In
                  Q1 2005, the Company implemented a server migration plan to upgrade
                  its
                  overall corporate network structure and e-mail system. The upgrade
                  improved network management and security, improved the flow of
                  information
                  and communication, and made the overall corporate network more
                  scalable.
 
 (vi)
              In
                  March 2005, the Company engaged a new outside consulting firm to
                  update
                  the Company’s network threat
                  assessment.
 
 (vii)
              In
                  August 2005, the Company engaged a new outside consulting firm
                  to assist
                  in updating its information technology policies and procedures
                  as well as
                  help with the 2005 information technology-related Sarbanes-Oxley
                  evaluation and compliance efforts.
 
 (viii)
              In
                  2005, the Company plans to upgrade its network and user access
                  to
                  appropriate levels for all remaining
                  departments.
 51
  Although
        the Company has implemented a significant number of remediation initiatives
        in
        2004 and 2005, and plans to continue improving the Company’s internal control
        over financial reporting, there can be no assurance that the Company will
        eliminate all of the aforementioned material weaknesses in 2005.
   **Report
        of Independent Registered Public Accounting Firm**
  To
        the
        Board of Directors and Shareholders of
 99¢
Only
        Stores
 City
        of
        Commerce, California
  We
        were
        engaged to audit management’s assessment regarding the effectiveness of internal
        control over financial reporting of 99¢ Only Stores (the “Company”), as of
        December 31, 2004. The Company’s management is responsible for maintaining
        effective internal control over financial reporting and for its assessment
        of
        the effectiveness of internal control over financial reporting.
  As
        described in the accompanying Management’s Report on Internal Control over
        Financial Reporting, the Company was unable to complete its assessment of
        the
        effectiveness of the Company’s internal control over financial reporting.
        Accordingly, we were unable to perform auditing procedures necessary to form
        an
        opinion on management’s assessment.
  A
        company’s internal control over financial reporting is a process designed by, or
        under the supervision of, the company’s principal executive and principal
        financial officers, or persons performing similar functions, and effected
        by the
        company’s board of directors, management, and other personnel to provide
        reasonable assurance regarding the reliability of financial reporting and
        the
        preparation of financial statements for external purposes in accordance with
        generally accepted accounting principles. A company’s internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to the maintenance of records that, in reasonable detail, accurately and
        fairly
        reflect the transactions and dispositions of the assets of the company;
        (2) provide reasonable assurance that transactions are recorded as
        necessary to permit preparation of financial statements in accordance with
        generally accepted accounting principles, and that receipts and expenditures
        of
        the company are being made only in accordance with authorizations of management
        and directors of the company; and (3) provide reasonable assurance
        regarding prevention or timely detection of unauthorized acquisition, use,
        or
        disposition of the company’s assets that could have a material effect on the
        financial statements.
  Because
        of the inherent limitations of internal control over financial reporting,
        including the possibility of collusion or improper management override of
        controls, material misstatements due to error or fraud may not be prevented
        or
        detected on a timely basis. Also, projections of any evaluation of the
        effectiveness of the internal control over financial reporting to future
        periods
        are subject to the risk that the controls may become inadequate because of
        changes in conditions, or that the degree of compliance with the policies
        or
        procedures may deteriorate.
  A
        material weakness is a significant deficiency, or combination of significant
        deficiencies, that results in more than a remote likelihood that a material
        misstatement of the annual or interim financial statements will not be prevented
        or detected. The following material weaknesses have been identified and included
        in management’s assessment:
  Control
        Environment. The
        Company did not maintain a control environment that fully emphasized the
        establishment of, adherence to, or adequate communication regarding appropriate
        internal control for all aspects of its operations. Specifically, management
        concluded that the Company did not have adequate controls in the following
        areas
        for the purposes of establishing, maintaining and communicating its control
        environment: (i) a sufficient number of or appropriate depth of experience
        for its accounting and finance, inventory management, real estate management,
        information technology, or internal audit personnel, (ii) a robust risk
        assessment or adequate compliance function, (iii) adequate segregation of
        duties, supervisory controls or information system controls in certain
        departments, (iv) adequate records storage and retention in the accounts
        payable, fixed assets, human resources, inventory pick ticketing, and real
        estate departments, where some records were missing or lost, (v) an adequate
        process to identify, record and disclose all appropriate and significant
        financial information and transactions, or (vi) an adequate monitoring program,
        including full testing of its internal control systems and a comprehensive
        internal audit function. These weaknesses increased the likelihood of potential
        material errors in the Company’s financial reporting.
  Inadequate
        Identification, Evaluation, Design, Documentation and Application of Accounting
        Policies and Procedures. The
        Company identified the following significant deficiencies, which were considered
        a material weakness when aggregated. Management identified areas where internal
        control was missing, including inadequate documentation of accounting policies
        and procedures, inadequate cutoff procedures, and a lack of properly documented
        management review controls. Management also concluded that its policies and
        procedures for the summarization and resolution of unusual or complex accounting
        matters were not adequate. These deficiencies increased the likelihood of
        potential material errors in the Company’s financial reporting.
 
 During
        the 2004 year-end financial closing and reporting process, management also
        discovered that certain of the Company’s accounting policies and procedures were
        not applied properly. The Company did not calculate depreciation of building
        improvements for its owned and leased stores in accordance with appropriate
        economic lives or its disclosed accounting policies. Also, for certain store
        leasing transactions, the Company did not properly account for rent holidays
        and
        tenant improvement allowances. Additionally, the Company determined that
        its
        presentation of cash flows from the purchase and sale of investments in the
        consolidated statements of cash flows should be presented as operating cash
        flows rather than investing cash flows as was previously reported. These
        material weaknesses resulted in restatement of the Company’s prior annual and
        quarterly financial statements, and adjustments to present the Company’s
        financial statements for the year ended December 31, 2004 in accordance with
        generally accepted accounting principles. The impact of the restatements
        on
        previously issued financial statements is described in Note 2 to the
        consolidated financial statements.
  52
  Inadequate
        Preparation of Account Analyses, Account Summaries and Account
        Reconciliations. During
        the 2004 year-end closing and financial reporting process, the Company
        identified the following significant deficiencies, which were considered
        a
        material weakness when aggregated. In some cases, inaccurate or incomplete
        account analyses, account summaries and account reconciliations were prepared
        during the year-end financial closing and reporting process in the areas
        of
        accounts receivable, inventory, other current assets, fixed assets, other
        assets, accrued expenses, deferred rent and stock options. These deficiencies
        increased the likelihood of potential material errors in the Company’s financial
        reporting.
  Deficiencies
        in Merchandise Inventory Management. During
        the year, the Company identified the following significant deficiencies,
        which
        were considered a material weakness when aggregated. Formal buying limits
        and
        purchase approval thresholds were not finalized or implemented for merchandise
        purchasing. Merchandise shipped from the warehouses to the stores was not
        adequately spot checked. Also, the store inventory transfer reports and
        inventory scrap reports were not consistently utilized. Additionally, there
        was
        no formal review of certain processes associated with the corporate inventory
        management system. Specifically, there was: (i) no formal review of input
        of new
        product data, including merchandise costs and retail selling prices, (ii)
        no
        formal review of certain changes to the inventory master data file, and (iii)
        no
        periodic review of the inventory master data file. Furthermore, the warehouse
        perpetual inventory records in the inventory master data file were not
        reconciled to the general ledger. These deficiencies increased the likelihood
        of
        potential material errors in the Company’s financial reporting.
  Inadequate
        Merchandise Costing and Valuation Procedures. During
        the 2004 year-end financial closing and reporting process, management concluded
        that certain merchandise inventory costs were not accurate due to inventory
        master file data not being updated or lack of proper inventory pricing data
        review. Consequently, due to these inventory costing errors, the Company
        materially increased cost of sales and reduced the inventory balance.
        Additionally, as of December 31, 2004, the Company inadequately supported
        their
        inventory shrinkage allowance and book-to-physical inventory reserves which
        had
        to be adjusted, resulting in a material increase in the inventory balance
        and a
        corresponding reduction in cost of sales.
  Inadequate
        Controls over Property and Equipment Management. The
        Company identified the following significant deficiencies, which were considered
        a material weakness when aggregated. There was no formal purchasing system
        or
        asset disposal system to help manage property and equipment. Additionally,
        there
        was no formal review of certain processes associated with the corporate fixed
        asset management system. Specifically, there was: (i) no review of input
        of new
        acquisitions of property and equipment, (ii) no review of changes to the
        fixed
        asset master data file, and (iii) no periodic review of the fixed asset master
        data file. Furthermore, certain leases were not evaluated properly for capital
        or operating lease treatment, and there was no comprehensive impairment
        calculation prepared for all long-term assets. These deficiencies increased
        the
        likelihood of potential material errors in the Company’s financial
        reporting.
  Inadequate
        Controls over the Recording and Classification of Property and
        Equipment. ** During
        the 2004 year-end financial closing and reporting process, a material weakness
        was identified regarding the improper recording and classification of certain
        property and equipment, including year-end purchasing cutoff errors and
        inappropriate classification of certain assets. During this process, certain
        fixed assets had to be recorded that were purchased prior to the end of the
        year, and were not previously recorded as of December 31, 2004. Also, a
        significant amount of acquired property and equipment was identified that
        was
        improperly classified as prepaid escrow deposits as of December 31, 2004.
        Upon
        discovery, this amount was reclassified primarily to land and buildings.
        Additionally, certain construction in progress had to be reclassified to
        other
        categories of property and equipment because the assets had been placed in
        service and depreciation expense had to be recorded.
  Management
        Information Systems and Information Technology. The
        Company identified the following significant deficiencies, which were considered
        a material weakness when aggregated. Management concluded that the Company’s
        management information systems and information technology internal control
        design was deficient because the potential for unauthorized access to certain
        information systems and software applications existed during 2004 in several
        departments, including corporate accounting, accounts payable, fixed assets,
        human resources, inventory management, payroll and the retail stores.
        Additionally, certain key controls for maintaining the overall integrity
        of
        systems and data processing were not properly designed and operating
        effectively. These deficiencies increased the likelihood of potential material
        errors in the Company’s financial reporting.
  These
        material weaknesses were considered in determining the nature, timing, and
        extent of audit tests applied in our audit of the consolidated financial
        statements and financial statement schedule as of and for the year ended
        December 31, 2004, of the Company and this report does not affect our
        report on such financial statements and financial statement schedule.
  Because
        of the limitation on the scope of our audit described in the second paragraph
        of
        this report, the scope of our work was not sufficient to enable us to express,
        and we do not express, an opinion on management’s assessment referred to above.
        In our opinion, because of the effect of the material weaknesses described
        above
        on the achievement of the objectives of the control criteria and the effects
        of
        other material weaknesses, if any, that might have been identified if we
        had
        been able to perform sufficient auditing procedures relating to management’s
        assessment regarding the effectiveness of internal control over financial
        reporting, the Company has not maintained effective internal control over
        financial reporting as of December 31, 2004, based on the criteria
        established in *Internal
        Control — Integrated Framework* issued
        by
        the Commission of Sponsoring Organizations of the Treadway Commission.
  53
  We
        have
        audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated financial statements and
        financial statement schedule as of and for the year ended December 31,
        2004, of the Company and have issued our report dated August 30, 2005 that
        expressed an unqualified opinion on those financial statements and financial
        statement schedule.
  Deloitte
        & Touche LLP
 Los
        Angeles, California
 August
        30, 2005
  **Item
        9B . Other Information**
  None
  **PART
        III**
  **Item
        10.**  **Directors
        and Executive Officers of the Registrant**
  The
        following table sets forth information with respect to the director nominees
        and
        our executive officers as of August 31, 2005:
  **Director
        Nominees:**
 **Name****:**
              
              **Age
                  at August 31, 2005**
              
              **Year
                  First Elected or Appointed****Director**
              
              **Principal
                  Occupation**David
                  Gold
              
              73
              
              1965
              
              *David
                  Gold*has been Chairman of the Board since the founding of the Company
                  in 1965.
                  Mr. Gold has over 50 years of retail experience.****Jeff
                  Gold
              
              ****37****
              
              1991
              
              *Jeff
                  Gold*joined us in 1984 and has served in various managerial capacities.
                  From
                  1991 to 2004 he served as Senior Vice President of Real Estate
                  and
                  Information Systems. In January 2005, he was promoted to President
                  and
                  Chief Operating Officer.EricSchiffer
              
              44
              
              1991
              
              *Eric
                  Schiffer*joined us in 1991 and has served in various managerial capacities.
                  In
                  March 2000, he was promoted to President and in January 2005 to
                  Chief
                  Executive Officer. From 1987 to 1991, he was employed by Oxford
                  Partners,
                  a venture capital firm. Mr. Schiffer is a graduate of the Harvard
                  Business
                  School.Lawrence
                  Glascott
              
              ****71
              
              1996
              
              *Lawrence
                  Glascott*serves
                  on our Audit, Compensation and Nominating and Corporate Governance
                  Committees. From 1991 to 1996 he was the Vice President - Finance
                  of Waste
                  Management International, an environmental services company. Prior
                  thereto, Mr. Glascott was a partner at Arthur Andersen LLP and
                  was the
                  Arthur Andersen LLP partner in charge of the 99¢ Only Stores account for
                  six years. Additionally, Mr. Glascott was in charge of the Los
                  Angeles
                  based Arthur Andersen LLP Enterprise Group practice for over 15
                  years.Marvin
                  Holen
              
              ****76****
              
              1991
              
              *Marvin
                  Holen*serves on our Audit, Compensation and Nominating and Corporate
                  Governance
                  Committees. He is an attorney and in 1960 founded the law firm
                  of Van
                  Petten & Holen. He served on the Board of the Southern California
                  Rapid Transit District from 1976 to 1993 (six of those years as
                  the
                  Board’s President). He served on the Board of Trustees of California
                  Blue
                  Shield from 1972 to 1978, on the Board of United California Savings
                  Bank
                  from 1992 to 1994 and on several other corporate, financial institution
                  and philanthropic boards of directors.****Eric
                  G. Flamholtz
              
              62
              
              2004
              
              *Eric
                  G. Flamholtz, Ph.D.,*serves on our Compensation, and Nominating and Corporate Governance
                  Committees.**He
                  has been a professor of management at the Anderson Graduate School
                  of
                  Management, University of California at Los Angeles since 1973
                  and
                  President of Management Systems Consulting Corporation, which he
                  founded
                  in 1978. He is the author of several books including*Growing
                  Pains: Transitioning from an Entrepreneurship to a Professionally
                  Managed
                  Firm*.
                  As a consultant he has extensive experience with firms ranging
                  from
                  entrepreneurships to Fortune 500 companies, including Starbucks,
                  Countrywide Financial Corporation, Baskin Robins, Jamba Juice and
                  Grocery
                  Outlets.****Thomas
                  Unterman
              
              60
              
              2004
              
              *Thomas
                  Unterman*serves
                  on our Audit, Compensation and Nominating and Corporate Governance
                  Committees.Mr.
                  Unterman is the Founder and Managing Partner of Rustic Canyon Partners,
                  a
                  sponsor of venture capital and private equity investment funds.
                  Previously, from 1992 through 1997, he was employed by the Times
                  Mirror
                  Company (since acquired by the Tribune Company) most recently as
                  Executive
                  Vice President and Chief Financial Officer of The Times Mirror
                  Company, a
                  diversified media company. Mr. Unterman also serves on the boards
                  of
                  several of privately held companies in which Rustic Canyon has
                  an
                  investment and several charitable
                  organizations.
  54
  **Other
                  Executive Officers:**Howard
                  Gold
              
              45
              
              
              
              *Howard
                  Gold*joined us in 1982 and has served in various managerial capacities.
                  In 1991
                  he was named Senior Vice President of Distribution, and in January
                  2005 he
                  was named Executive Vice President of Special Projects.Jeffrey
                  Kniffin
              
              52
              
              
              
              *Jeffrey
                  Kniffin*serves
                  as the interim Chief Financial Officer. Mr. Kniffin is a financial
                  expert
                  with 27 years of professional experience, including six years as
                  the CFO
                  of a mid-sized company. Mr. Kniffin has been a financial consultant
                  since
                  1994 and for approximately four of the past five years has been
                  engaged by
                  numerous small and mid-sized public and private corporations. Mr.
                  Kniffin
                  is a CPA with six years experience with Arthur Andersen LLP, and
                  is a
                  graduate of the UCLA Anderson School of Management.Michael
                  Zelkind
              
              36
              
              
              
              *Michael
                  Zelkind*was
                  elected to the newly created position of Executive Vice President
                  of
                  Supply Chain and Merchandizing in October 2004. Prior to joining
                  99¢ Only
                  Stores, Mr. Zelkind served as a Vice President with ConAgra Foods
                  Grocery
                  Products Division from June 2001 to October 2004. Mr. Zelkind has
                  also
                  held a variety of operational and management positions with ICG
                  Commerce,
                  AT Kearney, General Mills and Honeywell from December 1989 to June
                  2001.
 
 Jeff
        Gold
        and Howard Gold are the sons of David Gold, and Eric Schiffer is the son-in-law
        of David Gold.
 
 **Audit
        Committee**
  The
        Board
        of Directors has established an Audit Committee in accordance with Section
        3(a)(58)(A) of the Securities Exchange Act of 1934. The Audit Committee
        currently consists of Messrs. Glascott (Chairman), Holen and Unterman, each
        of
        whom meets the criteria for independence set forth in the New York Stock
        Exchange’s rules and in Rule 10A-3 under the Securities Exchange Act. The Board
        of Directors has determined that Mr. Glascott is an “audit committee financial
        expert” as that term is used in Item 401(h) of Regulation S-K promulgated under
        the Securities Exchange Act. The Audit Committee selects the independent
        registered public accounting firm to perform the Company’s audit and
        periodically meets with the independent registered public accounting firm
        and
        our management to review matters relating to our financial statements, our
        accounting principles and our system of internal accounting controls, and
        reports its recommendations as to the approval of our financial statements
        to
        the Board of Directors. The role and responsibilities of the Audit Committee
        are
        more fully set forth in a written charter adopted by the Board of Directors,
        which is available on our website at www.99only.com. The Audit Committee
        held
        nine meetings during fiscal 2004, at which each member of the Audit Committee
        was present.
  **SECTION
        16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**
  Section
        16(a) of the Securities Exchange Act of 1934 requires our officers,
        directors, and persons who own more than ten percent of a registered class
        of
        our equity securities to file reports of ownership and changes in ownership
        with
        the Commission. Officers, directors and greater-than-ten percent shareholders
        are required by the Commission’s regulations to furnish us with all Section
        16(a) forms they file. Based solely on our review of the copies of the forms
        received by us and written representations from certain reporting persons
        that
        they have complied with the relevant filing requirements, we believe that,
        during the year ended December 31, 2004, except for Form 4s (reporting a
        grant
        of options on May 21, 2004) filed on May 28, 2004 by each of William Christy
        (former Director), Andrew Farina (former CFO), Lawrence Glascott, Jose Gomez,
        Marvin Holen, Helen Pipkin, Ben Schwartz (former Director) and John Shields
        (former Director), all of our officers, directors and greater-than-ten percent
        shareholders complied with all Section 16(a) filing requirements.
  **Code
        of Business Conduct and Ethics**
  The
        Board
        of Directors has adopted a Code of Business Conduct and Ethics applicable
        to all
        directors, officers and employees of the Company. A copy of the Code of Business
        Conduct and Ethics is available on our website at www.99only.com.
  55
  **Item
          11. Executive Compensation**
 **Summary
        Compensation Table**
  The
        following table sets forth, as to the Chief Executive Officer, the other
        four
        most highly compensated executive officers during fiscal 2004, and one former
        executive officer (the “Named Executive Officers”), information concerning all
        compensation paid for services to us in all capacities during the last three
        fiscal years.
  **Name
                  and Principal**
              **Fiscal
                  Year Ended**
              **Annual
                  Compensation**
              **Other
                    Annual**
              **Long-Term
                  Compensation****Number of Securities**
              **All
                  Other****Position
                    During 2004**
              **December****31**
              **Salary**
              **Bonus**
              **Compensation**
              **Underlying
                          Options**
              **Compensation
                  ($)**David
                  Gold
              2004
              $114,423
              -
              -
              -
              -Chairman
                  of the Board &
              2003
              158,173
              -
              -
              -
              -Chief
                  Executive Officer
              2002
              167,596
              -
              -
              -
              -Eric
                  Schiffer (a)
              2004
              $124,615
              -
              -
              -
              -President
              2003
              117,692
              -
              -
              -
              -2002
              120,615
              -
              -
              -
              -Jeff
                  Gold (b)
              2004
              $124,615
              -
              -
              -
              -Senior
                  Vice President of
              2003
              123,231
              -
              -
              -
              -Real
                  Estate and
              2002
              118,615
              -
              -
              -
              -Information
                  SystemsHoward
                  Gold (c)
              2004
              $124,615
              -
              -
              -
              -Executive
                  Vice
              2003
              124,615
              -
              -
              -
              -President
                  of Special
              2002
              123,231
              -
              -
              -
              -Projects
                  and DirectorAndrew
                  Farina
              2004
              $177,500
              $25,000
              -
              13,500
              -Former
                  Chief Financial
              2003
              172,100
              25,000
              -
              13,500
              -Officer
              2002
              163,400
              25,000
              -
              13,500
              -Jose
                  Gomez (d)
              2004
              $174,450
              $25,000
              -
              13,500
              -Vice
                  President of Retail
              2003
              171,800
              25,000
              -
              13,500
              -Operations
              2002
              169,600
              25,000
              -
              13,500
              -
 
 (a)
              It
                  includes $92,723, $92,308, $99,692 discretionary contributions
                  made to a
                  deferred compensation plan for the year ended December 31, 2002,
                  2003, and
                  2004, respectively.
 (b)
              It
                  includes $90,528, $94,892, $99,692 discretionary contributions
                  made to a
                  deferred compensation plan for the year ended December 31, 2002,
                  2003, and
                  2004, respectively.
 (c)
              It
                  includes $90,538, $96,000, $99,692 discretionary contributions
                  made to a
                  deferred compensation plan for the year ended December 31, 2002,
                  2003, and
                  2004, respectively.
 (d)
              It
                  includes $18,400, $20,400, $20,400 discretionary contributions
                  made to a
                  deferred compensation plan for the year ended December 31, 2002,
                  2003, and
                  2004, respectively.
 56
  **Option
        Grants in Last Fiscal Year**
 
 The
        following table sets forth certain information regarding the grant of stock
        options made during the fiscal year ended December 31, 2004 to the Named
        Executive Officers.
  Number
                  Of Securities Underlying Option
              Percent
                  Of Total Options Granted To Employees in
              Exercise
                  Or
              Expiration
              Potential
                  Realizable Value At Assumed Annual Rates of Stock Price Appreciation
                  forOption
                  TermName
              Granted
                  (a)
              Fiscal
                  Year (b)
              Base
                  Price
              Date
              5%
              10%David
                  Gold
              -
              -
              -
              -
              -
              -Eric
                  Schiffer
              -
              -
              -
              -
              -
              -Jeff
                  Gold
              -
              -
              -
              -
              -
              -Howard
                  Gold
              -
              -
              -
              -
              -
              -Andrew
                  Farina
              13,500
              1.1%
              $17.92
              5/21/2014
              $152,142
              $385,558Jose
                  Gomez
              13,500
              1.1%
              $17.92
              5/21/2014
              $152,142
              $385,558
 
 (a)
              The
                  option grants set forth on this chart vest in three equal annual
                  installments beginning on May 21, 2005 or on the first anniversary
                  of the
                  option grant.
 (b)
              Options
                  covering an aggregate of 1,268,991 shares were granted to eligible
                  persons
                  during the fiscal year ended December 31,
                  2004.
 
 
 **Stock
        Options Held at Fiscal Year End**
 
 The
        following table sets forth, for each of the Named Executive Officers,
        information regarding the number of shares of common stock underlying stock
        options held at fiscal year end and the value of options held at fiscal year
        end. None of the Named Executive Officers exercised any options in
        2004.
  **Number
                      of Securities Underlying Unexercised Optio****ns
                      at****Decem****ber
                      31, 2004**
                  
                  **Value
                      of Unexerc****ised
                      In-the-M****oney
                      Options****At
                      December 31, 2004(a)****Name**
                  
                  **Shares
                      Acquired Upon****Exercise**
                  
                  **Value
                      Realized**
                  
                  **Exercisable**
                  
                  **Unexercisable**
                  
                  **Exercisable**
                  
                  **Unexercisable**David
                      Gold
                  
                  -
                  
                  -
                  
                  -
                  
                  -
                  
                  -
                  
                  -Eric
                      Schiffer
                  
                  -
                  
                  -
                  
                  75,006
                  
                  -
                  
                  $915,073
                  
                  -Jeff
                      Gold
                  
                  -
                  
                  -
                  
                  75,006
                  
                  -
                  
                  $915,073
                  
                  -Howard
                      Gold
                  
                  -
                  
                  -
                  
                  75,006
                  
                  -
                  
                  $915,073
                  
                  -Andrew
                      Farina
                  
                  -
                  
                  -
                  
                  100,300
                  
                  27,000
                  
                  $48,350
                  
                  -Jose
                      Gomez
                  
                  -
                  
                  -
                  
                  176,506
                  
                  27,000
                  
                  $546,823
                  
                  -
 
 (a)
                Based
                    on the last reported sale price of the common stock on the New
                    York Stock
                    Exchange on December 31, 2004 ($16.16) less the option exercise
                    price.
  57
  **Item
        12.** **Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters**
  The
        following table sets forth as of August 31, 2005, certain information relating
        to the ownership of our common stock by (i) each person known by us to be
        the
        beneficial owner of more than five percent of the outstanding shares of our
        common stock, (ii) each of our directors, (iii) each of the Named Executive
        Officers, and (iv) all of our executive officers and directors as a group.
        Except as may be indicated in the footnotes to the table and subject to
        applicable community property laws, each such person has the sole voting
        and
        investment power with respect to the shares owned. Unless otherwise noted,
        the
        address of each person listed is in care of 99¢ Only Stores, 4000 Union Pacific
        Avenue, City of Commerce, California 90023.
  **Names
                  and Addresses**
              
              **Number
                  of**
                **Shares(a)**
              
              **Percent**
                **Of
                  Class (a)**David
                  Gold (b)(e)
              
              15,864,212
              
              22.6%Sherry
                  Gold (c)(e)
              
              15,864,212
              
              22.6%Howard
                  Gold (d)(e)
              
              9,225,600
              
              13.1%Jeff
                  Gold (d)(e)
              
              9,225,600
              
              13.1%Eric
                  and Karen Schiffer (e)(f)
              
              9,300,606
              
              13.3%Au
                  Zone Investments #3, LLC (e)
              
              6,860,124
              
              9.8%Kayne
                  Anderson Rudnick (g)
              
              5,461,199
              
              7.8%Goldman
                  Sachs Asset Management, L.P. (h)
              
              4,223,843
              
              6.0%Massachusetts
                  Financial Services Company “MFS”(i)
              
              3,613,270
              
              5.1%Thomas
                  Unterman (j)
              
              1,000
              
              *Marvin
                  Holen (k)
              
              60,000
              
              *Lawrence
                  Glascott (l)
              
              51,772
              
              *Eric
                  Flamholtz (m)
              
              1,000
              
              *Michael
                  Zelkind (n)
              
              13,334
              
              *Jose
                  Gomez (o)
              
              190,006
              
              *Andrew
                  Farina (p)
              
              113,800
              
              *All
                  of the Company’s current executive officers
                and
                  directors as a group,
                10
                  persons (q)
              
              23,162,752
              
              33.0%
 
 *
              Less
                  than 1%
 (a)
              Beneficial
                  ownership is determined in accordance with the rules of the Securities
                  and
                  Exchange Commission that deem shares to be beneficially owned by
                  any
                  person who has or shares voting or investment power with respect
                  to such
                  shares. In computing the number of shares beneficially owned by
                  a person
                  and the percentage ownership of that person, shares of common stock
                  subject to options held by that person that currently are exercisable
                  or
                  exercisable within 60 days of August 31, 2005 are deemed outstanding.
                  Unless otherwise indicated, the persons named in this table have
                  sole
                  voting and sole investment power for all shares shown as beneficially
                  owned, subject to community property laws where applicable.
 (b)
              Includes
                  4,502,044 shares owned by Sherry Gold, David Gold’s spouse, and 6,860,124
                  shares controlled through Au Zone Investments #3, LLC, a California
                  limited liability company.
 (c)
              Includes
                  4,502,044 shares owned by David Gold, Sherry Gold’s spouse, and 6,860,124
                  shares controlled through Au Zone Investments #3,
                  LLC.
 (d)
              Includes
                  6,860,124 shares controlled through Au Zone Investments #3, LLC,
                  and
                  75,006 shares reserved for issuance upon exercise of stock options,
                  which
                  are exercisable.
 (e)
              Au
                  Zone Investments #3, LLC, is the general partner of Au Zone Investments
                  #2, L.P., a California limited partnership (the “Partnership”). The
                  Partnership is the registered owner of 6,860,124 shares of common
                  stock.
                  The limited partners of the Partnership are David Gold, Sherry
                  Gold,
                  Howard Gold, Jeff Gold and Karen Schiffer. Each of the limited
                  partners of
                  the Partnership owns a 20% interest in Au Zone Investments #3,
                  LLC.
 (f)
              Includes
                  6,860,124 shares controlled through Au Zone Investments #3, LLC,
                  and
                  150,012 shares reserved for issuance upon exercise of stock options,
                  which
                  are exercisable.
 (g)
              This
                  information is based on a Schedule 13G amendment filed by Kayne
                  Anderson
                  Rudnick Investment Management, LLC, 1800 Avenue of the Stars 2ndFloor, Los Angeles, California 90067, on February 7, 2005.
 (h)
              This
                  information is based on a Schedule13G amendment filed by Goldman
                  Sachs
                  Asset Management, L.P., 32 Old Slip, New York, NY 10005 on February
                  9,
                  2005.
 (i)
              This
                  information is based on a Schedule13G amendment filed by Massachusetts
                  Financial Services, Company, 500 Boylston Street, Ma. 02116, on
                  January
                  10, 2005.
 (j)
              Includes
                  1,000 shares of common stock reserved for issuance upon exercise
                  of stock
                  options, which are or will become exercisable on or before October
                  31,
                  2005.
  58
  (k)
              Includes
                  47,503 shares of common stock reserved for issuance upon exercise
                  of stock
                  options, which are or will become exercisable on or before October
                  31,
                  2005.
 (l)
              Includes
                  49,754 shares of common stock reserved for issuance upon exercise
                  of stock
                  options, which are or will become exercisable on or before October
                  31,
                  2005.
 (m)
              Includes
                  1,000 shares of common stock reserved for issuance upon exercise
                  of stock
                  options, which are or will become exercisable on or before October
                  31,
                  2005.
 (n)
              Includes
                  13,334 shares of common stock reserved for issuance upon exercise
                  of stock
                  options, which are or will become exercisable on or before October
                  31,
                  2005.
 (o)
              Includes
                  190,006 shares of common stock reserved for issuance upon exercise
                  of
                  stock options, which are or will become exercisable on or before
                  October
                  31, 2005.
 (p)
              Includes
                  113,800 shares of common stock reserved for issuance upon exercise
                  of
                  stock options, which are or will become exercisable on or before
                  October
                  31, 2005.
 (q)
              Includes
                  (i) 4,502,044 shares owned by Sherry Gold, the spouse of David
                  Gold, (ii)
                  6,860,124 shares controlled through Au Zone Investments #3, LLC,
                  and (iii)
                  412,615 shares of common stock reserved for issuance upon exercise
                  of
                  stock options, which are
                  exercisable.
 
 
 See
“Part
        II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters
        and Issuer Purchases of Equity Securities” for information regarding the
        securities authorized for issuance under the Company’s equity compensation
        plans.
  **Item
        13. Certain Relationships and Related Transactions**
  The
        Company currently leases 13 store locations and a parking lot associated
        with
        one of these stores from the Gold family and their affiliates. Rental expense
        for these facilities was approximately $2.2 million, $2.1 million, and $2.1
        million in 2002, 2003, and 2004, respectively. The Company believes that
        lease
        terms are as favorable to the Company as they would be for an unrelated party.
        The Company enters into real estate transactions with affiliates only for
        the
        renewal or modification of existing leases and on occasions where it determines
        that such transactions are in the Company’s best interests. Moreover, the
        independent members of the Board of Directors must unanimously approve all
        real
        estate transactions between the Company and its affiliates. They must also
        determine that such transactions are equivalent to a negotiated arm’s-length
        transaction with a third party. The Company cannot guarantee that it will
        reach
        agreements with the Gold family on renewal terms for the properties the Company
        currently leases from them. In addition, even if the Company agrees to such
        terms, it cannot be certain that the independent directors will approve them.
        If
        the Company fails to renew one of these leases, it could be forced to relocate
        or close the leased store.
  In
        addition, one of the Company’s directors, Ben Schwartz, who resigned in the
        first quarter of 2005 was a trustee of a trust that owns a property on which
        a
        single 99¢ Only Store is located. Rent expense on this store amounted to $0.3
        million in 2002, 2003, and 2004.
  In
        2004,
        the Company engaged Boris Zelkind, a partner in the law firm of
        Zelkind and Schakelford LLP and the brother of Michael Zelkind, the Company's
        Executive Vice President of Supply Chain and Merchandizing, to perform various
        legal services.  Boris Zelkind continues to be engaged by the
        Company.  Although the Company did not pay Zelkind and Schakelford LLP more
        than $60,000 during 2004, the Company expects to pay his firm in excess of
        $60,000 for such services in 2005.
  **Item
        14. Principal Accountant Fees and Services**
  On
        April
        6, 2004, the Company’s audit committee dismissed PricewaterhouseCoopers LLP
        (“PWC”) as the Company’s independent registered public accounting firm but
        retained them for tax services. The decision to change independent registered
        public accounting firms was not the result of any disagreement between the
        Company and PWC on any matters of accounting principles or practices, financial
        statement disclosure, or auditing scope or procedure. The audit reports of
        PWC
        with respect to the consolidated financial statements as of and for the fiscal
        years ended December 31, 2003 and 2002 did not contain any adverse opinion
        or
        disclaimer of opinion, nor were they qualified or modified as to uncertainty
        or
        audit scope.
 
 On
        April
        19, 2004, the Company’s audit committee engaged Deloitte & Touche LLP
        (“D&T”) as its independent registered public accounting firm to audit its
        financial statements for the year ended December 31, 2004. During the Company’s
        two most recent years ended December 31, 2003 and subsequent interim period
        through April 19, 2004, the Company did not consult with D&T with respect to
        the application of accounting principles to a specified transaction, either
        completed or proposed, or the type of audit opinion that might be rendered
        on
        the Company’s consolidated financial statements or any other matters or
        reportable events as set forth in Items 304 (a) (2) (i) and (ii) of Regulation
        S-K.
 
 Representatives
        of Deloitte are expected to be present at the Annual Meeting and will be
        afforded the opportunity to make a statement if they desire and will be
        available to respond to appropriate questions from shareholders. Representatives
        of PWC are not expected to be present at the Annual Meeting.
 59
  For
        the
        fiscal years ended December 31, 2004 and December 31, 2003, Deloitte &
Touche LLP and PricewaterhouseCoopers LLP billed the fees set forth below
        for
        work performed for the years indicated.
 
 2004
              
              2003Audit
                  Fees
              
              $
              2,346,000(a)
              
              $
              263,000Audit
                  Related Fees (b)
              
              $
              410,000
              
              $
              -Tax
                  Fees(c)
              
              $
              95,000
              
              $
              230,000All
                  Other Fees
              
              
              -
              
              
              -
 
 (a)
              The
                  2004 amount include fees necessary to perform an audit or quarterly
                  review
                  in accordance with Generally Accepted Auditing Standards and services
                  that
                  generally only the independent registered public accounting firm
                  can
                  reasonable provide, such as attest services, consents and assistance
                  with,
                  and review of, documents filed with the Securities and Exchange
                  Commission
                  (“SEC”). The amount also includes fees related to Deloitte’s attestation
                  of the Company’s internal controls over financial reporting as of December
                  31, 2004.
 (b)
              Fees
                  paid to PWC for consultation on a SEC comment letter related to
                  the 2003
                  10-K and other consultation related to the 2004
                  10-K.
 (c)
              Tax
                  fees paid to PWC primarily include fees for services performed
                  in
                  connection with IRS and California Franchise Tax Board audits in
                  2003 and
                  preparation of tax provision in
                  2004.
 
 
 The
        Audit
        Committee has considered whether the provision of non-audit services by our
        principal accountant is compatible with maintaining auditor independence
        and
        determined that it is. Pursuant to the rules of the Securities and Exchange
        Commission, before our independent registered accounting firm is engaged
        to
        render audit or non-audit services, the engagement must be approved by the
        Audit
        Committee or entered into pursuant to the Audit Committee’s pre-approval
        policies and procedures. The Audit Committee has adopted a policy, attached
        hereto as Exhibit 99.1, granting pre-approval to certain specific audit and
        audit-related services and specifying the procedures for pre-approving other
        services.
 
  **PART
        IV**
  **Item
        15. Exhibits, Financial Statement Schedules**
  a)
              Financial
                  Statements. Reference is made to the Index to the Financial Statements
                  set
                  forth in item 8 on page 25 of this Form
                  10-K.
  Financial
        Statement Schedules. All Schedules for which provision is made in the applicable
        accounting regulations of the Securities and Exchange Commission are included
        herein.
  b)
              The
                  Exhibits listed on the accompanying Index to Exhibits are filed
                  as part
                  of, or incorporated by reference into, this
                  report.
   **99¢
        Only Stores**
 **SCHEDULE
        II - VALUATION AND QUALIFYING ACCOUNTS**
 **For
        Each of the Three Years in the Period Ended December 31,
        2004**
 **(Amounts
        in thousands)**
 
 **Beginning
                  of Year**
              
              **Addition**
              
              **Reduction**
              
              **End
                  of Year**For
                  the year ended December 31, 2004Allowance
                  for doubtful accounts
              
              $
              143
              
              
              122
              
              
              -
              
              $
              268Inventory
                  reserve
              
              $
              1,711
              
              
              3,610
              
              
              324
              
              $
              4,997For
                  the year ended December 31, 2003Allowance
                  for doubtful accounts
              
              $
              149
              
              
              -
              
              
              6
              
              $
              143Inventory
                  reserve
              
              $
              1,522
              
              
              189
              
              
              -
              
              $
              1,711For
                  the year ended December 31, 2002:Allowance
                  for doubtful accounts
              
              $
              165
              
              
              -
              
              
              16
              
              $
              149Inventory
                  reserve
              
              $
              1,224
              
              
              298
              
              
              -
              
              $
              1,522
 60
  Exhibit
                  Index
              Exhibit
                  Description3.1
              Amended
                  and Restated Articles of Incorporation of the
                  Registrant.(2)3.2
              Amended
                  and Restated Bylaws of the Registrant.(1)4.1
              Specimen
                  certificate evidencing Common Stock of the
                  Registrant.(1)10.1
              Form
                  of Indemnification Agreement and Schedule of Indemnified
                  Parties.(1)10.2
              Indemnification
                  Agreement with David Gold. *10.3
              Form
                  of Tax Indemnification Agreement, between and among the Registrant
                  and the
                  Existing Shareholders.(1)10.4
              1996
                  Stock Option Plan, as Amended. *10.5
              [Reserved]10.6
              Lease
                  for 13023 Hawthorne Boulevard, Hawthorne, California, dated April
                  1 1994,
                  by and between the Registrant as Tenant and HKJ Gold, Inc. as Landlord,
                  as
                  amended.*10.7
              Lease
                  for 6161 Atlantic Boulevard, Maywood, California, dated November
                  11, 1985,
                  by and between the Registrant as Lessee and David and Sherry Gold,
                  among
                  others, as Lessors.(1)10.8
              Lease
                  for 14139 Paramount Boulevard, Paramount, California, dated as
                  of March 1
                  1996, by and between the Registrant as Tenant and 14139 Paramount
                  Properties as Landlord, as amended.(1)10.9
              [Reserved]10.10
              Lease
                  for 6124 Pacific Boulevard, Huntington Park, California, dated
                  January 31,
                  1991, by and between the Registrant as Tenant and David and Sherry
                  Gold as
                  the Landlord, as amended.(1)10.11
              Lease
                  for 14901 Hawthorne Boulevard, Lawndale, California, dated November
                  1,
                  1991, by and between Howard Gold, Karen Schiffer and Jeff Gold,
                  dba 14901
                  Hawthorne Boulevard Partnership as Landlord and the Registrant
                  as Tenant,
                  as amended.(1)10.12
              Lease
                  for 5599 Atlantic Avenue, North Long Beach, California, dated August
                  13,
                  1992, by and between the Registrant as Tenant and HKJ Gold, Inc.
                  as
                  Landlord, as amended.(1)10.13
              Lease
                  for 1514 North Main Street, Santa Ana, California, dated as of
                  November
                  12, 1993, by and between the Registrant as Tenant and Howard Gold,
                  Jeff
                  Gold, Eric J. Schiffer and Karen R. Schiffer as Landlord, as
                  amended.(1)10.14
              Lease
                  for 6121 Wilshire Boulevard, Los Angeles, California, dated as
                  of July 1,
                  1993, by and between the Registrant as Tenant and HKJ Gold, Inc.
                  as
                  Landlord, as amended; and lease for 6101 Wilshire Boulevard, Los
                  Angeles,
                  California, dated as of December 1, 1995, by and between the Registrant
                  as
                  Tenant and David and Sherry Gold as Landlord, as
                  amended.*10.15
              Lease
                  for 8625 Woodman Avenue, Arleta, California, dated as of July 8,
                  1993, by
                  and between the Registrant as Tenant and David and Sherry Gold
                  as
                  Landlord, as amended.*10.16
              Lease
                  for 2566 East Florence Avenue, Walnut Park, California, dated as
                  of April
                  18, 1994, by and between HKJ Gold, Inc. as Landlord and the Registrant
                  as
                  Tenant, as amended.*10.17
              Lease
                  for 3420 West Lincoln Avenue, Anaheim, California, dated as of
                  March 1,
                  1996, by and between the Registrant as Tenant and HKJ Gold, Inc.
                  as
                  Landlord, as amended.(1)10.18
              Master
                  Lease for 4000 East Union Pacific Avenue, City of Commerce, California
                  ("Warehouse and Distribution Facility Lease"), dated as of December
                  20,
                  1993, by and between the Registrant as Lessee and TBC Realty II
                  Corporation ("TBC") as Lessor, together with Lease Guaranty ("Lease
                  Guaranty"), dated December 20, 1993, by and between Sherry and
                  David Gold
                  and TBC with respect thereto and Letter Agreement, dated December
                  15,
                  1993, among Registrant, The Mead Corporation, TBC and Citicorp
                  Leasing,
                  Inc. with respect to the Lease Guaranty.(1)10.19
              Lease
                  for 12123-12125 Carson Street, Hawaiian Gardens, California dated
                  February
                  14, 1995, as amended.*10.20
              North
                  Broadway Indemnity Agreement, dated as of May 1, 1996, by and between
                  HKJ
                  Gold, Inc. and the Registrant.(1)10.21
              Lease
                  for 2606 North Broadway, Los Angeles, California, dated as of May
                  1, 1996,
                  by and between HKJ Gold, Inc. as Landlord and the Registrant as
                  Tenant.(1)10.22
              Grant
                  Deed concerning 8625 Woodman Avenue, Arleta, California, dated
                  May 2,
                  1996, made by David Gold and Sherry Gold in favor of Au Zone Investments
                  #2, L.P., a California limited partnership.(1)10.23
              Grant
                  Deed concerning 6101 Wilshire Boulevard, Los Angeles, California,
                  dated
                  May 2, 1996, made by David Gold and Sherry Gold in favor of Au
                  Zone
                  Investments #2, L.P., a California limited
                  partnership.(1)10.24
              Grant
                  Deed concerning 6124 Pacific Boulevard, Huntington Park, California,
                  dated
                  May 2, 1996, made by David Gold and Sherry Gold in favor of Au
                  Zone
                  Investments #2, L.P., a California limited
                  partnership.(1)10.25
              Grant
                  Deed concerning 14901 Hawthorne Boulevard, Lawndale, California,
                  dated May
                  2, 1996, made by Howard Gold, Karen Schiffer and Jeff Gold in favor
                  of Au
                  Zone Investments #2, L.P., a California limited
                  partnership.(1)10.26
              Services
                  Agreement, dated as of December 28, 2000, by and between Universal
                  International, Inc. and the registrant.(3)10.27
              Lease
                  for 955 West Sepulveda, Los Angeles, California, dated as of July
                  17,
                  1995, by and between Schwartz Investment Co., as successor to VAT
                  Partners
                  II, as Landlord and the Company as Tenant.(2)10.28
              Stanton
                  Associates Engagement *23.1
              Consent
                  of Deloitte & Touche LLP*23.2
              Consent
                  of PricewaterhouseCoopers LLP*31(a)
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.*31(b)
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.*32(a)
              Certification
                  of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley
                  Act of 2002.*
  61
  32(b)
              Certification
                  of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley
                  Act of 2002.*99.1
              Audit
                  Committee Pre-Approval Policy**
                  Filed herewith(1)
                  Incorporated by reference from the Company's Registration Statement
                  on
                  Form S-1 as filed with the Securities and Exchange Commission on
                  May
                  21,1996.(2)
                  Incorporated by reference from the Company's 2002 Annual Report
                  on Form
                  10-K as filed with the Securities and Exchange Commission on March
                  31,
                  2003.(3)
                  Incorporated by reference from the Company's Current Report on
                  Form 8-K as
                  filed with the Securities and Exchange Commission on January 12,
                  2001.
 62
  **SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this annual report Form 10-K to be signed
        on its behalf by the undersigned, thereunto duly authorized.
  99¢
                  Only Stores/s/
                  Eric SchifferBy:
                  Eric SchifferChief
                  Executive Officer
  Pursuant
        to the requirements of the Securities Exchange Act of 1934 this Annual Report
        on
        Form 10K has been signed below by the following persons on behalf of the
        Registrant and in the capacities and on the dates indicated.
  **Signature**
              
              **Title**
              
              **Date**/s/
                  David GoldDavid
                  Gold
              
              Chairman
                  of the Board
              
              September
                  8, 2005/s/
                  Eric SchifferEric
                  Schiffer
              
              Chief
                  Executive Officer and Director
              
              September
                  8, 2005/s/
                  Jeff GoldJeff
                  Gold
              
              President,
                  Chief Operating Officer and Director
              
              September
                  8, 2005/s/
                  Jeffrey KniffinJeffrey
                  Kniffin
              
              Interim
                  Chief Financial Officer (Principal financial officer and principal
                  accounting officer)
              
              September
                  8, 2005/s/
                  Eric FlamholtzEric
                  Flamholtz
              
              Director
              
              September
                  8, 2005/s/
                  Lawrence GlascottLawrence
                  Glascott
              
              Director
              
              September
                  8, 2005/s/
                  Marvin L. HolenMarvin
                  L. Holen
              
              Director
              
              September
                  8, 2005/s/
                  Thomas UntermanThomas
                  Unterman
              
              Director
              
              September
                  8, 2005
 
  63