**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





**x**
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES
                EXCHANGE ACT OF
                1934****For
                the Fiscal Year Ended March 31,
                2006****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 if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 the Securities Act.


Yes £ No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes £ No x





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. x





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one)





Large
                accelerated filer£
            Accelerated
                filer x
            Non-accelerated
                filer£





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes £ No
x





The
      aggregate market value of Common Stock held by non-affiliates of the Registrant
      on September 30, 2006 was $554,394,779 based on a $11.83 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, 69,937,297 Shares as of February 28, 2007












**Table
      of Contents**





Part
                I
            PageItem
                1.
            Business
            3Item
                1A.
            Risk
                Factors
            11Item
                1B.
            Unresolved
                Staff Comments
            17Item
                2.
            Properties
            17Item
                3.
            Legal
                Proceedings
            19Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            20Part
                IIItem
                5.
            Market
                for Registrant's Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity Securities
            21Item
                6.
            Selected
                Financial Data
            23Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and
                Results of Operations
            25Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            37Item
                8.
            Financial
                Statements and Supplementary Data
            38Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            71Item
                9A.
            Controls
                and Procedures
            71Item
                9B.
            Other
                Information
            75Part
                IIIItem
                10.
            Directors
                and Executive Officers of the
                Registrant
            75Item
                11.
            Executive
                Compensation
            77Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            80Item
                13.
            Certain
                Relationships and Related
                Transactions
            81Item
                14.
            Principal
                Accounting Fees and Services
            82Part
                IVItem
                15.
            Exhibits,
                Financial Statement Schedules
            83Signatures
            86Exhibit
                Index
            84





2
 *Table
            of Contents*





**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 potential investors and 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” and “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.





**EXPLANATORY
      NOTE REGARDING DATE OF FILING AND SUBSEQUENT EVENT
      ANALYSIS**





The
      consolidated financial statements as of and for the period ended March 31,
      2006,
      including footnote disclosures, are reflective of the ultimate resolution of
      various uncertainties and contingent matters which existed as of March 31,
      2006.
      In recording estimated carrying amounts of certain assets and liabilities,
      the
      Company considered the impact of events and transactions which occurred during
      the extended period of time subsequent to March 31, 2006 through the issuance
      date of these consolidated financial statements.





**EXPLANATORY
      NOTE REGARDING CHANGE IN FISCAL YEAR**





On
      December 30, 2005 the Company changed its fiscal year-end from December 31
      to
      March 31 (see “Notes to Consolidated Financial Statements”). Unless specifically
      indicated otherwise, any reference to “2006” or “fiscal 2006” relates to as of
      or for the year ended March 31, 2006 and any reference to “2004” and “2003” or
“fiscal 2004”and “fiscal 2003” relate to as of or for the years ended December
      31, 2004 and 2003, respectively. References to fiscal 2007 refer to the period
      from April 1, 2006 to March 31, 2007. The transition period, January 1 to March
      31, 2005, is referred to as the “transition period”.





**PART
      I**




**Item1.
      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 closeout merchandise. As of March 31, 2006, the Company operated
      232
      retail stores with 164 in California, 36 in Texas, 21 in Arizona, and 11 in
      Nevada. These stores averaged approximately 22,200 gross square feet. In fiscal
      2006, the Company’s stores open for the full year generated average net sales
      per estimated saleable square foot of $250, which the Company believes is among
      the highest in the deep discount retail industry, and average net sales per
      store of $4.3 million, which the Company believes is the highest among all
      dollar store chains. The Company entered the Texas market in June 2003. In
      fiscal 2006, 186 non-Texas stores open for the full year averaged net sales
      of
      $4.7 million per store and $283 per estimated saleable square foot and the
      36
      Texas stores open for the full year averaged net sales of $2.3 million per
      store
      and $111 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. From January
      1,
      2005 through March 31, 2006 (which includes the transition period and fiscal
      2006), the Company opened 15 new stores, including three in Texas, relocated
      one
      smaller California store and closed one store due to eminent domain. In fiscal
      2006, the Company 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. For fiscal 2007 the Company
      expanded its store base, opening 19 stores. Of the store openings, five stores
      are located in the Company’s Texas markets. Starting in fiscal 2008, the Company
      plans to increase its store opening rate by expanding in existing markets and
      new markets to be served primarily by its existing distribution centers as
      the
      first step in the Company’s long-term plan to become a premier nationwide
      deep-discount retailer.





3
 *Table
            of Contents*





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
      exposing the Company to a broader selection of opportunistic buys and generating
      additional sales with relatively small incremental operating expenses. Bargain
      Wholesale represented 3.8% of the Company’s total sales in fiscal 2006.





**Change
      in Fiscal Year End**





On
      December 30, 2005, the Company’s Board of Directors approved a change in the
      fiscal year-end from December 31 to March 31. The Board determined this was
      in
      the best interests of the Company’s shareholders, because this change separates
      year-end procedures such as physical inventories from the Christmas holiday
      season, helps to enhance operational focus on holiday period execution and
      reduces fiscal year end costs associated with accounting and audit procedures.
      With new auditors recently engaged at the time of this change, the Company
      believes this was an appropriate time to make this beneficial transition, which
      also allowed additional time to perform Sarbanes-Oxley Section 404 assessment,
      remediation and audit procedures for the period covered in this
      report.





**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 substantial portions of purchases are acquired at prices substantially
      below original wholesale cost through closeouts, manufacturer overruns, and
      other special-situation merchandise transactions. As a result, a substantial
      portion of the product mix is comprised of a frequently changing selection
      of
      specific brands and products. Special-situation merchandise is complemented
      by
      re-orderable merchandise which is also often purchased below normal wholesale
      prices. Deep-discount retail is also distinguished by offering this merchandise
      to customers at prices significantly below typical retail prices.




The
      Company considers closeout merchandise as any item that is not generally
      re-orderable on a regular basis. 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 when used by” date, and the financial needs of the supplier.





Most
      deep-discount retailers also sell merchandise that can be purchased from a
      manufacturer or wholesaler on a regular basis. Although this merchandise can
      often be purchased at less than normal 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.





The
      Company also sells wholesale merchandise, which is generally obtained through
      the same or shared opportunistic purchases of the retail operations and sold
      through its Bargain Wholesale division. The Company maintains showrooms at
      the
      Company’s main distribution facility in California and at the Company’s
      distribution facility outside Houston, Texas. Additionally, the Company has
      a
      showroom located in Chicago. Advertising of wholesale merchandise is conducted
      primarily at trade shows and by catalog 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 generally recognized under FOB origin where
      title and risk of loss pass to the buyer when the merchandise leaves the
      Company’s distribution facility.





4
 *Table
            of Contents*





**Business
      Mission and Strategy**




The
      Company’s mission is to provide a primary shopping destination for
      price-sensitive consumers and a fun treasure-hunt shopping experience for other
      value conscious consumers for food and other basic household items. The
      Company’s core strategy is to offer only good to excellent values on a wide
      selection of quality food and basic household items with a focus on name brands
      and an exciting assortment of surprises, all for 99¢ or less, in attractively
      merchandised, clean and convenient stores. The Company’s strategies to achieve
      its mission 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¢ or less.
      During fiscal 2006, 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.), housewares (including glassware, kitchen items, etc.), hardware,
      stationery, party goods, seasonal goods, baby products, toys, giftware, pet
      products, plants and gardening, clothing, electronics and entertainment. The
      Company carries name-brand merchandise, off-brands and its own private-label
      items. The Company 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.





**Fun
      Treasure-Hunt Shopping Experience** **.** The
      Company’s practices of buying closeouts and other opportunistic purchases and
      selling them for 99¢ or less, typically dramatically below retail prices, helps
      to create a sense of fun and excitement. The constantly changing selection
      of
      these special extreme values, often in limited quantities, helps to create
      a
      sense of urgency when shopping, increase shopping frequency and to generate
      customer goodwill, loyalty and great awareness via word-of-mouth.





**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 generally restocked throughout
      the day. The Company believes that offering merchandise in an attractive,
      convenient and familiar environment creates a store that is 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. A
      number of consistent behaviors have contributed to building the Company’s
      reputation, including its willingness and consistent practice over many years
      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 believes its relationships with suppliers
      are further enhanced by its ability to minimize channel conflict for the
      manufacturer. 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. The
      Bargain Wholesale division sells to local, regional, national, and international
      accounts. The Company maintains showrooms in Los Angeles, where it is based,
      as
      well as Houston, and Chicago.





**Savvy
      Purchasing.** The
      Company purchases merchandise at substantially discounted prices as a result
      of
      its buyers’ knowledge and experience in their respective categories, its
      negotiating ability, and its established reputation among its suppliers. The
      Company applies its aggressive negotiating approach to its purchasing of
      corporate supplies, construction, and services and strives to maintain a lean
      operating environment to reinforce its negotiating posture with suppliers.





5
 *Table
            of Contents*





**Store
      Location and Size** **.** 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 March 31,
      2006, the Company’s 232 existing 99¢ Only Stores average approximately 22,200
      gross square feet and the Company currently targets new store locations between
      15,000 and 19,000 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 smaller 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 had a negative
      impact on its historical comparable sales growth during the 2004 to fiscal
      2005
      period.





**Experienced
      Management Team and Depth of Employee Incentive
      Compensation.** 99¢ Only
      Stores’ management team has many years of retail experience. The Company’s
      management believes that employee ownership of the Company has historically
      helped build employee pride in its stores. Historically, almost all active
      hourly employees with six months tenure and all members of management and the
      Board of Directors (other than David Gold, Eric Schiffer, Jeff Gold, and Howard
      Gold) were eligible for an annual grant of stock options. As of March 31, 2006,
      the Company’s employees held options to purchase an aggregate of 4,532,000
      shares of Common Stock, or 6.5% of the outstanding shares of Common Stock.
      With
      recent changes in accounting pronouncements affecting the financial reporting
      of
      stock options, management has determined not to grant stock options to all
      employees and will evaluate additional or alternative methods for maintaining
      employee loyalty in the future.




**Growth
      Strategy**




The
      Company’s long-term growth plan is to become a premier nationwide deep-discount
      retailer. Management believes that growth, as of the date of this report, will
      primarily result from new store openings in its existing markets that include
      California, Texas, Arizona and Nevada.




**Growth
      in Existing Markets.** By
      continuing to develop new stores 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. This focus on growth through existing
      distribution facilities will help management to focus on implementing scaleable
      systems.




**Refined
      Store Size for 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 installed the “High Jump” warehouse management system in this facility.
      As of March 31, 2006, 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 and 26,397 gross square feet, which is larger than the
      Company average of 17,414 saleable square feet and 22,204 gross square feet
      for
      2006. In fiscal 2007, the Company opened five stores in its Texas markets which
      are smaller than the average of the existing Texas stores and more aligned
      with
      the density and unit volumes experienced in this market. The Company currently
      believes that there is potential for additional growth in Texas.




**Long
      Term Geographic Expansion.** ** The
      Company’s long term plan is to become a nationwide retailer by opening clusters
      of stores in densely populated geographic regions across the country. 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 United States. In 1999, the Company
      opened its first 99¢ Only Stores location outside the state of California in Las
      Vegas, Nevada; Arizona followed in 2001 and Texas in 2003.




**Real
      Estate Acquisitions** ***.*** ** The
      Company considers both real estate lease and purchase opportunities and may
      consider for future expansion the acquisitions of a chain, or chains, of retail
      stores in existing markets or other regions, primarily for the purpose of
      acquiring favorable locations in line with its expansion plans.





6
 *Table
            of Contents*





**Retail
      Operations**





The
      Company’s stores offer customers a wide assortment of regularly available
      consumer goods, as well as a broad variety of 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¢ per item or two or more
      items for 99¢, except in its Texas stores where items can sell from 9¢ up to
      99¢, as long as the price ends in a 9.




The
      following table sets forth certain relevant information with respect to the
      Company’s retail operations (dollar amounts in thousands, except sales per
      square foot):







**Year
                Ended December 31,**
            
            **Year
                ended**
              **March
                31,****2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2006**Net
                retail sales
            
            $
            522,019
            
            $
            663,983
            
            $
            816,348
            
            $
            929,896
            
            $
            984,293Annual
                net sales growth rate
            
            
            29.8
            %
            
            27.2
            %
            
            22.9
            %
            
            13.9
            %
            
            5.8
            %Store
                count at beginning of year
            
            
            98
            
            
            123
            
            
            151
            
            
            189
            
            
            219(b
            )New
                stores
            
            
            26
            
            
            28
            
            
            38
            
            
            33
            
            
            15Stores
                closed
            
            
            1
            
            
            -
            
            
            -
            
            
            3
                (a
            )
            
            2(c
            )Total
                store count at year-end
            
            
            123
            
            
            151
            
            
            189
            
            
            219
            
            
            232Average
                net sales per store open the full year (d)
            
            $
            4,647
            
            $
            4,750
            
            $
            4,957
            
            $
            4,603(e
            )
            $
            4,347(f
            )Estimated
                store saleable square footage at year-end
            
            
            1,892,949
            
            
            2,428,681
            
            
            3,190,528
            
            
            3,796,153
            
            
            4,040,096Average
                net sales per estimated saleable square foot (d)
            
            $
            319
            
            $
            309
            
            $
            308
            
            $
            270(e
            )
            $
            250(f
            )Change
                in comparable net sales(g)
            
            
            5.9
            %
            
            3.6
            %
            
            4.5
            %
            
            -1.8
            %
            
            0.3
            %





(a)
      Two
      smaller stores closed due to the presence of larger nearby 99¢ Only Stores and
      one store closed due to eminent domain.





(b)
      Store
      count includes store activity from January 1, 2005 through March 31, 2006 due
      to
      the change in fiscal year. The Company operated 223 stores as of March 31,
      2005.





(c)
      One
      store closed due to relocation and one due to an eminent domain
      action.




(d)
      For
      stores open for the entire fiscal year.




(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 in 2004 and average sales
      per
      saleable square foot of $101. All non-Texas 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)
      Includes 36 Texas stores open for a full year. Texas stores open for the full
      year had average sales of $2.3 million per store for 12 months ended March
      31,
      2006 and average sales per saleable square foot of $111. All non-Texas stores
      open for the full year had average sales of $4.7 million per store and $283
      of
      average sales per saleable square foot.





(g)
      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 consumable items
      for
      only 99¢ or less 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
      including many branded consumable items. 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 value-priced items that may be purchased
      by a single consumer.





7
 *Table
            of Contents*





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 operating hours designed to
      meet the needs of families.




**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, customized check-out counters and a distinctive
      color scheme on its interior and exterior signage, price tags, shopping carts,
      baskets and shopping bags. 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 value priced name-brands,
      convenient and inviting layout, and the lower shelving height, help encourage
      the typical customer to shop more of the whole store.




**Advertising** .
      Advertising expenditures were $3.8 million, $5.6 million and $4.4 million for
      fiscal 2003, 2004 and 2006 respectively, or 0.4%, 0.6% and 0.4% 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 or iPods and other high value items for 99¢ each, grand openings
      often attract long lines of customers and receive media coverage.




**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 appeal and interest at prices lower than regular wholesale. 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.





The
      Company seldom has 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 fiscal 2006. During fiscal 2006, 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 fiscal 2006
      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 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 its relationships with its suppliers
      are
      further enhanced by its ability to minimize channel conflict for a manufacturer.





8
 *Table
            of Contents*





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
      Stock Keeping Units (“SKU’s”) 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 such as kitchen items,
      house-wares, toys, seasonal products, pet-care and hardware which the Company
      believes are not brand sensitive to consumers.




**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 for both outbound shipping and a backhaul program. The
      Company also receives merchandise shipped by rail to its Commerce, California
      distribution center which has a railroad spur on the property. The Company
      uses
      only common carriers or owner-operators 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 centers will be
      able
      to support its anticipated growth throughout fiscal 2008. 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, that an opportunistic
      purchase may not temporarily pressure warehouse capacity, 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 some 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
      timely shipment to its store locations.





Information
      pertaining to warehouse and distribution facilities is described under
      Item 2. Properties.





**Information
      Systems**




In
      fiscal
      2006 and during the subsequent period to the date of this report, the Company
      made significant investments in a variety of infrastructural and process areas.
      These improvements included upgrades to the data center, networking
      infrastructure, and Wide Area Network (“WAN”) intended to improve security and
      reliability of processing. The Company has adopted formal control objectives
      and
      has deployed a compliance and self assessment program for key controls in its
      information systems and technology internal controls framework.





Also
      during this timeframe, the Company implemented the rollout of Highjump
      Software’s “Warehouse Advantage” warehouse management system (WMS) in its cold
      storage facility in Commerce, CA and much of its operations within its primary
      Commerce distribution center. Each deployment of the Highjump WMS and the
      associated Voxware voice-picking system moves the Company closer to its goal
      of
      real-time detailed inventory control and management.





Additionally,
      in fiscal 2006 the first application from Business Objects’ data warehouse and
      business intelligence, a store performance dashboard, was rolled out to the
      stores for use by store management personnel.





9
 *Table
            of Contents*





The
      Company currently operates financial, accounting, human resources, and payroll
      data processing using Lawson Software’s Financial and Human Resource Suites on
      an SQL database running on a Windows operating system. Various upgrades and
      deployments of new functionality are in progress using the Lawson system,
      primarily intended to streamline financial data gathering and
      reporting.





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 personal computer
      system at each store.





The
      Company has begun the implementation of a new Core Merchandising system (CMS)
      which, in combination with the Highjump WMS, will replace the majority of the
      functionality of the existing in-house proprietary inventory control and store
      ordering systems. During fiscal 2007, the Company implemented operational
      changes using existing systems to improve inventory transaction controls and
      to
      prepare for implementation of the CMS.





The
      Company utilizes an in-house developed Point of Sale (“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 competition for acquiring closeout
      merchandise also includes 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
      March
      31, 2006, the Company had 9,690 employees: 8,849 in its retail operation, 504
      in
      its warehousing and distribution operation, 264 in its corporate offices and
      73
      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 certain key management. Additionally,
      almost all active hourly employees with six months tenure and all members of
      management and the Board of Directors (other than David Gold, Eric Schiffer,
      Jeff Gold, and Howard Gold) have been eligible for an annual grant of stock
      options. With recent changes in accounting pronouncements affecting the
      financial accounting of stock options, management has determined not to
      distribute stock options to all employees and will evaluate additional or
      alternative methods for maintaining employee loyalty in the future.





None
      of
      the Company’s employees are party to a collective bargaining agreement and none
      are represented by a labor union.





**Trademarks
      and Service Marks**




“99¢
Only
      Stores,” “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 the Company believes that simultaneous litigation against
      all
      persons everywhere whom the Company believes to be infringing upon these marks
      is not feasible.





10
 *Table
            of Contents*





**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.





**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
      1A. Risk Factors**





**Inflation
      may affect the Company’s ability to sell merchandise at the 99¢ price
      point**




The
      Company’s ability to provide quality merchandise for profitable resale within
      the 99¢ 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¢ price point, which could
      have a material adverse effect on its business and results of operations.
      However, the Company can pass price increases on to customers to a degree,
      such
      as by selling smaller units for the same price and by selling fewer units for
      $0.99 in the case of items sold at two or more for $0.99. 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 control over financial
      reporting** ******




The
      Company received an adverse opinion on the effectiveness of its internal control
      over financial reporting as of March 31, 2006 because of material weaknesses
      identified in management’s assessment of the effectiveness of such internal
      control as of that date related to significant deficiencies in merchandise
      inventory management and financial reporting. These material weaknesses, if
      not
      remediated, create an increased risk of misstatement of the Company’s financial
      results, which, if material, may require future restatement thereof. A failure
      to implement improved internal controls, or difficulties encountered in their
      implementation or execution, 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 the status of the Company’s internal
      control over financial reporting.





**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 purchases with acceptable terms, refurbish stores, successfully compete
      against local competition and the increasing presence of large and successful
      companies entering or expanding into the markets that the Company operates
      in,
      upgrade its financial and management information systems and controls, gain
      brand recognition and acceptance in new markets, and manage operating expenses
      and product costs. 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 or are difficult to manage. 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, differentiate
      itself and 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.





11
 *Table
            of Contents*





A
      variety
      of factors, including store location, store size, local demographics, rental
      terms, competition, the level of store sales, availability of locally sourced
      as
      well as intra-Company distribution of merchandise, locally prevailing wages
      and
      labor pools, distance and time from existing distribution centers, 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 portion 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. New stores opened in existing
      and
      in new markets have in the past and may in the future be less profitable than
      existing stores in the Company’s core Southern California market and/or may
      reduce retail sales of existing stores, negatively affecting comparable store
      sales.





**The
      Company’s operations are concentrated in California; Natural disaster risk in
      all markets**





As
      of
      March 31, 2006, all but 68 of our 232 stores were located in California (with
      36
      stores in Texas, 21 stores in Arizona and 11 stores in Nevada). 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. California has also historically enacted minimum wages that exceed
      federal standards (and certain of its cities have enacted “living wage” laws
      that exceed State minimum wage laws), it is widely believed that it will soon
      do
      so again, and it typically has other factors making compliance, litigation
      and
      workers’ compensation claims more prevalent and costly.




In
      addition, the Company historically has been vulnerable to certain natural
      disasters and other risks, such as earthquakes, fires, floods, tornados,
      hurricanes, and civil disturbances. At times, these events have disrupted the
      local economy. These events could also pose physical risks to the Company’s
      properties. Furthermore, although the Company maintains standard property and
      business interruption insurance, the Company does not maintain earthquake
      insurance on its facilities and business or insure other risks which are not
      normally insured such as acts of war and acts of terrorism.





**The
      Company could experience disruptions in receiving and
      distribution**





The
      Company’s success depends upon whether receiving and shipments 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, and new store locations receiving shipments from
      distribution centers that are increasingly further from the new stores that
      they
      serve will increase transportation costs and may create transportation
      scheduling strains. The very nature of the Company’s closeout business makes it
      uniquely susceptible to periodic and difficult to foresee warehouse/distribution
      center overcrowding caused by spikes in inventory resulting from opportunistic
      closeout purchases. Such demands could cause delays in delivery of merchandise
      to and from warehouses and/or to stores. The Company is also in the process
      of
      implementing new warehouse distribution and merchandising systems and has
      experienced problems with the warehousing, distribution and merchandising
      systems being replaced. A fire, earthquake, or other disaster at our warehouses
      could also hurt our 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 that could disrupt our receiving, processing, and shipment of
      merchandise.





12
 *Table
            of Contents*





**The
      Company could be exposed to product liability or packaging violation
      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,
      and
      some of which are purchased through brokers as opposed to original manufacturing
      and supply sources. The closeout nature of many of the products may limit the
      Company’s opportunity to conduct product testing, label and ingredient analysis
      and other diligence as to these products, including compliance with particular
      State by State regulations. The Company is not listed as an additional insured
      for certain products and/or by certain product vendors, and general insurance
      may not provide full coverage in certain instances. This could result in
      unanticipated future losses from product liability or packaging violation
      claims. For example, the Environmental Protection Agency is investigating the
      Company’s past purchase of a product that it claims was not properly labeled
      and/or registered, and the California Air Resources Board is investigating
      product compliance with State pollution regulations, which may result in future
      action by the agencies, such as the imposition of penalties against the
      Company.




**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 within the 99¢ price point.
      The Company cannot be certain that such merchandise will continue to be
      available in the future at prices consistent with the Company business plan
      and/or historical costs. Further, the Company may not be able to find and
      purchase merchandise in necessary quantities. 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 or pricing commitments 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 as well as the back rooms of
      its retail stores. The Company’s short-term and long-term store and warehouse
      inventory approximated $155.8 million, $136.6 million and $143.9 million at
      December 31, 2004, March 31, 2005 and March 31, 2006, 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, and if it
      does, this may result in overcrowding and supply chain difficulties. 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, 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 perishable products.





**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. It also competes for retail real estate sites.
      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, and
      some of these competitors are entering or may enter the Company’s traditional
      markets. In addition, as it expands, the Company will enter new markets where
      its own brand is weaker and established brands are stronger, and where its
      own
      brand value may have been diluted by other retailers with similar names
      appearances and/or business models. 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
      and the ability to differentiate itself from competitors that do not share
      the
      Company’s price and merchandise attributes, yet may appear similar to
      prospective customers. The Company also faces competition from other retailers
      with similar names and/or appearances. 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.





13
 *Table
            of Contents*





**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 within the 99¢ price point could be hindered by certain economic
      factors beyond its control, including but not limited to:





-
            inflation
                and 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
                or
                from which parts and materials are
                sourced;


-
            increases
                in employee health and other benefit
                costs;


-
            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, which affect both the Company,
                as it
                ships over longer distances, and its customers and
                suppliers;


-
            increases
                in unionization efforts, including campaigns at the store and warehouse
                levels;


-
            increases
                in workers’ compensation costs and self-insured workers’ compensation
                liabilities due to increased claims costs, as well as frequent political
                and legislative pressure or judicial rulings easing or rolling back
                the
                recent tightening of certain California workers’ compensation
                provisions.





**The
      Company faces risks associated with international sales and
      purchases**




International
      sales historically have not been important to the Company’s overall net sales.
      Some of the Company’s inventory is manufactured outside the United States and
      there are many risks associated with doing business internationally.
      International transactions may be subject to risks such as:




-
            political
                instability;


-
            lack
                of knowledge by foreign manufacturers of or compliance with applicable
                federal and state product, content, packaging and other laws, rules
                and
                regulations;


-
            foreign
                currency exchange rate
                fluctuations;


-
            uncertainty
                in dealing with foreign vendors and countries where the rule of law
                is
                less established;


-
            risk
                of loss due to overseas
                transportation;


-
            import
                and customs review can delay delivery of
                product;


-
            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**





The
      Company leases 13 of its stores and a parking lot for one of those stores from
      the Gold family and their affiliates, of which 11 stores are leased on a month
      to month basis and are in negotiation for renewal. Under current policy, the
      Company only enters into real estate transactions with affiliates 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 no less favorable 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
      our
      net sales and operating results.





14
 *Table
            of Contents*





**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 was 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 has established a new and different management style. Jeff Gold, formerly
      Senior Vice President of Real Estate and Information Systems, assumed broader
      duties as President and Chief Operating Officer, and in addition to Real Estate,
      now also oversees the Company’s Retail operations, Logistics and Human Resources
      functions. In addition, Howard Gold, who for many years had been in charge
      of
      the Company’s distribution operations, moved to the newly created position of
      Executive Vice President of Special Projects and now also oversees our Bargain
      Wholesale division. In November 2005, the Company hired Robert Kautz as its
      new
      Chief Financial Officer, responsible for the Finance, Information Systems and
      Strategic Planning functions. In addition, the Company has added a number of
      new
      officer level positions in the areas of buying, real estate, information
      technology, finance, store operations, loss prevention, distribution and
      merchandise planning and allocation. The officers in these positions come from
      many different companies and this team must be retained to develop a coordinated
      management style.





These
      are
      very significant changes, implemented over a relatively short period of time.
      These officers and executive officers are largely 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. With the exception of
      Robert Kautz, the Company has not entered into employment agreements with any
      of
      its executive officers. Also, the Company does not maintain key person life
      insurance on any of its officers. 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
      quarter ended December 31, which includes the Christmas and Halloween selling
      seasons. During fiscal 2004 and 2006, the Company generated approximately 27.4%
      and 27.2%, respectively of its net sales during this quarter. If for any reason
      the Company’s net sales were to fall below norms during this quarter, it could
      have an adverse impact on profitability and impair the results of operations
      for
      the entire fiscal 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 fiscal year.




In
      addition to seasonality, many other factors may cause the results of operations
      to vary significantly from quarter to quarter. These factors, some beyond the
      Company’s control, include the following:





-
            the
                number, size and location of new stores and timing of new store
                openings;


-
            the
                distance of new stores from existing stores and distribution
                sources;


-
            the
                level of advertising and pre-opening expenses associated with new
                stores;


-
            the
                integration of new stores into
                operations;


-
            the
                general economic health of the deep-discount retail
                industry;


-
            changes
                in the mix of products sold;


-
            increases
                in fuel, shipping merchandise and energy
                costs;


-
            the
                ability to successfully manage inventory
                levels;


-
            changes
                in personnel;


-
            the
                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.





15
 *Table
            of Contents*





**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 tanks 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, 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
      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, but the Company cannot be assured that its policies and training
      are
      comprehensive and/or are consistently followed, nor that they will successfully
      help the Company avoid potential liability or violations of these environmental
      laws and regulations in the future even if consistently followed.





**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 family (including Eric
      Schiffer, Chief Executive Officer, Jeff Gold, President and Chief Operating
      Officer and Howard Gold, Executive Vice President of Special Projects) and
      certain of their affiliates and the Company’s other directors and executive
      officers beneficially own as of February 28, 2007, an aggregate of 23,206,101,
      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;


-
            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;


-
            increases
                in minimum wages;


-
            workers’
                compensation costs and new laws and
                regulations;


-
            the
                Company’s ability to control
                shrink;


-
            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.





16
 *Table
            of Contents*





**Item
      1B. Unresolved Staff Comments**





None.





**Item
      2. Properties**




As
      of
      March 31, 2006, the Company owned 37 stores and leased 195 of its 232 store
      locations. Additionally, as of March 31, 2006, the Company owns three parcels
      of
      land for potential store sites. The Company has an interest in a variable
      interest entity that developed a shopping center in La Quinta, California,
      in
      which it leases a store that opened in December 2005. The Company also has
      a 50%
      interest in another property which includes a leased store site.




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, of which 11 stores are leased on
      a
      month to month basis and are in negotiation for renewal. 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 signed documents purporting to
      guarantee certain obligations under leases in which Universal, or a
      subsidiary, was the lessee.  Subsequent to the sale, Universal may have
      defaulted on these lease agreements.  The Company was potentially
      contingently liable for lease payments totaling up to $1.1 million as of
      March 31, 2006, as well as additional costs for attorney fees, rent increases
      and common area maintenance charges, in connection with three lawsuits brought
      by the lessors under these leases. As of June 2006 one of the matters settled,
      and the Company has been fully reimbursed for the settlement pursuant to the
      guarantees by David and Sherry Gold. The Company and the plaintiffs in the
      two
      remaining cases have agreed on a tentative settlement of the cases, pursuant
      to
      which the Company would be responsible for an aggregate payment of $150,000.
      This settlement has not yet been reduced to writing or approved by the Court.
      The Company anticipates full reimbursement of any such settlement payment or
      other obligation in connection with these cases under the guarantees of David
      and Sherry Gold. 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, which indemnity David and Sherry Gold confirmed in writing in
      April 2004 and re-executed on August 5, 2005. For further information see
      Note 8 “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 March 31, 2006, information relating to the
      calendar year expiration dates of the Company’s current stores leases:





**Expiring**
              **2006**
            
            **Expiring**
              **2007-2009**
            
            **Expiring**
              **2010-2012**
            
            **Expiring**
              **2013
                and beyond**14(a)
            
            66
            
            76
            
            39





(a)
            Includes
                13 stores leased on a month-to-month
                basis.





17
 *Table
            of Contents*





The
      large
      majority of the Company’s store leases were entered into with 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 owns its main warehouse, distribution and executive office facility,
      located in the City of Commerce, California. The Company purchased an additional
      warehouse storage space nearly adjacent to its main distribution facility for
      $9.7 million in July 2005.




The
      Company owns a warehouse/distribution center in the Houston area to service
      its
      Texas operation. See “Growth Strategy - Continued Expansion into
      Texas.”




The
      Company also owns a cold storage warehouse/distribution center and leases
      additional warehouse facilities from time to time located near the City of
      Commerce, California.





The
      Company also owns a warehouse in Eagan, Minnesota.





18
 *Table
            of Contents*





**Item
      3. Legal Proceedings**





**Gillette
      Company vs. 99¢ Only Stores (Los Angeles Superior Court).** 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 amount of approximately $2.0 million (apart from approximately $1.0
      million already paid to Gillette for product purchases), together with
      pre-judgment interest at ten-percent per annum from the December 1998 date
      of
      the agreement. On August 9, 2006, the parties agreed upon a settlement under
      which the Company would pay Gillette the sum of $540,000 in full settlement
      of
      this lawsuit and dispute. The parties subsequently entered into a written
      settlement agreement and the Company has paid the $540,000 settlement amount
      to
      Gillette. This amount had been accrued as of March 31, 2006.





**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. The Company entered into a settlement with the plaintiffs in this
      matter, and the Court granted final approval of the settlement on March 17,
      2006
      and entered final judgment. The Company has paid out an aggregate sum of
      approximately $100,000 in settlement of this action. This sum includes the
      settlement payments to the named plaintiffs and plaintiffs who have opted into
      the settlement as well as the payments for costs and fees to plaintiffs’
counsel.





**Securities
      Class Action and Shareholder Derivative 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 sought to represent all who
      purchased shares of the Company's common stock between March 11 and June 10,
      2004, alleged 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 superseded the various complaints originally filed and
      contained an expanded class period. 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
      moved to dismiss the second amended complaint as well. 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. On or about January 24, 2006,
      the Company, the Company’s insurer and plaintiffs’ counsel in both the federal
      securities class action and in the state derivative action agreed to settle
      these matters. Pursuant to the settlement agreement the Company’s insurer and
      the Company each paid $2,062,500 in settlement of the putative class action
      and
      $87,500 in settlement of the state derivative action. The parties also agreed
      that the class action period would be extended through and including September
      21, 2005. Both the federal court and the state court approved the settlement
      and
      dismissed the actions with prejudice. The time for any appeal has expired.
      The
      Company had reserves for this matter at March 31, 2006 of $2.2
      million.





**Jasmine
      Minesaki v. 99¢ Only Stores (Los Angeles Superior Court).** Plaintiff
      Jasmine Minesaki filed this action on behalf of herself and her daughter for
      personal injuries suffered at a facility previously owned by the Company. The
      Court approved a settlement of this matter in October 2006, pursuant to which
      the Company's insurance carriers are obligated to satisfy the amounts owed
      to
      the plaintiff thereunder ,
      which
      totaled approximately $35.0 million .





19
 *Table
            of Contents*





**Employment
      Class Actions.**





**Vargas
      vs. 99¢ Only Stores (Ventura County Superior Court).** On
      June
      19, 2006, the plaintiff, Joanna Vargas, filed this putative class action suit
      against the Company seeking to represent its California retail non-exempt
      employees. The lawsuit alleges non-payment of wages, non-payment of overtime
      wages, failure to provide or pay for meal or rest breaks, unlawful deduction
      of
      wages, non-payment of wages to employees who quit or were terminated, and
      similar claims. The lawsuit seeks compensatory, special and punitive damages
      in
      unspecified amounts, as well as injunctive relief. The Company has responded
      to
      the complaint and denied all material allegations therein. The parties are
      currently litigating whether this matter and the Washington matter described
      below should be coordinated. Based on discussions during recent settlement
      negotiations, the Company has reserved $1.5 million at March 31, 2006 for
      potential liability in this case and the Washington matter described below.
      As
      the parties in this matter and the Washington matter have not entered into
      a
      settlement agreement, and any settlement would be subject to court approval,
      a
      settlement in this matter and the Washington matter cannot be
      assured.





**Washington
      v. 99¢ Only Stores (Los Angeles County Superior Court).** On
      October 31, 2006, the plaintiff, Chantelle Washington, filed this putative
      class
      action suit against the Company seeking to represent its California retail
      non-exempt cashier employees. The lawsuit alleges non-payment of failure to
      provide or pay for meal or rest breaks and associated claims. The lawsuit seeks
      compensatory damages and/or penalties in unspecified amounts, as well as
      equitable relief, attorney fees and interest. The Company has responded to
      the
      complaint and filed a demurrer asserting that this action should be stayed
      pending the resolution of the Vargas action described above. The parties are
      currently litigating whether this matter and the Vargas action should be
      coordinated. See the Vargas matter described above for reserves pertaining
      to
      this matter and a description of the settlement status.





**Environmental
      Protection Agency** .
      Region
      IX of the U.S. Environmental Protection Agency (the "EPA") notified the Company
      on May 4, 2005 that it intended to commence an action seeking civil penalties
      for an alleged sale of an unregistered pesticide product.  The EPA has not
      yet filed a complaint in this matter, nor has it made any demands for a specific
      penalty amount.  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 financial condition, results of operations, or overall
      liquidity.





**Others.**  The
      Company is named as a defendant in numerous 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.





20
 *Table
            of Contents*




**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**Fiscal
                Year ended December 31, 2004:**First
                Quarter
            
            $
            29.65
            
            $
            23.43Second
                Quarter
            
            
            24.80
            
            
            14.10Third
                Quarter
            
            
            15.74
            
            
            12.17Fourth
                Quarter
            
            
            16.36
            
            
            13.15**Three
                months ended March 31, 2005**
            
            $
            16.45
            
            $
            12.95**Fiscal
                Year ended March 31, 2006:**First
                Quarter
            
            $
            13.32
            
            $
            10.05Second
                Quarter
            
            
            12.86
            
            
            9.02Third
                Quarter
            
            
            10.85
            
            
            9.01Fourth
                Quarter
            
            
            13.62
            
            
            9.92**Fiscal
                Year ending March 31, 2007:**First
                Quarter
            
            $
            13.32
            
            $
            10.00Second
                Quarter
              Third
                Quarter
            
            
            12.92
              12.71
            
            
            10.04
              10.70





As
      of
      March 12, 2007, the Company had 418 shareholders of record and approximately
      15,282 beneficial holders of its 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
      5,035,000 are available as of March 31, 2006 for future option grants. Options
      may be granted to officers, employees, non-employee 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 independent members
      of the Board of Directors. Options typically vest over a three-year period,
      one-third one year from the date of grant and one-third per year thereafter,
      though an exception was made by the Company’s Compensation Committee on June 6,
      2006, when it granted options that vested in equal halves over a two year
      period. Options typically 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 2003, 2004, three months ended
      March 31, 2005. The Company recognized $0.2 million in option related
      compensation cost during fiscal 2006 (see Note 10 to Consolidated Financial
      Statements for detailed discussion). In fiscal 2007, the Company adopted SFAS
      No. 123(R), “Share-Based Payment” and expects to report approximately $5.2
      million in option related compensation cost in fiscal 2007. The plan will expire
      in 2011.





21
 *Table
            of Contents*





**Securities
      Authorized for Issuance Under Equity Compensation Plans**




The
      following table provides information as of March 31, 2006 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 outstanding options, warrants and rights
            (c)
              Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))Equity
                compensation plans approved by security holders
            4,532,000
            $19.49
            5,035,000Equity
                compensation plans not approved by security holders
            -
            -
            -Total
            4,532,000
            $19.49
            5,035,000





22
 *Table
            of Contents*




**Item
      6. Selected Financial Data** ****




The
      following table sets forth selected financial and operating data of the Company
      for the periods indicated. The data set forth below should be read in
      conjunction with the consolidated financial statements and notes thereto.


**Year
                Ended December 31,**
            
            **Year
                Ended**
              **March
                31,****(Amounts
                in thousands, except per share and operating
                data)****Statements
                of Income Data (f):**
            
            **2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2006**Net
                sales:99¢
                Only Stores
            
            $
            522,019
            
            $
            663,983
            
            $
            816,348
            
            $
            929,896
            
            $
            984,293Bargain
                Wholesale
            
            
            56,250
            
            
            49,959
            
            
            46,112
            
            
            42,277
            
            
            39,296Total
                sales
            
            
            578,269
            
            
            713,942
            
            
            862,460
            
            
            972,173
            
            
            1,023,589Cost
                of sales (excluding depreciation and amortization expense as shown
                separately below)
            
            
            350,421
            
            
            427,356
            
            
            516,686
            
            
            592,575
            
            
            640,140Gross
                profit
            
            
            227,848
            
            
            286,586
            
            
            345,774
            
            
            379,598
            
            
            383,449Selling,
                general and administrative expenses:Operating
                expenses
            
            
            142,358
            
            
            178,561
            
            
            235,428
            
            
            312,263
            
            
            340,371Depreciation
                and amortization
            
            
            10,096
            
            
            14,481
            
            
            19,391
            
            
            28,246
            
            
            31,424Total
                operating expenses
            
            
            152,454
            
            
            193,042
            
            
            254,819
            
            
            340,509
            
            
            371,795Operating
                income
            
            
            75,394
            
            
            93,544
            
            
            90,955
            
            
            39,089
            
            
            11,654Other
                income, net
            
            
            (5,931
            )
            
            (4,847
            )
            
            (4,457
            )
            
            (3,263
            )
            
            (5,084
            )Income
                before provision for income taxes
            
            
            81,325
            
            
            98,391
            
            
            95,412
            
            
            42,352
            
            
            16,738Provision
                for income taxes
            
            
            32,006
            
            
            37,659
            
            
            36,710
            
            
            14,521
            
            
            5,316Net
                income
            
            $
            49,319
            
            $
            60,732
            
            $
            58,702
            
            $
            27,831
            
            $
            11,422Earnings
                per common share:Basic
            
            $
            0.72
            
            $
            0.87
            
            $
            0.82
            
            $
            0.39
            
            $
            0.16Diluted
            
            $
            0.70
            
            $
            0.85
            
            $
            0.81
            
            $
            0.39
            
            $
            0.16Weighted
                average number of common shares outstanding:Basic
            
            
            68,815
            
            
            69,938
            
            
            71,348
            
            
            70,627
            
            
            69,553Diluted
            
            
            70,009
            
            
            71,181
            
            
            72,412
            
            
            71,016
            
            
            69,737**Company
                Operating Data:**Sales
                Growth99¢
                Only Stores
            
            
            29.8
            %
            
            27.2
            %
            
            22.9
            %
            
            13.9
            %
            
            5.8
            %Bargain
                Wholesale
            
            
            12.8
            %
            
            (11.2
            )%
            
            (7.7
            )%
            
            (8.3
            )%
            
            (7.1
            )%Total
                sales
            
            
            28.0
            %
            
            23.5
            %
            
            20.8
            %
            
            12.7
            %
            
            5.3
            %Gross
                margin
            
            
            39.4
            %
            
            40.1
            %
            
            40.1
            %
            
            39.0
            %
            
            37.5
            %Operating
                margin
            
            
            13.0
            %
            
            13.1
            %
            
            10.6
            %
            
            4.0
            %
            
            1.1
            %Net
                income
            
            
            8.5
            %
            
            8.5
            %
            
            6.8
            %
            
            2.9
            %
            
            1.1
            %





23
 *Table
            of Contents*




**Retail
                Operating Data (a):**99¢
                Only Stores at end of period
            
            
            123
            
            
            151
            
            
            189
            
            
            219
            
            
            232Change
                in comparable stores net sales (b)
            
            
            5.9
            %
            
            3.6
            %
            
            4.5
            %
            
            (1.8
            )%
            
            0.3
            %Average
                net sales per store open the full year
            
            $
            4,647
            
            $
            4,750
            
            $
            4,957
            
            $
            4,603
            
            $
            4,347Average
                net sales per estimated saleable squarefoot
                (c)
            
            $
            319
            
            $
            309
            
            $
            308
            
            $
            270
                (d
            )
            $
            250(e
            )Estimated
                saleable square footage at year end
            
            
            1,892,949
            
            
            2,428,681
            
            
            3,190,528
            
            
            3,796,153
            
            
            4,040,096Balance
                Sheet Data:Working
                capital
            
            $
            194,302
            
            $
            215,747
            
            $
            217,825
            
            $
            184,778
            
            $
            201,475Total
                assets
            
            $
            357,517
            
            $
            450,078
            
            $
            563,714
            
            $
            600,204
            
            $
            628,708Capital
                lease obligation, including current portion
            
            $
            1,677
            
            $
            1,637
            
            $
            1,593
            
            $
            811
            
            $
            774Total
                shareholders’ equity
            
            $
            322,781
            
            $
            401,511
            
            $
            496,954
            
            $
            488,284
            
            $
            501,526




(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)
            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.


(e)
            Includes
                36 Texas stores open for a full year. Texas stores open for the full
                year
                had average sales of $2.3 million per store for fiscal 2006 and average
                sales per saleable square foot of $111. All other stores open for
                the full
                year had average sales of $4.7 million per store and $283 of average
                sales
                per saleable square foot.


(f)
            The
                financial statements were audited by Arthur Andersen LLP, the Company’s
                external auditor until 2002, by PriceWaterhouseCoopers for 2003,
                by
                Deloitte & Touche LLP for 2004, and by BDO Seidman, LLP for fiscal
                2006.





The
      following table sets forth selected financial data for the transition three
      months ended March 31, 2005 and comparable three month period ended March 31,
      2004 (amounts in thousands, except for per share data):





**(Unaudited)**
              **Three
                Months Ended March 31, 2004**
            
            **Three
                Months Ended March 31, 2005****Net
                sales:**99¢
                Only Stores
            
            $
            218,812
            
            $
            231,899Bargain
                Wholesale
            
            
            11,238
            
            
            10,731Total
            
            
            230,050
            
            
            242,630Gross
                profit
            
            
            92,229
            
            
            90,339Operating
                income
            
            
            15,169
            
            
            803Net
                income
            
            $
            10,204
            
            $
            799**Earnings
                per common share:**Basic
            
            $
            0.14
            
            $
            0.01Diluted
            
            $
            0.14
            
            $
            0.01Shares
                outstanding:Basic
            
            
            72,064
            
            
            69,533Diluted
            
            
            72,717
            
            
            69,787





24
 *Table
            of Contents*





**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 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
      fiscal
      2006, 99¢ Only Stores had net sales of $1,023.6 million, operating income of
      $11.7 million and net income of $11.4 million. Sales increased 5.3% over fiscal
      2004 primarily due to the 15 new store openings since the end of fiscal 2004.
      Operating income and net income decreased 70.2% and 59.0%, respectively, from
      fiscal 2004. Average sales per store open the full year declined from $4.6
      million in fiscal 2004 to $4.3 million, in fiscal 2006. Average net sales per
      estimated saleable square foot (computed for 99¢ Only Stores open for the full
      year) declined from $270 per square foot at December 31, 2004 to $250 per square
      foot at March 31, 2006. 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 March 31, 2006 average approximately 22,204 gross
      square feet. From January 1, 2003 through March 31, 2006, the Company opened
      new
      99¢ Only Stores that average approximately 24,805 gross square feet. The Company
      had targeted new store locations between 15,000 and 36,000 gross square feet
      during this period. 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 fiscal 2006, as well as a decline in
      the
      gross profit margin.





The
      rate
      of annual sales growth has declined each year since 2001. As previously
      announced, the Company had significantly reduced its planned store opening
      growth rate in 2005 to approximately five percent to allow the Company to focus
      on implementing improvements in its systems infrastructure, business processes,
      and internal controls in order to help the Company to better support its
      existing stores and to establish a foundation for future profitable growth.





In
      fiscal
      2007 the Company continued to expand its store base with 19 store openings
      in
      California, Texas, Nevada and Arizona. In fiscal 2008, the Company intends
      to
      increase its store opening growth rate and believes that near term growth in
      2007 and 2008 will primarily result from new store openings in its existing
      territories and increases in same store sales. The Company is now targeting
      locations between 15,000 and 19,000 gross square feet.




On
      December 30, 2005 the Company changed its fiscal year-end from December 31
      to
      March 31 (see “Notes to Consolidated Financial Statements”). Unless specifically
      indicated otherwise, any reference to “2006” or “fiscal 2006” relates to as of,
      or for the year ended, March 31, 2006 and any reference to “2004” and “2003” or
“fiscal 2004”and “fiscal 2003” relate to as of, or for the years ended, December
      31, 2004 and 2003, respectively. References to “fiscal 2007” refer to a period
      from April 1, 2006 to March 31, 2007 and “fiscal 2008” refer to a period from
      April 1, 2007 to March 31, 2008, and so forth.





**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 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 and excess inventory, shrinkage, spoilage, and scrap
      are
      also recorded. 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 such as the amount of obsolete
      inventory, shrinkage and scrap in many locations (including various warehouses,
      store backrooms, and sales floors of all its stores), require management
      judgment and estimates that 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 0.3% for the fiscal years ended
      December 31, 2003, December 31, 2004 and March 31, 2006.





25
 *Table
            of Contents*





**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. Considerable
      management judgment is necessary to estimate projected future operating cash
      flows.  Accordingly, if actual results fall short of such estimates,
      significant future impairments could result. The Company concluded that there
      were no such events or changes in circumstances during fiscal 2003, 2004 and
      three months ended March 31, 2005. However, in the third quarter of fiscal
      2006,
      the Company recorded an asset impairment charge of $0.8 million related to
      one
      underperforming store in Texas.





**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 also relies
      on outside legal counsel 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.





**Self-insured
      workers’ compensation liability** :
      The
      Company self-insures for workers’ compensation claims in California and Texas.
      The Company establishes a liability for losses of both estimated known and
      incurred but not reported insurance claims based on reported claims and
      actuarial valuations of estimated future costs of reported and incurred but
      not
      yet reported claims. Should an amount of claims greater than anticipated occur,
      the liability recorded may not be sufficient and additional workers’
compensation costs, which may be significant, could be incurred. The Company
      has
      not discounted the projected future cash outlays for the time value of money
      for
      claims and claim related costs when establishing its workers’ compensation
      liability as of December 31, 2003, 2004, March 31, 2005, and March 31, 2006
      due
      to the volatility and unpredictability of its workers’ compensation experience
      over the past several years.




**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
      applicable 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 as an offset to rent expense using the straight-line method over
      the
      applicable lease term. 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 $32.4 million, $34.4 million and
      $40.3 million in net deferred tax assets that are net of tax valuation
      allowances of $4.6 million, $4.7 million and $5.5 million at December 31, 2004,
      March 31, 2005 and March 31, 2006, 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 March 31, 2006 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.





26
 *Table
            of Contents*





**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 merchandise is 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 $35.9
      million, $48.5 million and $47.4 million as of fiscal 2003, 2004 and 2006,
      respectively. Purchasing, receiving and distribution warehouse costs totaled
      $11.1 million and $13.0 million for three months ended March 31, 2004 and 2005,
      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). Selling, general, and administrative
      expenses also include depreciation and amortization expense.





**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 and construction loan.





27
 *Table
            of Contents*





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,**
            
            **Year
                Ended**
              **March
                31,**
            
            **Three
                Months**
              **Ended
                March 31,**
            
            **Three
                Months**
              **Ended
                March 31,****2003**
            
            **2004**
            
            **2006**
            
            **2004**
            
            **2005**(Amounts
                in thousands)Net
                Sales:
            
            
            
            
            
            (Unaudited)99¢
                Only Stores
            
            $
            816,348
            
            
            94.7
            %
            $
            929,896
            
            
            95.7
            %
            $
            984,.293
            
            
            96.2
            %
            $
            218,812
            
            
            95.1
            %
            $
            231,899
            
            
            95.6
            %Bargain
                Wholesale
            
            
            46,112
            
            
            5.3
            
            
            42,277
            
            
            4.3
            
            
            39,296
            
            
            3.8
            
            
            11,238
            
            
            4.9
            
            
            10,731
            
            
            4.4Total
            
            
            862,460
            
            
            100.0
            
            
            972,173
            
            
            100.0
            
            
            1,023,589
            
            
            100.0
            
            
            230,050
            
            
            100.0
            
            
            242,630
            
            
            100.0Cost
                of sales
            
            
            516,686
            
            
            59.9
            
            
            592,575
            
            
            61.0
            
            
            640,140
            
            
            62.5
            
            
            137,821
            
            
            59.9
            
            
            152,291
            
            
            62.8Gross
                profit
            
            
            345,774
            
            
            40.1
            
            
            379,598
            
            
            39.0
            
            
            383,449
            
            
            37.5
            
            
            92,229
            
            
            40.1
            
            
            90,339
            
            
            37.2Selling,
                general and administrative expenses:Operating
                expenses
            
            
            235,428
            
            
            27.3
            
            
            312,263
            
            
            32.1
            
            
            340,371
            
            
            33.3
            
            
            71,040
            
            
            30.9
            
            
            81,760
            
            
            33.7Depreciation
                and amortization
            
            
            19,391
            
            
            2.2
            
            
            28,246
            
            
            2.9
            
            
            31,424
            
            
            3.1
            
            
            6,020
            
            
            2.6
            
            
            7,776
            
            
            3.2Total
            
            
            254,819
            
            
            29.5
            
            
            340,509
            
            
            35.0
            
            
            371,795
            
            
            36.4
            
            
            77,060
            
            
            33.5
            
            
            89,536
            
            
            36.9Operating
                income
            
            
            90,955
            
            
            10.6
            
            
            39,089
            
            
            4.0
            
            
            11,654
            
            
            1.1
            
            
            15,169
            
            
            6.6
            
            
            803
            
            
            0.3Other
                income, net
            
            
            (4,457
            )
            
            (0.5
            )
            
            (3,263
            )
            
            (0.4
            )
            
            (5,084
            )
            
            (0.5
            )
            
            (1,600
            )
            
            (0.7
            )
            
            (302
            )
            
            (0.1
            )Income
                before provision for income taxes
            
            
            95,412
            
            
            11.1
            
            
            42,352
            
            
            4.4
            
            
            16,738
            
            
            1.6
            
            
            16,769
            
            
            7.3
            
            
            1,105
            
            
            0.4Provision
                for income taxes
            
            
            36,710
            
            
            4.3
            
            
            14,521
            
            
            1.5
            
            
            5,316
            
            
            0.5
            
            
            6,565
            
            
            2.9
            
            
            306
            
            
            0.1Net
                income
            
            $
            58,702
            
            
            6.8
            %
            $
            27,831
            
            
            2.9
            %
            $
            11,422
            
            
            1.1
            %
            $
            10,204
            
            
            4.4
            %
            $
            799
            
            
            0.3
            %





**Fiscal
      Year Ended March 31, 2006 Compared to Fiscal Year Ended December 31, 2004**





*Net
      sales.* Total
      net sales increased $51.4 million, or 5.3%, from $972.2 million in fiscal 2004
      to $1,023.6 million in fiscal 2006. 99¢ Only Stores’ net retail sales increased
      $54.4 million, or 5.8%, from $929.9 million in fiscal 2004 to $984.3 million
      in
      fiscal 2006. Bargain Wholesale net sales decreased $3.0 million, or 7.1%, from
      $42.3 million in fiscal 2004 to $39.3 million in fiscal 2006. The effect of
      15
      new stores opened since the end of fiscal 2004 increased 99¢ Only Stores net
      retail sales by $18.5 million and the full year fiscal 2006 effect of 30 net
      stores opened in fiscal 2004 increased sales by $50.7 million. However,
      comparable stores net sales for all stores open at least 18 months in fiscal
      2004 and 2006 decreased 0.6% in 2006 which management believes was due to
      operational issues in early to mid-year including lack of execution in the
      supply chain and shelf in-stock issues as well as the effects of higher gasoline
      prices. As has been announced, comparable stores net sales have increased in
      the
      first, second and third quarters of fiscal 2007. To account for the change
      in
      year end that affects the comparable stores sales comparison between fiscal
      2006
      and fiscal 2004, the Company used stores open at least 18 months instead of
      15
      months. Since the end of fiscal 2004, the Company added 15 stores and closed
      two
      stores; three stores were opened in Texas, three in Arizona and nine in
      California. At the end of fiscal 2006, the Company had 232 stores compared
      to
      219 as of fiscal 2004. Gross retail square footage at the end of fiscal 2006
      and
      fiscal 2004 was 5.2 million and 4.8 million, respectively. For 99¢ Only Stores
      open all of fiscal 2006, the average net sales per estimated saleable square
      foot was $250 and the average annual net sales per store were $4.3 million,
      including the Texas stores open for the full year. Non-Texas stores net sales
      averaged $4.7 million per store and $283 per square foot. Texas stores open
      for
      a full year averaged net sales of $2.3 million per store and $111 per square
      foot **.**




*Gross
      profit.* Gross
      profit increased $3.8 million, or 1.0%, from $379.6 million in fiscal 2004
      to
      $383.4 million in fiscal 2006. The increase in gross profit dollars was due
      to
      higher retail net sales. As a percentage of net sales, overall gross margin
      decreased to 37.5% in fiscal 2006 from 39.0% in fiscal 2004. As a percentage
      of
      retail sales, retail gross margin decreased to 38.2% in fiscal 2006 from 39.9%
      in fiscal 2004. The increase in gross profit dollars was partially offset by
      a
      reserve of $1.2 million or 0.2% which was recorded in cost of sales in fiscal
      2006 to account for a change in the net realizable value of certain retail
      sales
      floor inventory due to strategic changes in management’s plans for certain
      products. This additional expense increased the reserve which is included in
      inventory to $2.3 million. There was also an increase in product cost for retail
      from 56.4% for fiscal 2004 to 57.6% for fiscal 2006, primarily due to product
      cost changes and a shift in the sales mix to more grocery items. The increase
      in
      gross profit dollars was further offset by an increase in spoilage/shrink from
      3.5% for fiscal 2004 to 3.7% for fiscal 2006 as a result of higher shrink
      recorded based on physical inventories. The Bargain Wholesale margin decreased
      to 19.6% in fiscal 2006 versus 19.9% in fiscal 2004. The remaining change was
      made up of increases and decreases in other less significant items included
      in
      cost of sales.





28
 *Table
            of Contents*





*Operating
      expenses* .
      Operating expenses increased $28.1 million, or 9.0%, from $312.3 million in
      fiscal 2004 to $340.4 million in 2006. As a percentage of net sales, operating
      expenses increased to 33.3% for the year ended March 31, 2006 from 32.1% for
      the
      year ended December 31, 2004. The increase was primarily due to higher retail
      store operating expenses of $36.5 million between fiscal 2004 and fiscal 2006,
      including an increase in retail store labor and benefits costs of $27.2 million
      and an increase in rent costs of $3.2 million. The increases in labor, benefits,
      and rent expenses generally reflect the opening of 15 new stores since the
      end
      of fiscal 2004, the full year effect of fiscal 2004 store additions and cost
      increases in existing stores. In addition, retail store operating expenses
      increased disproportionately compared to retail sales increases due to the
      underperformance of Texas stores. The increase in operating expenses was due
      to
      an increase in transportation costs of $5.3 million, as a result of higher
      fuel
      costs and increased delivery costs, due to additional store locations. In
      addition, there was a $6.8 million increase in accounting and consulting fees
      associated with various systems initiatives and Sarbanes-Oxley compliance.
      Finally, the Company recorded an asset impairment charge of $0.8 million
      relating to one underperforming store in Texas. The increase in operating
      expenses was partially offset by a decrease in workers’ compensation expenses of
      $11.4 million due to stabilization of the reserves necessary for claims
      liability and improvements in claims handling and accident reporting. The
      increase in operating expenses was also partially offset by a decrease in legal
      costs of $4.4 million primarily due to reduced outside legal costs stemming
      from
      less litigation and settlement payments in fiscal 2006. The remaining change
      was
      made up of increases and decreases in other less significant items included
      in
      operating expenses.





*Depreciation
      and amortization.* Depreciation
      increased $3.2 million, or 11.3%, from $28.2 million in fiscal 2004 to $31.4
      million in fiscal 2006 as a result of the net 13 new stores operating since
      the
      end of the fiscal 2004, the full year effect of fiscal 2004 store additions,
      and
      the purchase of an additional distribution center in July 2005. The increase
      was
      partially offset due to the disposal of certain store fixed assets and fully
      depreciated assets.





*Operating
      income.* Operating income decreased $27.4 million, or 70.2%, from $39.1 million in fiscal
      2004 to $11.7 million in fiscal 2006. Operating income as a percentage of net
      sales decreased from 4.0% in fiscal 2004 to 1.1% in fiscal 2006 primarily due
      to
      the decrease in the gross margin percentage on sales and increases in operating
      expenses discussed above. Operating income in 2006 also benefited from a net
      gain of $4.2 million for a forced store closure due a local government eminent
      domain action, which is included in selling, general, and administrative
      expenses.




*Other
      income, net.* Other
      income increased $1.8 million to $5.1 million in fiscal 2006 compared to $3.3
      million in fiscal 2004. Interest income earned on the Company’s investments
      increased from $3.3 million in fiscal 2004 to $5.1 million in fiscal 2006 as
      a
      result of increasing interest rates enhanced by a $12.6 million increase in
      cash
      and investments since the end of fiscal 2004, and the net effect of market
      interest rate fluctuations during both periods on interest income. Interest
      expense related to the capital lease and a consolidated partnership line of
      credit with a bank was $0.1 million in fiscal 2006. Interest expense related
      to
      the capital lease was $0.1 million in fiscal 2004. The Company had no
      outstanding bank debt during fiscal 2004.





*Provision
      for income taxes.* The
      provision for income taxes in fiscal 2006 was $5.3 million compared to $14.5
      million in fiscal 2004. The provision for income taxes had effective combined
      federal and state income rates of 31.8% and 34.3% in fiscal 2006 and 2004,
      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 $16.4 million, or
      59.0%, from $27.8 million in fiscal 2004 to $11.4 million in fiscal 2006. Net
      income as a percentage of net sales declined from 2.9% in fiscal 2004 to 1.1%
      in
      fiscal 2006.





**Three
      Months Ended March 31, 2005 (Audited) Compared to Three Months ended March
      31,
      2004 (Unaudited)**





*Net
      Sales.* Net
      sales increased $12.6 million, or 5.5%, to $242.6 million for the three months
      ended March 31, 2005 compared to $230.1 million for the three months ended
      March
      31, 2004. Retail sales increased $13.1 million, or 6.0%, to $231.9 million
      for
      the three months ended March 31, 2005 compared to $218.8 million for the three
      months ended March 31, 2004. The effect of five new stores opened in the first
      three months of calendar 2005 increased retail sales by $3.2 million and the
      full quarter effect of 33 new stores opened in fiscal 2004 increased sales
      by
      $19.0 million for the three months ended March 31, 2005. However,
      same-store-sales decreased 2.8% for the three months ended March 31, 2005
      compared to a slight increase of 0.2% for the three months ended March 31,
      2004
      primarily due to the extra sales day due to the Leap Year in 2004 and other
      external factors negatively affecting the three months ended March 31, 2005
      same-store-sales which included severe inclement weather in California, the
      ending of the Southern California grocery strike in late February 2004, and
      the
      effects of higher gasoline prices. However, the decrease in same-store-sales
      was
      partially offset due to the Easter selling season occurring in the three months
      ended March 31, 2005 versus in the quarter ended June 30, 2004. Bargain
      Wholesale net sales decreased $0.5 million, or 4.5%, to $10.7 million for the
      three months ended March 31, 2005 compared to $11.2 million for the three months
      ended March 31, 2004.





29
 *Table
            of Contents*





*Gross
      Profit* **.** Gross
      profit decreased $1.9 million, or 2.1%, to $90.3 million for the three months
      ended March 31, 2005 compared to $92.2 million for the three months ended March
      31, 2004. As a percentage of net sales, overall gross margin decreased to 37.2%
      for the three months ended March 31, 2005 compared to 40.1% for the three months
      ended March 31, 2004. As a percentage of retail sales, retail gross margin
      decreased to 38.0% for the three months ended March 31, 2005 compared to 41.1%
      for the three months ended March 31, 2004 in part due to the increase in product
      cost for retail from 56.0% in the quarter ended March 31, 2004 to 57.4% for
      the
      three months ended March 31, 2005 primarily due to product cost changes and
      a
      shift in the sales mix to more grocery items. Gross margin also decreased due
      to
      an increase in spoilage, scrap, and shrink from 3.1% in the quarter ended March
      31, 2004 to 3.6 % in the three months ended March 31, 2005. The Company also
      recorded additional reserves of 1.1% based on the results of complete
      physical counts taken at all stores and warehouses subsequent to the end of
      the
      quarter and refined estimates with the benefit of hindsight from May 2006 to
      account for a change in net realizable value of certain retail sales floor
      inventory due to strategic changes in management plans for certain
      products .
      The
      Bargain Wholesale margin increased slightly to 21.1% for the three months ended
      March 31, 2005 compared to 19.8% for the three months ended March 31, 2004.
      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 $10.7 million, or 15.1%, to $81.8 million for
      the
      three months ended March 31, 2005 compared to $71.0 million for the three months
      ended March 31, 2004. As a percentage of net sales, operating expenses increased
      to 33.7% for the three months ended March 31, 2005 from 30.9% for the three
      months ended March 31, 2004. The dollar increase was primarily due to higher
      retail store operating expenses of $6.8 million between the three months ended
      March 31, 2005 and 2004, primarily as a result of an increase in retail store
      labor and benefit costs of $4.5 million, an increase in rent costs of $1.9
      million due to the opening of five new stores in the three months ended March
      31, 2005, the full quarter effect of 33 new stores opened in 2004 and costs
      increases in existing stores. In addition, retail store operating expenses
      increased disproportionately compared to retail sales increases due to the
      underperformance of Texas stores. The increase in operating expenses was also
      due to an increase in distribution and transportation costs of $1.9 million,
      primarily as a result of higher fuel costs and increased delivery costs due
      to
      new store locations. Operating expenses also increased by $1.1 million as a
      result of higher accounting and consulting fees due primarily to Sarbanes-Oxley
      compliance efforts. Finally, operating expenses increased due to an increase
      in
      workers’ compensation expenses of $2.8 million, which was primarily driven by an
      increase in the number of claims. The increase in operating expenses was
      partially offset by a decrease in legal costs of $3.3 million between the three
      months ended March 31 2005, and 2004 primarily due to lower legal settlements
      of
      $2.1 million in the three months ended March 31, 2005 compared to $6.1 million
      (including a $4.7 million legal settlement) in the quarter ended March 31,
      2004.
      The remaining change was made up of increases and decreases in other less
      significant items included in operating expenses.





*Depreciation
      and Amortization* ***.*** Depreciation and amortization increased $1.8 million, or 29.2%, to $7.8 million
      for the three months ended March 31, 2005 compared to $6.0 million for the
      three
      months ended March 31, 2004 as a result of five new stores opened through March
      31, 2005, the full quarter effect of 33 new stores opened in 2004, and additions
      to existing stores and distribution centers. This resulted in an increase as
      a
      percentage of sales to 3.2% from 2.6% due to the performance of the new stores
      in Texas that operated at significantly lower sales per square foot than the
      existing store base.





*Operating
      Income* **.** Operating income decreased $14.4 million, or 94.7%, to $0.8 million for the
      three months ended March 31, 2005 compared to $15.2 million for the three months
      ended March 31, 2004. Operating income as a percentage of net sales decreased
      from 6.6% for the three months ended March 31, 2004 to 0.3% for the three months
      ended March 31, 2005 primarily due to the decrease in the gross margin
      percentage on sales and increases in operating expenses discussed
      above.





*Other
      Income, net.* Other
      income decreased $1.3 million, or 81.1%, to $0.3 million for the three months
      ended March 31, 2005 compared to $1.6 million for the three months ended March
      31, 2004. Interest income earned on the Company’s investments decreased $1.0
      million, or 62.1% to $0.6 million for the three months ended March 31, 2005
      compared to $1.6 million for the three months ended March 31, 2004 due primarily
      to the valuation losses recognized on certain of its bonds as a result of
      interest rate fluctuations and the corresponding decrease in bond values in
      2005
      and due to the repurchase of 2.6 million shares of the Company’s common stock
      for $38.2 million in the second and third quarters of 2004, which reduced the
      total investment portfolio in the three months ended March 31, 2005. The Company
      had no outstanding bank debt during the three months ended March 31, 2005 and
      2004.





30
 *Table
            of Contents*





*Provision
      for Income Taxes.* The
      provision for income taxes was $0.3 million for the three months ended March
      31,
      2005 compared to $6.6 million for the three months ended March 31, 2004. The
      effective rate of the provision for income taxes was approximately 27.7% and
      39.1% for the three months ended March 31, 2005 and 2004, respectively. The
      provision rate decreased primarily due to the impact that certain permanent
      tax
      differences had on lower pre-tax income for the three months ended March 31,
      2005.




*Net
      Income* **.** As a
      result of the items discussed above, net income decreased $9.4 million, or
      92.2%, to $0.8 million for the three months ended March 31, 2005 compared to
      $10.2 million for the three months ended March 31, 2004. Net income as a
      percentage of net sales was 0.3% and 4.4% for the three months ended March
      31,
      2005 and 2004, respectively.





**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 were 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 56.4%
      in
      2004, and in part due to product mix and increase in spoilage/shrink from 3.0%
      in 2003 to 3.5% 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 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 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.





31
 *Table
            of Contents*








*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, 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.





**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.





Net
      cash
      provided by operating activities in fiscal 2003, 2004 and 2006 was $65.3
      million, $94.4 million, and $82.5 million, respectively, consisting primarily
      of
      $86.6 million, $45.8 million and $38.5 million of net income, respectively,
      adjusted for depreciation and other non-cash items. The Company used $7.2
      million and $5.8 million in working capital in fiscal 2003 and 2004,
      respectively. Net cash provided by working capital activities was $6.1 million
      in fiscal 2006. Net cash used in working capital activities primarily reflects
      the increases in inventories, net of increases in accounts payable and workers’
compensation for fiscal 2003 and 2004. Net cash provided by working capital
      activities primarily reflects increases in accounts payable and workers’
compensation partially offset by increases in inventories and a decrease in
      income tax payable in fiscal 2006. Cash used for growth in inventories was
      $24.2
      million, $48.4 million and $7.2 million in fiscal 2003, 2004 and 2006,
      respectively. Cash provided by other working capital activities included
      increases in workers’ compensation of $8.6 million, $20.1 million and $5.9
      million in fiscal 2003, 2004, and 2006, respectively. In fiscal 2003, the
      Company invested $14.4 million in trading securities. In fiscal 2004 and 2006,
      the Company sold $55.1 million and $36.0 million of its trading securities,
      respectively.





Net
      cash
      used in investing activities during fiscal 2003, 2004 and 2006 was $98.6
      million, $57.2 million, and $85.6 million, respectively. In fiscal 2003, 2004,
      and 2006 the Company used $98.8 million, $57.2 million and $47.6 million for
      the
      purchase of property and equipment due to the opening of 38, 33, and 10 new
      stores during the respective fiscal years and the purchase of a warehouse in
      Commerce, California for $9.7 million in fiscal 2006. In fiscal 2006, the
      Company used $135.0 million for the purchase of investments, which was offset
      by
      $96.9 million of cash inflow from the sale and maturity of available for sale
      securities. There was no purchase of investments and sale of available for
      sale
      securities in fiscal 2003 and 2004.





Net
      cash
      provided by financing activities during 2003 was $25.7 million, which primarily
      represents the proceeds from the exercise of non-qualified stock options in
      that
      fiscal year 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. Net cash provided by
      financing activities during 2006 was $6.0 million, which is composed primarily
      of the proceeds of a consolidated partnership’s construction loan.





32
 *Table
            of Contents*





The
      Company estimates that total capital expenditures in fiscal year 2007 will
      be
      approximately $55.0 million to $60.0 million and relate principally to property
      acquisitions and new store openings described in this report. The Company
      intends to fund its liquidity requirements in fiscal 2007 out of net cash
      provided by operations, short-term investments, and cash on hand.





**Review
      of Equity Grants and Procedures**





The
      Company’s management also recently conducted a voluntary, self-initiated review
      of the measurement dates for the Company’s stock option grants accounted for
      under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
      to Employees”, and SFAS 123(R), “Share-based Payment”, from its initial public
      offering in 1996 to December 31, 2006. Management found that certain measurement
      date errors occurred during the period 1996-2004. These errors resulted in
      adjustments that would have increased non-cash compensation expense in these
      periods. These non-material adjustments accumulated over eight years to
      approximately $2.4 million in unrecorded non-cash compensation expense. In
      addition, the Company recorded $0.2 million of non-cash compensation expense
      in
      fiscal 2006 related to the review. The Company evaluated these adjustments
      using
      its historical method of evaluating adjustments, the "roll-over" method. The
      rollover method focuses primarily on the impact of any misstatement, including
      the reversal of prior-year misstatements, on the current-year consolidated
      income statement. Under this method, the Company believes that these adjustments
      are not material to its financial statements in any of the periods to which
      the
      adjustments were related, and, therefore, does not believe that it is necessary
      to amend or revise its historical financial statements.





Management
      believes that the stock option errors were due to misunderstandings of how
      to
      establish the measurement date for accounting purposes and did not involve
      any
      intentional wrongdoing. Based on its review, management believes that there
      was
      no preferential treatment for officers and directors who participated in these
      annual grants, because they always received options on the same date and with
      the same price as other employees, and that although certain officers and
      directors did receive a benefit from the measurement date errors along with
      the
      rest of the employees, this benefit was de minimis in each instance. The
      Chairman and CEO, and the then President, who oversaw the grant process, did
      not
      receive any option grants during this period.





The
      transition provisions of SEC Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in the Current Year Financial Statements”, permits the Company to
      adjust for the cumulative effect of the uncorrected prior year misstatements
      that were not material to any prior periods under the Company’s historical
      income statement approach but that were material under the guidance in SAB
      108
      through retained earnings at the beginning of fiscal 2006. The Company has,
      in
      accordance with the transition provisions of SAB108, recorded a
      reclassification, within the equity section of the consolidated balance sheet
      included on this Form 10-K for the fiscal year ending March 31, 2006, of
      approximately $2.1 million, net of the related tax effect.  See Note 3 to
      Consolidated Financial Statements for detailed discussion.





The
      Company is currently evaluating the steps it will take with respect to
      outstanding options that were affected by these errors and has assessed
      costs it may incur in connection therewith, including with respect to Internal
      Revenue Code § 409A, and the Company believes any such costs would be
      immaterial.  In light of the compensation level of the Company's option
      recipients the Company does not anticipate incurring any negative tax
      consequences under Internal Revenue Code § 162(m) in connection with these
      errors.





33
 *Table
            of Contents*





**Contractual
      Obligations**





The
      following table summarizes the Company’s consolidated contractual obligations
      (in thousands) as of March 31, 2006.





Contractual
                obligations
            
            Total
            
            Less
                than
              1
                Year
            
            1-3
              Years
            
            3-5
              Years
            
            More
                than
              5
                YearsCapital
                lease obligations
            
            $
            774
            
            $
            74
            
            $
            116
            
            $
            138
            
            $
            446Operating
                lease obligations
            
            
            164,998
            
            
            32,228
            
            
            55,970
            
            
            37,198
            
            
            39,602Deferred
                compensation liability
            
            
            3,513
            
            
            -
            
            
            -
            
            
            -
            
            
            3,513Construction
                loan
            
            
            6,174
            
            
            -
            
            
            6,174
            
            
            -
            
            
            -Interest
                on Construction Loan
            
            
            552
            
            
            509
            
            
            43
            
            
            -
            
            
            -Total
            
            $
            176,011
            
            $
            32,811
            
            $
            62,303
            
            $
            37,336
            
            $
            43,561





**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 Company to pay property
      taxes, maintenance and insurance. Rental expense charged to operations in fiscal
      2003, 2004 and fiscal 2006 was approximately $32.9 million $43.4 million and
      $45.7 million, respectively. Rental expense charged for three months ended
      March
      31, 2005 was $11.4 million. 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 store leases were entered into
      with multiple renewal periods, which are typically five years and occasionally
      longer.





**Off-Balance
      Sheet Arrangements**





At
      December 31, 2004, the Company was the primary beneficiary of a variable
      interest entity to develop a shopping center in La Quinta, California, in which
      the Company committed to lease a store. The construction of this shopping center
      was completed and the store opened in the third quarter of fiscal 2006. As
      of
      March 31, 2006, this entity has $8.2 million in assets and $6.2 million in
      liabilities, including a bank construction loan for $6.2 million, which is
      shown
      on the Company’s fiscal 2006 year-end consolidated balance sheet.





The
      Company had an interest in two partnerships which the Company consolidated
      at
      December 31, 2004, March 31, 2005 and March 31, 2006 as a result of Financial
      Accounting Standards Board (“FASB”) Interpretation No. 46(R), “Consolidation of
      Variable Interest Entities - an Interpretation of ARB No. 51, Consolidated
      Financial Statements *”* .
      The
      assets of the partnerships consist 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, March 31, 2005 and March 31, 2006 is a reclassification of
      approximately $3.0 million, $2.9 million and $2.8 million, respectively, 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 Christmas, Easter, and Halloween
      seasons. A proportionately greater amount of the Company’s net sales and
      operating and net income is generally realized during the quarter ended December
      31. 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 such as Easter, the timing of new store openings and the
      merchandise mix.





34
 *Table
            of Contents*





**New
      Authoritative Pronouncements**




In
      January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 46, “Consolidation of Variable Interest Entities - an
      Interpretation of ARB No. 51, Consolidated Financial Statements” (“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 46(R)”). The requirements of FIN 46(R) 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 (see Note 5 to Consolidated Financial Statements).
      The Company adopted the provisions of this Interpretation in fiscal 2004, which
      resulted in the consolidation of two partnership investments and an additional
      partnership that was consolidated beginning March 31, 2005 (see Note 5 to
      Consolidated Financial Statements). In April 2006, the FASB issued FASB Staff
      Position (“FSP”) FIN 46(R)-6, “Determining the Variability to Be Considered in
      Applying FASB Interpretation No. 46(R)” (FSP FIN 46(R)-6”), that became
      effective beginning July 2006. FSP FIN 46(R)-6 clarifies that the variability
      to
      be considered in applying FIN 46(R) shall be based on an analysis of the design
      of the variable interest entity. The adoption did not have a material impact
      on
      the Company’s consolidated financial position or results of
      operations.





In
      November 2004, the FASB issued Statement of Financial Accounting Standard
      (“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 adopted SFAS No. 151 at the beginning of fiscal
      2007. The adoption did not have a material impact on the Company’s consolidated
      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 Accounting Principles
      Board (“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  will
      adopt the new requirements using the modified prospective transition method
      in
      the first quarter of fiscal 2007, and as a result, will not retroactively adjust
      results from prior periods. Under this transition method, compensation expense
      associated with stock options recognized in the first quarter of fiscal 2007
      will include: 1) expense related to the remaining unvested portion of all stock
      option awards granted prior to March 31, 2006, based on the grant date fair
      value estimated in accordance with the original provisions of SFAS No. 123;
      and 2) expense related to all stock option awards granted or modified subsequent
      to March 31, 2006, based on the grant date fair value estimated in accordance
      with the provisions of SFAS No. 123(R).  The Company will apply the
      Black-Scholes valuation model in determining the fair value of share-based
      payments to employees, which will then be amortized on a straight-line basis
      over the requisite service period. Based on current analysis, information and
      excluding future option grants, the Company has determined that the adoption
      of
      SFAS No. 123(R) will reduce our pretax earnings by approximately $5.2
      million in fiscal 2007. The Company adopted this pronouncement beginning with
      its fiscal year which starts April 1, 2006.





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 adopted SFAS No.
      153
      at the beginning of fiscal 2007. The adoption of SFAS No.153 did not have a
      material impact on the Company’s consolidated financial position or results of
      operations.





35
 *Table
            of Contents*





In
      March
      2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset
      Retirement Obligations—an interpretation of FASB Statement No. 143” (“FIN 47”).
      FIN 47 requires an entity to recognize a liability for the fair value of a
      conditional asset retirement obligation if the fair value can be reasonably
      estimated. A conditional asset retirement obligation is a legal obligation
      to
      perform an asset retirement activity in which the timing or method of settlement
      are conditional upon a future event that may or may not be within the control
      of
      the entity. The Company adopted FIN 47 for the fiscal year ended March 31,
      2006
      and the adoption did not have a material impact on the Company’s consolidated
      financial statements.





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 adopted this pronouncement beginning with its 2007 fiscal
      year. The adoption of the provisions of SFAS No. 154 did not have a
      material impact on the Company’s consolidated financial statements.




In
      October 2005, the FASB issued FASB Staff Position (“FSP”) FAS 13-1, “Accounting
      for Rental Costs Incurred during a Construction Period” The FASB has concluded
      that rental costs incurred during and after a construction period are for the
      right to control the use of a leased asset and must be recognized as rental
      expense. Such costs were previously capitalized as construction costs if a
      company had a policy to do so. The Company adopted FSP No. FAS 13-1 in the
      fourth quarter of 2006 and the adoption did not have a material impact on the
      Company’s consolidated financial statements.





In
      November 2005, the FASB issued FSP FAS 115-1, “The Meaning of
      Other-Than-Temporary Impairment and Its Application to Certain Investments.”
This addresses the determination as to when an investment is considered
      impaired, whether that impairment is other than temporary, and the measurement
      of an impairment loss. The FSP also includes accounting considerations
      subsequent to the recognition of an other-than-temporary impairment and requires
      certain disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. The guidance in the FSP is effective for
      reporting periods beginning after December 15, 2005. The Company adopted
      FSP FAS 115-1 on January 1, 2006.  The adoption of this FSP will not impact
      the Company’s consolidated financial statements.




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments—an amendment of FASB Statement No. 133 and 140,” to permit
      fair value remeasurement for any hybrid financial instrument that contains
      an
      embedded derivative that otherwise would require bifurcation in accordance
      with
      the provisions of SFAS No. 133, “Accounting for Derivative Instruments and
      Hedging Activities.” SFAS No. 155 is effective for all financial instruments
      acquired, issued, or subject to a remeasurement event occurring after the
      beginning of an entity’s fiscal year that begins after September 15, 2006. The
      Company will adopt SFAS No. 155 in the fiscal year beginning April 1, 2007.
      The
      Company does not believe that the adoption of this Statement will have a
      material impact on the Company’s consolidated financial statements.





In
      March
      2006, the FASB’s Emerging Issues Task Force (“EITF”) issued Issue 06-3, “How
      Sales Taxes Collected From Customers and Remitted to Governmental Authorities
      Should Be Presented in the Income Statement (That Is, Gross versus Net
      Presentation).” (“EITF 06-3”). A consensus was reached that entities may adopt a
      policy of presenting sales taxes in the income statement on either a gross
      or
      net basis. If taxes are significant, an entity should disclose its policy of
      presenting taxes and the amount of taxes. The guidance is effective for periods
      beginning after December 15, 2006. The Company presents sales net of sales
      taxes. The Company does not believe that the adoption of EITF 06-3 will impact
      the method for recording these sales taxes in the Company’s consolidated
      financial statements.





36
 *Table
            of Contents*





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which
      clarifies the accounting for uncertainty in income tax positions. This
      Interpretation requires the Company to recognize in the consolidated financial
      statements the impact of a tax position that is more likely than not to be
      sustained upon examination based on the technical merits of the position. The
      provisions of FIN 48 are effective for fiscal years beginning after December
      15,
      2006. The Company is currently evaluating the impact of adopting FIN 48 on
      the
      consolidated financial statements and plans to adopt FIN 48 at the beginning
      of
      fiscal year 2008.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
This statement clarifies the definition of fair value, establishes a framework
      for measuring fair value, and expands the disclosures on fair value
      measurements. SFAS No. 157 is effective for fiscal years beginning after
      November 15, 2007. The Company has not determined the effect, if any, the
      adoption of this statement will have on the Company’s consolidated financial
      statements.





In
      September 2006, the Securities
      and Exchange Commission SEC
      staff
      issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior
      Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements." (“SAB 108”).
      SAB 108 addresses how the effects of prior-year uncorrected misstatements should
      be considered when quantifying misstatements in current-year financial
      statements. SAB 108 requires an entity to quantify misstatements using a balance
      sheet and income-statement approach and to evaluate whether either approach
      results in quantifying an error that is material in light of relevant
      quantitative and qualitative factors. The
      Company early-adopted
      SAB 108 as of April 1, 2005, the beginning of fiscal 2006. See Note
      3 to Consolidated Financial Statements for further discussion.





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
      for Financial Assets and Financial Liabilities--Including an amendment of FASB
      Statement No. 115." SFAS No. 159 permits companies to choose to
      measure many financial instruments and certain other items at fair value at
      specified election dates. Upon adoption, an entity shall report unrealized
      gains
      and losses on items for which the fair value option has been elected in earnings
      at each subsequent reporting date. Most of the provisions apply only to entities
      that elect the fair value option. However, the amendment to SFAS No. 115,
      "Accounting for Certain Investments in Debt and Equity Securities," applies
      to
      all entities with available for sale and trading securities. SFAS No. 159
      is effective as of the beginning of an entity's first fiscal year that begins
      after November 15, 2007. The Company has not determined the effect, if any,
      the adoption of this statement will have on the Company’s consolidated financial
      statements.





**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 March 31, 2006,
      the Company had $151.9 million in securities maturing at various dates through
      November 2038, with approximately 77.4% maturing within one year. The Company’s
      investments are comprised primarily of marketable investment grade federal
      and
      municipal bonds, corporate bonds and equity securities, auction rate securities,
      asset-backed securities, commercial paper and money market funds. 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 March 31, 2006, the
      fair value of investments approximated the carrying value. Based on the
      investments outstanding at March 31, 2006 a 1.0% increase in interest rates
      would reduce the fair value of the Company’s total investment portfolio by $0.6
      million or 0.4%.





37
 *Table
            of Contents*





**Item
      8. Financial Statements and Supplementary
      Data**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
      SCHEDULE**


**99¢
      Only Stores**








Report
                of Independent Registered Public Accounting Firm, BDO Seidman,
                LLP
            39Report
                of Independent Registered Public Accounting Firm, Deloitte & Touche
                LLP
            40Reports
                of Independent Registered Public Accounting Firm, PricewaterhouseCoopers
                LLP
            41Consolidated
                Balance Sheets as of December 31, 2004, March 31, 2005 and March
                31,
                2006
            42Consolidated
                Statements of Income for the years ended December 31, 2003, 2004,
                three
                months ended March 31, 2005 and the year ended March 31,
                2006
            44Consolidated
                Statements of Shareholders’ Equity for the years ended December 31, 2003,
                2004, three months ended March 31, 2005 and the year ended March
                31,
                2006
            45Consolidated
                Statements of Cash Flows for the years ended December 31, 2003, 2004,
                three months ended March 31, 2005 and the year ended March 31,
                2006
            46Notes
                to Consolidated Financial Statements
            47Schedule
                II - Valuation and Qualifying Accounts
            83





38
 *Table
            of Contents*





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




Board
      of
      Directors and Shareholders


99¢
Only
      Stores


City
      of
      Commerce, California







We
      have
      audited the accompanying consolidated balance sheets of the 99¢ Only Stores and
      consolidated entities (the “Company”) as of March 31, 2005 and 2006 and the
      related consolidated statements of income, shareholders’ equity, and cash
      flows for the three months ended March 31, 2005 and for the year ended March
      31,
      2006. We also have audited the schedule as listed in the accompanying index.
      These consolidated financial statements and schedule are the responsibility
      of
      the Company’s management. Our responsibility is to express an opinion on these
      consolidated financial statements and schedule based on our audits.




We
      conducted our audits 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 and schedule are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements and schedule, assessing the accounting principles
      used
      and significant estimates made by management, as well as evaluating the overall
      presentation of the financial statements and schedule. We believe that our
      audits provide a reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Company at March 31,
      2005 and 2006, and the results of its operations and its cash flows for the
      three months ended March 31, 2005 and for the year ended March 31, 2006, in
      conformity with accounting principles generally accepted in the United States
      of
      America.





Also,
      in
      our opinion, the schedule presents fairly, in all material respects, the
      information set forth therein for three months ended March 31, 2005 and the
      year
      ended March 31, 2006.





As
      discussed in Note 3 to the financial statements, effective April 1, 2005, the
      Company changed its method of quantifying misstatements of prior year financial
      statements. The Company adopted the dual method, as required by SEC Staff
      Accounting Bulletin No. 108, “ *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* .”





We
      also
      have audited, 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 March 31, 2006, based on criteria
      established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
      and our report dated April 2, 2007 expressed an unqualified opinion on
      management’s assessment and an adverse opinion on the effectiveness of the
      Company’s internal control over financial reporting.




/s/
      BDO
      Seidman, LLP


BDO
      Seidman, LLP


Los
      Angeles, California


April
      2,
      2007





39
 *Table
            of Contents*





**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.





/s/
      Deloitte & Touche LLP


Deloitte
      & Touche LLP


Los
      Angeles, California


August
      30, 2005





40
 *Table
            of Contents*





**Report
      of Independent Registered Public Accounting Firm**








To
      the
      Board of Directors and Shareholders of 99¢ Only Stores





In
      our
      opinion, the accompanying consolidated statements of income, shareholders’
equity and cash flows present fairly, in all material respects, the results
      of
      operations and cash flows of 99¢ Only Stores and its subsidiary for the year
      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 audit. We conducted our
      audit
      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 audit provides a reasonable basis for our opinion.





/s/
      PricewaterhouseCoopers LLP


PricewaterhouseCoopers
      LLP


Los
      Angeles, California


February
      27, 2004, except for the restatement discussed in Note 2 (not presented herein)
      to the consolidated financial statements appearing under Item 8 of the Company’s
      2004 Annual Report on Form 10-K, 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¢ Only Stores





Our
      audit
      of the consolidated financial statements referred to in our report dated
      February 27, 2004, except for the restatement discussed in Note 2 (not presented
      herein) to the consolidated financial statements appearing under Item 8 of
      the
      Company’s 2004 Annual Report on Form 10-K, as to which the date is July 18,
      2005, also included an audit of the financial statement schedule appearing
      under
      Item 15(b) 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.


/s/
      PricewaterhouseCoopers LLP


PricewaterhouseCoopers
      LLP


Los
      Angeles, California


February
      27, 2004





41
 *Table
            of Contents*




**99¢
      Only Stores**


**CONSOLIDATED
      BALANCE SHEETS**


**(Amounts
      In Thousands, Except Share Data)**





**ASSETS**





**December
                31,**
              **2004**
            
            **March
                31,**
              **2005**
            
            **March
                31,**
              **2006**CURRENT
                ASSETS:Cash
            
            $
            884
            
            $
            2,116
            
            $
            4,958Short-term
                investments
            
            
            92,645
            
            
            99,610
            
            
            117,623Accounts
                receivable, net of allowance for doubtful accounts of $268, $189
                and $137
                as of December 31, 2004, March 31, 2005 and March 31, 2006,
                respectively
            
            
            3,463
            
            
            4,751
            
            
            3,193Income
                tax receivable
            
            
            -
            
            
            -
            
            
            8,797Deferred
                income taxes
            
            
            26,206
            
            
            27,113
            
            
            30,638Inventories
            
            
            155,836
            
            
            133,023
            
            
            139,901Other
                (including $208 receivable from employee at March 31,
                2006)
            
            
            5,946
            
            
            5,310
            
            
            5,426Total
                current assets
            
            
            284,980
            
            
            271,923
            
            
            310,536PROPERTY
                AND EQUIPMENT, at cost:Land
            
            
            41,240
            
            
            43,154
            
            
            59,890Building
            
            
            68,833
            
            
            70,082
            
            
            80,685Building
                improvements
            
            
            28,587
            
            
            31,093
            
            
            35,598Leasehold
                improvements
            
            
            106,482
            
            
            108,360
            
            
            113,110Fixtures
                and equipment
            
            
            71,577
            
            
            73,780
            
            
            80,467Transportation
                equipment
            
            
            3,847
            
            
            3,891
            
            
            4,116Construction
                in progress
            
            
            22,835
            
            
            17,213
            
            
            18,412Total
                property and equipment
            
            
            343,401
            
            
            347,573
            
            
            392,278Accumulated
                depreciation and amortization
            
            
            (95,482
            )
            
            (102,988
            )
            
            (132,944
            )Total
                net property and equipment
            
            
            247,919
            
            
            244,585
            
            
            259,334OTHER
                ASSETS:Long-term
                deferred income taxes
            
            
            6,213
            
            
            7,243
            
            
            9,672Long-term
                investments in marketable securities
            
            
            50,764
            
            
            50,271
            
            
            34,270Deposits
                and other assets
            
            
            10,328
            
            
            14,396
            
            
            14,896Total
                other assets
            
            
            67,305
            
            
            71,910
            
            
            58,838Total
                assets
            
            $
            600,204
            
            $
            588,418
            
            $
            628,708





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





42
 *Table
            of Contents*





**99¢
      Only Stores**


**CONSOLIDATED
      BALANCE SHEETS**


**(Amounts
      In Thousands, Except Share Data)**





**LIABILITIES
      AND SHAREHOLDERS’ EQUITY**





**December
                31,**
              **2004**
            
            **March
                31,**
              **2005**
            
            **March
                31,**
              **2006**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            39,094
            
            $
            21,917
            
            $
            38,332Accrued
                expenses:Payroll
                and payroll-related
            
            
            4,959
            
            
            5,862
            
            
            5,960Sales
                tax
            
            
            5,098
            
            
            4,306
            
            
            3,981Other
            
            
            12,074
            
            
            13,651
            
            
            16,489Workers’
                compensation
            
            
            36,445
            
            
            38,358
            
            
            44,225Income
                tax payable
            
            
            2,495
            
            
            2,743
            
            
            -Current
                portion of capital lease obligation
            
            
            37
            
            
            48
            
            
            74Total
                current liabilities
            
            
            100,202
            
            
            86,885
            
            
            109,061LONG-TERM
                LIABILITIES:Deferred
                rent
            
            
            8,097
            
            
            8,465
            
            
            7,734Deferred
                compensation liability
            
            
            2,847
            
            
            2,908
            
            
            3,513Construction
                Loan
            
            
            -
            
            
            -
            
            
            6,174Capital
                lease obligation, net of current portion
            
            
            774
            
            
            752
            
            
            700Total
                long-term liabilities
            
            
            11,718
            
            
            12,125
            
            
            18,121COMMITMENTS
                AND CONTINGENCIES: (Notes 8 and 9)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 - 69,517,185 shares at December 31, 2004, 69,548,761
                shares at March 31, 2005 and 69,569,150 shares at March 31,
                2006
            
            
            212,606
            
            
            212,938
            
            
            215,702Retained
                earnings
            
            
            275,678
            
            
            276,477
            
            
            285,823Other
                comprehensive (loss) income
            
            
            -
            
            
            (7
            )
            
            1Total
                shareholders’ equity
            
            
            488,284
            
            
            489,408
            
            
            501,526Total
                liabilities and shareholders’ equity
            
            $
            600,204
            
            $
            588,418
            
            $
            628,708





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





43
 *Table
            of Contents*





**99¢
      Only Stores**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**(Amounts
      In Thousands, Except Per Share Data)**





**Years
                Ended**
              **December
                31,**
            
            **Year
                Ended**
              **March
                31,**
            
            **Three
                months**
              **Ended
                March 31,****2003**
            
            **2004**
            
            **2006**
            
            **2005**NET
                SALES:99¢
                Only Stores
            
            $
            816,348
            
            $
            929,896
            
            $
            984,293
            
            $
            231,899Bargain
                Wholesale
            
            
            46,112
            
            
            42,277
            
            
            39,296
            
            
            10,731Total
                sales
            
            
            862,460
            
            
            972,173
            
            
            1,023,589
            
            
            242,630COST
                OF SALES (excluding depreciation and amortization expense as shown
                separately below)
            
            
            516,686
            
            
            592,575
            
            
            640,140
            
            
            152,291Gross
                profit
            
            
            345,774
            
            
            379,598
            
            
            383,449
            
            
            90,339SELLING,
                GENERAL, AND ADMINISTRATIVE EXPENSES:Operating
                expenses (includes asset impairment of $0.8 million for the year
                ended
                March 31, 2006)
            
            
            235,428
            
            
            312,263
            
            
            340,371
            
            
            81,760Depreciation
                and amortization
            
            
            19,391
            
            
            28,246
            
            
            31,424
            
            
            7,776Total
                Selling, General and Administrative
            
            
            254,819
            
            
            340,509
            
            
            371,795
            
            
            89,536Operating
                income
            
            
            90,955
            
            
            39,089
            
            
            11,654
            
            
            803OTHER
                (INCOME) EXPENSE:Interest
                income
            
            
            (3,105
            )
            
            (3,326
            )
            
            (5,059
            )
            
            (617
            )Interest
                expense
            
            
            125
            
            
            63
            
            
            122
            
            
            29Other
            
            
            (1,477
            )
            
            -
            
            
            (147
            )
            
            286Total
                other income, net
            
            
            (4,457
            )
            
            (3,263
            )
            
            (5,084
            )
            
            (302
            )Income
                before provision for income tax
            
            
            95,412
            
            
            42,352
            
            
            16,738
            
            
            1,105Provision
                for income taxes
            
            
            36,710
            
            
            14,521
            
            
            5,316
            
            
            306NET
                INCOME
            
            $
            58,702
            
            $
            27,831
            
            $
            11,422
            
            $
            799EARNINGS
                PER COMMON SHARE:Basic
            
            $
            0.82
            
            $
            0.39
            
            $
            0.16
            
            $
            0.01Diluted
            
            $
            0.81
            
            $
            0.39
            
            $
            0.16
            
            $
            0.01WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:Basic
            
            
            71,348
            
            
            70,627
            
            
            69,553
            
            
            69,533Diluted
            
            
            72,412
            
            
            71,016
            
            
            69,737
            
            
            69,787








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





44
 *Table
            of Contents*





**99¢
      Only Stores**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


**YEAR
      ENDED MARCH 31, 2006, THREE MONTHS ENDED MARCH 31, 2005 AND YEARS ENDED
      DECEMBER 31, 2004 AND 2003**


**(Amounts
      in Thousands)**





**Common
                Stock**
            
            **Other**
              **Comprehensive**
            
            **Retained**
            
            **Shareholders’****Shares**
            
            **Amount**
            
            **Income
                (Loss)**
            
            **Earnings**
            
            **Equity**BALANCE,
                December 31, 2002
            
            
            70,369
            
            $
            174,152
            
            $
            -
            
            $
            227,359
            
            $
            401,511Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            58,702
            
            
            58,702Tax
                benefit from exercise of stock options
            
            
            -
            
            
            11,041
            
            
            -
            
            
            -
            
            
            11,041Proceeds
                from exercise of stock options
            
            
            1,664
            
            
            25,700
            
            
            -
            
            
            -
            
            
            25,700BALANCE,
                December 31, 2003
            
            
            72,033
            
            
            210,893
            
            
            -
            
            
            286,061
            
            
            496,954Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            27,831
            
            
            27,831Tax
                benefit from exercise of stock options
            
            
            -
            
            
            40
            
            
            -
            
            
            -
            
            
            40Repurchase
                of common stock
            
            
            (2,594
            )
            
            -
            
            
            -
            
            
            (38,214
            )
            
            (38,214
            )Proceeds
                from exercise of stock options
            
            
            78
            
            
            1,673
            
            
            -
            
            
            -
            
            
            1,673BALANCE,
                December 31, 2004
            
            
            69,517
            
            
            212,606
            
            
            -
            
            
            275,678
            
            
            488,284Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            799
            
            
            799Net
                unrealized investment losses
            
            
            -
            
            
            -
            
            
            (7
            )
            
            -
            
            
            (7
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            792Tax
                benefit from exercise of stock options
            
            
            -
            
            
            50
            
            
            -
            
            
            -
            
            
            50Proceeds
                from exercise of stock options
            
            
            32
            
            
            282
            
            
            -
            
            
            -
            
            
            282BALANCE,
                March 31, 2005
            
            
            69,549
            
            
            212,938
            
            
            (7
            )
            
            276,477
            
            
            489,408SAB
                No. 108 cumulative effect (Note 3)
            
            
            -
            
            
            2,445
            
            
            -
            
            
            (2,076
            )
            
            369BALANCE,
                April 1, 2005, as adjusted
            
            
            69,549
            
            
            215,383
            
            
            (7
            )
            
            274,401
            
            
            489,777Net
                Income
            
            
            -
            
            
            -
            
            
            -
            
            
            11,422
            
            
            11,422Net
                unrealized investment gains
            
            
            -
            
            
            -
            
            
            8
            
            
            -
            
            
            8Total
                comprehensive income
            
            
            -
            
            
            -
            
            
            8
            
            
            11,422
            
            
            11,430Tax
                benefit from exercise of stock options
            
            
            -
            
            
            57
            
            
            -
            
            
            -
            
            
            57Proceeds
                from exercise of stock options
            
            
            20
            
            
            89
            
            
            -
            
            
            -
            
            
            89Stock-based
                compensation expense
            
            
            -
            
            
            173
            
            
            -
            
            
            -
            
            
            173BALANCE,
                March 31, 2006
            
            
            69,569
            
            $
            215,702
            
            $
            1
            
            $
            285,823
            
            $
            501,526





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





45
 *Table
            of Contents*





**99¢
      Only Stores**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Amounts
      in Thousands)**





**Years
                Ended**
              **December
                31**
            
            **Year
                Ended**
              **March
                31,**
            
            **Three
                Months**
              **Ended
                March 31,****2003**
            
            **2004**
            
            **2006**
            
            **2005**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            58,702
            
            $
            27,831
            
            $
            11,422
            
            $
            799Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            19,391
            
            
            28,246
            
            
            31,424
            
            
            7,776Loss
                on disposal of fixed assets (includes asset impairment of $0.8 million
                for
                the year ended March 31, 2006)
            
            
            -
            
            
            1,152
            
            
            999
            
            
            151Tax
                benefit from exercise of non qualified employee stock
                options
            
            
            11,041
            
            
            40
            
            
            57
            
            
            50Deferred
                income taxes
            
            
            (2,503
            )
            
            (11,502
            )
            
            (5,589
            )
            
            (1,932
            )Stock-based
                compensation expense
            
            
            -
            
            
            -
            
            
            173
            
            
            -Changes
                in assets and liabilities associated with operating
                activities:(Purchases)
                sales of short-term investments, net
            
            
            (14,378
            )
            
            55,050
            
            
            36,040
            
            
            8,885Accounts
                receivable
            
            
            507
            
            
            (1,218
            )
            
            1,558
            
            
            (1,288
            )Inventories
            
            
            (24,233
            )
            
            (48,427
            )
            
            (7,232
            )
            
            19,194Other
                assets
            
            
            (777
            )
            
            (2,750
            )
            
            2,474
            
            
            178Deposits
            
            
            (89
            )
            
            (74
            )
            
            165
            
            
            13Due
                to shareholders
            
            
            1,232
            
            
            -
            
            
            -
            
            
            -Accounts
                payable
            
            
            10,956
            
            
            11,191
            
            
            16,415
            
            
            (17,177
            )Accrued
                expenses
            
            
            2,808
            
            
            9,168
            
            
            1,006
            
            
            1,688Accrued
                workers’ compensation
            
            
            8,594
            
            
            20,126
            
            
            5,867
            
            
            1,913Income
                taxes
            
            
            (7,025
            )
            
            3,336
            
            
            (11,540
            )
            
            248Deferred
                rent
            
            
            1,052
            
            
            2,229
            
            
            (731
            )
            
            368Net
                cash provided by operating activities
            
            
            65,278
            
            
            94,398
            
            
            82,508
            
            
            20,866CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of property and equipment
            
            
            (98,768
            )
            
            (57,248
            )
            
            (47,600
            )
            
            (4,536
            )Purchases
                of investments
            
            
            -
            
            
            -
            
            
            (134,984
            )
            
            (15,369
            )Sale
                and maturity of available for sale securities
            
            
            -
            
            
            -
            
            
            96,944
            
            
            -Investments
                in partnerships
            
            
            166
            
            
            -
            
            
            -
            
            
            -Net
                cash used in investing activities
            
            
            (98,602
            )
            
            (57,248
            )
            
            (85,640
            )
            
            (19,905
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Payments
                of capital lease obligation
            
            
            (44
            )
            
            (43
            )
            
            (289
            )
            
            (11
            )Proceeds
                from exercise of stock options
            
            
            25,701
            
            
            1,673
            
            
            89
            
            
            282Repurchases
                of Company stock
            
            
            -
            
            
            (38,214
            )
            
            -
            
            
            -Proceeds
                from consolidation of construction loan
            
            
            -
            
            
            -
            
            
            6,174
            
            
            -Net
                cash provided by (used in) financing activities
            
            
            25,657
            
            
            (36,584
            )
            
            5,974
            
            
            271NET
                INCREASE (DECREASE) IN CASH
            
            
            (7,667
            )
            
            566
            
            
            2,842
            
            
            1,232CASH,
                beginning of period
            
            
            7,985
            
            
            318
            
            
            2,116
            
            
            884CASH,
                end of period
            
            $
            318
            
            $
            884
            
            $
            4,958
            
            $
            2,116





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





46
 *Table
            of Contents*





**99¢
      Only Stores**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**Fiscal
      Years Ended December 31, 2003 and 2004, Three Months Ended March 31, 2005 and
      Fiscal Year Ended March 31, 2006**





**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 March 31, 2006, the Company operated 232 stores with 164, 36,
      21,
      and 11 in California, Texas, Arizona, and Nevada, respectively. The Company
      is
      also a wholesale distributor of various consumable products.





**Date
      of Filing and Subsequent Event Analysis**





The
      consolidated financial statements as of and for the period ended March 31,
      2006,
      including footnote disclosures, are reflective of the ultimate resolution of
      various uncertainties and contingent matters which existed as of March 31,
      2006.
      In recording estimated carrying amounts of certain assets and liabilities,
      the
      Company considered the impact of events and transactions which occurred during
      the extended period of time subsequent to March 31, 2006 through the issuance
      date of these consolidated financial statements.





**Change
      in Fiscal Year**




On
      December 30, 2005, the Company’s Board of Directors approved a change in the
      fiscal year-end from December 31 to March 31. The Board determined this was
      in
      the best interests of the Company’s shareholders because this change separates
      year-end accounting procedures from the Christmas holiday season, helps to
      enhance operational focus on holiday period execution and reduces fiscal year
      end costs associated with accounting and audit procedures. With new auditors
      engaged at the time of this change, the Company believes this was an appropriate
      time to make this beneficial transition, which also allowed additional time
      to
      perform Sarbanes-Oxley Section 404 assessment, remediation and audit procedures.
      Unless specifically indicated otherwise, any reference to “2006” or “fiscal
      2006” relates to the year ended March 31, 2006 and any reference to “2004” and
“2003” or “fiscal 2004” and “fiscal 2003” relate to the years ended December 31,
      2004 and 2003, respectively. References to fiscal 2007 refer to a period from
      April 1, 2006 to March 31, 2007.




**Principles
      of Consolidation**





The
      consolidated financial statements include the accounts of the Company and its
      subsidiaries and 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. Cash balances held at financial institutions
      are generally in excess of federally insured limits. The Company has not
      experienced any losses in such accounts. These accounts are only insured by
      the
      Federal Deposit Insurance Corporation (FDIC) up to $100,000. The Company’s cash
      balances held at financial institutions and exceeding FDIC insurance totaled
      $13.9 million, $19.8 million, and $21.9 million respectively as of the periods
      ended December 31, 2004, March 31, 2005, and March 31, 2006. 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.





47
 *Table
            of Contents*





**Allowance
      for Doubtful Accounts**





The
      Company evaluates the collectibility of accounts receivable based on a
      combination of factors. In cases where the Company is aware of circumstances
      that may impair a specific customer’s ability to meet its financial obligations
      subsequent to the original sale, the Company will record an allowance against
      amounts due, and thereby reduce the net recognized receivable to the amount
      the
      Company reasonably believes will be collected. For all other customers, the
      Company recognizes allowances for doubtful accounts based on the length of
      time
      the receivables are past due, industry and geographic concentrations, the
      current business environment and the Company’s historical
      experiences.





**Investments**




The
      Company’s investments in debt and equity securities are comprised primarily of
      marketable investment grade government municipal bonds, corporate bonds and
      equity securities, auction rate securities, asset-backed securities, commercial
      paper and money market funds. The auction rate securities have stated interest
      rates, which typically reset to market prevailing rates every 35 days or less.
      Investment securities are recorded as required by Statement of Financial
      Accounting Standards Board No. 115, “Accounting for Certain Investments in Debt
      and Equity Securities”. Investments are adjusted for amortization of premiums or
      discounts to maturity and such amortization is included in interest income.
      Realized gains and losses and declines in values judged to be other than
      temporary are determined based on the specific identification method and are
      reported in the statements of income.





The
      Company classifies its securities as either available for sale or trading
      securities when there are readily determinable fair values based on the
      Company’s investment strategy at the time of acquisition. All securities that
      were acquired on or before December 31, 2004 were classified as trading
      securities. Commencing January 1, 2005, management modified its investment
      practices and securities acquired after this date are classified as available
      for sale. On December 30, 2005, the Company’s Board of Directors formally
      approved a change in corporate investment policy and all existing securities
      were reclassified from trading to available for sale on the next business day,
      January 2, 2006.





Available
      for sale securities are initially recorded at cost and periodically adjusted
      to
      fair value with any changes in fair value during a period excluded from earnings
      and reported as a charge or credit net of tax effects to other comprehensive
      income or loss in the Statement of Shareholders’ Equity. A decline in the fair
      value of any available for sale security below cost that is deemed to be other
      than temporary will be reported as a reduction of the carrying amount to fair
      value. Such an impairment is charged to earnings and a new cost basis of the
      security is established. Cost basis is established and maintained utilizing
      the
      specific identification method.





Trading
      securities are reported at fair value, with any changes in fair value during
      a
      period recorded as a charge or credit to net income. Gains or losses realized
      upon sale of all securities are recognized in other income or expense at the
      time of sale.




**Inventories**




Inventories
      are valued at the lower of cost (first in, first out) or market. Valuation
      allowances for obsolete inventory, shrinkage, spoilage, and scrap are also
      recorded. 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 judgment and estimates,
      such as the amount of obsolete inventory, shrinkage and scrap, in many locations
      (including various warehouses, store backrooms, and sales floors of all its
      stores), all of which may impact the ending inventory valuation as well as
      gross
      margins.





At
      times
      the Company also makes large block purchases of inventory that it plans to
      sell
      over a period of longer than twelve months. As of March 31, 2005 and 2006,
      the
      Company held inventory of specific products identified that it expected to
      sell
      over a period that exceeds twelve months of approximately $3.6 million and
      $4.0
      million, respectively, which is included in deposits and other assets in the
      consolidated financial statements.





48
 *Table
            of Contents*





**Property
      and Equipment**




Property
      and equipment are carried at cost and are depreciated or amortized on a
      straight-line basis over the following useful lives:





Owned
                buildings & improvements
            Lesser
                of 30 years or the estimated useful life of the
                improvement


Leasehold
                improvements
            Lesser
                of the estimated useful life of the improvement or remaining lease
                term


Fixtures
                and equipment
            3-5
                years


Transportation
                equipment
            3-5
                years





The
      Company’s policy is to capitalize expenditures that materially increase asset
      lives and expense ordinary repairs and maintenance as incurred.





**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. Considerable management judgment is necessary to estimate
      projected future operating cash flows.  Accordingly, if actual results fall
      short of such estimates, significant future impairments could result.  The
      Company concluded that there were no such events or changes in circumstances
      during fiscal 2003, 2004 and three months ended March 31, 2005. However, during
      the third quarter of fiscal year 2006, the Company recorded an asset impairment
      charge of $0.8 million related to one underperforming store in Texas. Fair
      value, calculated by discounting an estimate of the store’s projected future
      operating cash flows, was determined to be zero and all of the store’s leasehold
      improvements, fixtures and equipment were written off by a charge to operating
      expense.




**Lease
      Acquisition Costs**




The
      Company follows the policy of capitalizing allowable expenditures that relate
      to
      the acquisition and signing of its retail store leases. These costs are
      amortized on a straight-line basis over the applicable lease term.




**Income
      Taxes**




The
      Company utilizes the liability method of accounting for income taxes as set
      forth in SFAS No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”). Under
      the liability method, deferred tax assets and liabilities are 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 are
      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).





49
 *Table
            of Contents*





A
      reconciliation of the basic and diluted weighted average number of shares
      outstanding for years ended December 31, 2003, 2004, three months ended March
      31, 2005 and year ended March 31, 2006 follows:





**Year
                Ended December 31,**
            
            **Three
                Months**
              **Ended
                March 31,**
            
            **Year
                Ended**
              **March
                31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**(Amounts
                in thousands)Weighted
                average number of common shares outstanding-basic
            
            
            71,348
            
            
            70,627
            
            
            69,533
            
            
            69,553Dilutive
                effect of outstanding stock options
            
            
            1,064
            
            
            389
            
            
            254
            
            
            184Weighted
                average number of common shares outstanding-diluted
            
            
            72,412
            
            
            71,016
            
            
            69,787
            
            
            69,737





Potentially
      dilutive stock options of 1.9 million, 4.3 million, 4.2 million and 3.6 million
      shares for the years ended December 31, 2003 and 2004, three months ended March
      31, 2005 and year ended March 31, 2006, respectively, were excluded from the
      calculation of the weighted average number of common shares outstanding because
      they were anti-dilutive.




**Stock-Based
      Compensation**




The
      Company has elected to continue to measure compensation costs associated with
      its stock option plan under Accounting Principles Board (“APB”) 25, “Accounting
      for Stock Issued to Employees.” All options are issued at fair market value
      using the intrinsic value method; therefore no compensation expense is added
      back to pro forma net income. 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 (amounts in thousands, except for per
      share data):


**Year
                Ended December 31,**
            
            **Three
                Months**
              **Ended
                March 31,**
            
            **Year
                Ended**
              **March
                31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**Net
                income, as reported
            
            $
            58,702
            
            $
            27,831
            
            $
            799
            
            $
            11,422Add:
                Total stock-based employee compensation expense included in reported
                net
                income, net of related tax effects
            
            
            -
            
            
            -
            
            
            -
            
            
            173Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            
            8,931
            
            
            7,480
            
            
            1,722
            
            
            3,295Pro
                forma net income (loss)
            
            $
            49,771
            
            $
            20,351
            
            $
            (923
            )
            $
            8,300Earnings
                (loss) per share:Basic-as
                reported
            
            $
            0.82
            
            $
            0.39
            
            $
            0.01
            
            $
            0.16Basic-pro
                forma
            
            $
            0.70
            
            $
            0.29
            
            $
            (0.01
            )
            $
            0.12Diluted-as
                reported
            
            $
            0.81
            
            $
            0.39
            
            $
            0.01
            
            $
            0.16Diluted-pro
                forma
            
            $
            0.69
            
            $
            0.29
            
            $
            (0.01
            )
            $
            0.12





50
 *Table
            of Contents*





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,**
            
            **March
                31,**
            
            **March
                31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**Risk
                free interest rate
            
            
            3.37
            %
            
            3.90
            %
            
            3.90
            %
            
            4.72
            %Expected
                life
            
            
            5.2
                Years
            
            
            5.4
                Years
            
            
            5.4
                Years
            
            
            4.6
                YearsExpected
                stock price volatility
            
            
            51
            %
            
            50
            %
            
            50
            %
            
            42
            %Expected
                dividend yield
            
            
            None
            
            
            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,
      scrap 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. 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. **




**Operating
      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).




**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
      applicable 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 as an offset to rent expense using the straight-line method over
      the
      applicable lease term. The closing of stores in the future may result in the
      immediate write-off of associated deferred rent balances, if any.





**Revenue
      Recognition**




The
      Company recognizes retail sales in its retail stores 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
      typically 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.




**Self-insured
      Workers’ Compensation**




The
      Company self-insures for workers’ compensation claims in California and Texas.
      The Company establishes a liability for losses of both estimated known and
      incurred but not reported insurance claims based on reported claims and
      actuarial valuations of estimated future costs of reported and incurred but
      not
      yet reported claims. Should an amount of claims greater than anticipated occur,
      the liability recorded may not be sufficient and additional workers’
compensation costs, which may be significant, could be incurred. The Company
      has
      not discounted the projected future cash outlays for the time value of money
      for
      claims and claim related costs when establishing its workers’ compensation
      liability as of December 31, 2003 and 2004, March 31, 2005, and March 31, 2006
      due to the volatility and unpredictability of its workers’ compensation
      experience over the past several years.





51
 *Table
            of Contents*





**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 $3.8
      million, $5.6 million and $4.4 million for the fiscal years ended December
      31,
      2003 and 2004 and March 31, 2006, respectively. Advertising expenses were $1.0
      million for the three months ended March 31, 2005.




**Statements
      of Cash Flows**




Cash
      payments for income taxes were $35.2 million, $22.0 million and $22.4 million
      in
      fiscal 2003, 2004 and 2006 respectively. Cash payments for income taxes were
      $2.5 million for the three months ended March 31, 2005. Interest payments
      totaled approximately $125,000, $122,000, $29,000 and $279,000 for the fiscal
      years ended December 31, 2003 and 2004, three months ended March 31, 2005 and
      fiscal year ended March 31, 2006, respectively. Non-cash financing activities
      included adjustments under adoption of SAB 108 as of April 1, 2005. The Company
      recorded adjustments for stock-based compensation of $2.4 million. See Note
      3 to
      Consolidated Financial Statements for detailed discussion of these adjustments.




**Fair
      Value of Financial Instruments**




The
      Company’s financial instruments consist principally of cash and cash
      equivalents, short-term and long-term marketable securities, accounts
      receivable, accounts payable and borrowings. The Company believes all of the
      financial instruments’ recorded values approximate fair market value because of
      their nature and respective durations. The fair value of marketable securities
      is determined using quoted market prices for those securities or similar
      financial instruments.





**Comprehensive
      Income (Loss)**




SFAS
      No.
      130, “Reporting Comprehensive Income”, establishes standards for reporting and
      displaying comprehensive income/(loss) and its components in the consolidated
      financial statements. Accumulated other comprehensive income/(loss) includes
      unrealized gains or losses on investments.





**Reclassifications**





Certain
      amounts in the prior years’ consolidated financial statements have been
      reclassified to conform to the current year’s presentation.





**New
      Authoritative Pronouncements**




In
      January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 46, “Consolidation of Variable Interest Entities - an
      Interpretation of ARB No. 51, Consolidated Financial Statements” (“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 46(R)”). The requirements of FIN 46(R) 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 (see Note 5 to Consolidated Financial Statements).
      The Company adopted the provisions of this Interpretation in fiscal 2004, which
      resulted in the consolidation of two partnership investments and an additional
      partnership that was consolidated beginning March 31, 2005 (see Note 5 to
      Consolidated Financial Statements). In April 2006, the FASB issued FASB Staff
      Position (“FSP”) FIN 46(R)-6, “Determining the Variability to Be Considered in
      Applying FASB Interpretation No. 46(R)” (FSP FIN 46(R)-6”), that became
      effective beginning July 2006. FSP FIN 46(R)-6 clarifies that the variability
      to
      be considered in applying FIN 46(R) shall be based on an analysis of the design
      of the variable interest entity. The adoption did not have a material impact
      on
      the Company’s consolidated financial position or results of
      operations.





52
 *Table
            of Contents*





In
      November 2004, the FASB issued Statement of Financial Accounting Standard
      (“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 adopted SFAS No. 151 at the beginning of fiscal
      2007. The adoption did not have a material impact on the Company’s consolidated
      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 Accounting Principles
      Board (“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  will
      adopt the new requirements using the modified prospective transition method
      in
      the first quarter of fiscal 2007, and as a result, will not retroactively adjust
      results from prior periods. Under this transition method, compensation expense
      associated with stock options recognized in the first quarter of fiscal 2007
      will include: 1) expense related to the remaining unvested portion of all stock
      option awards granted prior to March 31, 2006, based on the grant date fair
      value estimated in accordance with the original provisions of SFAS No. 123;
      and 2) expense related to all stock option awards granted or modified subsequent
      to March 31, 2006, based on the grant date fair value estimated in accordance
      with the provisions of SFAS No. 123(R).  The Company will apply the
      Black-Scholes valuation model in determining the fair value of share-based
      payments to employees, which will then be amortized on a straight-line basis
      over the requisite service period. Based on current analysis, information and
      excluding future option grants, the Company has determined that the adoption
      of
      SFAS No. 123(R) will reduce our pretax earnings by approximately $5.2
      million in fiscal 2007. The Company adopted this pronouncement beginning with
      its fiscal year which starts April 1, 2006.





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 adopted SFAS No.
      153
      at the beginning of fiscal 2007. The adoption of SFAS No.153 did not have a
      material impact on the Company’s consolidated financial position or results of
      operations.





In
      March
      2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset
      Retirement Obligations—an interpretation of FASB Statement No. 143” (“FIN 47”).
      FIN 47 requires an entity to recognize a liability for the fair value of a
      conditional asset retirement obligation if the fair value can be reasonably
      estimated. A conditional asset retirement obligation is a legal obligation
      to
      perform an asset retirement activity in which the timing or method of settlement
      are conditional upon a future event that may or may not be within the control
      of
      the entity. The Company adopted FIN 47 for the fiscal year ended March 31,
      2006
      and the adoption did not have a material impact on the Company’s consolidated
      financial statements.





53
 *Table
            of Contents*





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 adopted this pronouncement beginning with its 2007 fiscal
      year. The adoption of the provisions of SFAS No. 154 did not have a
      material impact on the Company’s consolidated financial statements.





In
      October 2005, the FASB issued FASB Staff Position (“FSP”) FAS 13-1, “Accounting
      for Rental Costs Incurred during a Construction Period” The FASB has concluded
      that rental costs incurred during and after a construction period are for the
      right to control the use of a leased asset and must be recognized as rental
      expense. Such costs were previously capitalized as construction costs if a
      company had a policy to do so. The Company adopted FSP No. FAS 13-1 in the
      fourth quarter of 2006 and the adoption did not have a material impact on the
      Company’s consolidated financial statements.





In
      November 2005, the FASB issued FSP FAS 115-1, “The Meaning of
      Other-Than-Temporary Impairment and Its Application to Certain Investments.”
This addresses the determination as to when an investment is considered
      impaired, whether that impairment is other than temporary, and the measurement
      of an impairment loss. The FSP also includes accounting considerations
      subsequent to the recognition of an other-than-temporary impairment and requires
      certain disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. The guidance in the FSP is effective for
      reporting periods beginning after December 15, 2005. We adopted FSP FAS
      115-1 on January 1, 2006.  The adoption of this FSP will not impact the
      Company’s consolidated financial statements.





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments—an amendment of FASB Statement No. 133 and 140,” to permit
      fair value remeasurement for any hybrid financial instrument that contains
      an
      embedded derivative that otherwise would require bifurcation in accordance
      with
      the provisions of SFAS No. 133, “Accounting for Derivative Instruments and
      Hedging Activities.” SFAS No. 155 is effective for all financial instruments
      acquired, issued, or subject to a remeasurement event occurring after the
      beginning of an entity’s fiscal year that begins after September 15, 2006. The
      Company will adopt SFAS No. 155 in the fiscal year beginning April 1, 2007.
      The
      Company does not believe that the adoption of this Statement will have a
      material impact on the Company’s consolidated financial statements.





In
      March
      2006, the FASB’s Emerging Issues Task Force (“EITF”) issued Issue 06-3, “How
      Sales Taxes Collected From Customers and Remitted to Governmental Authorities
      Should Be Presented in the Income Statement (That Is, Gross versus Net
      Presentation).” (“EITF 06-3”). A consensus was reached that entities may adopt a
      policy of presenting sales taxes in the income statement on either a gross
      or
      net basis. If taxes are significant, an entity should disclose its policy of
      presenting taxes and the amount of taxes. The guidance is effective for periods
      beginning after December 15, 2006. The Company presents sales net of sales
      taxes. The Company does not believe that the adoption of EITF 06-3 will impact
      the method for recording these sales taxes in the Company’s consolidated
      financial statements.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which
      clarifies the accounting for uncertainty in income tax positions. This
      Interpretation requires the Company to recognize in the consolidated financial
      statements the impact of a tax position that is more likely than not to be
      sustained upon examination based on the technical merits of the position. The
      provisions of FIN 48 are effective for fiscal years beginning after December
      15,
      2006. The Company is currently evaluating the impact of adopting FIN 48 on
      the
      consolidated financial statements and plans to adopt FIN 48 at the beginning
      of
      fiscal year 2008.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
This statement clarifies the definition of fair value, establishes a framework
      for measuring fair value, and expands the disclosures on fair value
      measurements. SFAS No. 157 is effective for fiscal years beginning after
      November 15, 2007. The Company has not determined the effect, if any, the
      adoption of this statement will have on the Company’s consolidated financial
      statements.





54
 *Table
            of Contents*





In
      September 2006, the Securities
      and Exchange Commission SEC
      staff
      issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior
      Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements." (“SAB 108”).
      SAB 108 addresses how the effects of prior-year uncorrected misstatements should
      be considered when quantifying misstatements in current-year financial
      statements. SAB 108 requires an entity to quantify misstatements using a balance
      sheet and income-statement approach and to evaluate whether either approach
      results in quantifying an error that is material in light of relevant
      quantitative and qualitative factors. The
      Company early-adopted
      SAB 108 as of April 1, 2005, the beginning of fiscal 2006. See Note
      3 to Consolidated Financial Statements for further discussion.





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
      for Financial Assets and Financial Liabilities--Including an amendment of FASB
      Statement No. 115." SFAS No. 159 permits companies to choose to
      measure many financial instruments and certain other items at fair value at
      specified election dates. Upon adoption, an entity shall report unrealized
      gains
      and losses on items for which the fair value option has been elected in earnings
      at each subsequent reporting date. Most of the provisions apply only to entities
      that elect the fair value option. However, the amendment to SFAS No. 115,
      "Accounting for Certain Investments in Debt and Equity Securities," applies
      to
      all entities with available for sale and trading securities. SFAS No. 159
      is effective as of the beginning of an entity's first fiscal year that begins
      after November 15, 2007. The Company has not determined the effect, if any,
      the adoption of this statement will have on the Company’s consolidated financial
      statements.








**2.**
            **Change
                in Fiscal Year End**




On
      December 30, 2005, the Company’s Board of Directors approved a change in the
      fiscal year-end from December 31 to March 31. The following unaudited condensed
      information presents the three months period ended March 31, 2004 and is
      presented for comparative purposes to the audited three month period ended
      March
      31, 2005, which is included in these consolidated financial
      statements.





**Consolidated
                  Statement of Income**





**Three
      Months Ended March 31, 2004**


**(Amounts
      in thousands except per share data)** ****





**Net
                sales:**99¢
                Only Stores
            
            $
            218,812Bargain
                Wholesale
            
            
            11,238Total
            
            
            230,050Gross
                profit
            
            
            92,229Operating
                income
            
            
            15,169Net
                income
            
            $
            10,204**Earnings
                per common share:**Basic
            
            $
            0.14Diluted
            
            $
            0.14Weighted
                average shares outstanding:Basic
            
            
            72,064Diluted
            
            
            72,717





55
 *Table
            of Contents*




**Consolidated
                  Statement of Cash
                  Flow**





**Three
      Months Ended March 31, 2004**


**(Amounts
      in thousands)**





CASH
                FLOWS FROM OPERATING ACTIVITIES
            
            $
            9,430CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of property and equipment
            
            
            (9,728
            )Net
                cash used in investing activities
            
            
            (9,728
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Payments
                of capital lease obligation
            
            
            (11
            )Proceeds
                from exercise of stock options
            
            
            384Net
                cash provided (used in) by financing activities
            
            
            373NET
                INCREASE IN CASH
            
            
            75CASH,
                beginning of period
            
            
            318CASH,
                end of period
            
            $
            393





**3.**
            **Cumulative
                Effect Adjustment Under SAB No.
                108**





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
      "Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements." SAB 108 was issued in
      order
      to eliminate the diversity of practice surrounding how public companies quantify
      financial statement misstatements.




SAB
      108
      permits existing public companies to initially apply its provisions either
      by
      (i) restating prior financial statements as if the "dual approach" had always
      been applied or (ii) recording the cumulative effect of initially applying
      the
      "dual approach" as adjustments to the carrying values of assets and liabilities
      with an offsetting adjustment recorded to the opening balance of retained
      earnings. The Company elected to record the effects of applying SAB 108 using
      the cumulative effect transition method. The Company early adopted SAB 108
      as of
      April 1, 2005, the first day of fiscal 2006. The following table summarizes
      the
      effects (up to March 31, 2005) of applying the guidance in SAB 108 (in
      thousands):





56
 *Table
            of Contents*








Period
                in which the
              Misstatement
                Originated(1)Cumulative
              Prior
                to
              December
                31,
            
            Year
                Ended
              December
                31,
            
            Three
              Months
              Ended
              March
                31,
            
            Adjustment
              Recorded
                as of
              April
                1,2002
            
            2003
            
            2004
            
            2005
            
            2005Non-cash
                stock compensation(2)
            
            $
            1,780
            
            $
            369
            
            $
            243
            
            $
            53
            
            $
            2,445Long-term
                deferred income tax assets(3)
            
            
            (389
            )
            
            71
            
            
            (50
            )
            
            (1
            )
            
            (369
            )Impact
                on net income(4)
            
            $
            1,391
            
            $
            440
            
            $
            193
            
            $
            52Retained
                earnings(5)
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,076





(1)
      The
      Company quantified these errors under the roll-over method and concluded that
      they were immaterial.





(2)
      The
      Company’s stock option review noted certain deficiencies in the process of
      granting and documenting stock options. The Company noted 6 instances from
      1996
      to 2004 relating to annual stock option grants where a difference existed
      between the Compensation Committee Board approval date and the measurement
      date
      actually used resulting in a total error of $1.9 million. The Company also
      noted
      certain errors relating to option grants to newly hired employees where the
      grant date was a few days before or after the employee start dates. Total error
      relating to these grants was approximately $50,000. Finally, the Company noted
      errors relating to seven non-employees where the Company incorrectly used APB
      25
      as opposed to SFAS No. 123 “Accounting for Stock-Based Compensation” to value
      their grants resulting in an error of $0.5 million. Measurement dates for
      non-employee grants were determined based on EITF Issue No. 96-18, “Accounting
      for Equity Instruments that are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services.” As a result of the errors
      mentioned above, the Company’s selling, general and administrative expenses were
      understated by $1.8 million in years 1996 to 2002, $0.4 million in 2003, $0.2
      million in 2004 and $0.1 million for the three months ended March 31, 2005.
      The
      Company recorded a $2.4 million increase in common stock as of April 1, 2005
      with a corresponding reduction in retained earnings to correct these
      misstatements. See Note 10 to Consolidated Financial Statements for detailed
      discussion of the stock option review process.





(3)
      As a
      result of the misstatements described above, the Company’s provision for income
      taxes was overstated by $0.4 million. The Company recorded an increase in its
      long-term deferred income tax assets in the amount of $0.4 million as of April
      1, 2005 with a corresponding increase in the retained earnings





(4)
      Represents the net overstatement of net income for the indicated periods
      resulting from these misstatements





(5)
      Represents the net reduction to retained earnings recorded as of April 1, 2005
      to record the initial application of SAB 108.





57
 *Table
            of Contents*





**4.**
            **Investments**





The
      following tables summarize the investments in marketable securities (in
      thousands):





March
                31, 2006Cost
                or
              Amortized
              Cost
            
            Gross
              Unrealized
              Gains
            
            Gross
              Unrealized
              Losses
            
            Fair
                ValueAvailable
                for sale:Commercial
                paper and money market
            
            $
            41,094
            
            $
            1
            
            $
            -
            
            $
            41,095Auction
                rate securities
            
            
            18,727
            
            
            2
            
            
            -
            
            
            18,729Municipal
                bonds
            
            
            56,233
            
            
            47
            
            
            (100
            )
            
            56,180Asset-backed
                securities
            
            
            12,093
            
            
            5
            
            
            (180
            )
            
            11,918Corporate
                securities
            
            
            23,744
            
            
            275
            
            
            (48
            )
            
            23,971$
            151,891
            
            $
            330
            
            $
            (328
            )
            $
            151,893Reported
                as:Short-term
                investments
            
            
            
            
            $
            117,623Long-term
                investments in marketable securities
            
            
            
            
            
            34,270$
            151,893








March
                31, 2005Cost
                or
              Amortized
              Cost
            
            Trading
              Securities
              Holding
              Gains
              (Losses)
            
            Gross
              Unrealized
              Gains
            
            Gross
              Unrealized
              Losses
            
            Fair
                ValueAvailable
                for sale:Commercial
                paper and money market
            
            $
            1,103
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            1,103Auction
                rate securities
            
            
            9,812
            
            
            -
            
            
            2
            
            
            -
            
            
            9,814Municipal
                bonds
            
            
            4,454
            
            
            -
            
            
            -
            
            
            (14
            )
            
            4,44015,369
            
            
            -
            
            
            2
            
            
            (14
            )
            
            15,357Trading
                securities
            
            
            135,063
            
            
            (539
            )
            
            -
            
            
            -
            
            
            134,524$
            150,432
            
            $
            (539
            )
            $
            2
            
            $
            (14
            )
            $
            149,881Reported
                as:Short-term
                investments
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            99,610Long-term
                investments in marketable securities
            
            
            
            
            
            
            
            
            50,271$
            149,881





As
      stated
      in Note 1 to Consolidated Financial Statements, there were securities classified
      as trading securities up to the end of December 2005. Holding gains and losses
      were recognized in the appropriate reporting period. As of March 31, 2006 and
      March 31, 2005, the cumulative recognized holding net losses, since the purchase
      of the securities originally classified as trading, were $985,000 and $539,000,
      respectively. A net unrealized gain of $2,000 as of March 31, 2006 and a net
      unrealized loss of $12,000 as of March 31, 2005 relate to securities that were
      recorded as available for sale securities. The tax effected unrealized gain
      and
      loss are included in other comprehensive income or loss in the Consolidated
      Statement of Shareholders’ Equity.





58
 *Table
            of Contents*





Realized
      gains from sales of available for sale securities were $25,000 for the fiscal
      year ended March 31, 2006. There was no realized gain or loss from sales of
      available for sale securities for the three months ended March 31, 2005. The
      portion of recognized holding gains and losses that relate to trading securities
      still held at period end was a $24,000 gain and a $453,000 loss for the twelve
      months ending on December 31, 2003 and 2004, respectively, and a $545,000 loss
      for the three months ending on March 31, 2005.





The
      following table summarizes maturities of marketable fixed-income securities
      classified as available for sale as of March 31, 2006 (in
      thousands):





Amortized
              Cost
            
            Fair
                ValueDue
                within one year
            
            $
            69,454
            
            $
            69,594Due
                after one year through five years
            
            
            32,947
            
            
            32,813Due
                after five years
            
            
            1,468
            
            
            1,457$
            103,869
            
            $
            103,864





The
      following table presents the length of time securities were in continuous
      unrealized loss positions, but were not deemed to be other-than-temporarily
      impaired (in thousands):





Less
                than 12 Months
            
            12
                Months or GreaterFair
              Value
            
            Gross
              Unrealized
              Losses
            
            Fair
              Value
            
            Gross
              Unrealized
              LossesMarch
                31, 2006Municipal
                bonds
            
            $
            13,454
            
            $
            (91
            )
            $
            3,845
            
            $
            (9
            )Asset-backed
                securities
            
            
            6,962
            
            
            (169
            )
            
            1,456
            
            
            (11
            )Corporate
                securities
            
            
            2,003
            
            
            (36
            )
            
            4,115
            
            
            (12
            )$
            22,419
            
            $
            (296
            )
            $
            9,416
            
            $
            (32
            )





The
      gross
      unrealized loss of $296,000 for less than twelve months and the $32,000 loss
      for
      twelve months or greater as of March 31, 2006 pertain to 32 securities and
      primarily is caused by interest rate increases. Since the Company has the
      ability and intent to hold these securities until a recovery of fair value,
      which may be at maturity, and because the unrealized losses were primarily
      due
      to higher interest rates, the Company does not consider these securities to
      be
      other-than-temporarily impaired.





There
      were no realized losses recorded for available for sale securities for
      other-than-temporary impairments during the fiscal year ended March 31,
      2006.




**5.**
            **Variable
                Interest Entities**




At
      December 31, 2004, the Company was the primary beneficiary of a variable
      interest entity to develop a shopping center in La Quinta, California, in which
      the Company committed to lease a store. The construction of this shopping center
      was completed and the store opened in the third quarter of fiscal 2006. As
      of
      March 31, 2006, this entity has $8.2 million in assets and $6.2 million in
      liabilities, including a bank construction loan for $6.2 million, which is
      shown
      on the Company’s Consolidated Balance Sheet as of March 31, 2006.




The
      Company had interests in two partnerships which the Company consolidated at
      December 31, 2004, March 31, 2005 and March 31, 2006 as a result of FIN 46(R).
      The assets of the partnerships consist 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, March 31, 2005 and March 31, 2006 is a reclassification of
      approximately $3.0 million, $2.9 million and $2.8 million, respectively, from
      investments to property and equipment with no corresponding impact on the
      Company’s recorded liabilities.





59
 *Table
            of Contents*




**6.**
            **Purchases
                of Distribution Facilities**




In
      2003,
      the Company purchased two distribution centers. On January 28, 2003, the Company
      completed the purchase of a distribution center in Houston to service its Texas
      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. In July 2005,
      the Company purchased an additional warehouse storage space adjacent to its
      main
      distribution facility for $9.7 million.




**7.**
            **Income
                Tax Provision**




The
      provision for income taxes consists of the following:




**Years
                Ended December 31,**
            
            **Three
                Months**
              **Ended
                March 31,**
            
            **Year
                Ended**
              **March
                31,**(Amounts
                in thousands)**2003**
            
            **2004**
            
            **2005**
            
            **2006**Current:Federal
            
            $
            32,428
            
            $
            19,739
            
            $
            1,532
            
            $
            9,373State
            
            
            6,786
            
            
            6,306
            
            
            682
            
            
            1,90339,214
            
            
            26,045
            
            
            2,214
            
            
            11,276Deferred
                - federal and state
            
            
            (2,504
            )
            
            (11,524
            )
            
            (1,908
            )
            
            (5,960
            )Provision
                for income tax
            
            $
            36,710
            
            $
            14,521
            
            $
            306
            
            $
            5,316





Differences
      between the provision for income taxes and income taxes at the statutory federal
      income tax rate are as follows:




**Year
                  Ended December 31,**
              
              **Three
                  Months Ended**
                **March
                  31,**
              
              **Year
                  Ended**
                **March
                  31,**(Amounts
                  in thousands)**2003**
              
              **2004**
              
              **2005**
              
              **2006****Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**Income
                  tax at statutory federal rate
              
              $
              33,394
              
              
              35.0
              %
              $
              14,825
              
              
              35.0
              %
              $
              387
              
              
              35.0
              %
              $
              5,858
              
              
              35.0
              %State
                  income taxes, net of federal income tax effect
              
              
              4,840
              
              
              5.1
              
              
              1,281
              
              
              3.0
              
              
              (147
              )
              
              (13.3
              )
              
              (101
              )
              
              (0.6
              )Effect
                  of permanent differences
              
              
              (418
              )
              
              (0.4
              )
              
              (984
              )
              
              (2.3
              )
              
              (4
              )
              
              (0.4
              )
              
              (1,298
              )
              
              (7.8
              )Valuation
                  allowance
              
              
              -
              
              
              -
              
              
              706
              
              
              1.7
              
              
              160
              
              
              14.5
              
              
              751
              
              
              4.5Welfare
                  to work, LARZ, and other job credits
              
              
              (258
              )
              
              (0.3
              )
              
              (125
              )
              
              (0.3
              )
              
              (37
              )
              
              (3.3
              )
              
              (755
              )
              
              (4.5
              )Other
              
              
              (848
              )
              
              (0.9
              )
              
              (1,182
              )
              
              (2.8
              )
              
              (53
              )
              
              (4.8
              )
              
              861
              
              
              5.2$
              36,710
              
              
              38.5
              %
              $
              14,521
              
              
              34.3
              %
              $
              306
              
              
              27.7
              %
              $
              5,316
              
              
              31.8
              %





60
 *Table
            of Contents*




The
      Company’s net deferred tax assets are as follows:




**December
                31,**
            
            **March
                31,**
            
            **March
                31,**(Amounts
                in thousands)**2004**
            
            **2005**
            
            **2006**CURRENT
                ASSETS (LIABILITIES)Inventory
            
            $
            2,147
            
            $
            3,806
            
            $
            4,572Uniform
                inventory capitalization
            
            
            4,687
            
            
            4,860
            
            
            5,894Prepaid
                expenses
            
            
            (1,068
            )
            
            (723
            )
            
            (529
            )Accrued
                expenses
            
            
            3,387
            
            
            3,514
            
            
            2,243Workers’
                compensation
            
            
            15,597
            
            
            16,416
            
            
            18,927State
                taxes
            
            
            2,215
            
            
            (1,829
            )
            
            (1,992
            )Other,
                net
            
            
            (696
            )
            
            1,129
            
            
            1,569Valuation
                allowance
            
            
            (63
            )
            
            (60
            )
            
            (46
            )TOTAL
                CURRENT ASSETS (LIABILITIES)
            
            
            26,206
            
            
            27,113
            
            
            30,638NON-CURRENT
                ASSETS (LIABILITIES)Depreciation
                and amortization
            
            
            533
            
            
            2,221
            
            
            5,169Net
                operating loss carry-forwards
            
            
            7,727
            
            
            7,519
            
            
            7,916Deferred
                rent
            
            
            2,639
            
            
            2,466
            
            
            1,913Other,
                net
            
            
            (142
            )
            
            (257
            )
            
            145Valuation
                allowance
            
            
            (4,544
            )
            
            (4,706
            )
            
            (5,471
            )TOTAL
                NON-CURRENT ASSETS (LIABILITIES)
            
            
            6,213
            
            
            7,243
            
            
            9,672NET
                DEFERRED TAX ASSETS
            
            $
            32,419
            
            $
            34,356
            
            $
            40,310





As
      of
      March 31, 2006, the Company had federal and state net operating loss
      carryforwards of approximately $17.3 million and $38.5 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 $1.9
      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 8 to Consolidated Financial Statements) and for certain state
      net
      operating loss carry-forwards.




As
      of
      December 31, 2004, March 31, 2005, and March 31, 2006, the Company had
      approximately $0.5 million of tax contingency reserves. The tax contingency
      reserves are 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.





**8.**
            **Related-Party
                Transactions**





The
      Company leases certain retail facilities from its significant shareholders
      and
      their affiliates. Rental expense for these facilities was approximately $2.1
      million in fiscal years 2003, 2004 and fiscal 2006. Rental expense for these
      facilities was approximately $0.5 million for the three months ended March
      31,
      2005. In addition, one of the Company’s directors, who resigned in the quarter
      ended March 31, 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 2003 and 2004. Rent expense on this store was $46,000 for the three
      months ended March 31, 2005 and $0.2 million for the year ended March 31,
      2006.





61
 *Table
            of Contents*





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 is also
      Chairman of the Company. 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
      a
      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
      2003 and a reconciliation of amounts due to/from shareholder resulting from
      such
      transactions (amounts in thousands):




**Year**
            
            **Management**
              **Fees**
            
            **Rental**
              **Income**
            
            **Payments**
              **Received**
            
            **Balance
                (To) From**
              **Shareholder
                End of**
              **Period**2003
            
            $
            1,440
            
            $
            1,380
            
            $
            (4,052
            )
            
            -





Prior
      to
      the sale of Universal in 2000, the Company signed documents purporting to
      guarantee certain obligations under leases in which Universal, or a
      subsidiary, was the lessee.  Subsequent to the sale, Universal may have
      defaulted on these lease agreements.  The Company was potentially
      contingently liable for lease payments totaling up to $1.1 million as of
      March 31, 2006, as well as additional costs for attorney fees, rent increases
      and common area maintenance charges, in connection with three lawsuits brought
      by the lessors under these leases. As of June 2006 one of the matters settled,
      and the Company has been fully reimbursed for the settlement pursuant to the
      guarantees by David and Sherry Gold. The Company and the plaintiffs in the
      two
      remaining cases have agreed on a tentative settlement of the cases, pursuant
      to
      which the Company would be responsible for an aggregate payment of $150,000.
      This settlement has not yet been reduced to writing or approved by the Court.
      The Company anticipates full reimbursement of any such settlement payment or
      other obligation in connection with these cases under the guarantees of David
      and Sherry Gold. 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, which indemnity David and Sherry Gold confirmed in writing in
      April 2004 and re-executed on August 5, 2005.





**9.**
            **Commitments
                and Contingencies**





**Credit
      Facilities**





The
      Company recognizes a bank construction loan of $6.2 million in a partnership
      as
      a result of the consolidation of a variable interest partnership entity. In
      May
      of 2005 the partnership entered into a construction bank loan with a financial
      institution to finance the construction of a shopping center. See Note 5 to
      Consolidated Financial Statements for further information.





The
      partnership can draw construction funds up to $7.5 million as required under
      certain terms and conditions during the construction period. The loan bears
      interest at the “Prime rate” plus 0.5% (8.25% at March 31, 2006), and matures on
      December 1, 2006, but may be extended for up to 12 months at the partnership’s
      option. The partnership may also, at its option, upon completion of construction
      and meeting certain terms and conditions, convert the construction loan to
      an
      amortizing term loan maturing on December 1, 2016. On December 1, 2006, the
      partnership exercised its first option to extend the loan for six months through
      May 1, 2007. During fiscal 2006, the partnership paid interest costs in the
      amount of $0.2 million of which $0.1 million was capitalized. The minority
      partner has guaranteed the bank loan, and the Company has not made any
      guarantees or incurred direct liability outside the partnership for this loan.
      The assets of the partnership are collateralized under the construction
      loan.





The
      Company does not maintain any other credit facilities with any financial
      institutions.





62
 *Table
            of Contents*





**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 fiscal
      2003, 2004 and 2006 was approximately $32.9 million $43.4 million and $45.7
      million of which $0.1 million, $0.1 million and $0.2 million was paid as
      percentage rent based on sales volume, for each of the years then ended,
      respectively. Rental expense charged for the three months ended March 31, 2005
      was $11.4 million. Sub-lease income earned in fiscal 2003, 2004 and 2006 was
      approximately $0.7 million, $0.8 million and $0.7 million, respectively.
      Sub-lease income earned in the three months ended March 31, 2005 was $0.2
      million. As of March 31, 2006, the minimum annual rentals payable and future
      minimum sub-lease income under all non-cancelable operating leases were as
      follows: (amounts in thousands):




**Fiscal
                Year ending March 31:**
            
            **Operating**
              **leases**
            
            **Capital**
              **leases**
            
            **Future**
              **Minimum**
              **Sub-lease**
              **Income**2007
            
            $
            32,228
            
            $
            129
            
            $
            5012008
            
            
            28,990
            
            
            106
            
            
            4712009
            
            
            26,980
            
            
            106
            
            
            3882010
            
            
            21,809
            
            
            107
            
            
            2262011
            
            
            15,389
            
            
            107
            
            
            182Thereafter
            
            
            39,602
            
            
            541
            
            
            376Future
                minimum lease payments
            
            $
            164,998
            
            $
            1,096
            
            $
            2,144Less
                amount representing interest
            
            
            
            
            
            (322
            )Present
                value of future lease payments
            
            
            
            
            $
            774





The
      gross
      asset amount recorded under the capital lease was $957,000 as of December 31,
      2004, March 31, 2005 and March 31, 2006. Accumulated depreciation was $234,000,
      $250,000 and $314,000 as of December 31, 2004, March 31, 2005 and March 31,
      2006, respectively.





As
      described above, prior to the sale of Universal in 2000, the Company signed
      documents purporting to guarantee certain obligations under leases in which
      Universal, or a subsidiary, was the lessee.  Subsequent to the sale,
      Universal may have defaulted on these lease agreements.  The Company was
      potentially contingently liable for lease payments totaling up to $1.1
      million as of March 31, 2006, as well as additional costs for attorney fees,
      rent increases and common area maintenance charges, in connection with three
      lawsuits brought by the lessors under these leases. As of June 2006 one of
      the
      matters settled, and the Company has been fully reimbursed for the settlement
      pursuant to the guarantees by David and Sherry Gold. The Company and the
      plaintiffs in the two remaining cases have agreed on a tentative settlement
      of
      the cases, pursuant to which the Company would be responsible for an aggregate
      payment of $150,000. This settlement has not yet been reduced to writing or
      approved by the Court. The Company anticipates full reimbursement of any such
      settlement payment or other obligation in connection with these cases under
      the
      guarantees of David and Sherry Gold. 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, which indemnity David and Sherry Gold
      confirmed in writing in April 2004 and re-executed on August 5,
      2005.




**Workers’
      Compensation**




The
      Company self-insures its workers' compensation claims in California and provides
      for losses of estimated known and incurred but not reported insurance claims.
      At
      December 31, 2004, March 31, 2005 and March 31, 2006, the Company had recorded
      a
      liability of $36.4 million, $38.4 million and $44.2 million, respectively,
      for
      estimated workers’ compensation claims. The Company has limited self-insurance
      exposure and had recorded a liability of
      $56,000 at March 31, 2006 for workers’ compensation claims in Texas, and purchases insurance coverage in Arizona and
      Nevada.





63
 *Table
            of Contents*





**Legal
      Matters**





In
      accordance with Statement of Financial Accounting Standards, or
      SFAS No. 5, *Accounting for Contingencies* ,
      the
      Company records a liability when it is both probable that a liability has been
      incurred and the amount of the loss can be reasonably estimated. These
      provisions are reviewed at least quarterly and adjusted to reflect the impacts
      of negotiations, settlements, rulings, advice of legal counsel and other
      information and events pertaining to a particular case. Litigation is inherently
      unpredictable. The status of legal matters and reserves for them have been
      estimated through the date of this report.





**Gillette
      Company vs. 99¢ Only Stores (Los Angeles Superior Court).** 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 amount of approximately $2.0 million (apart from approximately $1.0
      million already paid to Gillette for product purchases), together with
      pre-judgment interest at ten-percent per annum from the December 1998 date
      of
      the agreement. On August 9, 2006, the parties agreed upon a settlement under
      which the Company would pay Gillette the sum of $540,000 in full settlement
      of
      this lawsuit and dispute. The parties subsequently entered into a written
      settlement agreement and the Company has paid the $540,000 settlement amount
      to
      Gillette. This amount had been accrued as of March 31, 2006.





**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. The Company entered into a settlement with the plaintiffs in this
      matter, and the Court granted final approval of the settlement on March 17,
      2006
      and entered final judgment. The Company has paid out an aggregate sum of
      approximately $100,000 in settlement of this action. This sum includes the
      settlement payments to the named plaintiffs and plaintiffs who have opted into
      the settlement as well as the payments for costs and fees to plaintiffs’
counsel.





**Securities
      Class Action and Shareholder Derivative 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 sought to represent all who
      purchased shares of the Company's common stock between March 11 and June 10,
      2004, alleged 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 superseded the various complaints originally filed and
      contained an expanded class period. 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
      moved to dismiss the second amended complaint as well. 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. On or about January 24, 2006,
      the Company, the Company’s insurer and plaintiffs’ counsel in both the federal
      securities class action and in the state derivative action agreed to settle
      these matters. Pursuant to the settlement agreement the Company’s insurer and
      the Company each paid $2,062,500 in settlement of the putative class action
      and
      $87,500 in settlement of the state derivative action. The parties also agreed
      that the class action period would be extended through and including September
      21, 2005. Both the federal court and the state court approved the settlement
      and
      dismissed the actions with prejudice. The time for any appeal has expired.
      The
      Company had reserves for this matter at March 31, 2006 of $2.2
      million.





64
 *Table
            of Contents*





**Jasmine
      Minesaki v. 99¢ Only Stores (Los Angeles Superior Court).** Plaintiff
      Jasmine Minesaki filed this action on behalf of herself and her daughter for
      personal injuries suffered at a facility previously owned by the Company. The
      Court approved a settlement of this matter in October 2006, pursuant to which
      the Company's insurance carriers are obligated to satisfy the amounts owed
      to
      the plaintiff thereunder ,
      which
      totaled approximately $35.0 million .




**Employment
      Class Actions.**





**Vargas
      vs. 99¢ Only Stores (Ventura County Superior Court).** On
      June
      19, 2006, the plaintiff, Joanna Vargas, filed this putative class action suit
      against the Company seeking to represent its California retail non-exempt
      employees. The lawsuit alleges non-payment of wages, non-payment of overtime
      wages, failure to provide or pay for meal or rest breaks, unlawful deduction
      of
      wages, non-payment of wages to employees who quit or were terminated, and
      similar claims. The lawsuit seeks compensatory, special and punitive damages
      in
      unspecified amounts, as well as injunctive relief. The Company has responded
      to
      the complaint and denied all material allegations therein. The parties are
      currently litigating whether this matter and the Washington matter described
      below should be coordinated. Based on discussions during recent settlement
      negotiations, the Company has reserved $1.5 million at March 31, 2006 for
      potential liability in this case and the Washington matter described below.
      As
      the parties in this matter and the Washington matter have not entered into
      a
      settlement agreement, and any settlement would be subject to court approval,
      a
      settlement in this matter and the Washington matter cannot be
      assured.





**Washington
      v. 99¢ Only Stores (Los Angeles County Superior Court).** On
      October 31, 2006, the plaintiff, Chantelle Washington, filed this putative
      class
      action suit against the Company seeking to represent its California retail
      non-exempt cashier employees. The lawsuit alleges non-payment of failure to
      provide or pay for meal or rest breaks and associated claims. The lawsuit seeks
      compensatory damages and/or penalties in unspecified amounts, as well as
      equitable relief, attorney fees and interest. The Company has responded to
      the
      complaint and filed a demurrer asserting that this action should be stayed
      pending the resolution of the Vargas action described above. The parties are
      currently litigating whether this matter and the Vargas action should be
      coordinated. See the Vargas matter described above for reserves pertaining
      to
      this matter and a description of settlement status.





**Environmental
      Protection Agency** .
      Region
      IX of the U.S. Environmental Protection Agency (the "EPA") notified the Company
      on May 4, 2005 that it intended to commence an action seeking civil penalties
      for an alleged sale of an unregistered pesticide product.  The EPA has not
      yet filed a complaint in this matter, nor has it made any demands for a specific
      penalty amount.  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 financial condition, results of operations, or overall
      liquidity.





**Others.**  The
      Company is named as a defendant in numerous 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.





**10.**
            **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
      5,035,000 are available as of March 31, 2006 for future option grants. Options
      may be granted to officers, employees, non-employee directors and consultants
      of
      the Company. All grants are made at fair market value at the date of grant
      or at
      a price determined by the compensation committee, which consists exclusively
      of
      independent members of the Board of Directors. Options typically vest over
      a
      three-year period, one-third one year from the date of grant and one-third
      per
      year thereafter, though an exception was made by the Company’s Compensation
      Committee on June 6, 2006, when it granted options that vested in equal halves
      over a two year period. Options typically 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 2003, 2004 and
      the three months ended March 31, 2005. The Company recognized $0.2 million
      in
      compensation cost during fiscal 2006. The plan will expire in 2011. The
      following table summarizes stock options available for grant:





65
 *Table
            of Contents*




**Year
                Ended December 31,**
            
            **Three
                Months**
              **Ended
                March 31,**
            
            **Year
                Ended**
              **March
                31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**Beginning
                balance
            
            
            6,200,000
            
            
            5,268,000
            
            
            4,440,000
            
            
            4,588,000Authorized
            
            
            -
            
            
            -
            
            
            -
            
            
            -Granted
            
            
            (1,075,000
            )
            
            (1,269,000
            )
            
            -
            
            
            (175,000
            )Cancelled
            
            
            143,000
            
            
            441,000
            
            
            148,000
            
            
            622,000Available
                for future grant
            
            
            5,268,000
            
            
            4,440,000
            
            
            4,588,000
            
            
            5,035,000





A
      summary
      of the status of the Company’s stock option plan at December 31, 2003 and 2004,
      March 31, 2005 and March 31, 2006 and changes during the years ended December
      31, 2003, 2004, three months ended March 31, 2005 and year ended March 31,
      2006
      is presented in the table and narrative below:




**Year
                Ended December 31,**
            
            **Three
                Months Ended****March
                31,**
            
            **Year
                Ended March 31,****2003**
            
            **2004**
            
            **2005**
            
            **2006****Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Outstanding
                at the beginning of the period
            
            
            5,261,000
            
            $
            17.86
            
            
            4,429,000
            
            $
            21.12
            
            
            5,179,000
            
            $
            20.05
            
            
            4,999,000
            
            $
            20.08Granted
            
            
            1,075,000
            
            $
            29.37
            
            
            1,269,000
            
            $
            17.63
            
            
            -
            
            
            -
            
            
            175,000
            
            $
            9.74Exercised
            
            
            (1,764,000
            )
            $
            15.47
            
            
            (78,000
            )
            $
            14.38
            
            
            (32,000
            )
            $
            9.80
            
            
            (20,000
            )
            $
            4.35Cancelled
            
            
            (143,000
            )
            $
            26.20
            
            
            (441,000
            )
            $
            25.85
            
            
            (148,000
            )
            $
            20.33
            
            
            (622,000
            )
            $
            22.02Outstanding
                at the end of the period
            
            
            4,429,000
            
            $
            21.12
            
            
            5,179,000
            
            $
            20.05
            
            
            4,999,000
            
            $
            20.08
            
            
            4,532,000
            
            $
            19.49Exercisable
                at the end of the period
            
            
            2,467,000
            
            $
            15.68
            
            
            3,076,000
            
            $
            18.43
            
            
            3,032,000
            
            $
            18.44
            
            
            3,470,000
            
            $
            19.61Weighted
                average fair value of options granted under the Black-Scholes option
                pricing model
            
            
            
            
            $
            12.95
            
            
            
            
            $
            8.80
            
            
            
            
            $
            -
            
            
            
            
            $
            4.41





The
      following table summarizes information about stock options outstanding at March
      31, 2006:




**Range
                of**
              **Exercise**
              **Prices**
            
            **Options**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life
                in Years**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Options**
              **Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$2.64
                - $5.50
            
            
            455,000
            
            
            0.7
            
            $
            4.14
            
            
            455,000
            
            $
            4.14$5.51
                - $8.70
            
            
            1,000
            
            
            1.3
            
            $
            6.53
            
            
            1,000
            
            $
            6.53$8.71
                - $15.75
            
            
            477,000
            
            
            5.56
            
            $
            10.96
            
            
            269,000
            
            $
            11.45$15.76
                - $22.50
            
            
            2,229,000
            
            
            5.78
            
            $
            18.30
            
            
            1,622,000
            
            $
            18.44$22.51-
                $35.00
            
            
            1,370,000
            
            
            6.67
            
            $
            29.49
            
            
            1,123,000
            
            $
            29.524,532,000
            
            
            5.51
            
            $
            19.49
            
            
            3,470,000
            
            $
            19.61




66
 *Table
            of Contents*





**Review
      of Equity Grants and Procedures**





The
      Company’s management also recently conducted a voluntary, self-initiated review
      of the measurement dates for the Company’s stock option grants accounted for
      under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
      to Employees”, and SFAS 123(R), “Share-based Payment”, from its initial public
      offering in 1996 to December 31, 2006. Management found that certain measurement
      date errors occurred during the period 1996-2004. These errors resulted in
      adjustments that would have increased non-cash compensation expense in these
      periods. These non-material adjustments accumulated over eight years to
      approximately $2.4 million in unrecorded non-cash compensation expense. In
      addition, the Company recorded $0.2 million of non-cash compensation expense
      in
      fiscal 2006 related to the review. The Company evaluated these adjustments
      using
      its historical method of evaluating adjustments, the "roll-over" method. The
      rollover method focuses primarily on the impact of any misstatement, including
      the reversal of prior-year misstatements, on the current-year consolidated
      income statement. Under this method, the Company believes that these adjustments
      are not material to its financial statements in any of the periods to which
      the
      adjustments were related, and, therefore, does not believe that it is necessary
      to amend or revise its historical financial statements.





Management
      believes that the stock option errors were due to misunderstandings of how
      to
      establish the measurement date for accounting purposes and did not involve
      any
      intentional wrongdoing. Based on its review, management believes that there
      was
      no preferential treatment for officers and directors who participated in these
      annual grants, because they always received options on the same date and with
      the same price as other employees, and that although certain officers and
      directors did receive a benefit from the measurement date errors along with
      the
      rest of the employees, this benefit was de minimis in each instance. The
      Chairman and CEO, and the then President, who oversaw the grant process, did
      not
      receive any option grants during this period.





The
      transition provisions of SEC Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in the Current Year Financial Statements”, permits the Company to
      adjust for the cumulative effect of the uncorrected prior year misstatements
      that were not material to any prior periods under the Company’s historical
      income statement approach but that were material under the guidance in SAB
      108
      through retained earnings at the beginning of fiscal 2006. The Company has,
      in
      accordance with the transition provisions of SAB108, recorded a
      reclassification, within the equity section of the consolidated balance sheet
      included on this Form 10-K for the fiscal year ending March 31, 2006, of
      approximately $2.1 million, net of the related tax effect.  See Note 3 to
      Consolidated Financial Statements for detailed discussion.




The
      Company is currently evaluating the steps it will take with respect to
      outstanding options that were affected by these errors and has assessed
      costs it may incur in connection therewith, including with respect to Internal
      Revenue Code § 409A, and the Company believes any such costs would be
      immaterial.  In light of the compensation level of the Company's option
      recipients the Company does not anticipate incurring any negative tax
      consequences under Internal Revenue Code § 162(m) in connection with these
      errors.





**11.**
            **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,
      2003 and 2004, three months ended March 31, 2005 and year ended March 31, 2006
      follows (amounts in thousands):





67
 *Table
            of Contents*








**Twelve
                Months Ended**
              **December
                31,**
            
            **Three
                Months**
              **Ended
                March 31,**
            
            **Year
                Ended**
              **March
                31,****Revenues**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006**Retail
            
            $
            816,348
            
            $
            929,896
            
            $
            231,899
            
            $
            984,293Wholesale
            
            
            46,112
            
            
            42,277
            
            
            10,731
            
            
            39,296Total
                sales
            
            $
            862,460
            
            $
            972,173
            
            $
            242,630
            
            $
            1,023,589**Gross
                Profit**Retail
            
            $
            336,642
            
            $
            371,180
            
            $
            88,070
            
            $
            375,756Wholesale
            
            
            9,132
            
            
            8,418
            
            
            2,269
            
            
            7,693Total
                gross profit
            
            $
            345,774
            
            $
            379,598
            
            $
            90,339
            
            $
            383,449Operating
                expenses
            
            
            235,428
            
            
            312,263
            
            
            81,760
            
            
            340,371Depreciation
                and amortization
            
            
            19,391
            
            
            28,246
            
            
            7,776
            
            
            31,424Interest
                income
            
            
            (3,105
            )
            
            (3,326
            )
            
            (617
            )
            
            (5,059
            )Interest
                expense
            
            
            125
            
            
            63
            
            
            29
            
            
            122Other
                expense (income)
            
            
            (1,477
            )
            
            -
            
            
            286
            
            
            (147
            )Income
                before provision for income tax
            
            $
            95,412
            
            $
            42,352
            
            $
            1,105
            
            $
            16,738





**12.**
            **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, 2003 and 2004, for the three months ended March 31, 2005 and for
      the year ended March 31, 2006 no matching or discretionary contributions
      were made.





**Deferred
      Compensation Plan**




The
      Company has 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. The rabbi trust is subject to
      creditor claims in the event of insolvency. The deferred compensation liability
      and related long-term asset was $2.8 million, $2.9 million and $3.5 million
      as
      of December 31, 2004, March 31, 2005 and March 31, 2006,
      respectively.




**13.**
            **Quarterly
                Financial Information**




The
      following table sets forth certain unaudited results of operations for each
      quarter during fiscal year 2004, the quarter ended March 31, 2005 and each
      quarter during fiscal year 2006. 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.





68
 *Table
            of Contents*








**Fiscal
                Year 2004 (January 1, 2004 to December 31, 2004)****(Amounts
                in thousands except per share data)****(Unaudited)****1****st****Quarter**
            
            **2****nd****Quarter**
            
            **3****rd****Quarter**
            
            **4****th****Quarter****Net
                sales:**99¢
                Only Stores
            
            $
            218,812
            
            $
            226,931
            
            $
            229,064
            
            $
            255,089Bargain
                Wholesale
            
            
            11,238
            
            
            10,335
            
            
            9,881
            
            
            10,823Total
            
            
            230,050
            
            
            237,266
            
            
            238,945
            
            
            265,912Gross
                profit
            
            
            92,229
            
            
            86,539
            
            
            91,734
            
            
            109,096Operating
                income
            
            
            15,169
            
            
            5,859
            
            
            7,821
            
            
            10,240Net
                income
            
            $
            10,204
            
            $
            3,463
            
            $
            5,506
            
            $
            8,658**Earnings
                per common share:**Basic
            
            $
            0.14
            
            $
            0.05
            
            $
            0.08
            
            $
            0.12Diluted
            
            $
            0.14
            
            $
            0.05
            
            $
            0.08
            
            $
            0.12Weighted
                average shares outstanding:Basic
            
            
            72,064
            
            
            71,437
            
            
            69,500
            
            
            69,507Diluted
            
            
            72,717
            
            
            71,828
            
            
            69,746
            
            
            69,778




**Three
                Months Ended March 31, 2005**
              **(Amounts
                in thousands except per share data)**
              **(Audited)****Net
                sales:**99¢
                Only Stores
            
            $
            231,899Bargain
                Wholesale
            
            
            10,731Total
            
            
            242,630Gross
                profit
            
            
            90,339Operating
                income
            
            
            803Net
                income
            
            $
            799**Earnings
                per common share:**Basic
            
            $
            0.01Diluted
            
            $
            0.01Weighted
                average shares outstanding:Basic
            
            
            69,533Diluted
            
            
            69,787




69
 *Table
            of Contents*




**Fiscal
                Year 2006 ( April 1, 2005 to March 31, 2006)**
              **(Amounts
                in thousands except per share data)**
              **(Unaudited)****(April
                -June)**
              **1****st****Quarter**
            
            **(July
                - September)**
              **2****nd****Quarter**
            
            **(October
                -December)**
              **3****rd****Quarter (b)**
            
            **(January
                - March)**
              **4****th****Quarter****Net
                sales:**99¢
                Only Stores
            
            $
            234,449
            
            $
            235,902
            
            $
            269,311
            
            $
            244,631Bargain
                Wholesale
            
            
            10,230
            
            
            10,122
            
            
            9,473
            
            
            9,471Total
            
            
            244,679
            
            
            246,024
            
            
            278,784
            
            
            254,102Gross
                profit
            
            
            91,706
            
            
            92,012
            
            
            105,820
            
            
            93,911Operating
                income (loss)
            
            
            7,020
            (a)
            
            470
            
            
            9,465
            
            
            (5,301
            )Net
                income (loss)
            
            $
            5,036
            
            $
            1,129
            
            $
            6,843
            
            $
            (1,586
            )**Earnings
                (loss) per common share:**Basic
            
            $
            0.07
            
            $
            0.02
            
            $
            0.10
            
            $
            (0.02
            )Diluted
            
            $
            0.07
            
            $
            0.02
            
            $
            0.10
            
            $
            (0.02
            )Weighted
                average shares outstanding:Basic
            
            
            69,549
            
            
            69,552
            
            
            69,552
            
            
            69,558Diluted
            
            
            69,749
            
            
            69,733
            
            
            69,719
            
            
            69,558




(a)
      Operating income as previously reported for the first quarter of 2006 was
      $2,820,000. An income statement re-classification adjustment of $4,200,000
      was
      subsequently considered necessary to reflect proceeds from an eminent domain
      action in operating income. This amount had previously been reported as a
      component of other income below operating income. Operating income for the
      first
      quarter 2006, after this adjustment, is $7,020,000. Gross profit and net income
      are unchanged for the quarter.




(b)
      During the fourth quarter of fiscal 2006, the Company determined that it had
      overaccrued certain accounting and auditing fees for the third quarter ended
      December 31, 2005. The Company corrected the error by increasing operating
      income and net income by approximately $812,000 and $570,000 net of tax effect,
      respectively, for the quarter ended December 31, 2005. The adjusted basic and
      diluted earnings per common share increased by $0.01 per share from $0.09 to
      $0.10. The effect of the correction of the error on the previously reported
      interim financial statements for the quarter ended December 31, 2005 was not
      material.





**14.**
            **Other
                Current Liabilities**





Other
      current liabilities as of December 31, 2004, March 31, 2005 and March 31, 2006
      are as follows:





**December
                31,**
              **2004**
            
            **March
                31,**
              **2005**
            
            **March
                31,**
              **2006**(Amounts
                in thousands)Accrued
                property taxes
            
            $
            2,544
            
            $
            2,149
            
            $
            2,306Accrued
                utilities
            
            
            1,206
            
            
            1,714
            
            
            2,147Accrued
                legal reserves and fees
            
            
            6,555
            
            
            7,284
            
            
            7,060Accrued
                accounting fees
            
            
            398
            
            
            746
            
            
            625Other
            
            
            1,371
            
            
            1,758
            
            
            4,351Total
                other current liabilities
            
            $
            12,074
            
            $
            13,651
            
            $
            16,489








70
 *Table
            of Contents*





**Item
      9. Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure**





None.





**Item
      9A. Controls and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





The
      Company evaluated the effectiveness of its disclosure controls and procedures
      as
      of the end of the period covered by this Report, under the supervision and
      with
      the participation of the Company’s management, pursuant to Rule 13a-15(b) of the
      Securities Exchange Act of 1934, as amended (the "Securities Exchange Act").
      Based on this evaluation, the Company’s Chief Executive Officer and Chief
      Financial Officer each concluded that due to the material weakness in accounting
      and financial reporting and the material weaknesses in merchandise inventory
      management and accounting, the Company’s disclosure controls and procedures were
      not effective.





**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.





Management
      uses the framework in *Internal
      Control - Integrated Framework* ,
      issued
      by the Committee of Sponsoring Organizations (“COSO”) of the Treadway
      Commission, for evaluating 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 outside consulting firms to assist
      in various aspects of its evaluation and compliance efforts.





In
      fiscal
      2006, management completed its documentation and evaluation of the design of
      the
      Company’s internal control over financial reporting. Management then commenced
      testing to evaluate the operating effectiveness of controls in the following
      areas: (a) control environment, (b) legal, (c) income taxes, (d) treasury,
      (e)
      fixed assets, (f) workers’ compensation, (g) financial reporting and close, (h)
      revenue, (i) human resources/payroll, (j) procure to pay, (k) inventory
      management, and (l) information technology. Based on this evaluation and
      testing, management concluded that there were material weaknesses in the design
      and operating effectiveness of certain accounting and financial reporting
      processes as well as in its inventory management processes and controls, as
      described more fully below. Due to these material weaknesses, management
      concluded that the Company’s internal control over financial reporting was not
      effective as of March 31, 2006.





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 information 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.





71
 *Table
            of Contents*





Management
      identified the following material weaknesses in the Company’s internal control
      over financial reporting as of March 31, 2006:





***Material
      Weaknesses in Merchandise Inventory Management and
      Accounting.*** Material
      weaknesses were identified in the following areas of merchandise inventory
      management and accounting: (1) the Company does not maintain accurate records
      of
      specific item quantity and location for its warehouse inventory and therefore
      relies primarily on the physical counting of inventory. The nature, size, and
      number of locations make it infeasible to physically count the entire inventory
      every quarter. In addition, the inventory records and controls do not enable
      cycle counting of segments of its inventory; (2) in receiving, notification
      to
      the purchasing department of vendor short shipments or overages and spot checks
      to ensure that items are not expired, damaged or intermixed with other goods
      was
      informal and inconsistently performed; (3) at the point of shipment from the
      warehouse, goods were allocated and recorded as shipped to the stores at times
      without confirmation of the quantities actually shipped, and a comparison of
      store orders, items recorded as shipped and items actually picked and shipped
      was performed inconsistently; (4) paperwork for recording transfers between
      warehouses or between warehouses and stores was incomplete and utilized
      inconsistently, and, consequently, at the retail stores items received from
      the
      warehouses often did not match the bill of lading or related shipping documents,
      at times a bill of lading was not available, and a comparison between goods
      actually received at the store and goods recorded on shipping documents was
      performed inconsistently; (5) at the stores, accounting procedures for recording
      scrap were utilized inconsistently resulting in significant variations in
      recorded scrap levels throughout the year and the warehouse scrap process was
      not utilized; and (6) many inventory exceptions were noted due to item pricing
      inaccuracy, inaccurate labeling of stored inventory, and excess and obsolete
      inventory being stored in retail locations, and a significant number of store
      physical inventory counts failed and had to be recounted for the fiscal year
      2006.





***Material
      Weakness in Accounting and Financial Reporting.*** The
      Company did not maintain effective controls over its quarterly and annual
      financial statement reporting process which resulted in a significant number
      of
      adjustments encountered during our audit and review procedures. These
      adjustments were in the areas of prepaid expenses, inventory reconciliations,
      inventory reserves, deferred rent, accounts payable, legal accruals, various
      liability accruals and stock based compensation in connection with the Company’s
      review of prior year accounting for stock option grants. We noted that there
      was
      insufficient oversight by management in its classification of short-term and
      long-term investments and that management did not have sufficient internal
      expertise to statistically evaluate the Company’s estimate of FIFO pricing of
      inventory layers. A material weakness in financial reporting impacts the
      Company’s ability to timely report financial information in conformity with U.S.
      generally accepted accounting principles (“GAAP”), which could affect all
      significant financial statement accounts and disclosures.




BDO
      Seidman, LLP issued its attestation report on management’s assessment of the
      effectiveness of the Company’s internal control over financial reporting. This
      report appears below.





**Changes
      in Internal Control Over Financial Reporting**




During
      the fourth quarter of fiscal 2006, the Company did not make any change in its
      internal control over financial reporting that has materially affected, or
      is
      reasonably likely to materially affect, its internal control over financials
      reporting. During this quarter, the Company did take certain steps to improve
      its internal control over financial reporting, as described below.





Control
      Environment.





(i)
            In
                January 2006, the Company hired an experienced full-time Vice President
                and Controller and a Director of Accounts Payable.





(ii)
            The
                Company also hired additional qualified personnel in the accounting
                and
                finance department.





(iii)
            The
                Company continued and enhanced its segregation of duties efforts.





(iv)
            The
                Company upgraded its organization charts, job descriptions and performance
                evaluations, and completed employee performance evaluations for corporate
                personnel who had been with the Company for one year as of December
                31,
                2005. The Company also documented fiscal 2007 performance goals and
                objectives for its corporate
                personnel.








72
 *Table
            of Contents*





Merchandise
      Inventory Management.




(i)
            The
                Company completed physical counts at all of its warehouses during
                January
                2006.





(ii)
            The
                Company completed physical counts at many of its stores using enhanced
                store counting and obsolete inventory identification and estimation
                procedures. Shortly after March 31, 2006, these physical counts were
                completed at the remaining stores.





Management
      Information Systems and Information Technology.





(i)
            The
                Company continued to make significant investments to upgrade its
                network
                and user access controls to appropriate levels for all
                departments.





(ii)
            In
                March 2006, the Company hired a full time, experienced Manager of
                Information Technology Security and
                Compliance.





Although
      the Company implemented a significant number of remediation initiatives in
      fiscal 2006 and is continuing to improve the Company’s internal control over
      financial reporting in fiscal 2007, there can be no assurance that the Company
      will eliminate the aforementioned material weaknesses in fiscal
      2007.





**Report
      of Independent Registered Public Accounting Firm**








The
      Board
      of Directors and Stockholders


99¢
Only
      Stores


Commerce,
      California





We
      have
      audited management’s assessment, included in the accompanying “Management’s
      Report on Internal Control Over Financial Reporting,” that 99¢ Only Stores (the
“Company”) did not maintain effective internal control over financial reporting
      as of March 31, 2006, because of the effect of material weaknesses relating
      to
      the inadequate controls over inventory and the financial reporting process,
      based on criteria established in Internal Control - Integrated Framework issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (the
      COSO criteria). 99¢ Only Stores’ management is responsible for maintaining
      effective internal control over financial reporting and for its assessment
      of
      the effectiveness of internal control over financial reporting. Our
      responsibility is to express an opinion on management’s assessment and an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting 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 effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of the 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 its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with policies or procedures may deteriorate.





73
 *Table
            of Contents*





A
      material weakness is a control deficiency, or combination of control
      deficiencies, that result 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:





1.
      As of
      March 31, 2006, there were internal control weaknesses surrounding the Company’s
      inventory accounts. The elements which comprise the material weaknesses are
      inclusive of the following: (1) the Company does not maintain accurate records
      of specific item quantity and location for its inventory and therefore relies
      primarily on physical counting of inventory. The nature, size and number of
      locations make it infeasible to physically count the entire inventory every
      quarter. In addition, the inventory records and controls do not enable cycle
      counting of segments of its inventory; (2) in receiving, there is not a formal
      process of notifying purchasing of vendor short shipments or overages or a
      physical spot check to ensure that items are not expired, damaged or intermixed
      with other goods; (3) there is not a comparison between items ordered from
      the
      Company’s warehouse by its retail stores and items shipped to the retail stores
      by inventory personnel. Furthermore, inventory is adjusted at the warehouse
      based on the items ordered by the retail stores, which may be different from
      the
      actual items shipped to the stores; (4) controls surrounding transfers of
      inventory are not operating effectively (warehouse to stores, or warehouse
      to
      warehouse). There is not a verification process at the retail stores to ensure
      that items received from warehouse locations match the bill of lading or related
      shipping documents from the warehouse. There is not a review system to ensure
      that items shipped have been properly relieved from the inventory system; (5)
      there is not a process for accounting for scrap other than at a physical count
      and (6) there were numerous failures of the store inventory counts at the retail
      locations due to inaccuracies of item pricing, labeling and had the existence
      of
      excess and obsolete inventory in the retail space and backrooms. These stores
      had to be recounted during fiscal year 2006.





2.
      As of
      March 31, 2006, the Company did not maintain effective controls over its
      quarterly and annual financial statement reporting process which resulted in
      a
      significant number of adjustments encountered during our audit and review
      procedures. These adjustments were in the areas of prepaid expenses, inventory
      reconciliations, inventory reserves, deferred rent, accounts payable, legal
      accruals, various liability accruals and stock based compensation in connection
      with the Company’s review of prior year accounting for stock option grants. We
      noted that there was insufficient oversight by management in its classification
      of short-term and long-term investments and that management did not have
      sufficient internal expertise to statistically evaluate the Company’s estimate
      of FIFO pricing of inventory layers. A material weakness in financial reporting
      impacts the Company’s ability to timely report financial information in
      conformity with U.S. generally accepted accounting principles (“GAAP”), which
      could affect all significant financial statement accounts and
      disclosures.





These
      material weaknesses were considered in determining the nature, timing and extent
      of audit tests applied in our audit of the 2006 consolidated financial
      statements, and this report does not affect our report dated April 2, 2007,
      on
      those consolidated financial statements.





In
      our
      opinion, management’s assessment that 99¢ Only Stores did not maintain effective
      internal control over financial reporting as of March 31, 2006, is fairly
      stated, in all material respects, based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Also in our opinion, because of the effect of the material weaknesses described
      above, 99¢ Only Stores has not maintained effective internal control over
      financial reporting as of March 31, 2006, based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet of 99¢ Only
      Stores as of March 31, 2005 and March 31, 2006 and the related consolidated
      statements of operations, changes in stockholders’ equity and comprehensive
      loss, and cash flows for the three months ended March 31, 2005 and for the
      year
      ended March 31, 2006, and our report dated April 2, 2007 expressed an
      unqualified opinion.




/s/
      BDO
      Seidman, LLP


BDO
      Seidman, LLP


Los
      Angeles, California


April
      2,
      2007





74
 *Table
            of Contents*





**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 directors and our
      executive officers as of February 28, 2007:





**Directors:**





**Name****:**
            **Age
                at**
              **February****28,
                2007**
            **Year
                First**
              **Elected
                or**
              **Appointed**
              **Director**
            **Principal
                Occupation**David
                Gold
            74
            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
            39
            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.Eric
              Schiffer
            46
            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
            72
            1996
            *Lawrence
                Glascott*serves
                on our Audit, Compensation and Nominating and Corporate Governance
                Committees. Mr. Glascott also serves as Chairman of the Board of
                General
                Finance Corporation as of November 2005. Before Mr. Glascott retired
                in
                1996, he had been Vice President - Finance of Waste Management
                International, an environmental services company, since 1991. 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
            77
            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; he currently serves on the
                Board of
                United Pacific Bank.Eric
                G. Flamholtz
            63
            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 - Los Angeles, since 1973 and
                in 2006
                became Professor Emeritus. He is 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 Robbins, Jamba Juice and
                Grocery
                Outlets.****





75
 *Table
            of Contents*




Thomas
                Unterman
            62
            2004
            *Thomas
                Unterman*serves
                on our Audit 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.





**Other
                Executive Officers:**Howard
                Gold
            47
            *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.Robert
                Kautz
            48
            *Robert
                Kautz*joined
                us in November 2005 as Executive Vice President and Chief Financial
                Officer. Mr. Kautz was the CEO/CFO of Eaturna LLC, a private start-up
                in
                food production and distribution, from September 2004 until he joined
                the
                Company. Mr. Kautz was CFO and subsequently CEO for Wolfgang Puck
                Casual
                Dining and Wolfgang Puck Worldwide where he was employed from January
                1998
                until July 31, 2004. Mr. Kautz is a graduate of the Harvard Business
                School.





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
      eleven meetings during fiscal 2006 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 three months ended March 31, 2005 and twelve months ended March
      31,
      2006, 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.





76
 *Table
            of Contents*





**Item11.**
            **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 2006, information
      concerning all compensation paid for services to us in all capacities during
      the
      periods indicated.




**Name
                  and Principal**
              
              **Fiscal
                  Year**
                **Ended**
                **(except
                  2005, which is a three month fiscal**
              
              **Annual
                  Compensation**
                **(except
                  2005, which is a three****month fiscal period) (1)**
              
              **Other
                  Annual**
              
              **Long-Term
                  Compensation Number of Securities Underlying**
              
              **All
                  Other****Position
                  During 2006**
              
              **period)
                  (1)**
              
              **Salary**
              
              **Bonus**
              
              **Compen****sation**
              
              **Options**
              
              **Compen****sation
                  ($)**Eric
                  Schiffer (a)
              
              
              3/31/2006
              
              $
              120,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Executive Officer
              
              
              3/31/2005
              
              
              32,308
              
              
              -
              
              
              -
              
              
              -
              
              
              -12/31/2004
              
              
              124,615
              
              
              -
              
              
              -
              
              
              -
              
              
              -12/31/2003
              
              
              117,692
              
              
              -
              
              
              -
              
              
              -
              
              
              -Jeff
                  Gold (b)
              
              
              3/31/2006
              
              $
              122,308
              
              
              -
              
              
              -
              
              
              -
              
              
              -President
                  & Chief
              
              
              3/31/2005
              
              
              34,615
              
              
              -
              
              
              -
              
              
              -
              
              
              -Operating
                  Officer
              
              
              12/31/2004
              
              
              124,615
              
              
              -
              
              
              -
              
              
              -
              
              
              -12/31/2003
              
              
              123,231
              
              
              -
              
              
              -
              
              
              -
              
              
              -Howard
                  Gold (c)
              
              
              3/31/2006
              
              $
              122,308
              
              
              -
              
              
              -
              
              
              -
              
              
              -Executive
                  Vice President
              
              
              3/31/2005
              
              
              34,615
              
              
              -
              
              
              -
              
              
              -
              
              
              -Of
                  Special Projects
              
              
              12/31/2004
              
              
              124,615
              
              
              -
              
              
              -
              
              
              -
              
              
              -12/31/2003
              
              
              124,615
              
              
              -
              
              
              -
              
              
              -
              
              
              -Mike
                  Zelkind
              
              
              3/31/2006
              
              $
              240,000
              
              $
              26,250
              
              
              -
              
              
              -
              
              
              -Former
                  Executive Vice
              
              
              3/31/2005
              
              
              50,000
              
              
              8,750
              
              
              -
              
              
              -
              
              
              -President
                  Of Supply
              
              
              12/31/2004
              
              
              35,000
              
              
              25,000
              
              
              -
              
              
              40,002
              
              
              -Chain
                  and Merchandising
              
              
              12/31/2003
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Robert
                  Kautz
              
              
              3/31/2006
              
              $
              129,500
              
              $
              20,000
              
              
              -
              
              
              150,000
              
              
              -Chief
                  Financial Officer
              
              
              3/31/2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -12/31/2004
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -12/31/2003
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -





(a)
            It
                includes $92,308, $99,692, $25,846, and $96,000 discretionary
                contributions made to a deferred compensation plan for the year ended
                December 31, 2003, December 31, 2004, March 31, 2005, and March 31,
                2006
                respectively.


(b)
            It
                includes $94,892, $99,692, $27,692, and $97,846 discretionary
                contributions made to a deferred compensation plan for the year ended
                December 31, 2003, December 31, 2004, March 31, 2005, and March 31,
                2006
                respectively.


(c)
            It
                includes $96,000, $99,692, $27,692, and $97,846 discretionary
                contributions made to a deferred compensation plan for the year ended
                December 31, 2003, December 31, 2004, March 31, 2005, and March 31,
                2006
                respectively.





(1)
            Fiscal
                year 2005 is the “stub-period” of January 1, 2005 through March 31, 2005
                due to the change from the calendar year-end December 31 reporting
                to
                fiscal year-end March 31 reporting.





77
 *Table
            of Contents*





**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 March 31, 2006 to the Named Executive
      Officers. No grants were made to the Named Executive Officers during the three
      months ended March 31, 2005.


Number
                  Of
                Securities
                Underlying
                Option
              
              Percent
                  Of Total
                Options
                  Granted
                To
                  Employees in
              
              Exercise
                  Or
                Base
              
              Expiration
              
              Potential
                Realizable
                  Value
                At
                  Assumed Annual
                Rates
                  of Stock Price
                Appreciation
                  for
                Option
                  TermName
              
              Granted
                  (a)
              
              Fiscal
                  year(b)
              
              Price
              
              Date
              
              5%
              
              10%Eric
                  Schiffer
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Jeff
                  Gold
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Howard
                  Gold
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Michael
                  Zelkind
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Robert
                  Kautz
              
              
              150,000
              
              
              85.7
              %
              $
              9.54
              
              
              11/11/2015
              
              $
              899,948
              
              $
              2,280,645





(a)
            The
                option grants set forth on this chart vest in three equal annual
                installments beginning on November 11, 2006 or on the first anniversary
                of
                the option grant.


(b)
            Options
                covering an aggregate of 175,000 shares were granted to eligible
                persons
                during the fiscal year ended March 31,
                2006.





**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 during the
      fiscal year ending March 31, 2006 or during the three months period ended March
      31, 2005.




**Shares**
                **Acquired
                  Upon**
              
              **Value**
              
              **Number
                  of Securities**
                **Underlying
                  Unexercised**
                **Options
                  at**
                **March
                  31, 2006**
              
              **Value
                  of Unexercised**
                **In-the-Money
                  Options**
                **At
                  March 31, 2006(a)****Name**
              
              **Exercise**
              
              **Realized**
              
              **Exercisable**
              
              **Unexercisable**
              
              **Exercisable**
              
              **Unexercisable**Eric
                  Schiffer
              
              
              -
              
              
              -
              
              
              75,006
              
              
              -
              
              $
              720,058
              
              
              -Jeff
                  Gold
              
              
              -
              
              
              -
              
              
              75,006
              
              
              -
              
              $
              720,058
              
              
              -Howard
                  Gold
              
              
              -
              
              
              -
              
              
              75,006
              
              
              -
              
              $
              720,058
              
              
              -Michael
                  Zelkind
              
              
              -
              
              
              -
              
              
              13,334
              
              
              26,666
              
              $
              4,467
              
              $
              8,934Robert
                  Kautz
              
              
              -
              
              
              -
              
              
              -
              
              
              150,000
              
              
              -
              
              $
              603,000





(a)
            Based
                on the last reported sale price of the common stock on the New York
                Stock
                Exchange on March 31, 2006($13.56)
                less the option exercise price.





78
 *Table
            of Contents*




**Compensation
      of Directors**





Each
      director who is not an officer of or otherwise employed by us receives $2,500
      per month, plus $750 for each board meeting attended. Such non-employee
      directors also receive $250 for each committee meeting attended or $350 for
      each
      committee meeting attended as committee chairperson ($700 for the audit
      committee chairperson). In addition, the Company’s stock option plan provides
      that each non-employee director receives an annual grant of a non-qualified
      option to purchase 3,000 shares of our common stock with a per share exercise
      price equal to the fair market value (as determined pursuant to the stock option
      plan).





**Compensation
      Committee Interlocks and Insider Participation**





The
      Compensation Committee of our Board of Directors currently consists of Messrs.
      Flamholtz, Glascott, and Holen. None of these individuals has
      at
      any time been an officer or employee of the Company. During fiscal 2006 and
      the
      transition quarter ended March 31, 2005, none of our executive officers served
      as a member of the board of directors or compensation committee of any entity
      for which a member of our Board of Directors or Compensation Committee has
      served as an executive officer.





**Employment
      Agreements with Executive Officers**





On
      November 14, 2005, the Company announced the appointment of Robert Kautz as
      Executive Vice President and Chief Financial Officer of the Company. In
      connection with this appointment, the Company and Mr. Kautz entered into an
      employment agreement (the “Agreement”) dated November 11, 2005. The Agreement
      provides that Mr. Kautz’s salary is $400,000 per year, subject to increase at
      the discretion of the Company and the Compensation Committee of the Board of
      Directors, and that he is eligible for an annual bonus of up to 50% of his
      salary. Mr. Kautz received an initial grant of 150,000 nonqualified stock
      options. Upon a termination during the five-year term of the Agreement either
      by
      the Company without cause or by Mr. Kautz upon the Company failing to cure
      a
      material breach of the Agreement after notice, Mr. Kautz is entitled to a
      payment equal to 12 months of his salary and the vesting of any unvested options
      from his initial grant. Upon a termination during the term of the Agreement
      either by the Company for cause or by Mr. Kautz for any other reason, Mr. Kautz
      is not entitled to any termination payment and all of his unvested options
      shall
      be forfeited.





79
 *Table
            of Contents*





**Item
      12. Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters**





The
      following table sets forth as of February 28, 2007, 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)(d)(e)
            
            
            15,864,832
            
            
            22.6
            %Sherry
                Gold (c)(d)(e)
            
            
            15,864,832
            
            
            22.6
            %Howard
                Gold (d)(e)
            
            
            9,225,600
            
            
            13.2
            %Jeff
                Gold (d)(e)
            
            
            9,225,600
            
            
            13.2
            %Eric
                and Karen Schiffer (d)(e)
            
            
            9,300,606
            
            
            13.3
            %Au
                Zone Investments #3, LLC (e)
            
            
            6,860,124
            
            
            9.8
            %Akre
                Capital Management, LLC (f)
            
            
            6,911,295
            
            
            9.9
            %Primecap
                Management Company (g)
            
            
            5,154,700
            
            
            7.4
            %Dimensional
                Fund Advisors LP (h)
            
            
            4,937,363
            
            
            7.1
            %Marvin
                Holen (i)
            
            
            62,000
            
            
            *Lawrence
                Glascott (j)
            
            
            53,835
            
            
            *Eric
                Flamholtz (k)
            
            
            2,000
            
            
            *Thomas
                Unterman (l)
            
            
            2,000
            
            
            *Rob
                Kautz (m)
            
            
            50,000
            
            
            *All
                of the Company’s current executive officers and directors as a
                group,
              9
                persons (n)
            
            
            23,206,101
            
            
            33.1
            %





*
            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 February 28, 2007 are deemed outstanding.


(b)
            Includes
                4,502,354 shares owned by Sherry Gold, David Gold’s
                spouse.


(c)
            Includes
                4,502,354 shares owned by David Gold, Sherry Gold’s
                spouse.


(d)
            Includes
                6,860,124 shares controlled through Au Zone Investments #3,
                LLC.


(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)
            This
                information is based on a Schedule 13G filed by Akre Capital Management,
                LLC, 2 West Marshall Street, Middleburg, Virginia 20118, on February
                13,
                2007.


(g)
            This
                information is based on a Schedule13G/A filed by Primecap Management
                Company, 225 South Lake Avenue #400, Pasadena, CA 91101, on February
                14,
                2007.


(h)
            This
                information is based on a Schedule 13G/A filed by Dimensional Fund
                Advisors LP, 1299 Ocean Avenue, Santa Monica, California 90401, on
                February 9, 2007.


(i)
            Includes
                48,503 shares of common stock reserved for issuance upon exercise
                of stock
                options, which are or will become exercisable on or before April
                29,
                2007.





80
 *Table
            of Contents*





(j)
            Includes
                48,503 shares of common stock reserved for issuance upon exercise
                of stock
                options, which are or will become exercisable on or before April
                29,
                2007.


(k)
            Includes
                2,000 shares of common stock reserved for issuance upon exercise
                of stock
                options, which are or will become exercisable on or before April
                29,
                2007.


(l)
            Includes
                2,000 shares of common stock reserved for issuance upon exercise
                of stock
                options, which are or will become exercisable on or before April
                29,
                2007.


(m)
            Includes
                50,000 shares of common stock reserved for issuance upon exercise
                of stock
                options, which are or will become exercisable on or before April
                29,
                2007


(n)
            Includes
                (i) 4,502,354 shares owned by Sherry Gold, the spouse of David Gold,
                and
                (ii) 6,860,124 shares controlled through Au Zone Investments #3,
                LLC, and
                (iii) 151,006 shares of common stock reserved for issuance upon exercise
                of stock option, which are currently
                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, of which 11
      stores are leased on a month to month basis and are in negotiation for renewal.
      Rental expense for these facilities was approximately $2.1 million in calendar
      years 2003, 2004 and fiscal 2006. Rental expense for these facilities was
      approximately $0.5 million for the three months ended March 31, 2005. 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 former directors, Ben Schwartz, who resigned in
      the quarter ended March 31, 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 2003 and 2004. Rent expense on this store was $46,000 for
      the
      three months ended March 31, 2005 and $0.2 million for the year ended March
      31,
      2006.




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
      former Executive Vice President of Supply Chain and Merchandizing, to perform
      various legal services. The Company paid Zelkind and Schakelford LLP less than
      $60,000 in fiscal 2004 and $94,000 in the fiscal year ended March 31, 2006.
      No
      payments were made for the three months ended March 31,
      2005.




Prior
      to
      the sale of Universal in 2000, the Company signed documents purporting to
      guarantee certain obligations under leases in which Universal, or a
      subsidiary, was the lessee.  Subsequent to the sale, Universal may have
      defaulted on these lease agreements.  The Company was potentially
      contingently liable for lease payments totaling up to $1.1 million as of
      March 31, 2006, as well as additional costs for attorney fees, rent increases
      and common area maintenance charges, in connection with three lawsuits brought
      by the lessors under these leases. As of June 2006 one of the matters settled,
      and the Company has been fully reimbursed for the settlement pursuant to the
      guarantees by David and Sherry Gold. The Company and the plaintiffs in the
      two
      remaining cases have agreed on a tentative settlement of the cases, pursuant
      to
      which the Company would be responsible for an aggregate payment of $150,000.
      This settlement has not yet been reduced to writing or approved by the Court.
      The Company anticipates full reimbursement of any such settlement payment or
      other obligation in connection with these cases under the guarantees of David
      and Sherry Gold. 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, which indemnity David and Sherry Gold confirmed in writing in
      April 2004 and re-executed on August 5, 2005.





81
 *Table
            of Contents*





**Item
      14. Principal Accountant Fees and
      Services**




For
      the
      fiscal year ended March 31, 2006, the three months ended March 31, 2005 and
      the
      year ended December 31, 2004, the Company’s principal accountants billed the
      aggregate fees set forth below for work performed for the periods
      indicated.





Year
                Ended
              March
                31,
              2006
            
            Period
                Ended
              March
                31,
              2005
            
            Year
                Ended
              December
                31
              2004Audit
                Fees (a)
            
            $
            2,760,000
            
            $
            829,000
            
            $
            2,346,000Audit
                Related Fees
            
            
            -
            
            
            -
            
            
            -Tax
                Fees
            
            
            -
            
            
            -
            
            
            -All
                Other Fees
            
            
            -
            
            
            -
            
            
            -





(a)
            Includes
                fees necessary to perform an audit or quarterly review in accordance
                with
                the standards of the Public Company Accounting Oversight Board (United
                States) and fees for 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. The amount also includes
                fees
                related to BDO Seidman, LLP’s attestation of the Company’s internal
                control over financial reporting as of March 31, 2006 and the Company’s
                former principal accountant, Deloitte & Touche LLP, for its
                attestation of the Company’s internal control over financial reporting as
                of December 31, 2004. Three months ended March 31, 2006 is the
                “stub-period” due to the change from calendar year-end December 31
                reporting to fiscal year-end March 31 reporting. Audit fees paid
                during
                the “stub-period” were paid to BDO Seidman
                LLP.





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 filed as
      Exhibit 99.1 to the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2004, granting pre-approval to certain specific audit and
      audit-related services and specifying the procedures for pre-approving other
      services.








82
 *Table
            of Contents*




**PART
      IV**





**Item15.
      Exhibits, Financial Statement Schedules**





a)
      Financial Statements. Reference is made to the Index to the Financial Statements
      set forth in item 8 on page 39 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**


**(Amounts
      in thousands)**





**Beginning
                of Period**
            
            **Addition**
            
            **Reduction**
            
            **End
                of Period**For
                the year ended March 31, 2006Allowance
                for doubtful accounts
            
            $
            189
            
            
            77
            
            
            129
            
            $
            137Inventory
                reserve
            
            $
            6,849
            
            
            2,840
            
            
            925
            
            $
            8,764Tax
                valuation allowance
            
            $
            4,766
            
            
            751
            
            
            -
            
            $
            5,517For
                the three months ended March 31, 2005Allowance
                for doubtful accounts
            
            $
            268
            
            
            -
            
            
            79
            
            $
            189Inventory
                reserve
            
            $
            4,997
            
            
            1,852
            
            
            -
            
            $
            6,849Tax
                valuation allowance
            
            $
            4,607
            
            
            159
            
            
            -
            
            $
            4,766For
                the year ended December 31, 2004Allowance
                for doubtful accounts
            
            $
            143
            
            
            125
            
            
            -
            
            $
            268Inventory
                reserve
            
            $
            1,711
            
            
            3,610
            
            
            324
            
            $
            4,997Tax
                valuation allowance
            
            $
            3,900
            
            
            707
            
            
            -
            
            $
            4,607For
                the year ended December 31, 2003Allowance
                for doubtful accounts
            
            $
            149
            
            
            -
            
            
            6
            
            $
            143Inventory
                reserve
            
            $
            1,522
            
            
            189
            
            
            -
            
            $
            1,711Tax
                valuation allowance
            
            $
            3,900
            
            
            -
            
            
            -
            
            $
            3,900




83
 *Table
            of Contents*




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.(3)10.1
            Form
                of Indemnification Agreement and Schedule of Indemnified
                Parties.(1)10.2
            Indemnification
                Agreement with David Gold.(4)10.3
            Form
                of Tax Indemnification Agreement, between and among the Registrant
                and the
                Existing Shareholders.(3)10.4
            1996
                Stock Option Plan, as Amended. (4)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.(1)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 (“6161 Atlantic Blvd. Lease”).(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 (“6121 Wilshire Blvd.
                Lease”), as amended.(1)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
                (“8625 Woodman Avenue Lease”).(1)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 (“2566 East Florence Avenue Lease”), as amended
                .(1)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
            [Reserved]10.19
            Lease
                for 12123-12125 Carson Street, Hawaiian Gardens, California dated
                February
                14, 1995, as amended.*(a)10.20
            North
                Broadway Indemnity Agreement, dated as of May 1, 1996, by and between
                HKJ
                Gold, Inc. and the Registrant.(6)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.(6)10.22
            Agreement
                with Gold family and affiliates related to nonpayment of rent
                increases*10.23
            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.(3)10.24
            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.(3)10.25
            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.(3)10.26
            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.(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 (4)10.29
            Robert
                Kautz Employment Agreement(5)10.30
            Second
                Amendment to 6161 Atlantic Blvd. Lease, dated January 1,
                2005.*




84
 *Table
            of Contents*




23.1
            Consent
                of BDO Seidman, LLP*23.2
            Consent
                of Deloitte & Touche LLP*23.3
            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.*32(b)
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002. **
                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
                March 26,
                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 Amendment No. 2 to
                Registration Statement on Form S-1/A as filed with the Securities
                and
                Exchange Commission on May 21, 1996.(4)
                Incorporated by reference from the Company’s 2004 Annual Report on Form
                10-K as filed with the Securities and Exchange Commission on September
                9,
                2005.(5)
                Incorporated by reference from the Company’s Current Report on Form 8-K as
                filed with Securities and Exchange Commission on November 17,
                2005.(6)
                Incorporated by reference from the Company’s Amendment No. 1 to
                Registration Statement on Form S-1/A as filed with the Securities
                and
                Exchange Commission on May 3, 1996.(a)
                Includes correction of previously filed Exhibit 10.19




85
 *Table
            of Contents*




**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
            April
                2, 2007/s/
                Eric SchifferEric
                Schiffer
            
            Chief
                Executive Officer and Director
            April
                2, 2007/s/
                Jeff GoldJeff
                Gold
            
            President,
                Chief Operating Officer and Director
            April
                2, 2007/s/
                Robert KautzRobert
                Kautz
            
            Chief
                Financial Officer (Principal financial officer and principal accounting
                officer)
            April
                2, 2007/s/
                Eric FlamholtzEric
                Flamholtz
            
            Director
            April
                2, 2007/s/
                Lawrence GlascottLawrence
                Glascott
            
            Director
            April
                2, 2007/s/
                Marvin L. HolenMarvin
                L. Holen
            
            Director
            April
                2, 2007/s/
                Thomas UntermanThomas
                Unterman
            
            Director
            April
                2, 2007






86