**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, 2007**


**OR**





** ̈          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 Each Exchange On Which Registered****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 x  No  ̈





Indicate
      by check mark if disclosure of
      delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this
      chapter)  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 registrant’s classes of common
      stock as of the latest practicable date.


Common
      Stock, No Par Value, 69,981,377 Shares as of May 31, 2007




DOCUMENTS
      INCORPORATED BY REFERENCE




Portions
      of the Registrant’s Proxy Statement for its 2007 Annual Meeting of Shareholders
      are incorporated by reference into Part III of this Annual Report on Form
      10-K.














**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
            19Part
                IIItem
                5.
            Market
                for Registrant's Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity Securities
            20Item
                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
            35Item
                8.
            Financial
                Statements and Supplementary Data
            36Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            66Item
                9A.
            Controls
                and Procedures
            66Item
                9B.
            Other
                Information
            69Part
                IIIItem
                10.
            Directors
                and Executive Officers of the
                Registrant
            70Item
                11.
            Executive
                Compensation
            70Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            70Item
                13.
            Certain
                Relationships and Related
                Transactions
            70Item
                14.
            Principal
                Accounting Fees and Services
            70Part
                IV
            70Item
                15.
            Exhibits,
                Financial Statement Schedules
            70Signatures
            74Exhibit
                Index
            72




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 Securities 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 CHANGE IN FISCAL YEAR**





On
      December 30, 2005 the Company changed its fiscal year-end from December 31
      to
      March 31.  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” or “fiscal 2004” relates to as of or for the year
      ended December 31, 2004.  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**




**Item
      1. Business**




99¢
Only
      Stores (the “Company”) is an extreme value 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, 2007, the Company
      operated 251 retail stores with 177 in California, 41 in Texas, 22 in
      Arizona, and 11 in Nevada. These stores averaged approximately 22,000 gross
      square feet. In fiscal 2007, the Company’s stores open for the full year
      generated average net sales per estimated saleable square foot of $254, which
      the Company believes is among the highest in the extreme value retail industry,
      and average net sales per store of $4.4 million, which the Company believes
      is
      the highest among all dollar store chains. The Company entered the Texas market
      in June 2003. In fiscal 2007, 196 non-Texas stores open for the full year
      averaged net sales of $4.8 million per store and $284 per estimated saleable
      square foot and the 36 Texas stores open for the full year averaged net sales
      of
      $2.4 million per store and $120 per estimated saleable square foot.




The
      Company competes in the extreme value retail industry, also known as the deep
      discount 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. For fiscal 2007 the Company
      expanded its store base, opening 19 stores.  Of these newly opened
      stores, five stores are located in Texas.  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
      extreme value retailer.





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 3.6% of the Company’s total sales in fiscal
      2007.  Further information on the Company’s two business segments,
      retail operations and wholesale distribution, is provided below in Item 8.
      Financial Statements and Supplementary Data.





3
 *Table
            of Contents*





**Industry**




The
      Company participates primarily in the extreme value retail industry, with its
      99¢ Only Stores. Extreme value 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 reorderable merchandise which is also often
      purchased below normal wholesale prices. Extreme value 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
      extreme value 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. Extreme
      value 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 purchases of the retail operations and sold through its
      Bargain Wholesale division.  The Company maintains showrooms at its
      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.





**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 2007, 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.





4
 *Table
            of Contents*





**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 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-oriented
      and
      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 stores that are 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.




**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, 2007, the Company’s 251 existing 99¢
Only Stores averaged approximately 22,000 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, the Company believes that this strategy had a negative impact
      on its historical comparable sales growth during the 2004 to 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, 2007,
      the Company’s employees held options to purchase an aggregate of 6,324,000
      shares of Common Stock, or 9.0% of the outstanding shares of Common Stock.
      With
      recent changes in accounting pronouncements affecting the financial reporting
      of
      stock options, the Company’s Board of Directors and management have determined
      not to distribute stock options to all employees and instead implemented a
      401(k) plan with “Safe Harbor” matching totaling up to a maximum of 4% of annual
      salary and enhancements to its paid time off policy.





5
 *Table
            of Contents*





**Growth
      Strategy**




The
      Company’s long-term growth plan is to become a premier nationwide extreme value
      retailer. Management believes that shorter term 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.




**Expansion
      in Texas.** The Company opened its first Texas stores in June 2003 and
      has a 741,000 square foot Houston-area distribution center, with warehouse
      racking, an automated pick-to-belt conveyor system, a “High Jump” warehouse
      management system and refrigerated and frozen storage space.  As of
      March 31, 2007, the Company had opened a total of 27 stores in the Houston
      area,
      13 in the Dallas Fort Worth Metroplex and one store in San Antonio area. The
      Texas stores average 19,675 saleable square feet and 25,349 gross square feet,
      which is larger than the Company average of 17,283 saleable square feet and
      22,003 gross square feet for 2007.  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 for certain items priced from 9¢ up to 99¢, as long as the
      price ends in a 9, which the Company has tested in its Texas markets and is
      currently utilizing as a limited pricing strategy in all its
      markets.




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,****2002**
            
            
            **2003**
            
            
            **2004**
            
            
            **2006**
            
            
            **2007**Net
                retail sales
            
            $
            663,983
            
            
            $
            816,348
            
            
            $
            929,896
            
            
            $
            984,293
            
            
            $
            1,064,518Annual
                net sales growth rate
            
            
            27.2
            %
            
            
            22.9
            %
            
            
            13.9
            %
            
            
            5.8
            %
            
            
            8.2
            %Store
                count at beginning of year
            
            
            123
            
            
            
            151
            
            
            
            189
            
            
            
            219
            (b)
            
            
            232New
                stores
            
            
            28
            
            
            
            38
            
            
            
            33
            
            
            
            15
            
            
            
            19Stores
                closed
            
            
            -
            
            
            
            -
            
            
            
            3
            (a)
            
            
            2
            (c)
            
            
            -Total
                store count at year-end
            
            
            151
            
            
            
            189
            
            
            
            219
            
            
            
            232
            
            
            
            251Average
                net sales per store open the full year (d)
            
            $
            4,750
            
            
            $
            4,957
            
            
            $
            4,603
            (e)
            
            $
            4,347
            (f)
            
            $
            4,421
            (g)Estimated
                store saleable square footage at year-end
            
            
            2,428,681
            
            
            
            3,190,528
            
            
            
            3,796,153
            
            
            
            4,040,096
            
            
            
            4,337,974Average
                net sales per estimated saleable square foot (d)
            
            $
            309
            
            
            $
            308
            
            
            $
            270
            (e)
            
            $
            250
            (f)
            
            $
            254
            (g)Change
                in comparable net sales(h)
            
            
            3.6
            %
            
            
            4.5
            %
            
            
            -1.8
            %
            
            
            0.3
            %
            
            
            2.4
            %





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





(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 for
      the
      construction of a light railway project.




(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)
      Includes 36 Texas stores open for a full year. Texas stores open for the full
      year had average sales of $2.4 million per store for 12 months ended March
      31,
      2007 and average sales per saleable square foot of $120. All non-Texas stores
      open for the full year had average sales of $4.8 million per store and $284
      of
      average sales per saleable square foot.





(h)
      Change in comparable store net sales compares net sales for all stores open
      at
      least 15 months.





7
 *Table
            of Contents*





**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, 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, encourage 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.




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 $5.6 million, $4.4 million and $5.0 million for
      fiscal 2004, 2006 and 2007 respectively, or 0.6%, 0.4% and 0.5% 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 only 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 2007. During fiscal 2007, 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.





8
 *Table
            of Contents*





A
      significant portion of the merchandise purchased by the Company in fiscal 2007
      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
      buying 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.





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, housewares,
      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
      2007, the Company made significant investments in a variety of infrastructural
      and process areas. These improvements included upgrades to its data center,
      networking infrastructure, and Wide Area Network (“WAN”) intended to improve
      security and reliability of processing. The Company adopted formal control
      objectives and deployed a compliance and self assessment program for key
      controls in its information systems and technology internal controls
      framework.





9
 *Table
            of Contents*





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.





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 is continuing 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 and in-house
      developed electronic polling to collect sales data for analysis, reporting
      and
      processing.





**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 extreme value 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 extreme value retail industry
      that could have an adverse effect on the Company’s business and results of
      operations.




**Employees**




At
      March
      31, 2007, the Company had approximately 10,000 employees including 9,000 in
      its
      retail operation, 500 in its warehousing and distribution operation, 340 in
      its
      corporate offices and 50 in its Bargain Wholesale division. The Company
      considers relations with its employees to be good. The Company offers certain
      benefits to benefit-eligible employees, including life, health and disability
      insurance, paid time off (vacation, holidays, and sick leave), a 401(k) plan
      with Company match and a deferred compensation plan for officers of the
      Company.  Additionally, almost all active hourly employees with six
      months tenure, and all members of the Board of Directors (other than David
      Gold,
      Eric Schiffer, Jeff Gold, and Howard Gold) had previously been eligible for
      an
      annual grant of stock options. With recent changes in accounting pronouncements
      affecting the financial accounting of stock options, the Company’s Board of
      Directors and management have determined not to distribute stock options to
      all
      employees and instead implemented a 401 (k) plan with “Safe Harbor” matching
      totaling up to a maximum of 4% of annual salary and enhancements to its paid
      time off policy.





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




10
 *Table
            of Contents*




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.





**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 or at higher price points below $0.99 ending in a 9 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 reported an adverse opinion on the effectiveness of its internal control
      over financial reporting as of March 31, 2007 because of material weaknesses
      identified in management’s assessment of the effectiveness of such internal
      control as of that date related to inventory accounting and fixed assets. These
      material weaknesses, if not remediated, create an increased risk of misstatement
      of 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.





11
 *Table
            of Contents*





**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 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.




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, local
      regulations, 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.  As the Company expands beyond its base in the Southwestern
      United States, differences in the available labor pool and potential customers
      could adversely impact the Company.




**The
      Company’s operations are concentrated in California; Natural disaster and
      similar risks in its markets**




As
      of
      March 31, 2007, all but 74 of the Company’s 251 stores were located in
      California (with 41 stores in Texas, 22 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 California
      will soon do so again, and this state typically has other factors making
      compliance, litigation and workers’ compensation claims more prevalent and
      costly.  Additional local regulation in certain California cities,
      such as newly enacted recycling laws and limitations on bags that may be used,
      can further pressure margins.




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.  In
      addition, because of the closeout nature of many of the Company’s products, a
      loss of inventory due to such a disaster would likely take the Company longer
      to
      remediate than if the Company only relied upon re-orderable
      merchandise.





12
 *Table
            of Contents*





**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 the Company’s
      warehouses could also hurt the Company’s 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 the Company’s receiving,
      processing, and shipment of merchandise.




**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, particularly as it grows and
      therefore requires a greater availability of such merchandise at competitive
      prices. 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
      extreme value 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 the Company’s
      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.  This can also result in shrink due to spoilage if
      merchandise cannot be sold in anticipated timeframes.  The Company’s
      short-term and long-term store and warehouse inventory approximated $143.9
      million and $155.8 million at March 31, 2006 and March 31, 2007, 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.





13
 *Table
            of Contents*





**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 extreme value retail industry.
      It
      is also becoming more common for superstores to sell products competitive with
      the Company’s 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.




**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.
      However, 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, packing 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 as could labor
                disruptions at ports;


-
            changes
                in import and export regulations, including “trade wars” and retaliatory
                responses; and


-
            changes
                in tariff and freight rates.





14
 *Table
            of Contents*





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 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 it currently leases from them. Also, even if terms were negotiated
      that were acceptable to the Company, it cannot be certain that such terms would
      meet the standard required for approval by the independent directors. 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
      the
      Company’s net sales and operating results.





**The
      Company relies heavily on its executive management team and is transitioning
      to
      new leadership**




The
      Company experienced a change in executive management in 2005 and has added
      a
      number of new officer level positions in the areas of buying, real estate,
      information technology, finance, store operations, logistics, loss prevention,
      distribution and merchandise planning and allocation. The officers in these
      positions come from many different companies and this team must develop a
      coordinated management style.  New management teams are generally more
      likely to experience turnover and may take more time to develop effective
      teamwork.





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 2006 and 2007, the Company generated approximately 27.2%
      and 27.3%, 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 extreme value 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, and the Company is still
      potentially subject to liability under, or violations of, these environmental
      laws and regulations in the future even if its policies are 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 May 15, 2007, an aggregate of 23,036,266, 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 extreme value 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, 2007, the Company owned 41 stores and leased 210 of its 251 store
      locations. Additionally, as of March 31, 2007, the Company owns four parcels
      of
      land for potential store sites. The Company has an interest in three variable
      interest entities, in which it leases stores. The Company also has an undivided
      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.





Effective
      September 30, 2000, the Company sold its discontinued operation, Universal
      International, Inc (“Universal”) to a company owned 100% by David and Sherry
      Gold.  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 but David and Sherry
      Gold
      have agreed to indemnify the Company for any and all payments under such
      guarantees.   For further information see Note 5 “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, 2007, information relating to the
      calendar year expiration dates of the Company’s current stores
      leases:







**Expiring**
            
            **Expiring**
            
            **Expiring**
            
            **Expiring****2007**
            
            **2008-2010**
            
            **2011-2013**
            
            **2014
                and beyond**17(a)
            
            79
            
            67
            
            47





(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 number of stores expiring with no additional options for
        renewal are set forth below:


**Expiring
                Without**
              **Renewal
                Options**
              **2007**
            
            **Expiring
                Without**
              **Renewal
                Options**
              **2008-2010**
            
            **Expiring
                Without**
              **Renewal
                Options**
              **2011-2013**
            
            **Expiring
                Without**
              **Renewal
                Options**
              **2014
                and beyond**13(a)
            
            2
            
            4
            
            191





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





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 from
      time to time additional warehouse facilities located near the City of Commerce,
      California.





The
      Company also owns a warehouse in Eagan, Minnesota.





18
 *Table
            of Contents*





**Item
      3. Legal Proceedings**





**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 and associated
      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.  This matter has been coordinated with the Washington case
      described below.  Based on discussions during recent settlement
      negotiations, the Company reserved $1.5 million at March 31, 2006 and March
      31,
      2007 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 final and court approved 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 the 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.  This matter has been coordinated with the Vargas case
      described above. See the Vargas matter described above for reserves pertaining
      to this matter and a description of settlement status.





**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.





19
 *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 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
            
            
            12.92
            
            
            
            10.04Third
                Quarter
            
            
            12.71
            
            
            
            10.70Fourth
                Quarter
            
            
            16.13
            
            
            
            12.22





As
      of May
      15, 2007, the Company had 412 shareholders of record and 14,611 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
      2,870,000 are available as of March 31, 2007 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. Prior to
      April 1, 2006, the Company accounted for its stock option plan under APB Opinion
      No. 25 under which no compensation cost has been recognized in fiscal 2004
      and
      the three months ended March 31, 2005.  The Company recognized $0.2
      million in option related compensation expense during fiscal 2006.  In
      fiscal 2007, the Company adopted SFAS No. 123(R), “Share-Based Payment” and
      recognized $5.2 million in option related compensation expense (see Note 7
      to
      Consolidated Financial Statements for detailed discussion).  The plan
      will expire in 2011.





20
 *Table
            of Contents*





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




The
      following table provides information as of March 31, 2007 about the Company’s
      Common Stock that may be issued upon the exercise of options granted to
      employees or members of the Company’s Board of Directors under the Company’s
      existing 1996 Stock Option Plan.





EQUITY
                COMPENSATION PLAN INFORMATIONPlan
                category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
              (a)
            
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
              (b)
            
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))
              (c)Equity
                compensation plans approved by security holders
            
            
            6,324,000
            
            
            $
            16.80
            
            
            
            2,870,000Equity
                compensation plans not approved by security holders
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            6,324,000
            
            
            $
            16.80
            
            
            
            2,870,000




21
 *Table
            of Contents*





**Performance
      Graph**





The
      following graph sets forth the percentage change in cumulative total shareholder
      return of the Company’s common stock during the period from December 31, 2001 to
      March 31, 2007, compared with the cumulative returns of the S&P Mid Cap 400
      Index and the Russell 2000 Index.  The comparison assumes $100 was
      invested on December 31, 2001 in the common stock and in each of the foregoing
      indices shown. The stock price performance on the following graph is not
      necessarily indicative of future stock price performance.






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 (a):**
            
            **2002**
            
            
            **2003**
            
            
            **2004**
            
            
            **2006**
            
            
            **2007(h)**Net
                sales:99¢
                Only Stores
            
            $
            663,983
            
            
            $
            816,348
            
            
            $
            929,896
            
            
            $
            984,293
            
            
            $
            1,064,518Bargain
                Wholesale
            
            
            49,959
            
            
            
            46,112
            
            
            
            42,277
            
            
            
            39,296
            
            
            
            40,178Total
                sales
            
            
            713,942
            
            
            
            862,460
            
            
            
            972,173
            
            
            
            1,023,589
            
            
            
            1,104,696Cost
                of sales (excluding depreciation and amortization expense as shown
                separately below)
            
            
            427,356
            
            
            
            516,686
            
            
            
            592,575
            
            
            
            640,140
            
            
            
            672,101Gross
                profit
            
            
            286,586
            
            
            
            345,774
            
            
            
            379,598
            
            
            
            383,449
            
            
            
            432,595Selling,
                general and administrative expenses:Operating
                expenses
            
            
            178,561
            
            
            
            235,428
            
            
            
            312,263
            
            
            
            340,371
            
            
            
            393,351Depreciation
                and amortization
            
            
            14,481
            
            
            
            19,391
            
            
            
            28,246
            
            
            
            31,424
            
            
            
            32,675Total
                operating expenses
            
            
            193,042
            
            
            
            254,819
            
            
            
            340,509
            
            
            
            371,795
            
            
            
            426,026Operating
                income
            
            
            93,544
            
            
            
            90,955
            
            
            
            39,089
            
            
            
            11,654
            
            
            
            6,569Other
                income, net
            
            
            (4,847
            )
            
            
            (4,457
            )
            
            
            (3,263
            )
            
            
            (5,084
            )
            
            
            (7,432
            )Income
                before provision for income taxes
            
            
            98,391
            
            
            
            95,412
            
            
            
            42,352
            
            
            
            16,738
            
            
            
            14,001Provision
                for income taxes
            
            
            37,659
            
            
            
            36,710
            
            
            
            14,521
            
            
            
            5,316
            
            
            
            4,239Net
                income
            
            $
            60,732
            
            
            $
            58,702
            
            
            $
            27,831
            
            
            $
            11,422
            
            
            $
            9,762Earnings
                per common share:Basic
            
            $
            0.87
            
            
            $
            0.82
            
            
            $
            0.39
            
            
            $
            0.16
            
            
            $
            0.14Diluted
            
            $
            0.85
            
            
            $
            0.81
            
            
            $
            0.39
            
            
            $
            0.16
            
            
            $
            0.14Weighted
                average number of common shares outstanding:Basic
            
            
            69,938
            
            
            
            71,348
            
            
            
            70,627
            
            
            
            69,553
            
            
            
            69,862Diluted
            
            
            71,181
            
            
            
            72,412
            
            
            
            71,016
            
            
            
            69,737
            
            
            
            70,017**Company
                Operating Data:**Sales
                Growth99¢
                Only Stores
            
            
            27.2
            %
            
            
            22.9
            %
            
            
            13.9
            %
            
            
            5.8
            %
            
            
            8.2
            %Bargain
                Wholesale
            
            
            (11.2
            )%
            
            
            (7.7
            )%
            
            
            (8.3
            )%
            
            
            (7.1
            )%
            
            
            2.2
            %Total
                sales
            
            
            23.5
            %
            
            
            20.8
            %
            
            
            12.7
            %
            
            
            5.3
            %
            
            
            7.9
            %Gross
                margin
            
            
            40.1
            %
            
            
            40.1
            %
            
            
            39.0
            %
            
            
            37.5
            %
            
            
            39.2
            %Operating
                margin
            
            
            13.1
            %
            
            
            10.6
            %
            
            
            4.0
            %
            
            
            1.1
            %
            
            
            0.6
            %Net
                income
            
            
            8.5
            %
            
            
            6.8
            %
            
            
            2.9
            %
            
            
            1.1
            %
            
            
            0.9
            %





23
 *Table
            of Contents*





**Year
                Ended December 31,**
            
            
            **Year
                Ended March 31,****(Amounts
                in thousands, except per share and operating
                data)****Retail
                Operating Data (b):**
            
            **2002**
            
            
            **2003**
            
            
            **2004**
            
            
            **2006**
            
            
            **2007(h)**99¢
                Only Stores at end of period
            
            
            151
            
            
            
            189
            
            
            
            219
            
            
            
            232
            
            
            
            251Change
                in comparable storesnet
                sales (c)
            
            
            3.6
            %
            
            
            4.5
            %
            
            
            (1.8
            )%
            
            
            0.3
            %
            
            
            2.4
            %Average
                net sales per store open the full year
            
            $
            4,750
            
            
            $
            4,957
            
            
            $
            4,603
            
            
            $
            4,347
            
            
            $
            4,421Average
                net sales per estimated saleable square  foot
                (d)
            
            $
            309
            
            
            $
            308
            
            
            $
            270
            (e)
            
            $
            250
            (f)
            
            $
            254
            (g)Estimated
                saleable square footage at year end
            
            
            2,428,681
            
            
            
            3,190,528
            
            
            
            3,796,153
            
            
            
            4,040,096
            
            
            
            4,337,974Balance
                Sheet Data:Working
                capital
            
            $
            215,747
            
            
            $
            217,825
            
            
            $
            184,778
            
            
            $
            201,475
            
            
            $
            209,890Total
                assets
            
            $
            450,078
            
            
            $
            563,714
            
            
            $
            600,204
            
            
            $
            628,708
            
            
            $
            643,135Capital
                lease obligation, including current portion
            
            $
            1,637
            
            
            $
            1,593
            
            
            $
            811
            
            
            $
            774
            
            
            $
            699Long-term
                debt, including current portion
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            6,174
            
            
            $
            7,299Total
                shareholders’ equity
            
            $
            401,511
            
            
            $
            496,954
            
            
            $
            488,284
            
            
            $
            501,526
            
            
            $
            519,227





(a)
            The
                financial statements were audited by PriceWaterhouseCoopers, the
                Company’s
                external auditor for 2002 and 2003, by Deloitte & Touche LLP for 2004,
                and by BDO Seidman, LLP for fiscal 2006 and
                2007.


(b)
            Includes
                retail operating data solely for the Company’s 99¢ Only
                Stores.


(c)
            Change
                in comparable stores net sales compares net sales for all stores
                open at
                least 15 months.


(d)
            Computed
                based upon estimated total saleable square footage of stores open
                for the
                entire period.


(e)
            Includes
                17 Texas stores open for a full year. Texas stores open for the full
                year
                had average sales of $2.2 million per store for 2004 and average
                sales per
                saleable square foot of $101. All other stores open for the full
                year had
                average sales of $4.8 million per store and $293 of average sales
                per
                saleable square foot.


(f)
            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.


(g)
            Includes
                36 Texas stores open for a full year. Texas stores open for the full
                year
                had average sales of $2.4 million per store for fiscal 2007 and average
                sales per saleable square foot of $120. All other stores open for
                the full
                year had average sales of $4.8 million per store and $284 of average
                sales
                per saleable square foot.


(h)
            In
                fiscal 2007, the Company adopted SFAS No. 123(R), “Share-Based Payment,”
                which requires the measurement at fair value and recognition of
                compensation expense for all share-based payment awards.  See
                Note 7 to the Consolidated Financial Statements for more
                information.




24
 *Table
            of Contents*





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





**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
      2007, 99¢ Only Stores had net sales of $1,104.7 million, operating income of
      $6.6 million and net income of $9.8 million.  Sales increased 7.9%
      over fiscal 2006 primarily due to the 19 new store openings since the end of
      fiscal 2006 and a 2.4% increase in same-store sales. Operating income and net
      income decreased 43.6% and 14.5%, respectively, from fiscal 2006. Average sales
      per store open the full year increased from $4.3 million in fiscal 2006 to
      $4.4
      million, in fiscal 2007. Average net sales per estimated saleable square foot
      (computed for 99¢ Only Stores open for the full year) increased from $250 per
      square foot at March 31, 2006 to $254 per square foot at March 31, 2007. This
      increase reflects the Company’s opening of smaller locations for new store
      development and improving performance of the Texas stores. Existing stores
      at
      March 31, 2007 average approximately 22,000 gross square feet.  The
      Company is targeting locations between 15,000 and 19,000 gross square
      feet.  Despite the increase in average store sales and average net
      sales per estimated saleable square foot as well as increase in the gross profit
      margin,  operating income and net income were negatively impacted by
      certain operating expenses increasing proportionately more than revenues in
      fiscal 2007.





In
      fiscal
      2007, the Company continued to expand its store base with 19 store openings
      in
      California, Texas, Nevada and Arizona.  By the end of fiscal 2008, the
      Company intends to increase its store opening growth rate to approximately
      15%
      and believes that near term growth in 2008 will primarily result from new store
      openings in its existing territories and increases in same store
      sales.




On
      December 30, 2005 the Company changed its fiscal year-end from December 31
      to
      March 31.  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” or “fiscal 2004”relates to as of, or for the year
      ended December 31, 2004. 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.





25
 *Table
            of Contents*





**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, taxes and
      share-based compensation.





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 and 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.





**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
      annually or 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 the Company’s 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 2004, the three
      months ended March 31, 2005 and fiscal 2007.  In 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, 2004, March
      31, 2005, 2006 and 2007 due to the volatility and unpredictability of its
      workers’ compensation experience over the past several years.




26
 *Table
            of Contents*





**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 assets will
      not
      be realized. The Company had approximately $40.3 million and $46.1 million
      in
      net deferred tax assets that are net of tax valuation allowances of $5.5 million
      and $4.0 million at March 31, 2006 and March 31, 2007, 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, 2007 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.





**Share-Based
        Compensation:** In the first quarter of fiscal 2007, the Company adopted
        SFAS No. 123(R), “Share-Based Payment,” (“SFAS No. 123(R)”), which requires the
        measurement at fair value and recognition of compensation expense for all
        share-based payment awards.  The determination of the fair value of
        the Company’s stock options at the grant date requires judgment. The
        Company uses the Black-Scholes option pricing model to estimate the fair
        value
        of these share-based awards consistent with the provisions of SFAS No. 123(R).
        Option pricing models, including the Black-Scholes model, also require the
        use
        of input assumptions, including expected volatility, expected life, expected
        dividend rate, and expected risk-free rate of return.  If factors
        change and the Company employs different assumptions in the application of
        SFAS
        123(R) in future periods, the compensation expense recorded under SFAS 123(R)
        may differ significantly from the amount recorded in the current
        period.





**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,
      freight in, inter-state warehouse transportation costs, obsolescence, spoilage
      and inventory shrinkage, and is net of discounts and allowances . 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 $48.5 million, $47.4 million and $59.7
      million as of fiscal 2004, 2006 and 2007, 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 (percentages
      may not add up due to rounding):




**Year
                    Ended**
                  **December
                    31,**
                
                
                **Year
                    Ended**
                  **March
                    31,**
                
                
                **Year
                    Ended**
                  **March
                    31,**
                
                
                **Three
                    Months Ended**
                  **March
                    31,**
                
                
                **Three
                    Months Ended**
                  **March
                    31,****2004**
                
                
                **2006**
                
                
                **2007**
                
                
                **2004**
                
                
                **2005**(Amounts
                    in thousands)Net
                    Sales:
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (Unaudited)99¢
                    Only Stores
                
                $
                929,896
                
                
                
                95.7
                %
                
                $
                984,293
                
                
                
                96.2
                %
                
                $
                1,064,518
                
                
                
                96.4
                %
                
                $
                218,812
                
                
                
                95.1
                %
                
                $
                231,899
                
                
                
                95.6
                %Bargain
                    Wholesale
                
                
                42,277
                
                
                
                4.3
                
                
                
                39,296
                
                
                
                3.8
                
                
                
                40,178
                
                
                
                3.6
                
                
                
                11,238
                
                
                
                4.9
                
                
                
                10,731
                
                
                
                4.4Total
                
                
                972,173
                
                
                
                100.0
                
                
                
                1,023,589
                
                
                
                100.0
                
                
                
                1,104,696
                
                
                
                100.0
                
                
                
                230,050
                
                
                
                100.0
                
                
                
                242,630
                
                
                
                100.0Cost
                    of sales
                
                
                592,575
                
                
                
                61.0
                
                
                
                640,140
                
                
                
                62.5
                
                
                
                672,101
                
                
                
                60.8
                
                
                
                137,821
                
                
                
                59.9
                
                
                
                152,291
                
                
                
                62.8Gross
                    profit
                
                
                379,598
                
                
                
                39.0
                
                
                
                383,449
                
                
                
                37.5
                
                
                
                432,595
                
                
                
                39.2
                
                
                
                92,229
                
                
                
                40.1
                
                
                
                90,339
                
                
                
                37.2Selling,
                    general and administrative expenses:Operating
                    expenses
                
                
                312,263
                
                
                
                32.1
                
                
                
                340,371
                
                
                
                33.3
                
                
                
                393,351
                
                
                
                35.6
                
                
                
                71,040
                
                
                
                30.9
                
                
                
                81,760
                
                
                
                33.7Depreciation
                    and amortization
                
                
                28,246
                
                
                
                2.9
                
                
                
                31,424
                
                
                
                3.1
                
                
                
                32,675
                
                
                
                3.0
                
                
                
                6,020
                
                
                
                2.6
                
                
                
                7,776
                
                
                
                3.2Total
                
                
                340,509
                
                
                
                35.0
                
                
                
                371,795
                
                
                
                36.4
                
                
                
                426,026
                
                
                
                38.6
                
                
                
                77,060
                
                
                
                33.5
                
                
                
                89,536
                
                
                
                36.9Operating
                    income
                
                
                39,089
                
                
                
                4.0
                
                
                
                11,654
                
                
                
                1.1
                
                
                
                6,569
                
                
                
                0.6
                
                
                
                15,169
                
                
                
                6.6
                
                
                
                803
                
                
                
                0.3Other
                    income, net
                
                
                (3,263
                )
                
                
                (0.4
                )
                
                
                (5,084
                )
                
                
                (0.5
                )
                
                
                (7,432
                )
                
                
                (0.7
                )
                
                
                (1,600
                )
                
                
                (0.7
                )
                
                
                (302
                )
                
                
                (0.1
                )Income
                    before provision for income taxes
                
                
                42,352
                
                
                
                4.4
                
                
                
                16,738
                
                
                
                1.6
                
                
                
                14,001
                
                
                
                1.3
                
                
                
                16,769
                
                
                
                7.3
                
                
                
                1,105
                
                
                
                0.4Provision
                    for income taxes
                
                
                14,521
                
                
                
                1.5
                
                
                
                5,316
                
                
                
                0.5
                
                
                
                4,239
                
                
                
                0.4
                
                
                
                6,565
                
                
                
                2.9
                
                
                
                306
                
                
                
                0.1Net
                    income
                
                $
                27,831
                
                
                
                2.9
                %
                
                $
                11,422
                
                
                
                1.1
                %
                
                $
                9,762
                
                
                
                0.9
                %
                
                $
                10,204
                
                
                
                4.4
                %
                
                $
                799
                
                
                
                0.3
                %


**Fiscal
      Year Ended March 31, 2007 Compared to Fiscal Year Ended March 31,
      2006**





*Net
      sales.* Total net sales increased $81.1 million, or 7.9%, from $1,023.6
      million in fiscal 2006 to $1,104.7 million in fiscal 2007. 99¢ Only Stores’ net
      retail sales increased $80.2 million, or 8.2%, from $984.3 million in fiscal
      2006 to $1,064.5 million in fiscal 2007. The effect of 19 new stores opened
      since the end of fiscal 2006 increased net retail sales by $38.8 million and
      the
      full year fiscal 2007 effect of stores opened in fiscal 2006 increased sales
      by
      $18.4 million. In addition, comparable stores net sales for all stores open
      at
      least 15 months in fiscal 2006 and 2007 increased 2.4% in 2007 due to a 0.5%
      increase in transaction counts (primarily attributable to the Company’s Texas
      stores, where sales continued to benefit from an anniversary advertising
      campaign held in the fourth quarter of fiscal 2006 and due to additional
      operational improvements made in fiscal 2007), as well as an increase in average
      ticket size by 1.9% to $9.34 from $9.17.  Bargain Wholesale net sales
      increased $0.9 million, or 2.2%, from $39.3 million in fiscal 2006 to $40.2
      million in fiscal 2007, primarily due to new customers. Since the end of fiscal
      2006, the Company added 19 stores; five stores were opened in Texas, one in
      Arizona and 13 in California. At the end of fiscal 2007, the Company had 251
      stores compared to 232 as of fiscal 2006. Gross retail square footage at the
      end
      of fiscal 2007 and fiscal 2006 was 5.52 million and 5.15 million, respectively.
      For 99¢ Only Stores open all of fiscal 2007, the average net sales per estimated
      saleable square foot was $254 and the average annual net sales per store were
      $4.4 million, including the Texas stores open for the full year. Non-Texas
      stores net sales averaged $4.8 million per store and $284 per square foot.
      Texas
      stores open for a full year averaged net sales of $2.4 million per store and
      $120 per square foot**.**




*Gross
      profit.* Gross profit increased $49.1 million, or 12.8%, from $383.4 million
      in fiscal 2006 to $432.6 million in fiscal 2007. As a percentage of net sales,
      overall gross margin increased to 39.2% in fiscal 2007 from 37.5% in fiscal
      2006. As a percentage of retail sales, retail gross margin increased to 39.9%
      in
      fiscal 2007 from 38.2% in fiscal 2006.  The increase in gross profit
      was primarily due to a reduction in excess and obsolete inventory reserves
      of
      0.5% of retail sales in fiscal 2007 due to the sales of items previously
      reserved as excess and obsolete inventory following a more focused approach
      to
      merchandising those items compared to an increase in these reserves of 0.1%
      of
      retail sales in fiscal 2006, and due to a reduction of spoilage/shrink from
      3.7%
      for fiscal 2006 to 3.0% for fiscal 2007. In addition, the increase in gross
      profit was due to a decrease in cost of products sold to 57.4% for fiscal 2007
      compared to 57.6% for fiscal 2006 due to product cost changes.  The
      remaining change was made up of increases and decreases in other less
      significant items included in cost of sales. The Bargain Wholesale margin
      increased to 20.0% in fiscal 2007 versus 19.6% in fiscal 2006, primarily due
      to
      product cost changes.




*Operating
      expenses*. Operating expenses increased $53.0 million, or 15.6%, from $340.4
      million in fiscal 2006 to $393.4 million in 2007. As a percentage of net sales,
      operating expenses increased to 35.6% for the year ended March 31, 2007 from
      33.3% for the year ended March 31, 2006.  Retail operating expenses
      increased $25.0 million between fiscal 2006 and fiscal 2007, primarily as a
      result of an increase in retail store labor and related costs of $18.0 million
      associated with the opening of 19 new stores in fiscal 2007 and the full year
      effect of stores opened in fiscal 2006.  Retail store labor also
      increased due to costs associated with training and implementing new inventory
      control procedures in the stores.  The remaining increases in retail
      operating expenses included rent, utilities and other store operating expenses.
      Corporate operating expenses increased $14.1 million between fiscal 2006 and
      fiscal 2007 primarily due to an increase in consulting and professional fees
      of
      $5.4 million as a result of costs associated with completing the fiscal year
      2006 annual audit and in connection with implementing Sarbanes-Oxley
      requirements, an increase of $5.0 million for stock-based compensation, and
      an
      increase of $3.4 million for personnel added at the executive, management and
      staff levels to support the Company’s infrastructure and growth
      requirements.  The increase in stock-based compensation expense is due
      to the adoption of SFAS No. 123(R) at the beginning of fiscal 2007, which
      requires the Company to recognize expense related to the estimated fair value
      of
      stock-based compensation awards.  Stock-based compensation recognized
      in fiscal 2006 was $0.2 million and increased to $5.2 million in fiscal 2007
      under FAS No. 123(R).  Finally, the increase in total operating
      expenses was also due to an increase in distribution and transportation costs
      of
      $14.9 million, due primarily to $7.7 million in labor to operate the warehouses,
      including labor to service the increased sales volume and implement various
      internal control initiatives, and $3.9 million in increased delivery costs
      due
      to additional new store locations and higher fuel costs. Operating expenses
      for
      both years were also affected by the gains from consideration received in
      eminent domain actions.  Fiscal 2006 operating expense was reduced by
      $4.2 million by a gain from consideration for a forced store closure due to
      a
      local government eminent domain action for the construction of a new public
      school, and fiscal 2007 operating expense was reduced by $0.7 million by the
      gain from consideration for another store closure due to an eminent domain
      action. The increases discussed above were also offset by a decrease in workers’
compensation expenses of $4.5 million, which was primarily driven by the
      stabilization of reserve requirements and improvements in claims management
      and
      accident reporting. The remaining change was made up of increases and decreases
      in other less significant items included in operating expenses.





28
 *Table
            of Contents*





*Depreciation
      and amortization.*Depreciation increased $1.3 million, or 4.0%, from $31.4
      million in fiscal 2006 to $32.7 million in fiscal 2007 as a result of the net
      19
      new stores operating since the end of the fiscal 2006, the full year effect
      of
      fiscal 2006 store additions, and additions to existing stores and distribution
      centers. The increase was partially offset due to the disposal of certain fixed
      assets and fully depreciated assets.





*Operating
      income.* Operating income decreased $5.1 million, or 43.6%, from $11.7
      million in fiscal 2006 to $6.6 million in fiscal 2007. Operating income as
      a
      percentage of net sales decreased from 1.1% in fiscal 2006 to 0.6% in fiscal
      2007 primarily due to increases in operating expenses discussed above partially
      offset by the increase in the gross margin percentage on
      sales.  Operating income in fiscal 2006 and 2007 benefited from net
      gains of $4.2 million and $0.7 million, respectively, for forced store closures
      due to local government eminent domain actions, which are included as an offset
      to selling, general, and administrative expenses.




*Other
      income, net.* Other income increased $2.3 million to $7.4 million in fiscal
      2007 compared to $5.1 million in fiscal 2006.  Interest income earned
      on the Company’s investments increased from $5.1 million in fiscal 2006 to $7.9
      million in fiscal 2007 as a result of increased interest
      rates.  Interest expense which primarily relates to consolidated
      partnership line of credit with a bank was $1.2 million in fiscal 2007 compared
      to $0.1 million in fiscal 2006.





*Provision
      for income taxes.* The provision for income taxes in fiscal 2007 was $4.2
      million compared to $5.3 million in fiscal 2006, due to the decrease in pre-tax
      income and a lower overall effective tax rate.  The provision for
      income taxes had effective combined federal and state income rates of 30.3%
      and
      31.8% in fiscal 2007 and 2006, respectively. Additionally, in fiscal 2007,
      the
      Company recorded a discrete tax benefit of approximately $290,000, due to
      additional prior period income tax credits that were identified during the
      first
      quarter of fiscal 2007. 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 $1.6
      million, or 14.5%, from $11.4 million in fiscal 2006 to $9.8 million in fiscal
      2007. Net income as a percentage of net sales declined from 1.1% in fiscal
      2006
      to 0.9% in fiscal 2007.





29
 *Table
            of Contents*





**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.  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.
      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 in fiscal 2006. Texas stores open
      for
      a full year averaged net sales of $2.3 million per store and $111 per square
      foot in fiscal 2006**.**




*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.




*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 requirements.  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.





30
 *Table
            of Contents*





*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.





*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.





31
 *Table
            of Contents*





*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.





*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.





**Effects
      of inflation**





The
      Company believes that inflation and/or deflation had a minimal impact on the
      Company’s overall operations during fiscal 2007, 2006, three months ended March
      31, 2005 and fiscal 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.





32
 *Table
            of Contents*





Net
      cash
      provided by operating activities in fiscal 2004, 2006 and 2007 was $94.4
      million, $82.5 million, and $28.5 million, respectively, consisting primarily
      of
      $45.8 million, $38.5 million and $42.3 million of net income, respectively,
      adjusted for depreciation and other non-cash items. The Company used $5.8
      million and $10.8 million in working capital in fiscal 2004 and 2007,
      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 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. Net cash used by working capital activities primarily
      reflects the increase in inventories, decrease in accounts payable and workers’
compensation liability partially offset by the increase in accrued expenses
      and
      decrease in income taxes receivable in fiscal 2007. Cash used for growth in
      inventories was $48.4 million, $7.2 million and $11.9 million in fiscal 2004,
      2006 and 2007, respectively.  In fiscal 2004, 2006 and 2007, the
      Company sold $55.1 million, $36.0 million and zero of its trading securities,
      respectively.





Net
      cash
      used in investing activities during fiscal 2004, 2006 and 2007 was $57.2
      million, $85.6 million, and $35.6 million, respectively. In fiscal 2004, 2006,
      and 2007 the Company used $57.2 million, $47.6 million and $47.0 million for
      the
      purchase of property and equipment due to the opening of 33, 10, and 19 new
      stores during the respective fiscal years and the purchase of a warehouse in
      Commerce, California for $9.7 million in fiscal 2006 and purchase of additional
      properties during fiscal 2007 for future store expansion during fiscal 2008
      or
      beyond. In fiscal 2007, the Company received cash inflow of $137.4 million
      from
      the sale and maturity of available for sale securities, which was offset by
      $126.0 million of cash used for the purchase of investments. 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 2004.




Net
      cash
      used in financing activities was $36.6 million in fiscal 2004 primarily 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 fiscal 2006 was $6.0 million, which is composed
      primarily of the proceeds of a consolidated partnership’s construction
      loan.  Net cash provided by financing activities during fiscal 2007
      was $3.2 million, which is composed primarily of the proceeds of a consolidated
      partnership’s construction loan and proceeds from the exercise of non-qualified
      stock options.





The
      Company estimates that total capital expenditures in fiscal year 2008 will
      be
      approximately $82.9 million and relate principally to property acquisitions
      of
      approximately $13.7 million, $43.3 million for leasehold and fixtures and
      equipment for new store openings, and $25.9 million for other capital projects.
      The Company intends to fund its liquidity requirements in fiscal 2008 out of
      net
      cash provided by operations, short-term investments, and cash on
      hand.





**Contractual
      Obligations**





The
      following table summarizes the Company’s consolidated contractual obligations
      (in thousands) as of March 31, 2007.





Contractual
                obligations
            
            Total
            
            
            Less
                than
              1
                Year
            
            
            1-3
              Years
            
            
            3-5
              Years
            
            
            More
                than
              5
                YearsCapital
                lease obligations
            
            $
            699
            
            
            $
            55
            
            
            $
            125
            
            
            $
            145
            
            
            $
            374Operating
                lease obligations
            
            
            196,029
            
            
            
            38,019
            
            
            
            67,480
            
            
            
            44,063
            
            
            
            46,467Deferred
                compensation liability
            
            
            4,014
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,014Construction
                loan
            
            
            7,299
            
            
            
            13
            
            
            
            7,286
            
            
            
            -
            
            
            
            -Interest
                on Construction Loan
            
            
            798
            
            
            
            639
            
            
            
            159
            
            
            
            -
            
            
            
            -Total
            
            $
            208,839
            
            
            $
            38,726
            
            
            $
            75,050
            
            
            $
            44,208
            
            
            $
            50,855




33
 *Table
            of Contents*





**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 2021. 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 2004,
      fiscal 2006 and fiscal 2007 was approximately $43.4 million $45.7 million and
      $49.3 million, respectively.  Rental expense charged for the 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.





**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, 2007, this entity has $9.0 million in assets
      and $7.4 million in liabilities, including a bank loan for $7.3 million, which
      is shown on the Company’s fiscal 2007 year-end consolidated balance
      sheet.




The
      Company had an interest in two partnerships which the Company consolidated
      at
      March 31, 2005, March 31, 2006 and March 31, 2007 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 March 31, 2006 and March 31, 2007 is a
      reclassification of approximately $2.8 million and $2.7 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.




**New
      Authoritative Pronouncements**




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 at the beginning of fiscal 2008. The Company
      does not believe that the adoption of this Statement will have a material impact
      on the Company’s consolidated financial position or results of
      operations.





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 will adopt FIN 48 at the beginning of fiscal 2008,
      and does not believe that the adoption of this Interpretation will have a
      material impact on the Company’s consolidated financial position or results of
      operations.





34
 *Table
            of Contents*





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
        position or results of operations.





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 position or results of operations.





**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
      May 2038, with approximately 77.4% maturing within one year. At March 31, 2007,
      the Company had $140.9 million in securities maturing at various dates through
      May 2046, with approximately 83.0% maturing within one year. There have not
      been
      material changes in market risk exposure between fiscal 2006 and 2007. 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 one year
      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,
      2007, the fair value of investments approximated the carrying value. Based
      on
      the investments outstanding at March 31, 2007, a 1.0% increase in interest
      rates
      would reduce the fair value of the Company’s total investment portfolio by $0.4
      million or 0.3%.  Based upon the Company’s outstanding indebtedness at
      March 31, 2007, a 1.0% adverse change in interest rates would have resulted
      in a
      pre-tax reduction of earnings by less than $0.1 million.





35
 *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
            37Report
                of Independent Registered Public Accounting Firm, Deloitte & Touche
                LLP
            38Consolidated
                Balance Sheets as of March 31, 2006 and March 31, 2007
            39Consolidated
                Statements of Income for the year ended December 31, 2004, three
                months
                ended March 31, 2005 and years ended March 31, 2006 and
                2007
            41Consolidated
                Statements of Shareholders’ Equity for the year ended December 31, 2004,
                three months ended March 31, 2005 and years ended March 31, 2006
                and
                2007
            42Consolidated
                Statements of Cash Flows for the year ended December 31, 2004, three
                months ended March 31, 2005 and years ended March 31, 2006 and
                2007
            43Notes
                to Consolidated Financial Statements
            44Schedule
                II – Valuation and Qualifying Accounts
            71




36
 *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, 2006 and 2007 and the
      related consolidated statements of income, shareholders’ equity, and cash
      flows for the three months ended March 31, 2005 and for the years ended March
      31, 2006 and 2007. We also have audited the schedule as listed in the
      accompanying index for the three months ended March 31, 2005 and the years
      ended
      March 31, 2006 and 2007. 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,
      2006 and 2007, and the results of its operations and its cash flows for the
      three months ended March 31, 2005 and for the years ended March 31, 2006 and
      2007, 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
      years ended March 31, 2006 and 2007.





As
      discussed in the notes to the consolidated financial statements, effective
      April
      1, 2006, the Company adopted the provisions of Statement of Financial Accounting
      Standard No. 123(R) – An Amendment of FASB Statement No. 123. Additionally
      effective April 1, 2005 the Company adopted the dual method of evaluating
      errors, 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, 2007, 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 June 28, 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


Los
      Angeles, California


June
      28,
      2007





37
 *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 statements of income, shareholders’
equity, and cash flows of 99¢ Only Stores (the “Company”) for the year ended
      December 31, 2004. Our audit also included the financial statement schedule
      listed in the Index to Consolidated Financial Statements and Financial Statement
      Schedule for the year ended December 31, 2004. 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 results of operations and cash flows of 99¢ Only Stores
      for the year ended December 31, 2004, in conformity with accounting principles
      generally accepted in the United States of America. Also in our opinion, such
      financial statement schedule for the year ended December 31, 2004, 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


Los
      Angeles, California


August
      30, 2005





38
 *Table
            of Contents*





**99¢
      Only Stores**


**CONSOLIDATED
      BALANCE SHEETS**


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





**ASSETS**




**March
                31,**
            
            
            **March
                31,****2006**
            
            
            **2007**CURRENT
                ASSETS:Cash
            
            $
            4,958
            
            
            $
            983Short-term
                investments
            
            
            117,623
            
            
            
            117,013Accounts
                receivable, net of allowance for doubtful accounts of $137 and $252
                as of
                March 31, 2006 and, 2007, respectively
            
            
            3,193
            
            
            
            2,687Income
                taxes receivable
            
            
            8,797
            
            
            
            2,784Deferred
                income taxes
            
            
            30,638
            
            
            
            28,343Inventories
            
            
            139,901
            
            
            
            152,793Other
            
            
            5,426
            
            
            
            8,931Total
                current assets
            
            
            310,536
            
            
            
            313,534PROPERTY
                AND EQUIPMENT, at cost:Land
            
            
            59,890
            
            
            
            65,916Buildings
            
            
            80,685
            
            
            
            87,528Building
                improvements
            
            
            35,598
            
            
            
            41,935Leasehold
                improvements
            
            
            113,110
            
            
            
            125,021Fixtures
                and equipment
            
            
            80,467
            
            
            
            98,710Transportation
                equipment
            
            
            4,116
            
            
            
            2,129Construction
                in progress
            
            
            18,412
            
            
            
            15,691Total
                property and equipment
            
            
            392,278
            
            
            
            436,930Accumulated
                depreciation and amortization
            
            
            (132,944
            )
            
            
            (163,364
            )Total
                net property and equipment
            
            
            259,334
            
            
            
            273,566OTHER
                ASSETS:Long-term
                deferred income taxes
            
            
            9,672
            
            
            
            17,760Long-term
                investments in marketable securities
            
            
            34,270
            
            
            
            23,873Deposits
                and other assets
            
            
            14,896
            
            
            
            14,402Total
                other assets
            
            
            58,838
            
            
            
            56,035Total
                assets
            
            $
            628,708
            
            
            $
            643,135





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





39
 *Table
            of Contents*





**99¢
      Only Stores**


**CONSOLIDATED
      BALANCE SHEETS**


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





**LIABILITIES
      AND SHAREHOLDERS’ EQUITY**





**March
                31,**
            
            
            **March
                31,****2006**
            
            
            **2007**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            38,332
            
            
            $
            28,934Accrued
                expenses:Payroll
                and payroll-related
            
            
            5,960
            
            
            
            9,361Sales
                tax
            
            
            3,981
            
            
            
            4,519Other
            
            
            16,489
            
            
            
            17,275Workers’
                compensation
            
            
            44,225
            
            
            
            43,487Current
                portion of capital lease obligation
            
            
            74
            
            
            
            55Construction
                loan, current
            
            
            -
            
            
            
            13Total
                current liabilities
            
            
            109,061
            
            
            
            103,644LONG-TERM
                LIABILITIES:Deferred
                rent
            
            
            7,734
            
            
            
            8,320Deferred
                compensation liability
            
            
            3,513
            
            
            
            4,014Construction
                loan, non-current
            
            
            6,174
            
            
            
            7,286Capital
                lease obligation, net of current portion
            
            
            700
            
            
            
            644Total
                long-term liabilities
            
            
            18,121
            
            
            
            20,264COMMITMENTS
                AND CONTINGENCIES: (Notes 5 and 6)SHAREHOLDERS’
                EQUITY:Preferred
                stock, no par valueAuthorized
                - 1,000,000 shares Issued and outstanding – none
            
            
            -
            
            
            
            -Common
                stock, no par valueAuthorized
                - 200,000,000 shares Issued and outstanding - 69,569,150 shares
                at  March 31, 2006 and 69,941,719 shares at March 31,
                2007
            
            
            215,702
            
            
            
            223,414Retained
                earnings
            
            
            285,823
            
            
            
            295,585Accumulated
                other comprehensive income
            
            
            1
            
            
            
            228Total
                shareholders’ equity
            
            
            501,526
            
            
            
            519,227Total
                liabilities and shareholders’ equity
            
            $
            628,708
            
            
            $
            643,135





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





40
 *Table
            of Contents*





**99¢
      Only Stores**


**CONSOLIDATED
      STATEMENTS OF INCOME**


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





**Year
                Ended December 31,**
            
            
            **Three
                months Ended March 31,**
            
            
            **Years
                Ended March 31,****2004**
            
            
            **2005**
            
            
            **2006**
            
            
            **2007**NET
                SALES:99¢
                Only Stores
            
            $
            929,896
            
            
            $
            231,899
            
            
            $
            984,293
            
            
            $
            1,064,518Bargain
                Wholesale
            
            
            42,277
            
            
            
            10,731
            
            
            
            39,296
            
            
            
            40,178Total
                sales
            
            
            972,173
            
            
            
            242,630
            
            
            
            1,023,589
            
            
            
            1,104,696COST
                OF SALES (excluding depreciation and amortization expense as shown
                separately below)
            
            
            592,575
            
            
            
            152,291
            
            
            
            640,140
            
            
            
            672,101Gross
                profit
            
            
            379,598
            
            
            
            90,339
            
            
            
            383,449
            
            
            
            432,595SELLING,
                GENERAL, AND ADMINISTRATIVE EXPENSES:Operating
                expenses (includes asset impairment of $800for
                the year ended March 31, 2006)
            
            
            312,263
            
            
            
            81,760
            
            
            
            340,371
            
            
            
            393,351Depreciation
                and amortization
            
            
            28,246
            
            
            
            7,776
            
            
            
            31,424
            
            
            
            32,675Total
                Selling, General and Administrative
            
            
            340,509
            
            
            
            89,536
            
            
            
            371,795
            
            
            
            426,026Operating
                income
            
            
            39,089
            
            
            
            803
            
            
            
            11,654
            
            
            
            6,569OTHER
                (INCOME) EXPENSE:Interest
                income
            
            
            (3,326
            )
            
            
            (617
            )
            
            
            (5,059
            )
            
            
            (7,948
            )Interest
                expense
            
            
            63
            
            
            
            29
            
            
            
            122
            
            
            
            1,181Other
            
            
            -
            
            
            
            286
            
            
            
            (147
            )
            
            
            (665
            )Total
                other income, net
            
            
            (3,263
            )
            
            
            (302
            )
            
            
            (5,084
            )
            
            
            (7,432
            )Income
                before provision for income taxes
            
            
            42,352
            
            
            
            1,105
            
            
            
            16,738
            
            
            
            14,001Provision
                for income taxes
            
            
            14,521
            
            
            
            306
            
            
            
            5,316
            
            
            
            4,239NET
                INCOME
            
            $
            27,831
            
            
            $
            799
            
            
            $
            11,422
            
            
            $
            9,762EARNINGS
                PER COMMON SHARE:Basic
            
            $
            0.39
            
            
            $
            0.01
            
            
            $
            0.16
            
            
            $
            0.14Diluted
            
            $
            0.39
            
            
            $
            0.01
            
            
            $
            0.16
            
            
            $
            0.14WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:Basic
            
            
            70,627
            
            
            
            69,533
            
            
            
            69,553
            
            
            
            69,862Diluted
            
            
            71,016
            
            
            
            69,787
            
            
            
            69,737
            
            
            
            70,017





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





41
 *Table
            of Contents*





**99¢
      Only Stores**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


**YEARS
      ENDED MARCH 31, 2007 and 2006, THREE MONTHS ENDED MARCH 31, 2005 AND YEAR ENDED
      DECEMBER 31, 2004**


**(Amounts
      in Thousands)**





**Common
                Stock**
            
            
            **Accumulated
                Other Comprehensive**
            
            
            **Retained**
            
            
            **Shareholders’****Shares**
            
            
            **Amount**
            
            
            **Income
                (Loss)**
            
            
            **Earnings**
            
            
            **Equity**BALANCE,
                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 12)
            
            
            -
            
            
            
            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
            
            
            
            501,526Net
                income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,762
            
            
            
            9,762Net
                unrealized investment gains
            
            
            -
            
            
            
            -
            
            
            
            227
            
            
            
            -
            
            
            
            227Total
                comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            227
            
            
            
            9,762
            
            
            
            9,989Tax
                benefit from exercise of stock options
            
            
            -
            
            
            
            1,032
            
            
            
            -
            
            
            
            -
            
            
            
            1,032Proceeds
                from exercise of stock options
            
            
            373
            
            
            
            1,456
            
            
            
            -
            
            
            
            -
            
            
            
            1,456Stock-based
                compensation expense
            
            
            -
            
            
            
            5,224
            
            
            
            -
            
            
            
            -
            
            
            
            5,224BALANCE,
                March 31, 2007
            
            
            69,942
            
            
            $
            223,414
            
            
            $
            228
            
            
            $
            295,585
            
            
            $
            519,227





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





42
 *Table
            of Contents*





**99¢
      Only Stores**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Amounts
      in Thousands)**





**Year
                Ended December 31,**
            
            
            **Years
                Ended March 31,**
            
            
            **Three
                Months Ended March 31,****2004**
            
            
            **2006**
            
            
            **2007**
            
            
            **2005**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            27,831
            
            
            $
            11,422
            
            
            $
            9,762
            
            
            $
            799Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            28,246
            
            
            
            31,424
            
            
            
            32,675
            
            
            
            7,776Loss
                on disposal of fixed assets (includes asset impairment of $800 for
                the
                year ended March 31, 2006)
            
            
            1,152
            
            
            
            999
            
            
            
            171
            
            
            
            151Excess
                tax benefit from share-based payment arrangements
            
            
            -
            
            
            
            -
            
            
            
            (645
            )
            
            
            -Deferred
                income taxes
            
            
            (11,502
            )
            
            
            (5,589
            )
            
            
            (5,934
            )
            
            
            (1,932
            )Stock-based
                compensation expense
            
            
            -
            
            
            
            173
            
            
            
            5,224
            
            
            
            -Tax
                benefit from exercise of non qualified employee stock
                options
            
            
            40
            
            
            
            57
            
            
            
            1,032
            
            
            
            50Changes
                in assets and liabilities associated with operating
                activities:Sales
                of short-term investments, net
            
            
            55,050
            
            
            
            36,040
            
            
            
            -
            
            
            
            8,885Accounts
                receivable
            
            
            (1,218
            )
            
            
            1,558
            
            
            
            506
            
            
            
            (1,288
            )Inventories
            
            
            (48,427
            )
            
            
            (7,232
            )
            
            
            (11,887
            )
            
            
            19,194Other
                assets
            
            
            (2,750
            )
            
            
            2,474
            
            
            
            (3,583
            )
            
            
            178Deposits
            
            
            (74
            )
            
            
            165
            
            
            
            50
            
            
            
            13Accounts
                payable
            
            
            11,191
            
            
            
            16,415
            
            
            
            (9,398
            )
            
            
            (17,177
            )Accrued
                expenses
            
            
            9,168
            
            
            
            1,006
            
            
            
            4,672
            
            
            
            1,688Accrued
                workers’ compensation
            
            
            20,126
            
            
            
            5,867
            
            
            
            (738
            )
            
            
            1,913Income
                taxes
            
            
            3,336
            
            
            
            (11,540
            )
            
            
            6,013
            
            
            
            248Deferred
                rent
            
            
            2,229
            
            
            
            (731
            )
            
            
            586
            
            
            
            368Net
                cash provided by operating activities
            
            
            94,398
            
            
            
            82,508
            
            
            
            28,506
            
            
            
            20,866CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of property and equipment
            
            
            (57,248
            )
            
            
            (47,600
            )
            
            
            (47,007
            )
            
            
            (4,536
            )Purchases
                of investments
            
            
            -
            
            
            
            (134,984
            )
            
            
            (125,991
            )
            
            
            (15,369
            )Sale
                and maturity of available for sale securities
            
            
            -
            
            
            
            96,944
            
            
            
            137,366
            
            
            
            -Net
                cash used in investing activities
            
            
            (57,248
            )
            
            
            (85,640
            )
            
            
            (35,632
            )
            
            
            (19,905
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Payments
                of capital lease obligation
            
            
            (43
            )
            
            
            (289
            )
            
            
            (75
            )
            
            
            (11
            )Proceeds
                from exercise of stock options
            
            
            1,673
            
            
            
            89
            
            
            
            1,456
            
            
            
            282Repurchases
                of company stock
            
            
            (38,214
            )
            
            
            -
            
            
            
            -
            
            
            
            -Proceeds
                from consolidation of construction loan
            
            
            -
            
            
            
            6,174
            
            
            
            1,125
            
            
            
            -Excess
                tax benefit from share-based payment arrangements
            
            
            -
            
            
            
            -
            
            
            
            645
            
            
            
            -Net
                cash provided by (used in) financing activities
            
            
            (36,584
            )
            
            
            5,974
            
            
            
            3,151
            
            
            
            271NET
                INCREASE (DECREASE) IN CASH
            
            
            566
            
            
            
            2,842
            
            
            
            (3,975
            )
            
            
            1,232CASH,
                beginning of period
            
            
            318
            
            
            
            2,116
            
            
            
            4,958
            
            
            
            884CASH,
                end of period
            
            $
            884
            
            
            $
            4,958
            
            
            $
            983
            
            
            $
            2,116




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




43
 *Table
            of Contents*





**99¢
      Only Stores**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




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


**March
      31, 2006 and 2007**





**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, 2007, the Company operated 251 retail stores with 177
      in
      California, 41 in Texas, 22 in Arizona, and 11 in Nevada. The Company is
      also a wholesale distributor of various consumable products.





**Principles
      of Consolidation**




The
      consolidated financial statements include the accounts of the Company and its
      subsidiaries and 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.





**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
“2007” or “fiscal 2007” refer to a period from April 1, 2006 to March 31,
      2007.




**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 $21.9 million and $1.6 million, respectively as of March
      31,
      2006 and 2007. 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.





**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.





44
 *Table
            of Contents*





**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 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 and 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, 2006
      and 2007, the Company held inventory of specific products identified that it
      expected to sell over a period that exceeds twelve months of approximately
      $4.0
      million and $3.0 million, respectively, which is included in deposits and other
      assets in the consolidated financial statements.





45
 *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
                improvementLeasehold
                improvements
            Lesser
                of the estimated useful life of the improvement or remaining lease
                termFixtures
                and equipment
            3-5
                yearsTransportation
                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
      annually or 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 the Company’s 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 2004 and three
      months ended March 31, 2005.  However, during fiscal year 2006, the
      Company recorded an asset impairment charge of $0.8 million related to one
      underperforming store in Texas.  No asset impairment charges were
      recorded in fiscal 2007. 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 assets 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).





46
 *Table
            of Contents*





A
      reconciliation of the basic and diluted weighted average number of shares
      outstanding for the year ended December 31, 2004, three months ended March
      31,
      2005 and year ended March 31, 2006 and 2007 follows:





**Year
                Ended**
              **December
                31,**
            
            
            **Three
                Months Ended**
              **March
                31,**
            
            
            **Year
                Ended**
              **March
                31,**
            
            
            **Year
                Ended**
              **March
                31,****2004**
            
            
            **2005**
            
            
            **2006**
            
            
            **2007**(Amounts
                in thousands)Weighted
                average number of common shares outstanding-basic
            
            
            70,627
            
            
            
            69,533
            
            
            
            69,553
            
            
            
            69,862Dilutive
                effect of outstanding stock options
            
            
            389
            
            
            
            254
            
            
            
            184
            
            
            
            155Weighted
                average number of common shares outstanding-diluted
            
            
            71,016
            
            
            
            69,787
            
            
            
            69,737
            
            
            
            70,017





Potentially
      dilutive stock options of
      4.3 million, 4.2 million, 3.6 million and 3.4 million shares for the year ended
      December 31, 2004, three months ended March 31, 2005, and the years ended March
      31, 2006 and 2007, respectively, were excluded from the calculation of the
      weighted average number of common shares outstanding because they were
      anti-dilutive.




**Stock-Based
      Compensation**




On
      April 1, 2006, the Company adopted
      SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No.
      123(R) requires the Company to recognize expense related to the estimated fair
      value of stock-based compensation awards. SFAS No. 123(R) supersedes Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB 25”). SFAS No. 123(R) does not allow the previously permitted pro forma
      disclosure-only method as an alternative to financial statement recognition.
      In
      March 2005, the Securities Exchange Commission (“SEC”) issued SAB No. 107,
“Share-Based Payment” (“SAB 107”), which provides guidance regarding the
      interaction of SFAS No. 123(R) and certain SEC rules and regulations. The
      Company has applied the provision of SAB 107 in its adoption of SFAS No.
      123(R).





The
      Company elected to use the modified prospective transition method as permitted
      by SFAS No. 123(R) and therefore has not restated its financial results for
      prior periods. Under the transition method, stock-based compensation expense
      includes compensation expense for all stock-based compensation awards granted
      prior to, but not vested as of, April 1, 2006 based on the grant date fair
      value
      estimated in accordance with the original provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS No. 123”). Stock-based
      compensation expense for all stock-based awards granted subsequent to April
      1,
      2006 was based on the grant date fair value estimated in accordance with the
      provisions of SFAS No. 123(R). Stock options are granted to employees at
      exercise prices equal to the fair market value of the Company’s stock at the
      dates of grant.





SFAS
      No.
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as an
      expense ratably over the requisite service periods. The Company has estimated
      the fair value for each award as of the date of grant using the Black-Scholes
      option pricing model. The Black-Scholes model considers, among other factors,
      the expected life of the award and the expected volatility of the Company’s
      stock price. Although the Black-Scholes model meets the requirement of SFAS
      No.
      123(R) and SAB 107, the fair values generated by the model may not be indicative
      of the actual fair values of the Company’s awards, as it does not consider other
      factors important to those share-based payment awards, such as continued
      employment and periodic vesting requirements. The Company recognizes the
      stock-based compensation expense ratably over the requisite service periods,
      which is generally a vesting term of 3 years. Stock options typically have
      a
      term of 10 years.





Prior
      to
      the adoption of SFAS No. 123(R), the Company accounted for share-based payment
      awards to employees in accordance with APB 25 and related interpretations,
      and
      had adopted the disclosure-only alternative of SFAS No. 123 and SFAS No. 148,
      “Accounting for Stock-Based Compensation—Transition and Disclosure.” In
      accordance with APB 25, stock-based compensation expense was not recorded in
      connection with share-based payment awards granted with exercise prices equal
      to
      or greater than the fair market value of the Company’s common stock on the date
      of grant, unless certain modifications were subsequently made.





47
 *Table
            of Contents*





**Cost
      of Sales**




Cost
      of
      sales includes the cost of inventory, freight in, inter-state warehouse
      transportation costs, obsolescence, spoilage, scrap and inventory shrinkage,
      and
      is net of discounts and allowances. 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.




The
      Company has a gift card program. The Company recognizes gift card sales at
      the
      time of gift card redemption. The liability for outstanding gift cards is
      recorded in accrued expenses. The Company has not recorded any breakage income
      related to its gift card program.




**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 March 31, 2006 and 2007 due to the volatility and
      unpredictability of its workers’ compensation experience over the past several
      years.




**Pre-Opening
      Costs**




The
      Company expenses, as incurred, all pre-opening costs related to the opening
      of
      new retail stores.





48
 *Table
            of Contents*





**Advertising**




The
      Company expenses advertising costs as incurred. Advertising expenses were $5.6
      million, $4.4 million and $5.0 million for the fiscal years ended December
      31,
      2004, March 31, 2006 and 2007, 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 $22.0 million, $22.4 million and $3.1 million
      in
      fiscal 2004, 2006 and 2007 respectively. Cash payments for income taxes were
      $2.5 million for the three months ended March 31, 2005. Interest payments
      totaled approximately $0.1 million, $29,000, $0.3 million and $0.8 million
      for
      the fiscal year ended December 31, 2004, three months ended March 31, 2005
      and
      fiscal years ended March 31, 2006 and 2007, respectively.  Non-cash
      financing activities included adjustments under adoption of SAB 108 as of April
      1, 2005. See Note 12 to Consolidated Financial Statements for detailed
      discussion of these adjustments. The Company recorded adjustments for
      stock-based compensation of $2.4 million. Non-cash investing activities included
      $1.6 million and $0.1 million in fixed assets purchased on account for fiscal
      2006 and 2007, respectively.





**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.





**New
      Authoritative Pronouncements**




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 at the beginning of fiscal 2008. The Company
      does not believe that the adoption of this Statement will have a material impact
      on the Company’s consolidated financial position or results of
      operations.





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 will adopt FIN 48 at the beginning of fiscal 2008,
      and does not believe that the adoption of this Interpretation will have a
      material impact on the Company’s consolidated financial position or results of
      operations.





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
        position or results of operations.





49
 *Table
            of Contents*





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 position or results of operations.





**2.**
            **Investments**





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





March
                31, 2007Cost
                or
              Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
                ValueAvailable
                for sale:Commercial
                paper and money market
            
            $
            27,520
            
            
            $
            -
            
            
            $
            -
            
            
            $
            27,520Auction
                rate securities
            
            
            41,966
            
            
            
            1
            
            
            
            -
            
            
            
            41,967Municipal
                bonds
            
            
            31,420
            
            
            
            43
            
            
            
            (31
            )
            
            
            31,432Asset-backed
                securities
            
            
            19,086
            
            
            
            30
            
            
            
            (196
            )
            
            
            18,920Corporate
                securities
            
            
            20,725
            
            
            
            399
            
            
            
            (77
            )
            
            
            21,047$
            140,717
            
            
            $
            473
            
            
            $
            (304
            )
            
            $
            140,886Reported
                as:Short-term
                investments
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            117,013Long-term
                investments in marketable securities
            
            
            
            
            
            
            
            23,873$
            140,886




50
 *Table
            of Contents*





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




As
      stated
      in Note 1 to the Consolidated Financial Statements, there were securities
      classified as trading securities up until December 31, 2005.  Holding
      gains and losses were recognized in the appropriate reporting
      period.  As of March 31, 2007 and March 31, 2006, the cumulative
      recognized holding net losses, since the purchase of the securities originally
      classified as trading, were $0.7 million and $0.1 million,
      respectively.  Non-tax effected net unrealized gains relating to
      securities that were recorded as available for sale securities were $0.4 million
      and $2,000 as of March 31, 2007 and 2006, respectively.   The tax
      effected unrealized gain and loss are included in other comprehensive income
      or
      loss in the Consolidated Statement of Shareholders’ Equity.





Gross
      realized gains from sales of available for sale securities were $0.3 million
      and
      $25,000 for the fiscal years ended March 31, 2007 and 2006,
      respectively.  There was no realized gain or loss from sales of
      available for sale securities for the three months ended March 31,
      2005.  Gross realized losses from sales of available for sale
      securities during fiscal 2007 were approximately $2,000.  There were
      no gross realized losses from sales of available for sale securities for the
      twelve months ended March 31, 2006 and 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 $453,000 loss for the
      twelve months ending on December 31, 2004, 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, 2007 (in
      thousands):





AmortizedCost
            
            
            Fair
                ValueDue
                within one year
            
            $
            77,844
            
            
            $
            77,856Due
                after one year through five years
            
            
            22,197
            
            
            
            22,386Due
                after five years
            
            
            1,468
            
            
            
            1,487$
            101,509
            
            
            $
            101,729




51
 *Table
            of Contents*




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, 2007Municipal
                bonds
            
            $
            2,020
            
            
            $
            (7
            )
            
            $
            4,128
            
            
            $
            (24
            )Asset-backed
                securities
            
            
            12,470
            
            
            
            (89
            )
            
            
            4,333
            
            
            
            (107
            )Corporate
                securities
            
            
            2,853
            
            
            
            -
            
            
            
            2,947
            
            
            
            (77
            )$
            17,343
            
            
            $
            (96
            )
            
            $
            11,408
            
            
            $
            (208
            )





The
      gross
      unrealized loss of $0.1 million for less than twelve months and the $0.2 million
      loss for twelve months or greater as of March 31, 2007 pertain to 25 securities
      and primarily was 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,
      2007.




**3.**
            **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 fiscal 2006.  As of March 31,
      2007, this entity has $9.0 million in assets and $7.4 million in liabilities,
      including a bank loan for $7.3 million. As of March 31, 2006, this entity had
      $8.2 million in assets and $6.2 million in liabilities, including a bank loan
      for $6.2 million.  These amounts are shown on the Company’s
      consolidated balance sheets as of March 31, 2007 and March 31,
      2006.




The
      Company had interests in two partnerships which the Company consolidated at
      March 31, 2006 and March 31, 2007 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 March 31, 2006 and
      March
      31, 2007 is a reclassification of approximately $2.8 million and $2.7 million,
      respectively, from investments to property and equipment with no corresponding
      impact on the Company’s recorded liabilities.





52
 *Table
            of Contents*





**4.**
            **Income
                Tax Provision**




The
      provision for income taxes consists of the following:




**Year
                Ended December 31,**
            
            
            **Three
                Months Ended March 31,**
            
            
            **Year
                Ended March 31,**(Amounts
                in thousands)**2004**
            
            
            **2005**
            
            
            **2006**
            
            
            **2007**Current:Federal
            
            $
            19,739
            
            
            $
            1,532
            
            
            $
            9,373
            
            
            $
            8,231State
            
            
            6,306
            
            
            
            682
            
            
            
            1,903
            
            
            
            1,92926,045
            
            
            
            2,214
            
            
            
            11,276
            
            
            
            10,160Deferred
                - federal and state
            
            
            (11,524
            )
            
            
            (1,908
            )
            
            
            (5,960
            )
            
            
            (5,921
            )Provision
                for income taxes
            
            $
            14,521
            
            
            $
            306
            
            
            $
            5,316
            
            
            $
            4,239




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)**2004**
            
            
            **2005**
            
            
            **2006**
            
            
            **2007****Amount**
            
            
            **Percent**
            
            
            **Amount**
            
            
            **Percent**
            
            
            **Amount**
            
            
            **Percent**
            
            
            **Amount**
            
            
            **Percent**Income
                taxes at statutory federal rate
            
            $
            14,825
            
            
            
            35.0
            %
            
            $
            387
            
            
            
            35.0
            %
            
            $
            5,858
            
            
            
            35.0
            %
            
            $
            4,901
            
            
            
            35.0
            %State
                income taxes, net of federal income tax effect
            
            
            1,281
            
            
            
            3.0
            
            
            
            (147
            )
            
            
            (13.3
            )
            
            
            (101
            )
            
            
            (0.6
            )
            
            
            231
            
            
            
            1.7Effect
                of permanent differences
            
            
            (984
            )
            
            
            (2.3
            )
            
            
            (4
            )
            
            
            (0.4
            )
            
            
            (1,298
            )
            
            
            (7.8
            )
            
            
            (816
            )
            
            
            (5.8
            )Valuation
                allowance
            
            
            706
            
            
            
            1.7
            
            
            
            160
            
            
            
            14.5
            
            
            
            751
            
            
            
            4.5
            
            
            
            -
            
            
            
            -Welfare
                to work, LARZ, and other job credits
            
            
            (125
            )
            
            
            (0.3
            )
            
            
            (37
            )
            
            
            (3.3
            )
            
            
            (755
            )
            
            
            (4.5
            )
            
            
            (601
            )
            
            
            (4.3
            )Other
            
            
            (1,182
            )
            
            
            (2.8
            )
            
            
            (53
            )
            
            
            (4.8
            )
            
            
            861
            
            
            
            5.2
            
            
            
            524
            
            
            
            3.7$
            14,521
            
            
            
            34.3
            %
            
            $
            306
            
            
            
            27.7
            %
            
            $
            5,316
            
            
            
            31.8
            %
            
            $
            4,239
            
            
            
            30.3
            %




53
 *Table
            of Contents*




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


**Year
                  Ended March 31,**(Amounts
                  in thousands)**2006**
              
              
              **2007**CURRENT
                  ASSETS (LIABILITIES)Inventory
              
              $
              4,572
              
              
              $
              2,592Uniform
                  inventory capitalization
              
              
              5,894
              
              
              
              5,999Prepaid
                  expenses
              
              
              (529
              )
              
              
              (1,847
              )Accrued
                  expenses
              
              
              2,243
              
              
              
              2,314Workers’
                  compensation
              
              
              18,927
              
              
              
              18,611State
                  taxes
              
              
              (1,992
              )
              
              
              (1,255
              )Other,
                  net
              
              
              1,569
              
              
              
              1,929Valuation
                  allowance
              
              
              (46
              )
              
              
              -TOTAL
                  CURRENT ASSETS (LIABILITIES)
              
              
              30,638
              
              
              
              28,343NON-CURRENT
                  ASSETS (LIABILITIES)Depreciation
                  and amortization
              
              
              5,169
              
              
              
              11,267Net
                  operating loss carry-forwards
              
              
              7,916
              
              
              
              5,625Deferred
                  rent
              
              
              1,913
              
              
              
              1,652Other,
                  net
              
              
              145
              
              
              
              3,176Valuation
                  allowance
              
              
              (5,471
              )
              
              
              (3,960
              )TOTAL
                  NON-CURRENT ASSETS (LIABILITIES)
              
              
              9,672
              
              
              
              17,760NET
                  DEFERRED TAX ASSETS
              
              $
              40,310
              
              
              $
              46,103





As
      of
      March 31, 2007, the Company had federal and state net operating loss
      carryforwards of approximately $16.1 million 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 $2.3 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.




As
      of
      March 31, 2006 and 2007, the Company had approximately $0.5 and $0.7 million
      of
      tax contingency reserves, respectively.  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.




**5.**
            **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 2004, 2006 and
      2007.  Rental expense for these facilities was approximately $0.5
      million for the three months ended March 31, 2005.




Prior
      to
      the sale of Universal International, Inc (“Universal) in 2000, the Company
      signed documents purporting to guarantee certain obligations under leases in
      which Universal, or a subsidiary, was the lessee.  However, as part of
      the sale, 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.  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 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.  On April 13, 2007, the Company and the plaintiffs in the two
      remaining cases entered into a settlement agreement, pursuant to which David
      and
      Sherry Gold would be responsible for an aggregate payment of
      $150,000.





54
 *Table
            of Contents*




**6.**
            **Commitments
                and Contingencies**




**Credit
      Facilities**





The
      Company recognizes a bank construction loan of $7.3 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 3 to the 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% (8.75% at March 31, 2007), and was to
      mature on May 31, 2007. On May 23, 2007, the partnership entered into an
      agreement to extend the loan through June 1, 2008.  During fiscal
      2007, the partnership paid interest costs in the amount of $0.8 million and
      no
      interest was capitalized. 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.





**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 2021. 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
      2004, 2006 and 2007 was approximately $43.4 million, $45.7 million and $49.3
      million, respectively, of which $0.1 million, $0.2 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 2004, 2006 and
      2007 was approximately $0.8 million, $0.7 million and $0.9 million,
      respectively.  Sub-lease income earned in the three months ended March
      31, 2005 was $0.2 million. As of March 31, 2007, 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**2008
            
            $
            38,019
            
            
            $
            106
            
            
            $
            8242009
            
            
            36,402
            
            
            
            106
            
            
            
            7422010
            
            
            31,078
            
            
            
            106
            
            
            
            5172011
            
            
            25,510
            
            
            
            106
            
            
            
            2192012
            
            
            18,553
            
            
            
            106
            
            
            
            110Thereafter
            
            
            46,467
            
            
            
            437
            
            
            
            -Future
                minimum lease payments
            
            $
            196,029
            
            
            $
            967
            
            
            $
            2,412Less
                amount representing interest
            
            
            
            
            
            
            (268
            )Present
                value of future lease payments
            
            
            
            
            
            $
            699




55
 *Table
            of Contents*





The
      gross
      asset amount recorded under the capital leases was $1.0 million as of March
      31,
      2006 and 2007. Accumulated depreciation was $0.3 million and $0.4 million as
      of
      March 31, 2006 and 2007, 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 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.  On April 13, 2007, the
      Company and the plaintiffs in the two remaining cases entered into a settlement
      agreement, pursuant to which David and Sherry Gold would be responsible for
      an
      aggregate payment of $150,000.  This settlement has not yet been
      approved by the Court.  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
      March 31, 2006 and March 31, 2007, the Company had recorded a liability $44.2
      million and $43.5 million, respectively, for estimated workers’ compensation
      claims.  The Company has limited self-insurance exposure and had
      recorded a liability of $56,000 and $62,000 at March 31, 2006 and 2007,
      respectively, for workers’ compensation claims in Texas, and purchases insurance
      coverage in Arizona and Nevada.




**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.





**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 and associated
      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.  This matter has been coordinated with the Washington case
      described below.  Based on discussions during recent settlement
      negotiations, the Company has reserved $1.5 million at March 31, 2006 and 2007
      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
      final and court approved 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 the 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.  This matter has been coordinated with the Vargas case
      described above.  See the Vargas matter described above for reserves
      pertaining to this matter and a description of settlement status.





**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.





56
 *Table
            of Contents*





**7.**
            **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
      2,870,000 are available as of March 31, 2007 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 plan will expire in 2011.





The
      following table summarizes stock options available for grant:




**Year
                Ended December 31,**
            
            
            **Three
                Months Ended March 31,**
            
            
            **Year
                Ended March 31,****2004**
            
            
            **2005**
            
            
            **2006**
            
            
            **2007**Beginning
                balance
            
            
            5,268,000
            
            
            
            4,440,000
            
            
            
            4,588,000
            
            
            
            5,035,000Authorized
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Granted
            
            
            (1,269,000
            )
            
            
            -
            
            
            
            (175,000
            )
            
            
            (2,856,000
            )Cancelled
            
            
            441,000
            
            
            
            148,000
            
            
            
            622,000
            
            
            
            691,000Available
                for future grant
            
            
            4,440,000
            
            
            
            4,588,000
            
            
            
            5,035,000
            
            
            
            2,870,000





Prior
      to
      April 1, 2006, the Company accounted for this plan under APB Opinion No. 25
      under which no compensation cost has been recognized in fiscal 2004 and the
      three months ended March 31, 2005. The Company recognized $0.2 million in
      stock-based compensation cost during fiscal 2006. On April 1, 2006, the Company
      adopted SFAS No. 123(R) using the modified-prospective method of recognition
      of
      compensation expense related to share-based payments. The Company’s consolidated
      statement of income for the twelve months ended March 31, 2007 reflects the
      impact of adopting SFAS No. 123(R). In accordance with the modified prospective
      transition method, the Company’s consolidated statements of income for the prior
      periods have not been restated to reflect, and do not include, the impact of
      SFAS No. 123(R).  In fiscal 2007, the Company incurred a non-cash
      stock-based compensation expense of $5.2 million recorded as operating expense,
      before the income tax benefit of $2.1 million which resulted in a decrease
      in
      net income of $3.1 million and a reduction in basic and diluted earnings per
      share of approximately $0.04.




57
 *Table
            of Contents*





***Pro
      Forma Information Under SFAS No. 123 for Periods Prior to Fiscal
      2007***




In
      accordance with the requirements of the disclosure-only alternative of SFAS
      No.
      123, set forth below is a pro forma illustration of the effect on net income
      and
      net income per share computed as if the Company had valued stock-based awards
      to
      employees using the Black-Scholes option pricing model instead of applying
      the
      guidelines provided by APB 25 (amounts in thousands, except per share
      data):




**Year
                Ended December 31,**
            
            
            **Three
                Months Ended March 31,**
            
            
            **Year
                Ended March 31,****2004**
            
            
            **2005**
            
            
            **2006**Net
                income, as reported
            
            $
            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
            
            
            7,480
            
            
            
            1,722
            
            
            
            3,295Pro
                forma net income (loss)
            
            $
            20,351
            
            
            $
            (923
            )
            
            $
            8,300Earnings
                (loss) per share:Basic-as
                reported
            
            $
            0.39
            
            
            $
            0.01
            
            
            $
            0.16Basic-pro
                forma
            
            $
            0.29
            
            
            $
            (0.01
            )
            
            $
            0.12Diluted-as
                reported
            
            $
            0.39
            
            
            $
            0.01
            
            
            $
            0.16Diluted-pro
                forma
            
            $
            0.29
            
            
            $
            (0.01
            )
            
            $
            0.12





***Valuation
      Information Under SFAS No. 123(R)***





The
      weighted average fair values per share of stock options granted have been
      estimated using the Black-Scholes pricing model with the following
      assumptions:





**December
                31,**
            
            **March
                31,****2004**
            
            **2005**
            
            **2006**
            
            
            **2007**Weighted-average
                fair value of options granted
            
            $
            8.80
            
            None
            
            $
            4.41
            
            
            $
            4.36Risk
                free interest rate
            
            
            3.90
            %
            None
            
            
            4.72
            %
            
            
            4.93
            %Expected
                life
            
            5.4
                Years
            
            None
            
            4.6
                Years
            
            
            4.6
                YearsExpected
                stock price volatility
            
            
            50
            %
            None
            
            
            42
            %
            
            
            41
            %Expected
                dividend yield
            
            None
            
            None
            
            None
            
            
            None







The
      risk-free interest rate is based on the U.S. treasury yield curve in effect
      at
      the time of grant with an equivalent remaining term.  Expected life
      represents the estimated period of time until exercise and is based on
      historical experience of similar options, giving consideration to the
      contractual terms and expectations of future employee
      behavior.  Expected stock price volatility is based on a combination
      of the historical volatility of the Company’s stock and the implied volatility
      of actively traded options of the Company’s stock.  Prior to fiscal
      2007, the Company used only historical price volatility for the purposes of
      the
      Company’s pro forma information. The Company has not paid dividends in the past
      and does not currently plan to pay dividends in the near
      future.  Compensation expense is recognized only for those options
      expected to vest, with forfeitures estimated based on the Company’s historical
      experience and future expectations.





58
 *Table
            of Contents*




***Stock
      Option Activity***





Option
      activity under the Company’s stock option plan during the year ended March 31,
      2007 is set forth below:




**Number
                of Shares**
            
            
            **Weighted
                Average Exercise Price**
            
            
            **Weighted
                Average Remaining Contractual Life (Years)**
            
            
            **Aggregate
                Intrinsic Value**Options
                Outstanding—at the beginning of the period
            
            
            4,532,000
            
            
            $
            19.49Granted
            
            
            2,856,000
            
            
            $
            10.39Exercised
            
            
            (373,000
            )
            
            $
            3.90Cancelled
            
            
            (691,000
            )
            
            $
            14.93Outstanding
                at the end of the period
            
            
            6,324,000
            
            
            $
            16.80
            
            
            
            6.57
            
            
            $
            13,168,000Exercisable
                at the end of the period
            
            
            3,471,000
            
            
            $
            21.49
            
            
            
            4.58
            
            
            $
            1,921,000Exercisable
                and expected to vest at the end of the period
            
            
            6,207,000
            
            
            $
            16.89
            
            
            
            6.53
            
            
            $
            12,739,000







The
      aggregate pre-tax intrinsic values of options outstanding, exercisable, and
      exercisable and expected to vest were calculated based on the Company’s closing
      stock price on the last trading day of fiscal 2007.  These amounts
      change based upon changes in the fair market value of the Company’s
      stock.  The aggregate pre-tax intrinsic value of options exercised in
      fiscal 2007 was $2.6 million. The aggregate pre-tax intrinsic value of options
      exercised represents the difference between the fair market value of the
      Company’s common stock on the date of exercise and the exercise price of each
      option.




The
      weighted average remaining contractual life, and the weighted average per share
      exercise price of options outstanding and of options exercisable as of March
      31,
      2007 were as follows:




**Options
                Outstanding**
            
            
            **Options
                Exercisable****Range
                of Exercise Prices**
            
            
            **Number
                of Shares**
            
            
            **Weighted
                Average Remaining Contractual Life in Years**
            
            
            **Weighted
                Average Exercise Price**
            
            
            **Number
                of Shares**
            
            
            **Weighted
                Average Exercise Price**$
            5.28
                - $5.50
            
            
            
            82,000
            
            
            
            0.18
            
            
            $
            5.28
            
            
            
            82,000
            
            
            $
            5.28$
            5.51
                - $8.70
            
            
            
            1,000
            
            
            
            0.30
            
            
            $
            6.53
            
            
            
            1,000
            
            
            $
            6.53$
            8.71
                - $15.75
            
            
            
            2,889,000
            
            
            
            8.41
            
            
            $
            10.44
            
            
            
            312,000
            
            
            $
            11.09$
            15.76
                - $22.50
            
            
            
            2,077,000
            
            
            
            4.72
            
            
            $
            18.30
            
            
            
            1,801,000
            
            
            $
            18.36$
            22.51-
                $35.00
            
            
            
            1,275,000
            
            
            
            5.64
            
            
            $
            29.50
            
            
            
            1,275,000
            
            
            $
            29.506,324,000
            
            
            
            6.57
            
            
            $
            16.80
            
            
            
            3,471,000
            
            
            $
            21.49




As
      of
      March 31, 2007, there was $7.3 million of total unrecognized compensation cost
      related to non-vested share-based compensation arrangements granted under the
      Company’s stock option plan. That cost is expected to be recognized over a
      weighted-average period of 1.4 years.




59
 *Table
            of Contents*





**8.**
            **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% of net sales. Substantially
      all of the Company’s net sales were to customers located in the United States.
      Reportable segment information for the year ended December 31, 2004, three
      months ended March 31, 2005 and years ended March 31, 2006 and 2007 follows
      (amounts in thousands):




**Twelve
                Months Ended**
              **December
                31,**
            
            
            **Three
                Months Ended**
              **March
                31,**
            
            
            **Year
                Ended March 31,****Net
                Sales**
            
            **2004**
            
            
            **2005**
            
            
            **2006**
            
            
            **2007**Retail
            
            $
            929,896
            
            
            $
            231,899
            
            
            $
            984,293
            
            
            $
            1,064,518Wholesale
            
            
            42,277
            
            
            
            10,731
            
            
            
            39,296
            
            
            
            40,178Total
                sales
            
            $
            972,173
            
            
            $
            242,630
            
            
            $
            1,023,589
            
            
            $
            1,104,696**Gross
                Profit**Retail
            
            $
            371,180
            
            
            $
            88,070
            
            
            $
            375,756
            
            
            $
            424,555Wholesale
            
            
            8,418
            
            
            
            2,269
            
            
            
            7,693
            
            
            
            8,040Total
                gross profit
            
            
            379,598
            
            
            
            90,339
            
            
            
            383,449
            
            
            
            432,595Operating
                expenses
            
            
            312,263
            
            
            
            81,760
            
            
            
            340,371
            
            
            
            393,351Depreciation
                and amortization
            
            
            28,246
            
            
            
            7,776
            
            
            
            31,424
            
            
            
            32,675Interest
                income
            
            
            (3,326
            )
            
            
            (617
            )
            
            
            (5,059
            )
            
            
            (7,948
            )Interest
                expense
            
            
            63
            
            
            
            29
            
            
            
            122
            
            
            
            1,181Other
                expense (income)
            
            
            -
            
            
            
            286
            
            
            
            (147
            )
            
            
            (665
            )Income
                before provision for income taxes
            
            $
            42,352
            
            
            $
            1,105
            
            
            $
            16,738
            
            
            $
            14,001




**9.**
            **Employee
                Benefit Plans**




**401(k)
      Plan**




In
      1998,
      the Company adopted a 401(k) Plan (the “Plan”). All full-time employees were
      eligible to participate in the Plan after one year of service. Prior to fiscal
      2007, the Company could elect to match employee contributions or make a
      discretionary contribution to the Plan, but historically had elected not to
      do
      so. For the year ended December 31, 2004, for the three months ended March
      31,
      2005, and for the year ended March 31, 2006, no matching or discretionary
      contributions were made.  The plan was amended in fiscal 2007 and
      currently the Company matches in cash at a rate of 100% of the first 3% an
      employee contributes and 50% of the next 2% the employee contributes with
      immediate vesting.  For the year ended March 31, 2007 the Company
      contributed approximately $0.4 million.










60
 *Table
            of Contents*




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 $3.5 million and $4.0 million as of March 31,
      2006 and March 31, 2007, respectively.




**10.**
            **Quarterly
                Financial Information
                (Unaudited)**




The
      following table sets forth certain unaudited results of operations for each
      quarter during fiscal years 2006 and 2007. 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.




**Fiscal
                  Year 2006 ( April 1, 2005 to March 31,
                  2006)****(Amounts
                  in thousands except per share data)**
                **(Unaudited)****(April
                  –June)**
                **1st****Quarter**
              
              
              **(July
                  – September)**
                **2nd
                  Quarter**
              
              
              **(October
                  –December)**
                **3rd
                  Quarter**
              
              
              **(January
                  – March)**
                **4th
                  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
              
              
              
              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





61
 *Table
            of Contents*




**Fiscal
                  Year 2007 ( April 1, 2006 to March 31, 2007)****(Amounts
                  in thousands except per share data)**
                **(Unaudited)****(April
                  –June)**
                **1st****Quarter**
              
              
              **(July
                  – September)**
                **2nd
                  Quarter**
              
              
              **(October
                  –December)**
                **3rd
                  Quarter**
              
              
              **(January
                  – March)**
                **4th
                  Quarter****Net
                  sales:**99¢
                  Only Stores
              
              $
              254,001
              
              
              $
              251,769
              
              
              $
              291,595
              
              
              $
              267,153Bargain
                  Wholesale
              
              
              9,613
              
              
              
              9,333
              
              
              
              10,456
              
              
              
              10,776Total
              
              
              263,614
              
              
              
              261,102
              
              
              
              302,051
              
              
              
              277,929Gross
                  profit
              
              
              99,890
              
              
              
              101,968
              
              
              
              121,114
              
              
              
              109,623(Operating
                  income (loss)
              
              
              141
              
              
              
              (1,712
              )
              
              
              10,632
              
              
              
              (2,492
              )Net
                  income (loss)
              
              $
              1,857
              
              
              $
              (5
              )
              
              $
              8,944
              
              
              $
              (1,034
              )**Earnings
                  (loss) per common share:**Basic
              
              $
              0.03
              
              
              $
              0.00
              
              
              $
              0.13
              
              
              $
              (0.01
              )Diluted
              
              $
              0.03
              
              
              $
              0.00
              
              
              $
              0.13
              
              
              $
              (0.01
              )Weighted
                  average shares outstanding:Basic
              
              
              69,684
              
              
              
              69,914
              
              
              
              69,919
              
              
              
              69,933Diluted
              
              
              69,877
              
              
              
              69,914
              
              
              
              69,986
              
              
              
              69,933




**11.**
            **Other
                Current Liabilities**





Other
      current liabilities as of March 31, 2006 and March 31, 2007 are as
      follows:





**March
                31,**
            
            
            **March
                31,****2006**
            
            
            **2007**(Amounts
                in thousands)Accrued
                property taxes
            
            $
            2,306
            
            
            $
            3,081Accrued
                utilities
            
            
            2,147
            
            
            
            2,145Accrued
                legal reserves and fees
            
            
            7,060
            
            
            
            2,956Accrued
                accounting fees
            
            
            625
            
            
            
            1,346Accrued
                advertising
            
            
            425
            
            
            
            577Accrued
                rent and related expenses
            
            
            1,473
            
            
            
            2,225Other
            
            
            2,453
            
            
            
            4,945Total
                other current liabilities
            
            $
            16,489
            
            
            $
            17,275





**12.**
            **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):




62
 *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 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.





(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.





63
 *Table
            of Contents*





**13.**
            **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




64
 *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




65
 *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 inventory
      accounting and the material weakness in construction-in-progress
      reclassifications to fixed assets, 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
      2007, 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 was a material weakness in the
      construction-in-progress reclassifications to fixed assets, and a material
      weakness in inventory accounting, 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,
      2007.





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.





66
 *Table
            of Contents*





Management
      identified the following material weaknesses in the Company’s internal control
      over financial reporting as of March 31, 2007:





1.  As
      of March 31, 2007, there was an internal control weakness surrounding the
      Company’s inventory accounts.  The Company did not maintain accurate
      records of specific item quantity and location of its inventory and therefore
      relied primarily on physical counting of inventory and its existing
      transactional controls.  The nature, size and number of locations make
      it infeasible to physically count the entire inventory every
      quarter.  These factors in combination with control deficiencies
      surrounding inventory accounts related to store receiving and store returns
      result in more than a remote likelihood that a material misstatement of the
      annual or interim financial statements will not be prevented or
      detected.





2.  As
      of March 31, 2007, the Company did not maintain effective controls over the
      transfers from and reconciliation of assets from the construction-in-progress
      to
      the fixed assets in use accounts which resulted in material reclassification
      adjustments.  In addition, the Company did not provide a
      reconciliation between its fixed asset subledgers and general ledger in a timely
      fashion.





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 2007, 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 financial
      reporting.  During this quarter, the Company did take certain steps to
      improve its internal control over financial reporting, as described
      below.





Merchandise
      Inventory Management.





(i)
            The
                Company implemented and tested new warehouse receiving standard operating
                procedures, including procedures related to tracking and valuation
                of
                overages.


(ii)
            The
                Company completed training certification for all warehouse supervisors
                and
                store management personnel in Total Inventory Control
                procedures.


(iii)
            Pallet
                level manifests were created and associated with scanable pallet
                tags for
                all outgoing pallets.


(iv)
            The
                Company implemented pallet tracking and reporting, and increased
                pallet
                auditing frequency to 1% of all outgoing pallets to identify retraining
                and disciplinary requirements.


(v)
            Scanable
                truck seals were implemented.


(vi)
            The
                Company enhanced its store physical counting procedures to achieve
                more
                accurate counts.





Although
      the Company implemented a significant number of remediation initiatives in
      fiscal 2007 and is continuing to improve the Company’s internal control over
      financial reporting in fiscal 2008, there can be no assurance that the Company
      will eliminate the aforementioned material weaknesses in fiscal
      2008.





67
 *Table
            of Contents*




**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, 2007, because of the effect of material weaknesses relating
      to
      the inadequate controls over inventory and fixed assets, 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.





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, 2007, there was an internal control weakness surrounding the
      Company’s inventory accounts.  The Company did not maintain accurate
      records of specific item quantity and location of its inventory and therefore
      relied primarily on physical counting of inventory and its existing
      transactional controls.  The nature, size and number of locations make
      it infeasible to physically count the entire inventory every
      quarter.  These factors in combination with control deficiencies
      surrounding inventory accounts related to store receiving, and store returns
      result in more than a remote likelihood that a material misstatement of the
      annual or interim financial statements will not be prevented or
      detected.





2.  As
      of March 31, 2007, the Company did not maintain effective controls over the
      transfers from and reconciliation of assets from the construction-in-progress
      to
      the fixed assets in use accounts which resulted in material reclassification
      adjustments encountered during our audit.  In addition, the Company
      did not provide a reconciliation between its fixed asset subledgers and general
      ledger in a timely fashion.





68
 *Table
            of Contents*





These
      material weaknesses were considered in determining the nature, timing and extent
      of audit tests applied in our audit of the 2007 consolidated financial
      statements, and this report does not affect our report dated June 28, 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, 2007, 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, 2007, 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, 2006 and March 31, 2007 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
      years
      ended March 31, 2006 and 2007, and our report dated June 28, 2007 expressed
      an
      unqualified opinion.







/s/
      BDO
      Seidman, LLP


Los
      Angeles, California


June
      28,
      2007




**Item
      9B. Other Information**




None





69
 *Table
            of Contents*








**PART
      III**




**Item
                10.**
            **Directors
                and Executive Officers of the
                Registrant**





Information  regarding
      Directors and Executive Officers of the registrant required by Item 401 of
      Regulation S-K, information regarding Directors and Executive Officers of the
      registrant required by Item 405 of Regulation S-K,  information
      regarding Directors and Executive Officers of the registrant required by Item
      406 of Regulation S-K, and information regarding Directors and Executive
      Officers of the registrant required by Item 407(d)(4) and (d)(5) of Regulation
      S-K is presented under the captions "Election of Directors," "Information with
      Respect to Nominees and Executive Officers," "Code of Business Conduct and
      Ethics," “Further Information Concerning the Board of Directors” and "Section
      16(a) Beneficial Ownership Reporting Compliance" in the definitive Proxy
      Statement for the Company's 2007 Annual Meeting of Shareholders, which will
      be
      filed with the Commission no later than 120 days after the end of the Company’s
      2007 fiscal year and which is incorporated  herein by
      reference.





**Item
                11.**
            **Executive
                Compensation**





The
      information required by Item 402 of Regulation S-K and paragraphs (e)(4) and
      (e)(5) of Item 407 of Regulation S-K is presented under the captions "Executive
      Compensation", “Compensation Committee Interlocks and Insider Participation,”
and “Report of the Compensation Committee” in the definitive Proxy Statement for
      the Company's 2007 Annual Meeting of Shareholders, and is incorporated herein
      by
      reference.




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




The
      information required by Item 403 of Regulation S-K is presented under the
      captions "Principal Shareholders" in the definitive Proxy Statement for the
      Company's 2007 Annual Meeting of Shareholders, and is incorporated herein by
      reference.





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
      information required by Item 404 of Regulation S-K and Item 407(a) of Regulation
      S-K is presented under the captions "Certain Transactions with Directors and
      Executive Officers" and “Further Information Concerning the Board of Directors”
in the definitive Proxy Statement for the Company's 2007 Annual Meeting of
      Shareholders, and is incorporated herein by reference.





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




The
      information required by Item 9(e) of Schedule 14A is presented under the caption
      "Independent Registered Public Accountants" in the definitive Proxy Statement
      for the Company's 2007 Annual Meeting of Shareholders, and is incorporated
      herein by reference.







**PART
      IV**




**Item
                15.**
            **Exhibits,
                Financial Statement Schedules**




a)  Financial
      Statements. Reference is made to the Index to the Financial Statements set
      forth
      in item 8 on page 36 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.




70
 *Table
            of Contents*




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, 2007Allowance
                for doubtful accounts
            
            $
            137
            
            
            
            254
            
            
            
            139
            
            
            $
            252Inventory
                reserve
            
            $
            8,764
            
            
            
            1,702
            
            
            
            6,716
            
            
            $
            3,750Tax
                valuation allowance
            
            $
            5,517
            
            
            
            -
            
            
            
            1,557
            
            
            $
            3,960For
                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
            
            
            
            -
            
            
            $
            4,607




71
 *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.(7)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
            [Reserved]10.29
            Robert
                Kautz Employment Agreement(5)10.30
            Second
                Amendment to 6161 Atlantic Blvd. Lease, dated January 1, 2005.
                (7)




72
 *Table
            of Contents*





21.0
            Subsidiaries*23.1
            Consent
                of BDO Seidman, LLP*23.2
            Consent
                of Deloitte & Touche 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.
              (7)
                ) Incorporated by reference from the Company’s 2006 Annual Report on Form
                10-K as filed with the Securities and Exchange Commission on
                April  2, 2007


73
 *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
              
              /s/
                Eric Schiffer
            
            Chairman
                of the Board
            
            June
                28, 2007Eric
                Schiffer
            
            Chief
                Executive Officer and Director
            
            June
                28, 2007/s/
                Jeff GoldJeff
                Gold
              
              /s/
                Howard Gold
            
            President,
                Chief Operating Officer and Director
            
            June
                28, 2007Howard
                Gold
              
              /s/
                Robert Kautz
            
            Executive
                Vice President of Special Projects and Director
            
            June
                28, 2007Robert
                Kautz
              
              /s/
                Eric Flamholtz
            
            Chief
                Financial Officer (Principal financial officer and principal accounting
                officer)
            
            June
                28, 2007Eric
                Flamholtz
              
              /s/
                Lawrence Glascott
            
            Director
            
            June
                28, 2007Lawrence
                Glascott
              
              /s/
                Marvin L. Holen
            
            Director
            
            June
                28, 2007Marvin
                L. Holen
              
              /s/
                Jennifer Holden Dunbar
            
            Director
            
            June
                28, 2007Jennifer
                Holden Dunbar
              
              /s/
                Peter Woo
            
            Director
            
            June
                28, 2007Peter
                Woo
            
            Director
            
            June
                28, 2007




74