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	Page
Item 1.	Business	3
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	17
Item 2.	Properties	17
Item 3.	Legal Proceedings	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
	Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	23
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	66
Item 9A.	Controls and Procedures	66
Item 9B.	Other Information	69
	Part III
Item 10.	Directors and Executive Officers of the Registrant	70
Item 11.	Executive Compensation	70
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	70
Item 13.	Certain Relationships and Related Transactions	70
Item 14.	Principal Accounting Fees and Services	70
	Part IV	70
Item 15.	Exhibits, Financial Statement Schedules	70
	Signatures	74
	Exhibit Index	72

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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.

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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.

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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.

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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.

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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		$	1,064,518
Annual 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)		232
New stores		28			38			33			15			19
Stores closed		-			-			3	(a)		2	(c)		-
Total store count at year-end		151			189			219			232			251
Average 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			4,337,974
Average 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.

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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.

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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.

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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

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.

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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.

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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

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

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

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.

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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.

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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.

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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.

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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 Range
	High		Low
Fiscal Year ended March 31, 2006:
First Quarter	$	13.32	$	10.05
Second Quarter		12.86		9.02
Third Quarter		10.85		9.01
Fourth Quarter		13.62		9.92
Fiscal Year ending March 31, 2007:
First Quarter	$	13.32	$	10.00
Second Quarter		12.92		10.04
Third Quarter		12.71		10.70
Fourth 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.

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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 INFORMATION
Plan 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		2,870,000
Equity compensation plans not approved by security holders		-		-		-
Total		6,324,000	$	16.80		2,870,000

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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.

 

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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		$	1,064,518
Bargain Wholesale		49,959			46,112			42,277			39,296			40,178
Total sales		713,942			862,460			972,173			1,023,589			1,104,696
Cost of sales (excluding depreciation and amortization expense as shown separately below)		427,356			516,686			592,575			640,140			672,101
Gross profit		286,586			345,774			379,598			383,449			432,595
Selling, general and administrative expenses:
Operating expenses		178,561			235,428			312,263			340,371			393,351
Depreciation and amortization		14,481			19,391			28,246			31,424			32,675
Total operating expenses		193,042			254,819			340,509			371,795			426,026
Operating income		93,544			90,955			39,089			11,654			6,569
Other 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			14,001
Provision for income taxes		37,659			36,710			14,521			5,316			4,239
Net income	$	60,732		$	58,702		$	27,831		$	11,422		$	9,762
Earnings per common share:
Basic	$	0.87		$	0.82		$	0.39		$	0.16		$	0.14
Diluted	$	0.85		$	0.81		$	0.39		$	0.16		$	0.14
Weighted average number of common shares outstanding:
Basic		69,938			71,348			70,627			69,553			69,862
Diluted		71,181			72,412			71,016			69,737			70,017
Company Operating Data:
Sales Growth
99¢ 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	%

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	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			251
Change in comparable stores
net 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		$	4,421
Average 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			4,337,974
Balance Sheet Data:
Working capital	$	215,747		$	217,825		$	184,778		$	201,475		$	209,890
Total assets	$	450,078		$	563,714		$	600,204		$	628,708		$	643,135
Capital lease obligation, including current portion	$	1,637		$	1,593		$	811		$	774		$	699
Long-term debt, including current portion		-			-			-		$	6,174		$	7,299
Total 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.

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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	$	231,899
Bargain Wholesale		11,238		10,731
Total		230,050		242,630
Gross profit		92,229		90,339
Operating income		15,169		803
Net income	$	10,204	$	799
Earnings per common share:
Basic	$	0.14	$	0.01
Diluted	$	0.14	$	0.01
Shares outstanding:
Basic		72,064		69,533
Diluted		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.

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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.

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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.

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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		4.4
Total		972,173		100.0			1,023,589		100.0			1,104,696		100.0			230,050		100.0			242,630		100.0
Cost of sales		592,575		61.0			640,140		62.5			672,101		60.8			137,821		59.9			152,291		62.8
Gross profit		379,598		39.0			383,449		37.5			432,595		39.2			92,229		40.1			90,339		37.2
Selling, general and administrative expenses:
Operating expenses		312,263		32.1			340,371		33.3			393,351		35.6			71,040		30.9			81,760		33.7
Depreciation and amortization		28,246		2.9			31,424		3.1			32,675		3.0			6,020		2.6			7,776		3.2
Total		340,509		35.0			371,795		36.4			426,026		38.6			77,060		33.5			89,536		36.9
Operating income		39,089		4.0			11,654		1.1			6,569		0.6			15,169		6.6			803		0.3
Other 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		0.4
Provision for income taxes		14,521		1.5			5,316		0.5			4,239		0.4			6,565		2.9			306		0.1
Net 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.

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 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.

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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

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.

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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.

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

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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.

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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.

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

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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

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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

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99¢ Only Stores

CONSOLIDATED BALANCE SHEETS

(Amounts In Thousands, Except Share Data)

ASSETS

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

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

39

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

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

40

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

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

41

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		$	496,954
Net income		-			-		-			27,831			27,831
Tax benefit from exercise of stock options		-			40		-			-			40
Repurchase of common stock		(2,594	)		-		-			(38,214	)		(38,214	)
Proceeds from exercise of stock options		78			1,673		-			-			1,673
BALANCE, December 31, 2004		69,517			212,606		-			275,678			488,284
Net income		-			-		-			799			799
Net unrealized investment losses		-			-		(7	)		-			(7	)
Total comprehensive income													792
Tax benefit from exercise of stock options		-			50		-			-			50
Proceeds from exercise of stock options		32			282		-			-			282
BALANCE, March 31, 2005		69,549			212,938		(7	)		276,477			489,408
SAB No. 108 cumulative effect (Note 12)		-			2,445		-			(2,076	)		369
BALANCE, April 1, 2005, as adjusted		69,549			215,383		(7	)		274,401			489,777
Net income		-			-		-			11,422			11,422
Net unrealized investment gains		-			-		8			-			8
Total comprehensive income		-			-		8			11,422			11,430
Tax benefit from exercise of stock options		-			57		-			-			57
Proceeds from exercise of stock options		20			89		-			-			89
Stock-based compensation expense		-			173		-			-			173
BALANCE, March 31, 2006		69,569			215,702		1			285,823			501,526
Net income		-			-		-			9,762			9,762
Net unrealized investment gains		-			-		227			-			227
Total comprehensive income		-			-		227			9,762			9,989
Tax benefit from exercise of stock options		-			1,032		-			-			1,032
Proceeds from exercise of stock options		373			1,456		-			-			1,456
Stock-based compensation expense		-			5,224		-			-			5,224
BALANCE, March 31, 2007		69,942		$	223,414	$	228		$	295,585		$	519,227

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

42

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		$	799
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		28,246			31,424			32,675			7,776
Loss on disposal of fixed assets (includes asset impairment of $800 for the year ended March 31, 2006)		1,152			999			171			151
Excess 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			50
Changes in assets and liabilities associated with operating activities:
Sales of short-term investments, net		55,050			36,040			-			8,885
Accounts receivable		(1,218	)		1,558			506			(1,288	)
Inventories		(48,427	)		(7,232	)		(11,887	)		19,194
Other assets		(2,750	)		2,474			(3,583	)		178
Deposits		(74	)		165			50			13
Accounts payable		11,191			16,415			(9,398	)		(17,177	)
Accrued expenses		9,168			1,006			4,672			1,688
Accrued workers’ compensation		20,126			5,867			(738	)		1,913
Income taxes		3,336			(11,540	)		6,013			248
Deferred rent		2,229			(731	)		586			368
Net cash provided by operating activities		94,398			82,508			28,506			20,866
CASH 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			282
Repurchases 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			271
NET INCREASE (DECREASE) IN CASH		566			2,842			(3,975	)		1,232
CASH, beginning of period		318			2,116			4,958			884
CASH, end of period	$	884		$	4,958		$	983		$	2,116

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

43

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

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

Property and Equipment

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

Owned buildings & improvements	Lesser of 30 years or the estimated useful life of the improvement
Leasehold improvements	Lesser of the estimated useful life of the improvement or remaining lease term
Fixtures and equipment	3-5 years
Transportation equipment	3-5 years

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

Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”, the Company assesses the impairment of long-lived assets 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

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		69,862
Dilutive effect of outstanding stock options		389		254		184		155
Weighted 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

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

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.

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

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

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

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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 Greater
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
March 31, 2007
Municipal 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.

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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		$	8,231
State		6,306			682			1,903			1,929
		26,045			2,214			11,276			10,160
Deferred - 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			1.7
Effect 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	%

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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		$	2,592
Uniform inventory capitalization		5,894			5,999
Prepaid expenses		(529	)		(1,847	)
Accrued expenses		2,243			2,314
Workers’ compensation		18,927			18,611
State taxes		(1,992	)		(1,255	)
Other, net		1,569			1,929
Valuation allowance		(46	)		-
TOTAL CURRENT ASSETS (LIABILITIES)		30,638			28,343
NON-CURRENT ASSETS (LIABILITIES)
Depreciation and amortization		5,169			11,267
Net operating loss carry-forwards		7,916			5,625
Deferred rent		1,913			1,652
Other, net		145			3,176
Valuation allowance		(5,471	)		(3,960	)
TOTAL NON-CURRENT ASSETS (LIABILITIES)		9,672			17,760
NET 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.

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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		$	824
2009		36,402		106			742
2010		31,078		106			517
2011		25,510		106			219
2012		18,553		106			110
Thereafter		46,467		437			-
Future minimum lease payments	$	196,029	$	967		$	2,412
Less amount representing interest				(268	)
Present value of future lease payments			$	699

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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.

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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			5,035,000
Authorized		-			-		-			-
Granted		(1,269,000	)		-		(175,000	)		(2,856,000	)
Cancelled		441,000			148,000		622,000			691,000
Available 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.

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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		$	11,422
Add: Total stock-based employee compensation expense included in reported net income, net of related tax effects		-		-			173
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		7,480		1,722			3,295
Pro forma net income (loss)	$	20,351	$	(923	)	$	8,300
Earnings (loss) per share:
Basic-as reported	$	0.39	$	0.01		$	0.16
Basic-pro forma	$	0.29	$	(0.01	)	$	0.12
Diluted-as reported	$	0.39	$	0.01		$	0.16
Diluted-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		$	4.36
Risk free interest rate		3.90	%	None		4.72	%		4.93	%
Expected life	5.4 Years			None	4.6 Years			4.6 Years
Expected 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.

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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		$	19.49
Granted		2,856,000		$	10.39
Exercised		(373,000	)	$	3.90
Cancelled		(691,000	)	$	14.93
Outstanding at the end of the period		6,324,000		$	16.80		6.57	$	13,168,000
Exercisable at the end of the period		3,471,000		$	21.49		4.58	$	1,921,000
Exercisable 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	$	29.50
			6,324,000		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.

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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		$	1,064,518
Wholesale		42,277			10,731			39,296			40,178
Total sales	$	972,173		$	242,630		$	1,023,589		$	1,104,696
Gross Profit
Retail	$	371,180		$	88,070		$	375,756		$	424,555
Wholesale		8,418			2,269			7,693			8,040
Total gross profit		379,598			90,339			383,449			432,595
Operating expenses		312,263			81,760			340,371			393,351
Depreciation and amortization		28,246			7,776			31,424			32,675
Interest income		(3,326	)		(617	)		(5,059	)		(7,948	)
Interest expense		63			29			122			1,181
Other 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.

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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	$	244,631
Bargain Wholesale		10,230		10,122		9,473		9,471
Total		244,679		246,024		278,784		254,102
Gross profit		91,706		92,012		105,820		93,911
Operating 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		69,558
Diluted		69,749		69,733		69,719		69,558

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	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	$	267,153
Bargain Wholesale		9,613		9,333			10,456		10,776
Total		263,614		261,102			302,051		277,929
Gross 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		69,933
Diluted		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	$	3,081
Accrued utilities		2,147		2,145
Accrued legal reserves and fees		7,060		2,956
Accrued accounting fees		625		1,346
Accrued advertising		425		577
Accrued rent and related expenses		1,473		2,225
Other		2,453		4,945
Total 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):

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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			2005
Non-cash stock compensation(2)	$	1,780		$	369	$	243		$	53		$	2,445
Long-term deferred income tax assets(3)		(389	)		71		(50	)		(1	)		(369	)
Impact on net income(4)	$	1,391		$	440	$	193		$	52
Retained 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.

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

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Consolidated Statement of Cash Flow

Three Months Ended March 31, 2004
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES	$	9,430
CASH 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		384
Net cash provided (used in) by financing activities		373
NET INCREASE IN CASH		75
CASH, beginning of period		318
CASH, end of period	$	393

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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

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

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

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

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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

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, 2007
Allowance for doubtful accounts	$	137		254		139	$	252
Inventory reserve	$	8,764		1,702		6,716	$	3,750
Tax valuation allowance	$	5,517		-		1,557	$	3,960
For the year ended March 31, 2006
Allowance for doubtful accounts	$	189		77		129	$	137
Inventory reserve	$	6,849		2,840		925	$	8,764
Tax valuation allowance	$	4,766		751		-	$	5,517
For the three months ended March 31, 2005
Allowance for doubtful accounts	$	268		-		79	$	189
Inventory reserve	$	4,997		1,852		-	$	6,849
Tax valuation allowance	$	4,607		159		-	$	4,766
For the year ended December 31, 2004
Allowance for doubtful accounts	$	143		125		-	$	268
Inventory reserve	$	1,711		3,610		324	$	4,997
Tax valuation allowance	$	3,900		707		-	$	4,607

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Exhibit Index	Exhibit Description
3.1	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)

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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

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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 Schiffer

By:  Eric Schiffer

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

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