UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 1O-Q

[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934

         For the quarterly period ended August 2, 2003
                                        --------------

                                            OR

[   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1932

         For the transition period from...............to................


                         Commission File Number: 1-10089

                            FACTORY 2-U STORES, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                       51-0299573
           --------                                       ----------
(State or other jurisdiction of                      (I.R.S. Employer
 incorporation or organization)                       Identification No.)


  4000 Ruffin Road, San Diego, CA                         92123-1866
  -------------------------------                         ----------
  (Address of principal executive office)                 (Zip Code)

                                 (858) 627-1800
              (Registrant's telephone number, including area code)


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

The number of shares  outstanding of the  registrant's  common stock, as of
September 10, 2003 was 18,046,132 shares.


<PAGE>



                            FACTORY 2-U STORES, INC.

             FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 2, 2003

                                      INDEX


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Balance Sheets as of August 2, 2003 (Unaudited), August 3, 2002
         (Unaudited) and February 1, 2003 ..................................F-1

         Statements of Operations (Unaudited) for the 13 and  26 weeks ended
         August 2, 2003 and August 3, 2002 .................................F-3

         Statements of Cash Flows (Unaudited) for the 26 weeks ended
         August 2, 2003 and August 3, 2002 .................................F-4

         Notes to Financial Statements (Unaudited) .........................F-5

Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations ...............................................3

Item 3.  Quantitative and Qualitative Disclosures About Market Risk..........11
Item 4.  Controls and Procedures ............................................12


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.................................................. 13
Item 2.  Changes in Securities and Use of Proceeds...........................13
Item 3.  Defaults Upon Senior Securities.....................................13
Item 4.  Submission of Matters to a Vote of Security Holders.................13
Item 5.  Other Information ..................................................13
Item 6.  Exhibits and Reports on Form 8-K ...................................14
Signatures    ...............................................................15






                                        2

<PAGE>



PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements


<TABLE>
<CAPTION>


                            FACTORY 2-U STORES, INC.
                                 Balance Sheets
                 (in thousands, except share and per share data)


                                         August 2,     August 3,     February 1,
                                           2003          2002           2003
                                         ---------     ---------     -----------
                                        (Unaudited)   (Unaudited)
<S>                                         <C>           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents              $  6,384        $  7,446      $  3,465
  Merchandise inventory                    65,692          76,824        32,171
  Accounts receivable, net                    350           2,476           884
  Income taxes receivable                       -           5,913         8,200
  Prepaid expenses                          6,862           6,909         5,436
  Deferred income taxes                     9,753           3,553         9,732
                                         --------        --------      --------
       Total current assets                89,041         103,121        59,888

Leasehold improvements and equipment, net  25,388          36,957        28,602
Deferred income taxes                      15,813           7,182        10,750
Other assets                                  815             959           963
Goodwill                                   26,301          26,301        26,301
                                         --------        --------      --------
       Total assets                      $157,358        $174,520      $126,504
                                         ========        ========      ========

</TABLE>












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


                                   (continued)




                                       F-1


<PAGE>

<TABLE>
<CAPTION>


                            FACTORY 2-U STORES, INC.
                                 Balance Sheets
                 (in thousands, except share and per share data)
                                   (continued)


                                        August 2,     August 3,     February 1,
                                          2003          2002           2003
                                        ---------     --------      -----------
                                       (Unaudited)   (Unaudited)
<S>                                       <C>            <C>           <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt   $  3,030      $  2,001      $   3,000
  Junior secured term loans                 7,500             -              -
  Accounts payable                         47,767        52,714         27,961
  Taxes payable                             2,840         3,150          5,840
  Accrued expenses                         25,223        32,875         27,831
                                         --------      --------      ---------
       Total current liabilities           86,360        90,740         64,632

Revolving credit facility                  17,949         5,386          6,300
Long-term debt                              7,023         8,906          6,445
Accrued restructuring charges               1,747         3,578          1,747
Deferred rent                               2,931         3,295          3,061
                                         --------      --------      ---------
       Total liabilities                  116,010       111,905         82,185
                                         --------      --------      ---------


Stockholders' equity:
  Common stock, $0.01 par value;
    35,000,000 shares authorized
    and 15,670,382 shares, 12,968,910
    shares and 13,475,705 shares
    issued and outstanding, respectively      157           130            135
  Stock subscription notes receivable           -        (2,149)        (1,116)
  Additional paid-in capital              126,518       122,319        122,516
  Accumulated deficit                     (85,327)      (57,685)       (77,216)
                                         --------      --------      ---------
       Total stockholders' equity          41,348        62,615         44,319
                                         --------      --------      ---------
       Total liabilities and
         stockholders' equity            $157,358      $174,520       $126,504
                                         ========      ========      =========



</TABLE>




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



                                       F-2




<PAGE>

<TABLE>
<CAPTION>


                            FACTORY 2-U STORES, INC.
                            Statements of Operations
                      (in thousands, except per share data)
                                   (Unaudited)



                                                            13 Weeks Ended            26 Weeks Ended
                                                            --------------            --------------
                                                        August 2,     August 3,     August 2,     August 3,
                                                          2003          2002          2003          2002
                                                        ---------     ---------     ---------     ---------
<S>                                                        <C>           <C>           <C>           <C>

Net sales                                               $ 123,659     $ 128,088     $ 228,006     $ 245,039
Cost of sales                                              85,090        87,059       151,802       162,852
                                                        ---------     ---------     ---------     ---------
    Gross profit                                           38,569        41,029        76,204        82,187

Selling and administrative expenses                        46,248        50,181        87,503        95,879
Pre-opening and closing expenses                               83           266           221           703
                                                        ---------     ---------     ---------     ---------
    Operating loss                                         (7,762)       (9,418)      (11,520)      (14,395)

Interest expense, net                                         935           310         1,569           568
                                                        ---------     ---------     ---------     ---------
Loss before income taxes                                   (8,697)       (9,728)      (13,089)      (14,963)
Income tax benefit                                         (3,307)       (3,891)       (4,978)       (5,985)
                                                        ---------     ---------     ---------     ---------
Net loss                                                $  (5,390)    $  (5,837)    $  (8,111)    $  (8,978)
                                                        =========     =========     =========     =========


Loss per share
  Basic                                                 $   (0.35)    $   (0.45)    $   (0.54)    $   (0.69)
  Diluted                                               $   (0.35)    $   (0.45)    $   (0.54)    $   (0.69)


Weighted average common shares outstanding
  Basic                                                    15,197        12,957        14,909        12,930
  Diluted                                                  15,197        12,957        14,909        12,930


</TABLE>


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



                                       F-3


<PAGE>

<TABLE>
<CAPTION>


                            FACTORY 2-U STORES, INC.
                            Statements of Cash Flows
                                 (in thousands)
                                   (Unaudited)

                                                        26 Weeks Ended
                                                        --------------
                                                 August 2, 2003   August 3, 2002
                                                 --------------   --------------
<S>                                                    <C>              <C>
Cash flows from operating activities
  Net loss                                         $    (8,111)      $   (8,978)
  Adjustments to reconcile net loss to net cash
    used in operating activities
      Depreciation and amortization                      6,667            7,466
      Loss on disposal of equipment                         24               51
      Deferred income tax                               (4,978)               -
      Deferred rent                                        277             (354)
      Stock subscription notes receivable
        valuation adjustment                              (708)               -
      Changes in operating assets and liabilities
        Merchandise inventory                          (33,521)         (21,964)
        Income tax receivable                            8,200           (5,913)
        Prepaid expenses and other assets                 (628)             536
        Advances to vendor                                 (16)          (1,525)
        Repayments from vendor                              77                -
        Accounts payable                                19,806           16,442
        Accrued expenses and other liabilities          (5,572)           3,098
                                                   ------------      -----------
Net cash used in operating activities                  (18,483)         (11,141)

Cash flows from investing activities
  Purchases of leasehold improvements and equipment     (3,155)          (5,125)
                                                   ------------      -----------
Net cash used in investing activities                   (3,155)          (5,125)

Cash flows from financing activities
  Borrowings on revolving credit facility               72,792           25,760
  Payments on revolving credit facility                (61,143)         (20,374)
  Payments on long-term debt and capital
    lease obligations                                       (6)             (18)
  Proceeds from debt financing                           7,500                -
  Proceeds from issuance of common stock, net            5,713                -
  Payment of deferred debt issuance costs                 (442)             (40)
  Proceeds from exercise of stock options                    -              918
  Payments of stock subscription notes receivable          143               76
                                                    -----------      -----------
Net cash provided by financing activities               24,557            6,322

Net increase (decrease) in cash                          2,919           (9,944)
Cash at the beginning of the period                      3,465           17,390
                                                    ----------       -----------
Cash at the end of the period                       $    6,384       $    7,446
                                                    ==========       ===========
Supplemental disclosure of cash flow information
  Cash paid during the period for
    Interest                                        $      916       $       97
    Income taxes                                    $       88       $    1,102

Supplemental disclosure of non-cash investing and financing activities
  Acquisition of equipment under notes payable      $      132       $        -
  Issuance of common stock to board members
    as compensation                                 $        8       $       33
  Foreclosure of collateral on stock subscription
    notes receivable                                $    1,681       $        -


</TABLE>

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

                                       F-4

<PAGE>

                            FACTORY 2-U STORES, INC.
                          Notes to Financial Statements
                                   (Unaudited)

(1)      Unaudited Interim Financial Statements

         The accompanying unaudited financial statements do not include all of
         the information and footnotes required by accounting principles
         generally accepted in the United States for annual financial statements
         and should be read in conjunction with the financial statements for the
         fiscal year ended February 1, 2003 included in our Form 10-K/A as filed
         with the Securities and Exchange Commission.

         We believe that the unaudited financial statements as of and for the 13
         weeks and 26 weeks ended August 2, 2003 and August 3, 2002 reflect all
         adjustments (consisting of normal recurring adjustments) necessary to
         present fairly the financial position, results of operations and cash
         flows for the periods presented. Due to the seasonal nature of our
         business, the results of operations for the interim period may not
         necessarily be indicative of the results of operations for a full year.

         Certain prior period amounts have been reclassified to conform their
         presentation to the current period's financial statements.

(2)      Recent Accounting Pronouncements

         In January 2003, the Financial Accounting Standards Board (the "FASB")
         issued FIN 46 - "Consolidation of Variable Interest Entities." FIN 46
         clarifies the application of Accounting Research Bulletin No. 51 -
         Consolidated Financial Statements to those entities defined as
         "Variable Interest Entities" (more commonly referred to as special
         purpose entities) in which equity investors do not have the
         characteristics of a "controlling financial interest" or do not have
         sufficient equity at risk for the entity to finance its activities
         without additional subordinated financial support from other parties.
         FIN 46 applies immediately to all Variable Interest Entities created
         after January 31, 2003, and by the beginning of the first interim or
         annual reporting period commencing after June 15, 2003 for Variable
         Interest Entities created prior to February 1, 2003. We do not expect
         the adoption of this statement will have a material impact on our
         financial position or results of operations.

         In April 2003, the FASB issued Statement of Financial Accounting
         Standard (the "SFAS") No. 149, "Amendment of Statement 133 on
         Derivative Instruments and Hedging Activities." This statement provides
         clarification on the financial accounting and reporting of derivative
         instruments and hedging activities and requires contracts with similar
         characteristics to be accounted for on a comparable basis. We are
         currently in the process of assessing the effect of SFAS No.149 and do
         not expect the adoption of it, which will be effective for contracts
         entered into or modified after June 30, 2003, to have a material impact
         on our financial position or results of operations.



                                       F-5


<PAGE>


         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
         Financial Instruments with Characteristics of both Liabilities and
         Equity." This statement establishes standards on the classification and
         measurement of financial instruments with characteristics of both
         liabilities and equity and is effective for financial instruments
         entered into or modified after May 31, 2003. We do not expect the
         adoption of this statement will have a material impact on our financial
         position or results of operations.

(3)      Fiscal 2002 Restructuring Charge

         In December 2002, we recorded a restructuring charge of $14.4 million
         in conjunction with the decision to close 23 stores as well as to
         consolidate both our distribution center network and corporate overhead
         structure. The purpose of these restructuring initiatives was to
         improve store profitability, reduce costs and improve efficiency.

         As of September 10, 2003, we closed 16 of these 23 stores and
         terminated the lease obligations of 13 of these closed stores. For the
         remaining seven stores, we have decided to continue to operate four of
         these stores as a result of entering into amendments to the leases with
         the landlords; and we plan to close the other three stores by January
         2004. In addition, we had completed the consolidation of our two former
         San Diego distribution centers into the new distribution center, which
         is also located in San Diego, California. We are currently seeking
         disposition of the leases for these two former San Diego distribution
         facilities.

         The balance of the liability ($4.7 million was included in the accrued
         expenses and $1.7 million was included in the accrued restructuring
         charges in the accompanying balance sheets) related to the fiscal 2002
         restructuring charge at August 2, 2003 was as follows:

<TABLE>

                                Balance at                            Balance at
                                February 1,     Cash       Non-cash    August 2,
(in thousands)                     2003       Payments      Charges       2003
                                -----------   --------     --------   ----------
<S>                                 <C>          <C>          <C>         <C>
Lease termination costs*         $ 6,548       $ (1,632)     $ 588      $ 5,504
Employee termination costs           908           (483)      (115)         310
Other costs                          786           (238)       115          663
                                 -------       --------      ------     -------
                                 $ 8,242       $ (2,353)     $ 588      $ 6,477
                                 =======       ========      ======     =======


<FN>

* The non-cash charge portion consists primarily of the write-off of deferred
  rent.

</FN>
</TABLE>








                                       F-6

<PAGE>


         The balances of non-cash inventory liquidation costs and fixed asset
         write-downs related to the fiscal 2002 restructuring charge at August
         2, 2003 were as follows:

<TABLE>

                                       Balance at                     Balance at
                                       February 1,       Usage/        August 2,
        (in thousands)                    2003         Adjustments        2003
                                       -----------     -----------    ----------
        <S>                                <C>             <C>            <C>
        Inventory liquation costs*       $   517        $ (103)         $  414
        Fixed asset write-downs**        $ 3,652        $ (656)         $2,996

<FN>

         * The balance of inventory liquidation costs of approximately $414,000
         as of August 2, 2003 was recorded as a valuation allowance for
         merchandise inventory.

         ** The balance of fixed asset write-downs of approximately $3.0 million
         as of August 2, 2003 was recorded as a valuation allowance for
         leasehold improvements and equipment.
</FN>
</TABLE>


 (4)     Fiscal 2001 Restructuring Charge

         In January 2002, we recorded a restructuring charge of $21.2 million in
         conjunction with the decision to close 28 under-performing stores, as
         well as the realignment of our field organization and workforce
         reductions. The purpose of the restructuring was to improve store
         profitability, streamline field operations, reduce costs and improve
         efficiency.

         We closed 24 of these 28 stores during the first quarter of fiscal 2002
         and the remaining four stores in January 2003. As of September 10,
         2003, we had terminated the lease obligations of 22 of these closed
         stores. In light of the favorable experience related to the costs of
         closing these stores, we recorded a non-cash adjustment to reduce the
         reserve for the fiscal 2001 restructuring initiatives by approximately
         $5.0 million during the fourth quarter of fiscal 2002. The adjustment
         included (1) reduction of reserve for lease termination costs by $3.8
         million, (2) reduction of reserve for inventory liquidation costs by
         $1.3 million, offset by (3) an additional reserve for fixed asset
         write-downs of $94,000.

         The balance of the liability (included in the accrued expenses in the
         accompanying balance sheets) related to the fiscal 2001 restructuring
         charge at August 2, 2003 was as follows:

<TABLE>

                                   Balance at                     Non-cash      Balance at
                                   February 1,      Cash        Charges and      August 2,
(in thousands)                        2003        Payments      Adjustments        2003
                                   -----------    --------      -----------     ----------
<S>                                    <C>           <C>             <C>            <C>
Lease termination costs             $  4,275      $ (1,330)        $     -       $  2,945
Employee termination costs                70           (16)              -             54
Other costs                              277          (108)           (132)            37
                                   -----------    --------      -----------     ----------
                                    $  4,622      $ (1,454)        $  (132)      $  3,036
                                   -----------    --------      -----------     ----------
</TABLE>


                                       F-7
<PAGE>

         The balances of non-cash inventory liquidation costs and fixed asset
         write-downs related to the fiscal 2001 restructuring charge at August
         2, 2003 were as follows:

<TABLE>

                                     Balance at                      Balance at
                                     February 1,       Usage/         August 2,
(in thousands)                          2003         Adjustments         2003
                                     -----------     -----------     ----------
<S>                                      <C>             <C>             <C>
Inventory liquation costs*            $    19         $     -          $    19
Fixed asset write-downs**             $   133         $    35          $   168

<FN>

         * The balance of inventory liquidation costs of approximately $19,000
         as of August 2, 2003 was recorded as a valuation allowance for
         merchandise inventory.

         ** The balance of fixed asset write-downs of approximately $168,000 as
         of August 2, 2003 was recorded as a valuation allowance for leasehold
         improvements and equipment.
</FN>
</TABLE>

 (5)     Revolving Credit Facility

         We have a $50.0 million revolving credit facility with a financial
         institution. Under this revolving credit facility, we may borrow up to
         70% of our eligible inventory and 85% of our eligible accounts
         receivable, as defined, up to $50.0 million. The revolving credit
         facility provides for a $7.5 million availability block against our
         availability calculation as defined. The credit facility also includes
         a $15.0 million sub-facility for letters of credit. Under the terms of
         the credit facility, the interest rate may increase or decrease subject
         to earnings before interest, tax obligations, depreciation and
         amortization expense (EBITDA), as defined, on a rolling four fiscal
         quarter basis. Accordingly, prime rate borrowings could range from
         prime to prime plus 1.0 % and LIBOR borrowings from LIBOR plus 1.5% to
         LIBOR plus 3.0%. The credit facility expires on March 3, 2006. We are
         obligated to pay fees equal to 0.125% per annum on the unused amount of
         the credit facility. The credit facility is secured by a first lien on
         accounts receivable and inventory. We are contractually prohibited from
         paying cash dividends on our common stock under the terms of the
         revolving credit facility without the consent of the lender.

         On February 14, 2003, we obtained the lender's consent to the
         incurrence by us of up to $10.0 million in additional indebtedness,
         which may be secured by a junior lien on the collateral.

         On April 10, 2003, we amended the terms of our revolving credit
         facility to add $7.5 million of term loans, to add financial covenants,
         and to amend certain reporting provisions and other terms. The term
         loans consist of a $6.5 million junior term note secured primarily by
         inventory and accounts receivable and a $1.0 million junior term note
         secured primarily by equipment and other assets. These notes bear
         interest at the rate of 14.5% per annum on the then current outstanding
         balance, and mature on April 10, 2004. The $6.5 million junior term
         note can be extended for one additional year. The financial covenant,
         which is related to achieving a minimum earnings before interest, tax




                                       F-8
<PAGE>

         obligations, depreciation and amortization expense (EBITDA), as
         defined, is subject to testing only if the Triggering Availability, as
         defined, is less than $10.0 million on the last three days of each
         month commencing on May 3, 2003. In addition, outstanding borrowings
         and letters of credit cannot exceed $12.2 million under the revolving
         credit facility during the period from December 22 through January 7 of
         each fiscal year. These financial covenants will terminate at such time
         that the $7.5 million term loans are no longer outstanding.

         At August 2, 2003, we were in compliance with all financial covenants,
         as defined, and had outstanding borrowings of $17.9 million and letters
         of credit of $12.5 million under our revolving credit facility. In
         addition, based on eligible inventory and accounts receivable, we were
         eligible to borrow $49.8 million under our revolving credit facility
         and had $11.9 million available for future borrowings after giving
         effect for the $7.5 million availability block, as defined.

(6)      Long-Term Debt

         Our long-term debt primarily consists of Junior Subordinated Notes (the
         "Notes"), which are non-interest bearing and are reflected on our
         balance sheets at the present value using a discount rate of 10%. We
         are prohibited from paying cash dividends on our common stock under the
         terms of the Notes without the consent of the note holders.

         As of August 2, 2003, the Notes had a face value of $11.3 million and a
         related unamortized discount of $1.4 million, resulting in a net
         carrying value of $9.9 million. The discount is amortized to interest
         expense as a non-cash charge over the term of the Notes. We made a
         principal payment on the Notes of $2.0 million in January 2003.
         Additional principal payments are scheduled on December 31, 2003 ($3.0
         million), December 31, 2004 ($3.0 million) and a final payment on May
         28, 2005 ($5.3 million).

(7)      Loss per Share and Comprehensive Loss

         We compute loss per share in accordance  with SFAS No. 128, "Earnings
         Per Share." Under the  provisions of SFAS No. 128, loss per share is
         computed based on the weighted  average shares  outstanding.  Diluted
         earnings per share is computed based on the weighted average shares
         outstanding and potentially dilutive common equivalent shares.

         Common stock equivalent shares totaling 274,669 and 191,553 for 13
         weeks and 26 weeks ended August 2, 2003, respectively, and 121,832 and
         134,391 for 13 weeks and 26 weeks ended August 3, 2002, respectively,
         are not included in the computation of diluted loss per share because
         the effect would be anti-dilutive.

         Our comprehensive loss equaled our net loss for the 13 weeks and 26
         weeks ended August 2, 2003 and August 3, 2002.




                                       F-9


<PAGE>


(8)      Stock-based Compensation

         We have elected under the provisions of SFAS No. 123, "Accounting for
         Stock-Based Compensation" to continue using the intrinsic value method
         of accounting for employee stock- based compensation in accordance with
         Accounting Principles Board No. 25 ("APB No. 25"), "Accounting for
         Stock Issued to Employees." Under the intrinsic value method,
         compensation expense is recognized only in the event that the exercise
         price of options granted is less than the market price of the
         underlying stock on the date of grant. The fair value method generally
         requires entities to recognize compensation expense over the vesting
         period of options based on the estimated fair value of the options
         granted. We have disclosed the pro forma effect of using the fair value
         based method to account for our stock-based compensation as required by
         SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
         Disclosure."

         The following table illustrates the effect on net loss and net loss per
         share if we had applied the fair value recognition provisions of SFAS
         No. 148.

<TABLE>

                                                         (in thousands, except per share data)
                                                         -------------------------------------
                                                       13 weeks ended               26 weeks ended
                                                       --------------               --------------
                                                  August 2,      August 3,      August 2,     August 3,
                                                    2003           2002           2003          2002
                                                  ---------      ---------      ---------     ---------
<S>                                                  <C>            <C>            <C>           <C>
Net loss before stock-based compensation,         $ (5,390)      $ (5,837)      $ (8,111)     $ (8,978)
  as reported
Stock-based compensation, using the fair              (529)          (782)        (1,126)       (1,592)
  value method, net of tax
                                                  ---------      ---------      ---------     ---------
Pro-forma net loss available to
  shareholders                                    $ (5,919)      $ (6,619)      $ (9,237)     $(10,570)
                                                  ---------      ---------      ---------     ---------

Pro-forma loss per share                          $  (0.39)      $  (0.51)      $  (0.62)     $  (0.82)
</TABLE>


         The Black-Scholes option valuation model was developed for use in
         estimating the fair value of traded options that have no vesting
         restrictions and are fully transferable. Option valuation models also
         require the input of highly subjective assumptions such as expected
         option life and expected stock price volatility. Because our employee
         stock-based compensation plan has characteristics significantly
         different from those of traded options and because changes in the
         subjective input assumptions can materially affect the fair value
         estimate, we believe that the existing option valuation models do not
         necessarily provide a reliable single measure of the fair value of
         awards from those plans.

         The weighted-average fair value of each option grant is estimated on
         the date of grant using the Black-Scholes option pricing model using
         the following weighted-average assumptions:
<TABLE>


                                      13 weeks ended         26 weeks ended
                                      --------------         --------------
                                  August 2,   August 3,   August 2,   August 3,
                                    2003        2002        2003        2002
                                  ---------   ---------   ---------   ---------
<S>                                  <C>         <C>         <C>         <C>
(i)   Expected dividend yield        0.00%       0.00%       0.00%       0.00%
(ii)  Expected volatility          103.63%     104.01%     103.66%     104.01%
(iii) Expected life                7 years     8 years     7 years     8 years
(iv)  Risk-free interest rate        4.01%       3.55%       3.96%       3.55%
</TABLE>


                                      F-10
<PAGE>

(9)      Provision for Income Taxes

         Based on our estimated effective tax rate for the entire fiscal year,
         which is dependent on our ability to generate future taxable income and
         to utilize the net operating loss carryforwards, we recorded an income
         tax benefit of $3.3 million and $5.0 million for the 13 weeks and 26
         weeks ended August 2, 2003.

(10)     Private Offering

         On March 6, 2003, we completed a private offering of 2,532,679 shares
         of our common stock for net proceeds of approximately $5.7 million,
         after deducting placement fees and other offering expenses. We used the
         net proceeds of this private offering for working capital purposes. In
         addition to the placement fees, the placement agent received warrants
         to purchase 75,000 shares of our common stock at an exercise price of
         $3.50 per share, a 30% premium over the closing price of $2.68 on March
         6, 2003. These warrants will expire in March 2006.

(11)     Stock Subscription Notes Receivable

         As of February 1, 2003, the outstanding stock subscription notes
         receivable balance was $1.1 million, net of a valuation allowance. All
         outstanding stock subscription notes receivable, which are secured by
         the underlying common stock of the Company, at that time were either
         due from current or former members of management with a five-year term
         and had maturity dates from April 29, 2003 to July 29, 2003 and an
         interest rate of 8.0% per annum.

         On March 21, 2003, two stock subscription notes in the principal amount
         of $99,548 and $50,000, respectively, plus accrued interest, were paid
         in full by current members of management.

         On April 29, 2003, the remaining stock subscription notes matured and
         we foreclosed on the shares of our common stock that served as
         collateral as of the close of business. The principal and accrued
         interest on the note due from Michael M. Searles, our former President
         and Chief Executive Officer, was $1,458,608 and the collateral's market
         value on April 29, 2003 was $1,198,750, resulting in a deficiency of
         $259,858, for which Mr. Searles is not personally liable under the
         terms of the note. In addition, the principal and accrued interest on
         two notes due from Jonathan W. Spatz, our former Chief Financial
         Officer, were $688,197 and the collateral's market value on April 29,
         2003 was $376,744, resulting in a deficiency of $311,453, for which Mr.
         Spatz is personally liable for $136,614 of the deficiency under the
         terms of his notes. Additionally, on April 29, 2003, the principal and
         accrued interest on the notes due from Tracy W. Parks, our former Chief
         Operating Officer, was $117,042 and the collateral had a market value
         of $82,197, resulting in a deficiency of $34,845, for which he is
         personally liable under the terms of his notes.



                                      F-11
<PAGE>


         In conjunction with the foreclosures as discussed above, we recorded
         income of approximately $708,000 to adjust the valuation allowance
         established as of February 1, 2003 as a result of the increase in the
         market value of our common stock on April 29, 2003 as compared to
         February 1, 2003.

         In August 2003, we received payment in full from Mr. Parks to repay the
         outstanding balance of his note. Based on Mr. Spatz's current financial
         condition, we have elected, at this time, to forbear our collection
         efforts regarding the amount for which he is personally liable.

(12)     Stock Options and Warrants

         As of August 2, 2003, we had outstanding options to purchase 1,316,436
         shares of our common stock. Included in these outstanding stock options
         are 450,000 stock options granted to certain of our new senior
         management members as an inducement to accept employment at the time
         they were hired, subject to shareholder approval of an appropriate
         amendment to our stock option plan. In the event that such an amendment
         is not approved, we are nevertheless contractually obligated to grant
         such options, which would not be granted under our stock option plan.

         At August 2, 2003, warrants to purchase 157,690 shares of our common
         stock were outstanding. These warrants have exercise prices in the
         range of $3.50 to $19.91 (weighted average exercise price of $12.11)
         and expire on various dates between May 2005 and March 2006.

(13)     Note Receivable

         In July 2002, we entered into a temporary bridge financing agreement
         (the "Agreement") with one of our trade vendors (the "Borrower") in
         which we, subject to the terms and conditions of the Agreement, would
         provide a $4.0 million revolving line of credit facility to the
         Borrower. Advances made to the Borrower under this Agreement are
         secured by the Borrower's accounts receivable, inventory, personal
         property and other assets including cash. Borrowings under this
         facility are also secured by personal guarantees from the principals of
         the Borrower. This Agreement expired on October 11, 2002, and we have
         not made any direct advances to the Borrower thereafter.

         Through August 2, 2003, we have made cash advances in the aggregate of
         approximately $3.1 million to the Borrower and received cash payments
         in the aggregate of approximately $866,000. We also received
         approximately $1.5 million of inventory shipments to offset the
         advances. The remaining balance of approximately $1.1 million was fully
         reserved as of August 2, 2003.





                                      F-12

<PAGE>

(14)     Legal Matters, Commitments and Contingencies

         On March 19, 2003, we entered into a settlement agreement with a former
         candidate for an executive level position who alleged that we breached
         an oral agreement to employ him for one year. Under the terms of the
         settlement agreement, we are obligated to pay $390,000, payable in 52
         equal bi-weekly installments.

         In April 2003, Lynda Bray and Masis Manougian, two of our then current
         employees, filed a lawsuit against us entitled "Lynda Bray, Masis
         Manougian, etc., Plaintiffs, vs. Factory 2-U Stores, Inc., etc.,
         Defendants", Case No. RCV071918 in the Superior Court of the State of
         San Bernardino (the "Bray Lawsuit"). The First Amended Complaint in the
         Bray Lawsuit alleges that we violated the California Labor Code,
         Industrial Wage Commission Orders and the California Unfair Competition
         Act by failing to pay wages and overtime for all hours worked, by
         failing to document all hours worked, by threatening to retaliate
         against employees who sought to participate in the settlement of the
         O'Hara Lawsuit and by failing to inform prospective employees of unpaid
         wage claims. Plaintiffs purport to bring this action on behalf of all
         persons who were employed in one of our California stores at any time
         after April 25, 2003. Plaintiffs seek compensatory and exemplary
         damages, interest, penalties, attorneys' fees and disgorged profits in
         an amount which plaintiffs estimated to be not less than $100,000,000.
         Plaintiffs also seek injunctive relief requiring correction of the
         alleged unlawful practices.

         Although at this stage of the litigation it is difficult to predict the
         outcome of the case with certainty, we believe that we have meritorious
         defenses to the Bray Lawsuit and we are vigorously defending against
         it.

         We are at all times subject to pending and threatened legal actions
         that arise in the normal course of business. In the opinion of our
         management, based in part on the assessment of legal counsel, the
         ultimate disposition of these current matters will not have a material
         adverse effect on our financial position or results of operations.

         On May 27, 2003, we filed a lawsuit against the Borrower and the two
         guarantors seeking the balance due under the temporary bridge financing
         agreement (see Note 13).

15.      Subsequent Event

         On August 20, 2003, we sold 2,450,000 shares of common stock at $5.00
         per share to accredited investors and received approximately $11.6
         million in net proceeds, after deducting placement fees and other
         expenses. This transaction also provides for warrants to purchase
         490,000 shares at the same price as the initial shares purchased
         exercisable until 90 days after the effective date of the registration
         statement filed for the resale of the initial shares. In addition to
         the placement fees, the placement agent received warrants to purchase
         112,500 shares of our common stock at an exercise price of $6.00 per
         share. These warrants will expire in August 2006. Depending on the
         number of additional shares purchased by investors, the placement agent
         is entitled to receive additional fees and an additional warrant to
         purchase up to 22,500 shares at $6.00 per share.


                                      F-13


<PAGE>


Item 2.   Management's Discussion and Analysis
            of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q are forward-looking
statements, which are within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are not based on historical facts, but rather reflect
our current expectation concerning future results and events. These
forward-looking statements generally may be identified by the use of phrases
such as "believe", "expect", `estimate", "anticipate", "intend", "plan",
"foresee", "likely", "will" or other similar words or phrases. Similarly,
statements that describe our objectives, plans or goals are or may be
forward-looking statements. These forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be different from any future results,
performance or achievements expressed or implied by these statements.

The following factors, among others, could affect our future results,
performance or achievements, causing these results to differ materially from
those expressed in any of our forward-looking statements: general economic and
business conditions (both nationally and in regions where we operate); trends in
our business and consumer preferences, especially as may be impacted by economic
weakness on consumer spending; the effect of government regulations and
legislation; litigation and other claims that may be asserted against us; the
effects of intense competition; changes in our business strategy or development
plans, including anticipated growth strategies and capital expenditures; the
challenges and costs associated with maintaining and improving technology; the
costs and difficulties of attracting and retaining qualified personnel; the
effects of increasing labor, utility, fuel and other operating costs; our
ability to obtain adequate quantities of suitable merchandise at favorable
prices and on favorable terms and conditions; the effectiveness of our operating
initiatives and advertising and promotional strategies and other factors
described in the Annual Report for the fiscal year ended February 1, 2003 on
Form 10-K/A and in our other filings with the Securities and Exchange
Commission.

We do not undertake to publicly update or revise any of our forward-looking
statements, whether as a result of new information, future events and
developments or otherwise, except to the extent that we may be obligated to do
so by applicable law.

General

The following discussion and analysis should be read in conjunction with our
Financial Statements and notes thereto, included elsewhere in this Form 10-Q.

As of August 2, 2003, we operated 242 "Factory 2-U" off-price retail stores
which sell branded casual apparel for the family, as well as selected domestics
and household merchandise at prices which generally are significantly lower than
the prices offered by other discount chains. We had 257 stores in operation as
of August 3, 2002.



                                        3
<PAGE>

During the 13-week period ended August 2, 2003, we opened one new store and
closed one store. For the same period last year, we opened three new stores and
closed two stores. The average numbers of stores in operation were 242 and 257
for the 13-week periods ended August 2, 2003 and August 3, 2002, respectively.
In addition, we averaged 229 and 217 comparable stores for the 13 weeks ended
August 2, 2003 and August 3, 2002, respectively.

During the 26-week period ended August 2, 2003, we opened two new stores and
closed four stores, one of which was closed on a temporary basis for structural
repairs and reopened subsequent to August 2, 2003. For the same period last
year, we opened eight new stores and closed 30 stores. The average numbers of
stores in operation were 243 and 260 for the 26-week periods ended August 2,
2003 and August 3, 2002, respectively. In addition, we averaged 226 and 211
comparable stores for the 26 weeks ended August 2, 2003 and August 3, 2002,
respectively.

We define comparable stores as follows:

o  New stores are considered comparable after 18 months from date of opening.
o  When a store relocates within the same market, it is considered comparable
   after 6 months of operations.
o  Store expansion greater than 25% of the original store size are treated
   like a new store and become comparable after 18 months of operations.
   Store expansion less than 25% of the original store size remains in the
   comparable store base.

Operating results for the 13-week period ended August 2, 2003 were lower than
originally anticipated as a result of lower than expected sales in July,
promotional efforts during the quarter and costs associated with the start-up of
our new distribution center in San Diego, California.

Operating results for the 26-week period ended August 2, 2003 were lower than
originally anticipated as well. In addition to the factors we experienced in the
second quarter, our lower than expected operating results for the first half of
fiscal 2003 was also due to our low inventory levels for most of the first
quarter and a very soft retail environment for retailers in general,
particularly in apparel.

In an effort to improve our liquidity position, obtain more favorable credit
terms and provide for a consistent flow of merchandise, we initiated a series of
financing transactions, as well as initiated steps to accelerate the recognition
of tax loss carry-back benefits. On March 6, 2003, we completed the private
offering of 2,515,379 shares of our common stock for net proceeds of
approximately $5.7 million, after deducting the placement fees and other
offering expenses. In addition, during March of 2003, we received an $8.2
million federal tax refund as a result of utilizing tax loss carry-back
benefits. On April 10, 2003, we completed a $7.5 million debt financing
transaction consisting of a $6.5 million junior term note secured primarily by
inventory and a $1.0 million term note secured primarily by equipment and other
assets. On August 20, 2003, we sold 2,450,000 shares of common stock at $5.00
per share to accredited investors and received approximately $11.6 million in
net proceeds, after deducting the placement fees and other expenses.



                                        4
<PAGE>

We continue to experience a very soft retail environment, affected by general
price deflation and heavy promotion within the retail industry, particularly in
apparel. This has been a very difficult environment for us, especially during
the first quarter, when we experienced lower than normal inventory levels due to
the tightening of credit terms from vendors and factors. Though we experienced a
significant improvement in inventory levels near the end of the first quarter
and started to see a very slowly recovering economy in the second quarter,
excess inventories generally held by apparel retailers continues to drive
aggressive pricing and a deflationary retail environment. In our second quarter,
in response to a very competitive retail environment, we increased our
advertising expenditures above originally planned levels and equivalent to last
year. We also increased our in-store promotional efforts with weekly in-store
specials.

Due to the lower than anticipated August sales results, we have lowered our
third quarter's guidance for comparable store sales and operating results.
Currently, we expect comparable store sales to be flat or slightly negative and
an operating loss of approximately $0.07 per share.


Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make
estimates, assumptions and judgments that affect the reported amounts of assets
and liabilities and disclosures 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.
Specifically, we must make estimates in the following areas:

o    Inventory valuation.  Merchandise  inventory is stated at the lower of cost
     or market  determined  using  the  retail  inventory  method  ("RIM")  on a
     first-in,  first-out  basis.  Under the RIM, the  valuation of inventory at
     cost and the resulting  gross margin are  calculated by applying a computed
     cost-to-retail ratio to the retail value of inventory.  RIM is an averaging
     method  that  has  been  widely  used  in the  retail  industry  due to its
     practicality. Also, it is recognized that the use of the RIM will result in
     valuing inventory at the lower of cost or market if markdowns are currently
     taken as a reduction of the retail value of inventory.  Inherent in the RIM
     calculation  are certain  significant  management  judgments  and estimates
     regarding  markdowns  and  shrinkage,  which  may from  time to time  cause
     adjustments to the gross margin in the subsequent period.  Factors that can
     lead to distortion in the  calculation  of the  inventory  balance  include
     applying the RIM to a group of merchandise items that is not fairly uniform
     in terms of its cost and  selling  price  relationship  and  turnover,  and
     applying RIM to transactions over a period of time that includes  different
     rates of gross  profit,  such as those  relating  to  seasonal  merchandise
     items.  To minimize the potential of such  distortions  in the valuation of
     inventory from  occurring,  we utilize 83  sub-departments  in which fairly
     homogeneous  classes of  merchandise  items having similar gross margin are
     grouped. In addition,  failure to take markdowns currently may result in an
     overstatement  of cost under the lower of cost or market  principle.  As of
     August 2, 2003, we had an inventory  valuation  allowance of  approximately
     $1.3 million,  which  represents  our estimate of the cost in excess of the
     net realizable  value of slow-moving  inventory  items. We believe that our
     RIM provides an inventory  valuation that reasonably  approximates cost and
     results in carrying inventory at the lower of cost or market.

                                        5
<PAGE>

o    Valuation of  goodwill,  intangible  and other  long-lived  assets.  We use
     certain  assumptions in establishing the carrying value and estimated lives
     of our  long-lived  assets  and  goodwill.  The  criteria  used  for  these
     evaluations include management's estimate of the asset's continuing ability
     to generate  income from  operations and positive cash flows. If assets are
     considered  to be impaired,  the  impairment  recognized is measured by the
     amount that the carrying  value of the assets exceeds the fair value of the
     assets.  Useful lives and related  depreciation or amortization expense are
     based on our estimate of the period that the assets will generate  revenues
     or  otherwise  be used in  operations.  Factors  that would  influence  the
     likelihood  of  a  material  change  in  our  reported  results  include  a
     significant decline in our stock price and market  capitalization  compared
     to our net  book  value,  significant  changes  in an  asset's  ability  to
     generate positive cash flows, significant changes in our strategic business
     objectives and utilization of the asset.

o    Accrued restructuring costs. We have estimated amounts for the charges and
     the related liabilities regarding our fiscal 2002 and fiscal 2001
     restructuring initiatives including store closures, realignment of our
     field organization and workforce reductions in accordance with the Emerging
     Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain
     Employee Termination Benefits and Other Costs to Exit an Activity
     (including Certain Costs Incurred in a Restructuring)." Depending on our
     ability to dispose of the remaining lease obligations for the store and
     distribution center closures, the actual costs to complete the
     restructuring initiatives may be different from our estimated costs. Future
     restructuring efforts, if any, will be accounted for in accordance with
     SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
     Activities."

o    Litigation reserves. Based in part on the advice of our legal counsel,
     estimated amounts for litigation and claims that are probable and can be
     reasonably estimated are recorded as liabilities in the balance sheet. The
     likelihood of a material change in these estimated reserves would be
     dependent on new claims as they may arise and the favorable or unfavorable
     outcome of the particular litigation. We continuously evaluate the adequacy
     of these reserves and, as new facts come to light, adjust these reserves
     when necessary.

o    Workers'  compensation  accrual.  At  the  beginning  of  fiscal  2001,  we
     transitioned to a partially self-insured workers' compensation program. The
     program for the policy year ended  January 31, 2002 had both a specific and
     aggregate stop loss amount of $250,000 and $3.2 million,  respectively. The
     program for the policy year ended January 31, 2003 had a specific stop loss
     amount of $250,000 with no aggregate stop loss limit.  We utilize  internal
     actuarial methods,  as well as an independent  third-party  actuary for the
     purpose of estimating ultimate costs for a particular policy year. Based on
     these  actuarial  methods  along with  current  available  information  and
     insurance industry statistics,  the ultimate expected losses for the policy
     year ended  January 31, 2003 and 2002 were  estimated  to be  approximately
     $3.4  million  and  $3.7  million  ($3.2  million   aggregate  stop  loss),
     respectively.  Our estimate is based on average  claims  experience  in our
     industry  and our own  experience  in terms of  frequency  and  severity of
     claims,  with no explicit  provision for adverse  fluctuation  from year to
     year and is subject to inherent  variability.  This variability may lead to
     ultimate  payments being either greater or less than the amounts  presented
     above.

                                        6
<PAGE>

o    Valuation of deferred income taxes. Valuation allowances are established,
     if deemed necessary, to reduce deferred tax assets to the amount expected
     to be realized. The likelihood of a material change in our expected
     realization of these assets is dependent on future taxable income, our
     ability to use the net operating loss carryforwards, the effectiveness of
     our tax planning and strategies among the various tax jurisdictions that we
     operate in, and any significant changes in the tax treatment we currently
     receive.


Results of Operations

13 weeks ended August 2, 2003 compared to 13 weeks ended August 3, 2002

Net sales were $123.7 million for the 13 weeks ended August 2, 2003 compared to
$128.1 million for the same period last year, a decrease of $4.4 million, or
3.5%. Comparable store sales for the 13-week period ended August 2, 2003
increased 0.1% versus a decrease of 8.7% for the same period last year. The
decline in net sales was primarily due to fewer stores in operation. Though we
recorded an increase of 8.9% in comparable transaction counts and an increase of
12.2% in average purchase size in units, our average unit retail price point was
21.0% lower as compared to the same period last year.

Gross profit was $38.6 million for the 13 weeks ended August 2, 2003 compared to
$41.0 million for the same period last year, a decrease of $2.5 million or 6.0%.
As a percentage of net sales, gross profit was 31.2% for the 13 weeks ended
August 2, 2003 versus 32.0% for the same period last year. The decline in gross
profit as a percentage of net sales for the 13 weeks ended August 2, 2003 from
the comparable period last year was primarily due to lower initial mark-up as a
result of lower retail price points and higher distribution costs associated
with the start-up of our new distribution center, which opened in May 2003.

Selling and administrative expenses were $46.2 million for the 13 weeks ended
August 2, 2003 compared to $50.2 million for the same period last year, a
decrease of $3.9 million or 7.8%. Selling and administrative expenses decreased
as a result of (1) fewer stores in operation during the current quarter, (2)
reduced consulting and legal fees, and (3) a charge of $2.1 million related to a
legal settlement recorded in the second quarter last year. As a percentage of
net sales, selling and administrative expenses were 37.4% for the 13 weeks ended
August 2, 2003 as compared to 37.5%, adjusted for the legal settlement charge,
for the same period last year. The decrease in selling and administrative
expenses as a percentage of net sales was due to the items mentioned above,
partially offset by the loss of sales volume leverage.

Pre-opening and closing expenses were $83,000 for the 13 weeks ended August 2,
2003 compared to $266,000 for the same period last year, a decrease of $183,000
or 68.8%. The decrease in pre-opening and closing expenses was primarily due to
the opening of two fewer new stores during the current quarterly period versus
the same period last year.

Interest expense, net was $935,000 for the 13 weeks ended August 2, 2003
compared to $310,000 for the 13 weeks ended August 3, 2002, an increase of
$625,000 or 201.6%. The increase in interest expense for the current quarter was
due to increased borrowings and higher interest rates.

                                        7
<PAGE>

We recorded an income tax benefit of $3.3 million for the 13 weeks ended August
2, 2003 compared to $3.9 million for the 13 weeks ended August 3, 2002. The
decrease in income tax benefit was the result of decreased pre-tax loss compared
to the same period a year ago.

For the 13 weeks ended August 2, 2003, the net loss was $5.4 million as compared
to $5.8 million for the 13 weeks ended August 3, 2002. The decrease in net loss
was a result of factors cited above.


26 weeks ended August 2, 2003 compared to 26 weeks ended August 3, 2002

Net sales were $228.0 million for the 26 weeks ended August 2, 2003 compared to
$245.0 million for the same period last year, a decrease of $17.0 million, or
7.0%. Comparable store sales for the 26-week period ended August 2, 2003
decreased 3.5% versus a decrease of 10.2% for the same period last year. The
decline in net sales was due to fewer stores in operation and negative
comparable store sales. Though we recorded an increase of 5.9% in comparable
transaction counts and an increase of 12.6% in average purchase size in units,
our average unit retail price point was 19.0% lower as compared to the same
period last year.

Gross profit was $76.2 million for the 26 weeks ended August 2, 2003 compared to
$82.2 million for the same period last year, a decrease of $6.0 million or 7.3%.
As a percentage of net sales, gross profit was 33.4% for the 26 weeks ended
August 2, 2003 versus 33.5% for the same period last year. Compared to the first
six months of last year, our cumulative initial mark-up was lower by
approximately 200 basis points as a result of lower retail price points, and our
distribution costs were approximately 90 basis points higher due to the start-up
of the new distribution center. The effect of these unfavorable variances was
substantially offset by the favorable adjustment to the inventory valuation
allowance that we recorded during the first quarter.

Selling and administrative expenses were $87.5 million for the 26 weeks ended
August 2, 2003 compared to $95.9 million for the same period last year, a
decrease of $8.4 million or 8.7%. The decrease in selling and administrative
expenses was primarily a result of (1) fewer stores in operation during the
current period, (2) reduced consulting and legal fees, (3) non-recurring income
of $708,000 recorded in conjunction with the foreclosures of certain stock
subscription notes during the first quarter, and (4) a charge of $2.1 million
related to a legal settlement recorded in the second quarter last year.
Excluding the non-recurring income of $708,000 and the legal settlement charge
of $2.1 million, selling and administrative expenses, as a percentage of net
sales, were 38.7% and 38.3% for the 26 weeks ended August 2, 2003 and August 3,
2002, respectively. The increase in selling and administrative expenses as a
percentage of net sales was primarily due to the loss of sales volume leverage.

Pre-opening and closing expenses were $221,000 for the 26 weeks ended August 2,
2003 compared to $703,000 for the same period last year, a decrease of
approximately $482,000 or 68.6%. The decrease in pre-opening and closing
expenses was due to the opening of six fewer new stores during the current
26-week period versus the same period last year, and the start-up expenses
incurred for our new distribution center.


                                        8
<PAGE>

Interest expense, net was $1.6 million for the 26 weeks ended August 2, 2003
compared to $568,000 for the 26 weeks ended August 3, 2002, an increase of $1.0
million or 176.2%. The increase in interest expense from the same period last
year was primarily due to increased borrowings and higher interest rates.

We recorded an income tax benefit of $5.0 million for the 26 weeks ended August
2, 2003 compared to $6.0 million for the 26 weeks ended August 3, 2002. The
decrease in income tax benefit was the result of decreased pre-tax loss compared
to the same period a year ago.

For the 26 weeks ended August 2, 2003, the net loss was $8.1 million as compared
to $9.0 million for the 26 weeks ended August 3, 2002. The decrease in net loss
was a result of factors cited above.


Liquidity and Capital Resources

General

We finance our operations through credit provided by vendors and other
suppliers, amounts borrowed under our $50.0 million revolving credit facility,
internally generated cash flow, and other financing resources. Credit terms
provided by vendors and other suppliers are generally net 30 days. Amounts that
may be borrowed under the revolving credit facility are based on a percentage of
eligible inventory and accounts receivable, as defined.

Since February 1, 2003, we have completed a series of financing transactions
designed to add liquidity and strengthen our financial position. On March 6,
2003, we completed the private offering of 2,515,379 shares of our common stock
for net proceeds of approximately $5.7 million, after deducting the placement
fees and other offering expenses. On April 10, 2003, we completed a $7.5 million
debt financing transaction, which consists of a $6.5 million junior term note
secured primarily by inventory and accounts receivable and a $1.0 million term
note secured primarily by equipment and other assets. In addition, we received a
federal tax refund of $8.2 million in March 2003. On August 20, 2003, we sold
2,450,000 shares of common stock at $5.00 per share to accredited investors and
received approximately $11.6 million in net proceeds, after deducting the
placement fees and other expenses.

Since the completion of our private equity offering and debt financing
transaction, and receipt of the federal tax refund, the vendor and credit
community have begun to provide support and extend credit terms for merchandise
shipments. Based on the current credit support being provided by our vendors and
the credit community, we expect to receive merchandise receipts on credit terms
necessary to meet our desired inventory levels. While we have experienced an
improvement in support from the credit community, any further improvement in
credit will be contingent upon improved operating results and liquidity.
Provided we do not experience comparable store sales declines and a tightening
of credit from our vendors and/or the credit community in the future, we believe
our $50.0 million revolving credit facility and internal cash flow should
provide sufficient funds to finance our operations and capital expenditures, pay
our debt obligations, and complete the closing of stores and distribution
centers included in our fiscal 2002 restructuring and fiscal 2001 restructuring
efforts over the next twelve months.

                                        9
<PAGE>

At August 2, 2003, we were in compliance with all financial covenants, as
defined, and had outstanding borrowings of $17.9 million and letters of credit
of $12.5 million under our revolving credit facility. In addition, based on
eligible inventory and accounts receivable, we were eligible to borrow $49.8
million under our revolving credit facility and had $11.9 million available for
future borrowings after giving effect for the $7.5 million availability block,
as defined.

With respect to cash flows for the 26-week period ended August 2, 2003, we used
$18.5 million in operating activities, $3.2 million in investing activities and
generated $24.6 million from financing activities, which resulted in a net
increase in cash of $2.9 million. For the same period last year, we used $11.1
million in operating activities, $5.1 million in investing activities and
generated $6.3 million from financing activities, which resulted a net decrease
in cash of $9.9 million. The increase in cash used in operating activities was
primarily due to replenishment of inventory. The decrease in cash used in
investing activities was primarily due to fewer new store openings and
completion of our new distribution center. The increase in cash generated from
the financing activities was a result of borrowings against the revolving credit
facility, net proceeds received from the private offering and the borrowings on
the junior secured term loans.

Capital Expenditures

We anticipate capital expenditures of approximately $1.0 million for the second
half of the current fiscal year ending January 31, 2004, primarily in connection
with information systems replacement at our corporate office. We believe the
capital expenditures will be financed from internal cash flow and borrowings
under our revolving credit facility.

Store Closures and Restructuring Initiatives

As of September 10, 2003, we had closed 16 of the 23 stores identified in our
Fiscal 2002 restructuring efforts, as well as completed the consolidation of our
corporate overhead structure. For the remaining seven stores, we have decided to
continue to operate four of these stores as a result of entering into amendments
to the leases with the landlords; and we plan to close the other three stores by
January 2004. In addition, we had completed the consolidation of our two former
San Diego distribution centers into the new distribution facility, which is also
located in San Diego, California. We estimate the cash requirement for the
remainder of this current fiscal year for the Fiscal 2002 restructuring efforts
will be approximately $2.5 million, which we intend to fund from our sources of
cash, including the revolving credit facility.

In regards to our Fiscal 2001 restructuring efforts, we closed 24 of 28
under-performing stores in the first quarter of fiscal 2002 and the remaining
four stores in January 2003. We estimate the cash requirement for the remainder
of this current fiscal year for the Fiscal 2001 restructuring efforts will be
approximately $828,000, which we intend to fund from our sources of cash,
including the revolving credit facility.




                                       10
<PAGE>


Contractual Obligations and Commitments

The following table summarizes our significant contractual obligations, as well
as estimated cash requirements related to our restructuring initiatives, as of
August 2, 2003. These should be read in conjunction with "Note 3 - Fiscal 2002
Restructuring Charge", "Note 4 - Fiscal 2001 Restructuring Charge", "Note 5 -
Revolving Credit Facility", and "Note 6 - Long-Term Debt" in the accompanying
unaudited financial statements, as well as our fiscal 2002 Annual Report on Form
10-K/A as filed with the Securities and Exchange Commission.

<TABLE>

                                                         (in thousands)
                                                         --------------
                      Revolving         Junior
                        Credit       Subordinated    Junior Secured    Operating    Restructuring
                       Facility          Notes         Term Loans        Leases       Charges*         Total
                      ---------      ------------    --------------    ---------    -------------      -----
<S>                      <C>              <C>              <C>             <C>          <C>             <C>
Fiscal Year:
2003 (remaining
  6 months)            $     -        $   3,000        $     500       $  15,258     $    3,324      $  22,082
2004                         -            3,000            7,000          28,034          6,189         44,223
2005                         -            5,300                -          25,103              -         30,403
2006                    17,949                -                -          18,942              -         36,891
2007                         -                -                -          13,869              -         13,869
Thereafter                   -                -                -          44,484              -         44,484
                      --------        ---------        ---------       ---------     ----------      ---------
                       $17,949        $  11,300        $   7,500       $ 145,690     $    9,513      $ 191,952
                      --------        ---------        ---------       ---------     ----------      ---------
<FN>

* Amounts reflect management's best estimate to complete store closures and
other restructuring initiatives.
</FN>
</TABLE>

We believe our internal cash flow and borrowings under our revolving credit
facility provide sufficient funds to service the above contractual obligations
over the next twelve months.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate risk on our Junior Subordinated Notes, which are
non-interest bearing and discounted at an annual rate of 10%. At August 2, 2003,
our long-term debt had a face value of $11.3 million with a net carrying value
of $9.9 million. While generally an increase in market interest rates will
decrease the value of this debt, and decreases in interest rates will have the
opposite effect, we are unable to estimate the impact that interest rate changes
will have on the value of this debt as there is no active public market for the
debt and we are unable to determine the market interest rate at which alternate
financing would have been available at August 2, 2003.











                                       11


<PAGE>


Item 4.    Controls and Procedures

Evaluation. Within 90 days prior to the date of this Quarterly Report on Form
10-Q, we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as defined under Rule 13a-14 and Rule 15d-14
of the Securities Exchange Act of 1934, as amended. This evaluation was done
under the supervision and with the participation of management, including our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Conclusions. Based upon our evaluation, the CEO and CFO have concluded that our
disclosure controls and procedures are effective to ensure that material
information relating to the Company is made known to management, including the
CEO and CFO, particularly during the period when our periodic reports are being
prepared.

Changes in Internal Controls. There have not been any significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of our last evaluation of such internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.





























                                       12

<PAGE>


PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

           As disclosed in our financial statements for the fiscal year ended
           February 1, 2003 included in our Form 10-K/A as filed with the
           Securities and Exchange Commission, in April 2003, Lynda Bray and
           Masis Manougian, two of our then current employees, filed a lawsuit
           against us entitled "Lynda Bray, Masis Manougian, etc., Plaintiffs,
           vs. Factory 2-U Stores, Inc., etc., Defendants", Case No. RCV071918
           in the Superior Court of the State of San Bernardino (the "Bray
           Lawsuit"). The First Amended Complaint in the Bray Lawsuit alleges
           that we violated the California Labor Code, Industrial Wage
           Commission Orders and the California Unfair Competition Act by
           failing to pay wages and overtime for all hours worked, by failing to
           document all hours worked, by threatening to retaliate against
           employees who sought to participate in the settlement of the O'Hara
           Lawsuit and by failing to inform prospective employees of unpaid wage
           claims. Plaintiffs purport to bring this action on behalf of all
           persons who were employed in one of our California stores at any time
           after April 25, 2003. Plaintiffs seek compensatory and exemplary
           damages, interest, penalties, attorneys' fees and disgorged profits
           in an amount which plaintiffs estimated to be not less than
           $100,000,000. Plaintiffs also seek injunctive relief requiring
           correction of the alleged unlawful practices.

           Although at this stage of the litigation it is difficult to predict
           the outcome of the case with certainty, we believe that we have
           meritorious defenses to the Bray Lawsuit and we are vigorously
           defending against it.

Item 2.   Changes in Securities and Use of Proceeds

           None.

Item 3.   Defaults Upon Senior Securities

           None.

Item 4.   Submission of Matters to a Vote of Security Holders

           None.

Item 5.   Other Information

           None.






                                       13
<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibit

         31.1    Certification  pursuant to Rule  13a-14(a)  and  15d-14(a) of
                 the  Securities  Exchange Act of 1934,  as amended, by
                 William R. Fields, Chief Executive Officer.

         31.2    Certification  pursuant to Rule  13a-14(a) and  15d-14(a) of
                 the  Securities  Exchange Act of 1934,  as amended, by
                 Douglas C. Felderman, Executive Vice President and
                 Chief Financial Officer.

         32.1    Certification  pursuant  to 18  U.S.C.  Section  1350,  as
                 adopted  pursuant  to  Section  906  of  the Sarbanes-Oxley Act
                 of 2002 by William R. Fields, Chief Executive Officer.

         32.2    Certification  pursuant  to 18  U.S.  C.  Section  1350,  as
                 adopted  pursuant  to  Section  906 of the Sarbanes-Oxley  Act
                 of 2002 by  Douglas C.  Felderman,  Executive  Vice  President
                 and Chief  Financial Officer.

(b) Reports on Form 8-K

                  Item 5:

                  On August 13, 2003, we filed a report on Form 8-K regarding
                  the termination of employment of the Company's former
                  Executive Vice President and General Merchandising Manager
                  effective August 11, 2003.

                  Item 9:

                  On August 21, 2003, we furnished a report on Form 8-K
                  regarding the announcement of our definitive agreement with
                  institutional investors to sell 2,450,000 shares of common
                  stock at $5.00 per share. The full text of our press release
                  dated August 20, 2003 was attached as exhibit to the Form 8-K.

                  Item 12:

                  On August 7, 2003, we furnished a report on Form 8-K regarding
                  the announcement of sales for the four-week, 13-week and
                  26-week periods ended August 2, 2003. The full text of our
                  press release dated August 6, 2003 was attached as exhibit to
                  the Form 8-K.

                  On August 14, 2003, we furnished a report on Form 8-K
                  regarding the announcement of operating results for the
                  13-week and 26-week periods ended August 2, 2003. The full
                  text of our press release dated August 13, 2003 was attached
                  as exhibit to the Form 8-K.

                                       14
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


FACTORY 2-U STORES, INC.

Date: September 16, 2003



By:    /s/Douglas C. Felderman
       -------------------------------------------------
       Name:  Douglas C. Felderman
       Title: Executive Vice President and Chief Financial Officer
              (duly authorized officer and principal financial officer)





























                                       15