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

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

                  For the quarterly period ended May 1, 1999

                                       Or

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

                       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)

                                   (619) 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 of common stock, as of May
1, 1999, was 12,107,729 shares.




<PAGE>  2


                            FACTORY 2-U STORES, INC.

              FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 1, 1999

                                      INDEX


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

 Factory 2-U Stores, Inc. Balance Sheets as of
  May 1, 1999 (Unaudited) and January 30, 1999    ..........................F-1

 Factory 2-U Stores, Inc. Statements of Operations (Unaudited)
  for the 13 weeks ended May 1, 1999 and May 2, 1998    ....................F-3

 Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited)
  for the 13 weeks ended May 1, 1999 and May 2, 1998........................F-4

 Factory 2-U Stores, Inc. Notes to Financial Statements (Unaudited) ........F-6

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

PART II. OTHER INFORMATION

Item 1.   Legal Proceedings ...................................................8
Item 2.   Changes in Securities................................................8
Item 3.   Defaults Upon Senior Securities......................................8
Item 4.   Submission of Matters to a Vote of Security Holders..................8
Item 5.   Other Information ...................................................8
Item 6.   Exhibits and Reports on Form 8-K ....................................8
          Signatures ..........................................................9
          Exhibit Index ......................................................10



<PAGE>

                                     PART I

Item 1.   Financial Statements

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


                                                      May 1,        January 30,
                                                       1999             1999
                                                    (Unaudited)
                  Assets

Current assets:
  Cash                                            $    4,562          $   3,124
  Merchandise inventories                             36,191             31,353
  Prepaid expenses and other assets                    3,384              1,137
  Deferred income taxes                                1,747              1,690
                                                    ---------          ---------

          Total current assets                        45,884             37,304

Leasehold improvements and equipment, net             19,953             18,187
Deferred income taxes                                    762              1,149
Other assets, net                                      2,191              2,419

Excess of cost over net assets acquired,
  less accumulated  amortization  of
  $8,937 and $8,537 at May 1, 1999 and
  January 30, 1999, respectively                      30,708             31,108
                                                   ----------          ---------

          Total assets                              $ 99,498           $ 90,167
                                                     =======             ======

                                   (continued)











                                       F-1


<PAGE>


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

                                                   May 1,            January 30,
                                                    1999                1999
                                                 (Unaudited)

Liabilities and Stockholders' Equity

Current liabilities:
  Current maturities of long-term debt
       and capital lease obligations              $   1,315           $   1,818
  Accounts payable                                   28,107              21,258
  Income taxes payable                                   57               2,656
  Accrued expenses                                   15,968              20,151
  Revolving credit notes                             11,386                   -
                                                   ---------           ---------
          Total current liabilities                  56,833              45,883

Revolving credit notes                                    -               1,843
Long-term debt, less current maturities              10,206              10,530
Capital lease and other long-term obligations         2,308               2,257
Deferred rent                                         2,298               1,889
                                                   ---------           ---------
          Total liabilities                          71,645              62,402
                                                   ---------           ---------

Stockholders' equity:
  Series A convertible preferred stock,
    $.01 par value,  4,500,000 shares authorized,
    0 shares issued and outstanding
    (aggregate liquidation preference of $0)
    at May 1, 1999 and January 30, 1999                   -                   -
  Series B  junior  convertible, exchangeable
    preferred  stock, $.01 par value,
    40,000 shares authorized,
    0 shares issued and outstanding
    (aggregate  liquidation  preference  of $0)
    at May 1, 1999 and January 30, 1999,
    respectively                                          -                   -
  Common stock, $.01 par value,
    80,000,000 shares authorized,
    12,107,729 and 12,106,175 shares issued an
    outstanding at May 1, 1999 and January 30, 1999,
    respectively                                        121                 121

Stock subscription notes receivable                  (4,057)             (4,087)
Additional paid-in capital                          102,971             103,248
Accumulated deficit                                 (71,182)            (71,517)
                                                  ----------           ---------

          Total stockholders' equity                 27,853              27,765
                                                   ---------           ---------

Total liabilities and stockholders' equity        $  99,498            $ 90,167
                                                   ========             ========


                See accompanying notes to financial statements.

                                       F-2


<PAGE>


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



                                                          13 Weeks Ended

                                                     May 1,              May 2,
                                                      1999                1998

Net sales                                         $  85,099           $  66,495
Cost of sales                                        56,108              44,649
                                                   --------             --------
     Gross profit                                    28,991              21,846

Selling and administrative expenses                  27,297              21,194
Amortization of intangibles                             589                 589
Special charges                                           -               1,500
                                                   --------             --------
     Operating income (loss)                          1,105              (1,437)

Interest expense                                       (539)             (1,278)
                                                   ---------            --------

Income (loss) before income taxes and
     extraordinary item                                 566              (2,715)

Income taxes                                           (232)                (74)
                                                  ----------           ---------

     Income (loss) before extraordinary item            334              (2,789)

Extraordinary item - debt extinguishment
  (less applicable income taxes of $0)                    -              (2,750)
                                                 -----------          ----------

     Income (loss) before dividends                     334              (5,539)

Preferred stock dividends - Series A                      -                (864)

Preferred stock dividends - Series B                      -                (703)
                                                 ------------        -----------

     Net income (loss) available
      to common stockholders                      $     334          $   (7,106)
                                                 ============        ===========

Basic and diluted earnings per share:
Income (loss) before extraordinary item           $  0.03             $   (2.92)
Extraordinary item                                $     -             $   (1.86)
Net income (loss)                                 $  0.03             $   (4.78)

Weighted average common shares outstanding:
       Basic                                       12,107                 1,486
       Diluted                                     12,577                 1,486


                 See accompanying notes to financial statements.

                                       F-3

<PAGE>



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


                                                            13 Weeks Ended
                                                  ------------------------------
                                                            May 1,      May 2,
                                                             1999        1998
                                                      ------------  -----------
Cash Flows from Operating Activities:
  Income (loss) before dividends                       $     334      $  (5,539)
  Adjustments to reconcile net income (loss) to net
    cash used in operating activities:
      Depreciation and amortization                        2,018          1,678
      Debt discount amortization                             276            601
      Extraordinary loss on debt extinguishment                -          2,750
      Changes in operating assets and liabilities:
        Merchandise inventories                           (4,837)        (4,361)
        Prepaid expenses and other assets                 (3,129)        (3,240)
        Accounts payable                                   6,848           (991)
        Accrued expenses and other                        (4,977)        (2,660)
                                                         --------      ---------

Net cash used in operating activities                     (3,467)       (11,762)
                                                         --------      ---------

Cash Flows from Investing Activities:
  Purchase of leasehold improvements
    and equipment                                         (3,266)          (504)

Net cash used in investing activities                     (3,266)          (504)
                                                        ---------     ----------

Cash Flows from Financing Activities:
  Borrowings on revolving credit notes                    98,890         85,170
  Payments on revolving credit notes                     (89,347)       (69,852)
  Payments on notes payable and capital
    lease obligations                                     (1,125)          (978)
  Payment of deferred debt issuance costs                      -            (45)
  Purchase of warrants                                      (288)             -
  Exercise of stock options                                   11              -
  Proceeds from stock subscription notes receivable           30              -
  Payment of dividends on Series A preferred stock             -           (864)
                                                        ---------     ----------


Net cash provided by financing activities                  8,171         13,431
                                                         --------     ----------

                                   (continued)


                                       F-4

<PAGE>


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



                                                           13 Weeks Ended
                                                    ---------------------------
                                                         May 1,         May 2,
                                                          1999           1998
                                                     ------------    -----------

Net increase in cash                                   $  1,438       $   1,165

Cash at the beginning of the period                       3,124           3,167
                                                       --------         --------
Cash at the end of the period                          $  4,562       $   4,332
                                                         ======           ======
Supplemental disclosure of cash flow information:
  Cash paid during the period for interest             $    170       $     535
  Cash paid during the period for income taxes         $  2,647       $      74

Supplemental disclosure of non-cash investing activities:
  Capital lease purchases                              $      -       $     333

Supplemental disclosure of non-cash financing activities:
  Series B preferred stock dividends                   $      -       $     703


                See accompanying notes to financial statements.




















                                       F-5

<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 generally accepted  accounting  principles
for  annual  financial  statements  and should be read in  conjunction  with the
financial  statements for the fiscal year ended January 30, 1999 included in the
Factory 2-U Stores,  Inc. (the "Company") Form 10-K as filed with the Securities
and Exchange Commission. The unaudited consolidated financial statements for the
13 weeks ending May 2, 1998 include the accounts of Family  Bargain  Corporation
and its subsidiaries.  All significant intercompany transactions were eliminated
in consolidation.

On November 23, 1998, the Company carried out a  Recapitalization  in which
all of the Company's  stock was  converted  into a single class of Common Stock.
Under the Plan of Recapitalization,  each share of Pre- Recapitalization  Common
Stock was converted  into .30133 shares of Common Stock,  each share of Series A
Preferred  Stock was converted  into one share of Common Stock and each share of
Series B Preferred  Stock was converted  into 173.33 shares of Common Stock.  In
connection with the  Recapitalization,  General  Textiles,  Inc. was merged into
Family  Bargain  Corporation  and the Company's  name was changed to Factory 2-U
Stores, Inc.

In the opinion of management,  the unaudited financial statements as of and
for the 13 weeks  ended  May 1,  1999 and May 2, 1998  reflect  all  adjustments
(which include  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 the Company's business, the results of
operations  for the interim  period may not  necessarily  be  indicative  of the
results of operations for a full year.

(2)      Long-term Debt

As of May 1, 1999, the Company had  outstanding  long-term  indebtedness in
the principal amount of $10.2 million.

At January 31, 1998, the Company had  outstanding  $22.9 million face value
of Trade  Subordinated  Notes,  Subordinated  Reorganization  Notes  and  Junior
Subordinated Reorganization Notes. These notes were non-interest bearing, except
for certain  contingent  interest payments and were subject to minimum principal
payment  requirements based on the annual excess cash flows of General Textiles.
Accordingly,  they were discounted to carrying values based on estimated  future
cash flows of General Textiles at discount rates ranging from 6% to 25%.

Effective   April  30,  1998,  the  Company   exchanged  the   Subordinated
Reorganization Notes and the Junior Subordinated  Reorganization Notes (the "Old
Notes")  for new  notes  (the  "New  Subordinated  Notes"  and the  "New  Junior
Subordinated  Notes",  collectively,  the "New Notes"). The New Notes removed an
estimated excess cash flow  calculation  previously used to determine the timing
and amount of payments. Further, the New Notes provide a fixed schedule for debt
principal  payments.  In accordance  with EITF 96-19,  the Company  recorded the
exchange  of the Old  Notes  as an  extinguishment  of debt,  and in  connection
therewith,  recorded an extraordinary loss, net of taxes, of $2.8 million.  This
loss  represents  the amount by which the present value of the New Notes exceeds
the present  value of the Old Notes for which they were  exchanged and fees paid
to  the  lenders.   The  fees   included  the  issuance  of  22,600   shares  of
pre-Recapitalization  common  stock and  warrants to purchase  82,690  shares of
pre-Recapitalization  common  stock,  both stated at fair market value when they
were issued.

The New  Subordinated  Notes totaled $3.3 million and bore interest at 9.2%
per annum through March 31, 1999,  after which the interest rate would  increase
by one percent per annum each year up to a maximum of 13.2%.  Principal  was due
in annual  payments  ranging  from $0.2  million to $0.4  million with a balloon
payment of $2.1 million due May 28, 2003. The entire balance of $3.3 million was
paid on December 8, 1998.

The New Junior  Subordinated Notes have a face value of $17.3 million,  are
non-interest bearing and are reflected on the accompanying balance sheets at the
present value using a discount rate of 10%. The unamortized  discount related to
the New Junior Subordinated Notes was $6.1 million at May 1, 1999,  resulting in
a net  carrying  value of $11.2  million,  of which  $1.0  million  is a current
maturity,  as  reflected  in the  May  1,  1999  balance  sheet  (see  Financial
Statements).  The discount is amortized to interest expense as a non-cash charge
until the notes are paid in full.  Further,  the New Junior  Subordinated  Notes
require  principal  payments at December  31, 1999 and December 31, 2000 of $1.0
million, at December 31, 2001 and December 31, 2002 of $2.0 million, at December
31, 2003 and December  31, 2004 of $3.0  million and a final  payment at May 28,
2005 of $5.3 million.

(3)      Revolving Credit Facility

The Company finances its operations  through credit provided by vendors and
other  suppliers,  amounts  borrowed  under its $50.0 million  revolving  credit
facility and internally  generated  cash flow.  Credit terms provided by vendors
and other suppliers are usually net 30 days. Amounts which may be borrowed under
the working capital facility are based on a percentage of eligible  inventories,
as defined, outstanding from time to time, as more fully described below.

On July  31,  1998,  the  Company's  two  operating  subsidiaries,  General
Textiles and Factory 2-U, Inc., merged to form a new Delaware  corporation named
General Textiles, Inc. (the "Subsidiary Merger"). As a result, in July 1998, the
Company  and its lender  agreed to amend  certain  terms and  conditions  of the
revolving credit facilities  between the lender and General Textiles and Factory
2-U.  The  covenants  and  financial  ratios  were reset to reflect  anticipated
earnings,  capital  expenditures and cash flow of the Company during fiscal 1998
and the  facilities  were  combined  into one  revolving  credit  facility  (the
"Facility").

At May 1, 1999 the Company  could  borrow up to $50.0  million at the prime
rate plus 0.75%,  subject to limitations  based on inventory  levels.  At May 1,
1999,  the Company owed $11.4  million  under the Facility and had $22.6 million
available to borrow under the Facility.  The Facility  expires in March 2000 but
is subject to one year  automatic  renewal  periods,  unless  terminated  by the
Company or its lender.  The balance owed under the Facility  fluctuates based on
working  capital  requirements.  Because of the seasonal nature of the Company's
business,  borrowings  are usually  greatest  between  August and December.  The
Company pays fees of 0.25% on the unused  portion of the Facility.  The Facility
is secured by all the assets of the Company.

The Company was not in compliance  with the current  ratio  covenant in the
Facility  as of May 1, 1999.  The lender has waived that  requirement  at May 1,
1999.


(4)      Earnings per Share

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standard  No. 128,  Earnings per Share (SFAS No. 128),
which the Company  adopted as of January 31, 1998. This Statement sets forth the
basis for the computation of "basic"  earnings per share and "diluted"  earnings
per share  from the  previous  method of  computing  both  "primary"  and "fully
diluted" earnings per share.

The preferred stock and other common stock  equivalents were not considered
for the  thirteen  week  period  ended May 2, 1998,  as  converted  because  the
calculation was anti-dilutive.  At May 1, 1999, there were 1,893,528 potentially
dilutive common stock options and warrants outstanding.


(5)      Provision for Income Taxes

An amount for federal  alternative  minimum  taxes was  recorded for the 13
weeks  ended May 2, 1998.  The Company  recorded a $0.2  million  provision  for
income taxes as reflected in the  accompanying  statements of operations for the
13 weeks ended May 1, 1999.

(6)      Stock Options and Warrants

On March 5, 1999, the Company purchased 49,769 of its outstanding  warrants
for $5.78 per warrant, or $0.3 million.  Those warrants had an exercise price of
$6.22  per share and were to expire  on March  14,  2001.  At May 1,  1999,  the
Company had 320,000  warrants  outstanding  with an exercise price of $16.50 per
share and  82,690  warrants  outstanding  with an  exercise  price of $19.91 per
share.

As of May 1, 1999, the Company had 1,490,838 stock options outstanding.  Of
those options,  385,721 are  exercisable  when certain common stock market price
hurdles are achieved and maintained for 60 consecutive  trading days, subject to
vesting  conditions  (92,960 are  exercisable,  when the Company's  common stock
reaches market price hurdles in the amount of $19.91;  92,961 are exercisable at
$24.89; 99,900 are exercisable at $33.19; and 99,900 are exercisable at $49.78).
Assuming  all options  with market  price  hurdles  are fully  vested,  when the
Company's common stock market price is $19.91,  $24.89,  $33.19 and $49.78,  the
Company will be required to record aggregate  non-cash  compensation  expense in
the  minimum  amounts of $1.2  million,  $1.6  million,  $2.6  million  and $4.2
million, respectively.


<PAGE>  3


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

General

Management's discussion of the results of operations  provides an analysis
of the  Company's operations during the 13 weeks ended May 1, 1999 and May 2,
1998.

Results of Operations

The following  discussion and analysis  should be read in  conjunction  with the
Company's Financial Statements and notes thereto included elsewhere in this Form
10-Q. As of May 1, 1999 there were 169 stores in operation  versus 162 stores at
May 2, 1998.


13 Weeks Ended May 1, 1999 Compared to the 13 Weeks Ended May 2, 1998

Net sales were $85.1  million  for the 13 weeks  ended May 1, 1999  compared  to
$66.5 million for the 13 weeks ended May 2, 1998, an increase of $18.6  million,
or 28.0%. Comparable sales increased 21.4%, or $13.9 million.

Gross  profit was $29.0  million for the 13 weeks ended May 1, 1999  compared to
$21.8 million for the 13 weeks ended May 2, 1998,  an increase of  approximately
$7.2 million.  As a percentage of sales, gross profit was 34.1% for the 13 weeks
ended May 1, 1999  compared  to 32.9% for the 13 weeks  ended May 2,  1998.  The
increase in the gross profit margin is primarily attributable to lower markdowns
and reduced shrinkage.

Selling  and  administrative  expenses  were $27.3 for the 13 weeks ended May 1,
1999  compared to $21.2  million for the 13 weeks ended May 2, 1998, an increase
of  approximately  $6.1  million.   As  a  percentage  of  sales,   selling  and
administrative  expenses  increased  to 32.1% for the 13 weeks ended May 1, 1999
from 31.9% for the 13 weeks ended May 2, 1998.  The increase as a percentage  of
sales is primarily due to an increase in the minimum wage.

Amortization  of intangibles was $0.6 million for the 13 weeks ended May 1, 1999
and $0.6 million for the 13 weeks ended May 2, 1998.

The special charge of $1.5 million for the 13 weeks ended May 2, 1998 represents
various  expenses  incurred in connection with hiring the current  President and
CEO of the Company.  Such expenses  included a signing bonus,  moving  expenses,
costs to liquidate a former residence, and executive search fees.

Interest  expense  was $0.5  million for the 13 weeks ended May 1, 1999 and $1.3
million for the 13 weeks ended May 2, 1998,  a decrease  of  approximately  $0.8
million  or 61.5%.  The  decrease  is due  primarily  to a lower  balance on the
revolving credit facility.

<PAGE> 4


Federal  income  taxes of $0.1  million were accrued for the 13 weeks ended
May 1, 1999 and $0.1 million were paid in anticipation of an alternative minimum
tax for the 13 weeks ended May 2, 1998.

An extraordinary  charge of $2.8 million was incurred for the 13 weeks ended May
2, 1998 because notes payable  associated with the General  Textiles  bankruptcy
were extinguished and new notes with terms favorable to the Company were issued.

The net income  available  to common  stockholders  was $0.3  million for the 13
weeks  ended  May 1,  1999 as  compared  to the net  loss  available  to  common
stockholders of $7.1 million for the 13 weeks ended May 2, 1998. The increase in
net  income  for the 13 weeks  ended May 1,  1999 is a result  of the  operating
factors cited above. Additionally, as a result of the Recapitalization that took
place on November  23, 1998,  the Company no longer pays  dividends on preferred
stock.  Dividends  of $1.6 million were charged to income for the 13 weeks ended
May 2, 1998.


Liquidity and Capital Resources

General

As of May 1, 1999,  the Company had  outstanding  indebtedness  in the principal
amount of $22.6 million.

The Company finances its operations through credit provided by vendors and other
suppliers,  amounts  borrowed under its $50.0 million  revolving credit facility
and internally  generated cash flow.  Credit terms provided by vendors and other
suppliers  are usually  net 30 days.  Amounts  which may be  borrowed  under the
working capital facility are based on a percentage of eligible  inventories,  as
defined, outstanding from time to time, as more fully described below.


Revolving Credit Facility

In July 1998,  the  Company  and its lender  agreed to amend  certain  terms and
conditions of the  revolving  credit  facilities  between the lender and General
Textiles and Factory 2-U. As a result of the  Subsidiary  Merger,  the covenants
and  financial  ratios  were  reset to  reflect  anticipated  earnings,  capital
expenditures  and cash flow of the Company during fiscal 1998 and the facilities
were combined into the Facility.

At May 1, 1999 the Company  could  borrow up to $50.0  million at the prime rate
plus 0.75%,  subject to limitations  based on inventory  levels. At May 1, 1999,
the  Company  owed  $11.4  million  under the  Facility  and had  $22.6  million
available to borrow under the Facility.  The Facility  expires in March 2000 but
is subject to one year  automatic  renewal  periods,  unless  terminated  by the
Company or its lender.  The balance owed under the Facility  fluctuates based on
working  capital  requirements.  Because of the seasonal nature of the Company's
business,  borrowings  are usually  greatest  between  August and December.  The
Company pays fees of 0.25% on the unused  portion of the Facility.  The Facility
is secured by all the assets of the Company.

<PAGE>    5

The  Company  was not in  compliance  with the  current  ratio  covenant  in the
Facility  as of May 1, 1999.  The lender has waived that  requirement  at May 1,
1999.

Subordinated Notes

At May 2, 1998,  the Company had  outstanding  $22.3 million face value of Trade
Subordinated Notes,  Subordinated  Reorganization  Notes and Junior Subordinated
Reorganization Notes. These notes were non-interest bearing,  except for certain
contingent  interest  payments  and were  subject to minimum  principal  payment
requirements  based  on the  annual  excess  cash  flows  of  General  Textiles.
Accordingly,  they were discounted to carrying values based on estimated  future
cash flows of General Textiles at discount rates ranging from 6% to 25%.

Effective April 30, 1998, the Company exchanged the Subordinated  Reorganization
Notes and the Junior Subordinated Reorganization Notes (the "Old Notes") for new
notes (the "New  Subordinated  Notes" and the "New Junior  Subordinated  Notes",
collectively,  the "New Notes").  The New Notes removed an estimated excess cash
flow calculation previously used to determine the timing and amount of payments.
Further, the New Notes provide a fixed schedule for debt principal payments.  In
accordance with EITF 96-19,  the Company  recorded the exchange of the Old Notes
as  an  extinguishment  of  debt,  and  in  connection  therewith,  recorded  an
extraordinary loss, net of taxes, of $2,750,000. This loss represents the amount
by which the present value of the New Notes exceeds the present value of the Old
Notes  for which  they were  exchanged  and fees paid to the  lenders.  The fees
included the issuance of 22,600 shares of pre-Recapitalization  common stock and
warrants to purchase 82,690 shares of  pre-Recapitalization  common stock,  both
stated at fair market value when they were issued.

The New  Subordinated  Notes  totaled  $3,250,000  and bore interest at 9.2% per
annum  through March 31, 1999,  after which the interest rate would  increase by
one percent per annum each year up to a maximum of 13.2%.  Principal  was due in
annual  payments  ranging from  $200,000 to $400,000  with a balloon  payment of
$2,050,000  due May 28,  2003.  The  entire  balance of  $3,250,000  was paid on
December 8, 1998.

The New  Junior  Subordinated  Notes  have a face  value of $17.3  million,  are
non-interest bearing and are reflected on the accompanying balance sheets at the
present value using a discount rate of 10%. The unamortized  discount related to
the New Junior Subordinated Notes was $6.1 million at May 1, 1999,  resulting in
a net  carrying  value of $11.2  million,  of which  $1.0  million  is a current
maturity,  as  reflected  in the  May  1,  1999  balance  sheet  (see  Financial
Statements).  The discount is amortized to interest expense as a non-cash charge
until the notes are paid in full.  Further,  the New Junior  Subordinated  Notes
require  principal  payments at December  31, 1999 and December 31, 2000 of $1.0
million,  at December 31, 2001 and December 31, 2002 of $2.0 million at December
31, 2003 and December  31, 2004 of $3.0  million and a final  payment at May 28,
2005 of $5.3 million.

Management believes that the Company's sources of cash,  including the Facility,
will be  adequate  to finance  its  operations  and meet  obligations  under its
existing indebtedness as they become due for at least the next twelve months.


<PAGE>   6

Capital Expenditures

The  Company   anticipates   spending   approximately  $12  million  on  capital
expenditures  during the  remainder  of the current  fiscal year which  includes
costs to open new stores,  to renovate  and/or  relocate  existing stores and to
upgrade information  systems.  Management believes that future expenditures will
be financed from internal cash flow and the Facility.


Inflation

In general,  the Company  believes  that  inflation  has had no recent  material
impact on operations and none is anticipated in the next fiscal year.


Minimum Wage Increases

The Company  employs,  both in its stores and in its corporate  headquarters,  a
substantial  number of  employees  who earn hourly  wages near or at the minimum
wage.  Actions by both the federal and certain state  governments have increased
the hourly  wages  payable by the Company to such  employees.  To  mitigate  the
impact of this wage increase,  the Company has instituted policies to manage its
ratio of  wages to  sales.  Management  believes  that  these  measures  will be
adequate  to  control  the  impact  of  hourly  wage  increases  on the  overall
profitability of its operations.


Seasonality and Quarterly Fluctuations

The Company  historically  has  realized  its highest  level of sales and income
during the third and fourth  quarters of its fiscal year (the quarters ending in
October and January) as a result of the "Back to School"  (August and September)
and Christmas (November and December) seasons. The seasonally lower sales in the
Company's  first  two  quarters  (February  through  July),  can  result  in the
Company's  incurring losses during those quarters even in years in which it will
have full year profits.


Year 2000 Issue

Many currently  installed  computer  systems and software  products are coded to
accept only 2 digit entries in the date code field.  Beginning in the year 2000,
these date code fields will need to accept 4 digit entries to  distinguish  21st
century dates from 20th century  dates.  Systems that do not properly  recognize
such information  could generate  erroneous data or fail. As a result,  computer
systems and/or software used by many companies may need to be upgraded to comply
with Year 2000 requirements.

<PAGE>  7

The Company is utilizing both internal and external resources as applicable,  to
identify,  correct or reprogram its internal  systems for Year 2000  compliance.
The effect on the Company's  future results of operations is being determined as
part  of  the  detailed  conversion  process.  In  February  1999,  the  Company
implemented a new  integrated  software  package to support future growth and to
address the issues  associated  with the Year 2000.  This system  implementation
substantially  completed the Company's internal program to address the Company's
Year 2000 issues. The new software installation cost $2.8 million.

The Company is  currently  seeking to insure  that the  software  and  operating
systems included in its new integrated software package are Year 2000 compliant.
The Company is also in the process of requesting information and assurances from
its major  vendors,  service  providers and customers  about their state of Year
2000 compliance and readiness.  In the event that  significant  Year 2000 issues
are identified  with such parties,  the Company will develop  contingency  plans
such as the use of alternate vendors or manual systems.


Cautionary  Statement  for  Purposes  of "Safe  Harbor  Provisions"  of the
Private Securities Litigation Reform Act of 1995


Certain  statements  contained in this  Management's  Discussion and Analysis of
Financial Condition and Results of Operations that are not related to historical
results are  forward-looking  statements.  Actual results may differ  materially
from those  projected or implied in the  forward-looking  statements.  Risks and
uncertainties  which could effect the Company  include,  but are not limited to,
economic and weather  conditions  that affect  buying  patterns of the Company's
customers,  changes in consumer spending and the Company's ability to anticipate
buying  patterns  and  implement   appropriate  inventory  strategies  continued
availability  of capital and  financing,  competitive  factors and other factors
affecting the Company's business beyond the Company's control. Consequently, all
of the forward-looking  statements are qualified by these cautionary  statements
and there can be no assurance  that the results or  developments  anticipated by
the Company will be realized or that they will have the expected  effects on the
Company or its business or operations.



<PAGE>  8


                           PART II - OTHER INFORMATION

Item 1.    Legal Proceedings

The Company is at all times  subject to pending and  threatened  legal  actions,
which arise out of the normal course of business.  In the opinion of management,
based in part on the advice of legal counsel,  the ultimate disposition of these
matters will not have a material  adverse  effect on the  financial  position or
results of operations of the Company.

Item 2.    Changes in Securities
                  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.

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits


11.1     Computation of per share loss (1 page)

27       Financial Data Schedule (1 page)

(b)      Reports on Form 8-K
                  None.




<PAGE>   9


                                   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: May 24, 1999




By:    /s/  Jonathan W. Spatz____
       Name:  Jonathan W. Spatz
         Title:    Executive Vice President and Chief Operating Officer
                   (duly authorized officer and principal financial officer)



<PAGE>  10



                                  EXHIBIT INDEX

Exhibit
Number Description Page


11.1     Computation of per share income                                 11
27       Financial Data Schedule                                         12


<PAGE>   11


                     COMPUTATION OF PER SHARE INCOME (LOSS)

                                                          13 weeks ended

--------------------------------------------------------------------------------
                                                       May 1,            May 2,
                                                       1999               1998
The computation of net income (loss)
 available and adjusted shares outstanding
 follows:


Income (loss) from continuing operations          $      334          $  (2,789)

Extraordinary item                                         -             (2,750)

Net income (loss)                                        334             (5,539)

Less:

 Series A preferred stock dividends                        -               (864)

 Series B preferred stock dividends                        -               (703)

Net income used for basic and diluted computation  $     334          $  (7,106)



Weighted average number of
 common shares outstanding                        12,106,636          1,485,789

Add:

  Assumed exercise of those options
    that are common stock equivalents                470,553                  -

  Assumed exercise of convertible preferred stock:

     Series A Preferred                                    -                  -

     Series B Preferred                                    -                  -

Adjusted shares outstanding,
  used for diluted computation                    12,577,189          1,485,789


Basic and Diluted:

Income (loss) before extraordinary item               $ 0.03            $ (2.92)

Extraordinary item per share                               -              (1.86)

Net income (loss) applicable to common stock          $ 0.03            $ (4.78)


--------------------------------------------------------------------------------


The weighted average number of common shares  outstanding has been restated
for the reverse stock split  (factor is .30133) that took place effect  November
23, 1998.