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 October 28, 2000
                                                 ----------------

                                       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)



                                 (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  of common stock,  as of
October 28, 2000, was 12,738,280 shares.




<PAGE>


                            FACTORY 2-U STORES, INC.

            FORM 10-Q FOR THE QUARTERLY PERIOD ENDED OCTOBER 28, 2000

                                      INDEX


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Factory 2-U Stores, Inc. Balance Sheets as of October 28, 2000
         (Unaudited) and January 29, 2000 ...................................F-1

         Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
         13 weeks ended October 28, 2000 and October 30, 1999................F-3

         Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
         39 weeks ended October 28, 2000 and October 30, 1999 ...............F-4

         Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the
         39 weeks ended October 28, 2000 and October 30, 1999 ...............F-5

         Factory 2-U Stores, Inc. Notes to Financial Statements (Unaudited) .F-7

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk ...........7

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.................................................... 8
Item 2.  Changes in Securities and Use of Proceeds.............................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







                                        2


<PAGE>



                                     PART I

Item 1.   Financial Statements

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


                                                 October 28,        January 29,
                                                     2000              2000
                                               --------------     --------------
                                                 (Unaudited)
ASSETS
Current assets:
  Cash                                           $     4,530          $    9,473
  Merchandise inventory                               77,436              35,048
  Prepaid expenses and other assets                    4,622               2,291
  Deferred income taxes                                2,950               2,184
                                                     -------             -------
       Total current assets                           89,538              48,996

Leasehold improvements and equipment,
  net of accumulated depreciation
  and amortization                                    38,578              27,425
Deferred income taxes                                  2,756               1,032
Other assets                                           1,256               1,507
Excess of cost  over net  assets  acquired,
  less  accumulated  amortization  of
  $11,341 and $10,139 at October 28, 2000 and
  January 29, 2000, respectively                      28,304              29,506
                                                     -------              ------

    Total assets                                 $   160,432         $   108,466
                                                 ===========         ===========


















                                   (continued)


                                       F-1



<PAGE>


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


                                                  October 28,        January 29,
                                                     2000                2000
                                                --------------    --------------
                                                   (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt
    and capital lease obligations                $     1,177         $     1,251
  Accounts payable                                    43,998              19,994
  Income taxes payable                                 3,128               4,235
  Accrued expenses                                    20,021              22,275
                                                     -------              ------
       Total current liabilities                      68,324              47,755

Revolving credit facility                             13,000                   -
Long-term debt, less current maturities               10,926              10,067
Capital leases and other long-term obligations         1,439               1,658
Deferred rent                                          3,082               2,556
                                                     -------             -------
         Total liabilities                            96,771              62,036


Stockholders' equity:
  Common stock, $0.01 par value; 35,000,000 shares
  authorized, 12,738,280 and 12,390,817 shares
  issued and outstanding at October 28, 2000
  and January 29, 2000, respectively                     127                 124
  Stock subscription notes receivable                (2,425)             (2,710)
  Additional paid-in capital                         115,935             108,091
  Accumulated deficit                               (49,976)            (59,075)
                                                    --------            --------

    Total stockholders' equity                        63,661              46,430
                                                     -------             -------

    Total liabilities and stockholders'equity    $   160,432         $   108,466
                                                 ============        ===========











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



                                       F-2


<PAGE>


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

                                                         13 Weeks Ended
                                                --------------------------------
                                                   October 28,       October 30,
                                                      2000              1999
                                                --------------   ---------------

Net sales                                         $   136,831        $   104,551
Cost of sales                                          87,874             67,191
                                                      --------          --------
  Gross profit                                         48,957             37,360

Selling and administrative expenses
 (exclusive of non-cash stock-based
 compensation expense shown below)                     38,759             30,392
Pre-opening expenses                                    1,548                770
Amortization of intangibles                               482                590
Stock-based compensation expense                        2,056              2,094
                                                       ------             ------
  Operating income                                      6,112              3,514

Interest expense, net                                     441                622
                                                       ------             ------

Income before income taxes                              5,671              2,892

Income tax (benefit)/ provision                         (165)              1,186
                                                     ---------           -------

  Net income                                      $     5,836        $     1,706
                                                   ===========       ===========


Earnings per share:
  Basic                                           $      0.46        $      0.14
  Diluted                                         $      0.44        $      0.13



Weighted average common shares outstanding:
  Basic                                                12,686             12,230
  Diluted                                              13,168             13,022












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

                                       F-3

<PAGE>


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



                                                          39 weeks Ended
                                                --------------------------------
                                                  October 28,        October 30,
                                                      2000              1999
                                                ---------------  ---------------

Net sales                                         $  361,884        $    281,581
Cost of sales                                        232,567             181,571
                                                     -------             -------
  Gross profit                                       129,317             100,010

Selling and administrative expenses
 (exclusive of non-cash stock-based
  compensation expense shown below)                  107,717              85,978
Pre-opening expenses                                   3,910               2,834
Amortization of intangibles                            1,630               1,769
Condemnation award                                   (1,240)                   -
Stock-based compensation expense                       4,807               2,094
                                                     -------             -------
  Operating income                                    12,493               7,335

Interest expense, net                                  1,264               1,824
                                                     -------             -------

Income before income taxes                            11,229               5,511

Income taxes                                           2,130               2,259
                                                     -------             -------

  Net income                                      $    9,099         $     3,252
                                                 ===========         ===========


Earnings per share:
   Basic                                          $     0.73         $      0.27
   Diluted                                        $     0.70         $      0.25

Weighted average common shares outstanding:
  Basic                                               12,530              12,157
  Diluted                                             13,009              12,804
















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

                                       F-4

<PAGE>



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

                                                          39 weeks Ended
                                                 -------------------------------
                                                    October 28,      October 30,
                                                        2000             1999
                                                 --------------- ---------------
Cash flows from operating activities:
  Income from operating activities                    $    9,099      $    3,252
  Adjustments to reconcile income to net cash
    provided by (used in) operating activities:
      Depreciation                                         7,433           4,776
      Amortization of intangibles                          1,630           1,769
      Amortization of debt discount                          858             848
      Loss on disposal of equipment                          554             464
      Deferred rent expense                                  596             515
      Stock-based compensation expense                     4,807           2,094
      Other non-cash items                                   122              83
      Changes in operating assets and liabilities:
           Merchandise inventory                        (42,388)        (22,880)
           Prepaid expenses and other assets             (4,999)         (1,324)
           Accounts payable                               24,004          14,115
           Accrued expenses and other liabilities        (4,746)         (2,200)
                                                    ------------    ------------
Net cash provided by (used in)
 operating activities                                    (3,030)           1,512
                                                    ------------    ------------

Cash flows used in investing activities:
  Purchase of leasehold improvements
    and equipment                                       (17,105)        (12,368)
                                                    ------------    ------------

Net cash used in investing activities                   (17,105)        (12,368)
                                                    ------------    ------------


















                                  (continued)


                                      F-5

<PAGE>


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


                                                         39 weeks Ended
                                              ----------------------------------
                                                 October 28,         October 30,
                                                     2000                1999
                                                --------------     -------------
Cash flows from financing activities:
  Borrowings on revolving credit facility            102,201             316,293
  Payments on revolving credit facility             (89,201)           (304,668)
  Payments on notes payable and
    capital lease obligations                          (207)             (1,335)
  Repurchase of warrants                                   -               (457)
  Proceeds from exercise of
    stock options and warrants                         2,389               2,038
  Payments of deferred financing costs                 (275)                   -
  Payments of stock subscription notes receivable        285                 202
                                                     -------              ------
Net cash provided by financing activities             15,192              12,073
                                                     -------              ------
Net increase (decrease) in cash                      (4,943)               1,217

Cash at the beginning of the period                    9,473               3,124
                                                     -------             -------
Cash at the end of the period                    $     4,530         $     4,341
                                                 ============        ===========


Supplemental disclosure of cash flow information:
  Cash paid during the period for:
    Interest                                     $       424         $       934
    Income taxes                                 $     5,628         $     3,021
















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



                                      F-6

<PAGE>


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

(1)      Unaudited Interim Financial Statements

         Our 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 our  financial  statements  for the fiscal year ended
         January 29, 2000 included in our Form 10-K as filed with the Securities
         and Exchange Commission.

         In the opinion of our management, the unaudited financial statements as
         of and for the 13 and 39 weeks  ended  October 28, 2000 and October 30,
         1999  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 our business,  the results of operations for the
         interim periods may not  necessarily  be  indicative  of the results of
         operations for a full year.

(2)      New Accounting Pronouncements

         In December 1999, the Securities and Exchange  Commission  issued Staff
         Accounting Bulletin ("SAB") No. 101, "Revenue  Recognition in Financial
         Statements."  This SAB summarizes the SEC's view in applying  generally
         accepted  accounting  principles  to revenue  recognition  in financial
         statements.  This  SAB  was  amended  by SAB  101B,  which  defers  the
         effective date for all  registrants  with fiscal years that begin after
         December 15, 1999 to allow for the option of implementing no later than
         the fourth  quarter of fiscal  2000.  Our  management  has reviewed the
         impact of SAB No. 101 on our financial statements, and does not believe
         that  its  adoption  will  have a  material  impact  on  our  financial
         statements.

         In June 1998, the Financial Accounting Standards Board issued Statement
         of Financial  Accounting  Standards  ("SFAS") No. 133,  "Accounting for
         Derivative  Instruments  and  Hedging  Activities",  which  establishes
         accounting  and reporting  standards  for  derivative  instruments  and
         hedging activities.  SFAS No. 133 requires that an entity recognize all
         derivatives  as  either  assets  or  liabilities  in the  statement  of
         financial  position and measure those  instruments at fair value.  This
         Statement  was  amended  by SFAS Nos.  137 and 138,  which  defers  the
         effective date to all fiscal  quarters of fiscal years  beginning after
         June 15,  2000  and  clarifies  certain  provisions  of SFAS  No.  133,
         respectively.  SFAS No. 133 is effective  for our first  quarter in the
         fiscal year beginning  February 4, 2001 and we do not expect it to have
         a material effect on our financial position or results of operations.





                                       F-7

<PAGE>



(3)      Revolving Credit Facility

         In March 2000,  we entered into a new $50.0  million  revolving  credit
         facility with a financial  institution and terminated a prior revolving
         credit facility.  Under the new 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 new credit facility
         includes a $5.0  million  sub-facility  for  letters  of credit.  As of
         October 28, 2000, interest on the credit facility is at the prime rate,
         or at our election, LIBOR plus 1.50%. Under the terms of the new 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 0.50% and LIBOR borrowings from LIBOR plus 1.50% to
         LIBOR plus  2.50%.  The new credit  facility  expires on March 3, 2003,
         subject  to  automatic  one-year  renewal  periods,  unless  terminated
         earlier by either  party.  We are obligated to pay fees equal to 0.125%
         per annum on the  unused  amount of the new  credit  facility.  The new
         credit  facility is secured by a first lien on accounts  receivable and
         inventory and requires us to maintain  specified levels of tangible net
         worth in the  event  that our  borrowing  availability  is less  than a
         specified amount.

         At  October  28,  2000,  based  on  eligible   inventory  and  accounts
         receivable,  we  were  eligible  to  borrow  $50.0  million  under  the
         revolving  credit  facility,  of which $13.0 million was outstanding at
         the end of the period.  At October 28,  2000,  we had a balance of $7.0
         million  outstanding  at a prime rate of 9.5% and a $6.0 million 30-day
         LIBOR loan outstanding with an effective interest rate of 8.12%.

(4)      Long-term Debt

         As of October 28, 2000, we had outstanding long-term indebtedness, less
         current  maturities,  of  $10.9  million.  The  long-term  indebtedness
         consists of the New Junior  Subordinated  Notes, which are non-interest
         bearing and are  reflected on our balance  sheets at the present  value
         using a discount  rate of 10%. As of October 28,  2000,  the New Junior
         Subordinated  Notes  had a face  value of $16.3  million  and a related
         unamortized discount of $4.4 million, resulting in a net carrying value
         of $11.9  million.  The discount is amortized to interest  expense as a
         non-cash  charge until the notes are paid in full.  We made a principal
         payment  on the  New  Junior  Subordinated  Notes  of $1.0  million  in
         December 1999.  Additional principal payments are scheduled on December
         31, 2000 ($1.0 million),  December 31, 2001 and December 31, 2002 ($2.0
         million), December 31, 2003 and December 31, 2004 ($3.0 million) and on
         May 28, 2005 ($5.3 million).






                                      F-8

<PAGE>

(5)      Earnings per Share

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

         At  October  28,  2000 and  October  30,  1999,  we had  40,750  and
         37,750 anti-dilutive stock options outstanding, respectively.

(6)      Provision for Income Taxes

         For the 13 weeks ended  October 28,  2000,  we recorded a $2.3  million
         provision for income taxes, which is based upon our estimated effective
         tax rate for the entire  fiscal  year.  This was offset by a  favorable
         adjustment  of $2.5 million to our income tax provision for a reduction
         in the Company's tax valuation  allowance.  Our estimated effective tax
         rate is subject to ongoing review and evaluation.

(7)      Stock Options and Warrants


         As of October 28, 2000, we had options to purchase  1,284,839 shares of
         our common stock outstanding.

         On July 12, 2000, our common stock achieved a market price of $24.89 or
         greater for 60  consecutive  trading  days.  As a result,  92,961 stock
         options with a market price hurdle of $24.89 became  exercisable and we
         recorded non-cash stock-based  compensation expense of $2.8 million. On
         August 22, 2000,  our common stock achieved a market price of $33.19 or
         greater for 60  consecutive  trading  days.  As a result,  71,419 stock
         options with a market price hurdle of $33.19 became  exercisable and we
         recorded non-cash stock-based  compensation expense of $2.1 million. An
         additional 65,957 stock options will become exercisable once our common
         stock has achieved and  maintained a price of $49.78 for 60 consecutive
         trading  days.  At that time,  we will be required  to record  non-cash
         compensation expense in the minimum amount of $2.8 million.

         At October 28, 2000,  warrants to purchase  82,690 shares of our common
         stock were outstanding with an exercise price of $19.91 per share.

(8)      Condemnation Award

         In  October  1998,  the City of San Diego  filed an action in San Diego
         County  Superior Court seeking  condemnation of real property leased by
         us for our store  located in downtown  San Diego,  California.  In July
         2000,  we reached a settlement  with the City in which the City paid us
         $1.2  million  for our  loss of  goodwill,  recovery  for the  value of
         property, plant and equipment abandoned and loss of operating income.


                                      F-9


<PAGE>


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

General

Management's  discussion of the results of operations  provides  analysis of our
operations  during the 13 and 39 weeks  ended  October  28, 2000 and October 30,
1999.

Results of Operations

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 October 28, 2000,  we operated  231 stores  compared to 187 as of October 30,
1999.

13 Weeks Ended October 28, 2000 Compared to the 13 Weeks Ended October 30, 1999

Net sales were $136.8  million for the 13 weeks ended  October 28, 2000 compared
to $104.6  million for the 13 weeks ended October 30, 1999, an increase of $32.3
million,  or 30.9%.  Comparable  store sales  increased  7.0%.  We opened 20 new
stores and none were closed during the current period.

Gross profit was $49.0  million for the 13 weeks ended October 28, 2000 compared
to $37.4  million for the 13 weeks ended  October 30, 1999, an increase of $11.6
million,  or 31.0%. As a percentage of net sales, gross profit was 35.8% for the
13 weeks ended October 28, 2000 compared to 35.7% for the 13 weeks ended October
30, 1999. Our gross margin percentage  improved due to lower markdown volume net
of higher distribution and marking costs.

Selling and  administrative  expenses  were $38.8 million for the 13 weeks ended
October 28, 2000  compared to $30.4  million for the 13 weeks ended  October 30,
1999,  an increase  of $8.4  million,  or 27.5%.  The  increase in spending  was
related  to new  store  growth.  As a  percentage  of  net  sales,  selling  and
administrative  expenses  were 28.3% for the 13 weeks ended October 28, 2000 and
29.1% for the 13 weeks ended October 30, 1999.  The  improvement  in the selling
and administrative ratio was primarily due to sales volume leverage.

Pre-opening  expenses  were $1.5 million for the 13 weeks ended October 28, 2000
compared to $0.8 million for the 13 weeks ended October 30, 1999, an increase of
$0.8 million, or 101.0%. The increase in pre-opening  expenses was primarily due
to higher pre-opening expenses incurred for 20 new store openings in the current
period versus 15 new store  openings  last year.  In addition,  we recorded $0.3
million  in  the  current  period   associated  with  the  opening  of  our  new
distribution center in Lewisville,  Texas. We expect to incur an additional $0.5
million  to $0.7  million in the fourth  quarter of fiscal  2000  related to the
opening of this new distribution center. The new distribution center is expected
to be fully operational in February 2001.

We recorded non-cash  stock-based  compensation expense of $2.1 million for each
of the 13 weeks ended October 28, 2000 and October 30, 1999,  related to certain
performance based stock options. See Note 7 of "Notes to Financial Statements."

                                        3

<PAGE>

Interest  expense  was $0.4  million  for the 13 weeks  ended  October  28, 2000
compared to $0.6 million for the 13 weeks ended  October 30, 1999, a decrease of
$0.2 million.  The decrease was due to lower average  outstanding  borrowings on
our revolving credit facility.

Income tax was a $0.2  million  benefit for the 13 weeks ended  October 28, 2000
compared  to the income tax  provision  of $1.2  million  for the 13 weeks ended
October 30, 1999. In the current  period,  we recorded a $2.3 million  provision
for income taxes  versus $1.2  million for the 13 weeks ended  October 30, 1999.
This  increase is the result of higher  taxable  income versus the same period a
year ago. During the current period, the $2.3 million provision for income taxes
was offset by a favorable adjustment of $2.5 million to our income tax provision
for a reduction in our tax valuation allowance.

Net income was $5.8 million for the 13 weeks ended  October 28, 2000 compared to
$1.7 million for the 13 weeks ended October 30, 1999. The increase in net income
was a result of the operating and other factors cited above.

39 weeks Ended October 28, 2000 Compared to the 39 weeks Ended October 30, 1999

Net sales were $361.9  million for the 39 weeks ended  October 28, 2000 compared
to $281.6  million for the 39 weeks ended October 30, 1999, an increase of $80.3
million,  or 28.5%.  Comparable  store sales  increased  4.7%.  We opened 56 new
stores and closed 12 stores during the current period.

Gross profit was $129.3 million for the 39 weeks ended October 28, 2000 compared
to $100.0  million for the 39 weeks ended October 30, 1999, an increase of $29.3
million,  or 29.3%. As a percentage of net sales, gross profit was 35.7% for the
39 weeks ended October 28, 2000 compared to 35.5% for the 39 weeks ended October
30, 1999. The improvement in gross margin was primarily attributable to a higher
initial markup on merchandise purchases and lower markdown volume.

Selling and  administrative  expenses were $107.7 million for the 39 weeks ended
October 28, 2000  compared to $86.0  million for the 39 weeks ended  October 30,
1999,  an increase of $21.7  million,  or 25.3%.  The  increase in spending  was
related  to new  store  growth.  As a  percentage  of  net  sales,  selling  and
administrative  expenses  were 29.8% for the 39 weeks ended October 28, 2000 and
30.5% for the 39 weeks ended October 30, 1999.  The  improvement  in the selling
and administrative expense ratio was primarily due to sales volume leverage.

Pre-opening  expenses  were $3.9 million for the 39 weeks ended October 28, 2000
compared to $2.8 million for the 39 weeks ended October 30, 1999, an increase of
$1.1  million,  or 38.0%.  The increase in  pre-opening  expenses was related to
higher pre-opening  expenses incurred for 56 new store openings this year versus
34 new store  openings last year, as well as $0.3 million in the current  period
associated with the opening of our new distribution center in Lewisville, Texas.
We expect to incur an  additional  $0.5  million  to $0.7  million in the fourth
quarter of fiscal 2000 related to the opening of this new  distribution  center.
The new  distribution  center is  expected to be fully  operational  in February
2001.


                                        4

<PAGE>

We recorded a non-recurring  gain of $1.2 million for the 39 weeks ended October
28, 2000 related to a condemnation  award from the City of San Diego for a store
located in downtown  San Diego,  California.  See Note 8 of "Notes to  Financial
Statements."

We  recorded  non-cash  stock-based  compensation  expense  related  to  certain
performance  based stock  options of $4.8  million  and $2.1  million for the 39
weeks ended October 28, 2000 and October 30, 1999, respectively.  In the current
period, we recorded non-cash  stock-based  compensation expense in the aggregate
amount of $4.8  million when stock  options with market price  hurdles of $24.89
and $33.19 became  exercisable  in July and August 2000.  For the 39 weeks ended
October 30, 1999, we recorded non-cash stock-based  compensation expense of $2.1
million  when  stock  options  with a  market  price  hurdle  of  $19.91  became
exercisable in October 1999. See Note 7 of "Notes to Financial Statements."

Interest  expense  was $1.3  million  for the 39 weeks  ended  October  28, 2000
compared to $1.8 million for the 39 weeks ended  October 30, 1999, a decrease of
$0.6 million.  The decrease was due to lower average  outstanding  borrowings on
our revolving credit facility.

Income taxes were $2.1 million for the 39 weeks ended  October 28, 2000 and $2.3
million for the 39 weeks ended October 30, 1999.  For the 39 weeks ended October
28,  2000,  we recorded a $4.6  million  provision  for income taxes versus $2.3
million for the 39 weeks ended October 30, 1999.  This increase is the result of
higher  taxable  income  versus the same  period a year ago.  During the current
period,  the $4.6 million  provision  for income taxes was offset by a favorable
adjustment  of $2.5 million to our income tax  provision  for a reduction in our
tax valuation allowance.

Net income was $9.1 million for the 39 weeks ended  October 28, 2000 compared to
$3.3 million for the 39 weeks ended October 30, 1999. The increase in net income
was a result of the operating and other factors cited above.

Liquidity and Capital Resources

General

As of October 28, 2000, we had  outstanding  indebtedness  and capital leases of
$26.5 million.

We  finance  our  operations  through  credit  provided  by  vendors  and  other
suppliers,  amounts  borrowed under our $50.0 million  revolving credit facility
and internally  generated cash flow.  Credit terms provided by vendors and other
suppliers are usually 30 days. Amounts which may be borrowed under the revolving
credit  facility are based on a percentage  of eligible  inventory  and accounts
receivable,  as defined,  outstanding from time to time, as more fully described
in Note 3 of "Notes to  Financial  Statements."  At October 28,  2000,  based on
eligible  inventory  and accounts  receivable,  we were eligible to borrow $50.0
million  under  the  revolving  credit  facility,  of which  $13.0  million  was
outstanding  at the end of the period.  At October 28, 2000, we had a balance of
$7.0 million outstanding at a prime rate of 9.5% and a $6.0 million 30-day LIBOR
loan outstanding with an effective interest rate of 8.12%.


                                        5

<PAGE>

Our management believes that our sources of cash, including the revolving credit
facility, will be adequate to finance operations,  capital requirements and debt
obligations as they become due for at least the next twelve months.  See Notes 3
and 4 of "Notes to Financial Statements."


Capital Expenditures

We anticipate  capital  expenditures  of  approximately  $4.9 million during the
remainder  of the current  fiscal year ending  February 3, 2001,  which  include
costs to open approximately 13 new stores, to complete the construction of a new
distribution  center, to upgrade  information systems and to renovate and expand
our administrative offices.

Inflation

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

Minimum Wage Increases

We employ, both in our stores and in our 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  and may
continue  to  increase  the  hourly  wages  that we must  pay to our  employees.
Historically,  we have mitigated these increases  through policies to manage our
ratio of wages to sales.  However, we can make no assurances that these measures
and other  steps taken will be adequate to control the impact of any hourly wage
increases in the future and they may have a negative impact on  profitability in
the future.

Seasonality and Quarterly Fluctuations

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

Year 2000 Issue

The Year 2000 issue was the result of  computer  systems and  software  products
coded to accept  only 2 digit  entries in the date code  field.  This could have
resulted in system  failure or the  generation of erroneous data in systems that
do not properly recognize such information.

We diligently addressed the potential Year 2000 issue by utilizing both internal
and external  resources as  applicable,  to identify,  correct or reprogram  our
internal systems for Year 2000 compliance.  In fiscal 1999, we implemented a new
integrated  software  package to  support  future  growth and to address  issues
associated with the Year 2000 at a cost of approximately $2.8 million.

                                        6

<PAGE>

To date, we have not experienced any significant  business disruptions or system
failures  as a result  of the Year 2000  issue  and none of our  major  vendors,
service  providers  and  customers  has reported  substantial  Year 2000 related
problems.

Although the Year 2000 event has  occurred,  and while there can be no assurance
that there will be no problems  related to the Year 2000 issue after  January 1,
2000, we believe we will not be adversely impacted by the Year 2000 issue.


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


In December 1995, Congress enacted the Private Securities  Litigation Reform Act
of 1995.  The Act  contains  amendments  to the  Securities  Act of 1933 and the
Securities  Exchange  Act of 1934 which  provide  protection  from  liability in
private lawsuits for "forward-looking"  statements made by specified persons. We
desire to take advantage of the "safe harbor" provisions of the Act.

Certain statements in this Form 10-Q, or in documents  incorporated by reference
into this Form  10-Q,  are  forward-looking  statements.  Those  forward-looking
statements  are subject to  uncertainties  that may cause the actual  results to
differ from the results anticipated by the forward-looking  statements.  Factors
which  may  cause   actual   results  to  differ  from  those   anticipated   by
forward-looking  statements include, among others, general economic and business
conditions (both nationally and in the regions in which we operate);  government
regulations   (including   regulations   regarding   temporary   immigration  of
agricultural works and minimum wages of agricultural and other workers);  claims
asserted  against  us;   competition;   changes  in  our  business  strategy  or
development plans;  difficulties  attracting and retaining qualified  personnel;
the inability to obtain adequate  quantities of merchandise at favorable prices;
the  management  of our growth;  and the other  factors  described  in our other
filings with the Securities and Exchange  Commission.  Consequently,  all of the
forward-looking  statements  are qualified by these  cautionary  statements  and
there can be no assurance  that the results or  developments  that we anticipate
will be realized or that they will have the expected  effects on our business or
operations.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are  exposed to  interest  rate risk on our fixed rate debt  obligations.  At
October 28, 2000, our fixed rate debt  obligations  totaled $16.3  million.  The
fixed rate debt  obligations  are  non-interest  bearing and are discounted at a
rate of 10%, resulting in a net carrying value of $11.9 million.  Maturities are
$1.0 million,  $2.0 million,  $2.0 million,  $3.0 million, $3.0 million and $5.3
million in fiscal year 2000,  2001,  2002,  2003,  2004 and 2005,  respectively.
While  generally an increase in market interest rates will decrease the value of
this debt, and decreases in 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 October 28, 2000.


                                        7

<PAGE>

                           PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

                  None.

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

     On June  28,  2000,  Ira  Neimark  resigned  as a  member  of our  Board of
Directors.  He remains a consultant to the Board of Directors.  On September 21,
2000, H. Whitney Wagner resigned as a member of our Board of Directors to pursue
other  interests.  Neither Mr. Neimark nor Mr. Wagner  resigned as a result of a
disagreement  with us on any matter  relating  to our  operations,  policies  or
practices.

     On December 5, 2000,  the Board  elected to replace Mr. Wagner as a Class I
director with Willem de Vogel, whose term of office will extend until the annual
meeting  of  stockholders  in 2003.  Mr. De Vogel is a general  partner of Three
Cities Fund II, L.P., one of our largest shareholders.

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.








                                        8

<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: December 11, 2000




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






























                                        9
<PAGE>


                                  EXHIBIT INDEX

Exhibit
Number Description Page

11.1     Computation of per share income                                      11
27       Financial Data Schedule (for EDGAR filing only)                      12





































                                       10


<PAGE>


EXHIBIT 11.1


                       COMPUTATION OF EARNINGS PER SHARE
                     (in thousands, except per share data)


<TABLE>
<CAPTION>

                                                         13 weeks ended                                 39 weeks ended
                                                         --------------                                 --------------


                                                  October 28, 2000    October 30, 1999    October 28, 2000   October 30, 1999
                                                  ----------------    ----------------    ----------------   ----------------


<S>                                               <C>                <C>                  <C>                 <C>
Net income                                        $    5,836         $    1,706           $    9,099          $   3,252

Weighted average number of common
    shares outstanding                                12,686             12,230               12,530             12,157

Effect of dilutive securities:

    Warrants that are common stock
     equivalents                                          34                 24                   31                 20

     Options that are common stock
      equivalents                                        448                768                  448                627

Adjusted common shares outstanding used
    for diluted computation                           13,168             13,022               13,009             12,804

Earnings per share:

  Basic                                           $     0.46         $     0.14           $     0.73          $    0.27

  Diluted                                         $     0.44         $     0.13           $     0.70          $    0.25


</TABLE>



























                                       11

<PAGE>