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 May 1, 2004
                                        -----------


                         Commission File Number: 1-10089

                          FACTORY 2-U STORES, INC. (1)
             (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

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).             [X] YES [ ] NO

The number of shares outstanding of the registrant's common stock, as of June 4,
2004 was 17,796,178 shares.


(1)  Factory 2-U Stores, Inc. has been operating as a debtor in possession under
     Chapter 11 of the United States Bankruptcy Code since January 13, 2004.



<PAGE>



                            FACTORY 2-U STORES, INC.

              FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 1, 2004

                                      INDEX


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Factory 2-U Stores, Inc. Balance Sheets as of May 1, 2004 (Unaudited),
         May 3, 2003 (Unaudited) and January 31, 2004  ......................F-1

         Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
         13 weeks ended May 1, 2004 and May 3, 2003 .........................F-3

         Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the
         13 weeks ended May 1, 2004 and May 3, 2003 .........................F-4

         Factory 2-U Stores, Inc. 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...........12

Item 4.  Controls and Procedures .............................................12


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings ...................................................12

Item 6.  Exhibits and Reports on Form 8-K ....................................12

Signatures    ................................................................13






                                       2


<PAGE>


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

<TABLE>
<CAPTION>

                            FACTORY 2-U STORES, INC.
                             (Debtor-in-Possession)
                                 Balance Sheets
                                 (in thousands)


                                            May 1,        May 3,     January 31,
                                            2004           2003         2004
                                            ------        ------     -----------
                                          (Unaudited)   (Unaudited)
<S>                                          <C>            <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents                 $ 5,487      $  5,414       $ 9,963
  Merchandise inventory                      46,534        66,012        38,168
  Accounts receivable, net                      884           623           618
  Income tax receivable                           -         1,756             -
  Prepaid expenses                            3,863         6,258         2,740
  Deferred income taxes                           -         9,753             -
                                            ---------    ---------     --------
          Total current assets               56,768        89,816        51,489

  Leasehold improvements and equipment, net  16,094        26,594        18,186
  Deferred income taxes                           -        10,750             -
  Other assets                                1,366           936         1,033
  Goodwill                                        -        26,301             -
                                            ---------    ---------     --------
                                            $74,228      $154,397       $70,708
                                            =========    =========     ========

</TABLE>








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


                                   (continued)




                                      F-1



<PAGE>

<TABLE>
<CAPTION>

                            FACTORY 2-U STORES, INC.
                             (Debtor-in-Possession)
                                 Balance Sheets
                                 (in thousands)
                                   (continued)


                                              May 1,      May 3,     January 31,
                                               2004        2003          2004
                                              ------      ------     -----------
                                           (Unaudited) (Unaudited)
<S>                                             <C>         <C>          <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  DIP financing facility                     $ 3,015      $     -      $     -
  Current maturities of long-term debt            36        3,021           36
  Junior secured term loans                        -        7,500            -
  Accounts payable                            16,013       43,844        8,257
  Income tax payable                           3,492            -        3,500
  Sales tax payable                            4,142        2,748        5,615
  Accrued expenses                            14,670       27,693       12,560
                                            ---------     --------     ---------
     Total current liabilities                41,368       84,806       29,968

Revolving credit facility                          -       11,535            -
Long-term debt                                    83        6,754           92
Accrued restructuring charges                      -        1,747            -
Deferred rent and other liabilities            2,073        2,822        2,518
                                            ---------     ---------    ---------
     Total liabilities not subject
       to compromise                          43,524      107,664       32,578
                                            ---------     ---------    ---------

Liabilities subject to compromise             67,986            -       63,062


Stockholders' equity (deficit):
  Common stock, $0.01 par value;
    35,000 shares authorized
    and 17,796 shares, 15,657 shares
    and 17,921 shares issued and
    outstanding, respectively                    178          157          179
  Additional paid-in capital                 137,965      126,513      137,964
  Accumulated deficit                       (175,425)     (79,937)    (163,075)
                                            ---------    ---------   ----------
      Total stockholders' equity (deficit)   (37,282)      46,733      (24,932)
                                            ---------    ---------   ----------

                                            $ 74,228     $154,397     $ 70,708
                                            =========    =========   ===========
</TABLE>




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





                                      F-2


<PAGE>

<TABLE>
<CAPTION>


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



                                                        13 Weeks Ended
                                                        --------------
                                                   May 1,              May 3,
                                                    2004                2003
                                                  -------              ------
<S>                                                 <C>                  <C>
Net sales                                        $ 80,326            $ 104,347
Cost of sales                                      52,913               66,712
                                                ----------          ------------
      Gross profit                                 27,413               37,635

Selling and administrative expenses                31,165               41,255
Pre-opening and closing expenses                       14                  138
                                                ----------          ------------
      Operating loss                               (3,766)              (3,758)

Interest expense, net                                 375                  634
                                                ----------          ------------
Loss before reorganization items
  and income tax benefit                           (4,141)              (4,392)
Reorganization items                                8,210                    -
                                                ----------          ------------
Loss before income tax benefit                    (12,351)              (4,392)
Income tax benefit                                      -               (1,671)
                                                ----------          ------------
Net loss                                        $ (12,351)           $  (2,721)
                                                ==========          ============



Net loss per share, basic and diluted           $   (0.70)           $   (0.19)


Weighted average common shares outstanding,
  basic and diluted                                17,696               14,620

</TABLE>





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



                                      F-3


<PAGE>

<TABLE>
<CAPTION>

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


                                                          13 Weeks Ended
                                                          --------------
                                                    May 1, 2004     May 3, 2003
                                                    -----------     -----------
<S>                                                     <C>              <C>
Cash flows from operating activities
  Net loss                                          $ (12,351)       $ (2,721)
  Adjustments to reconcile net loss to net cash
    used in operating activities
      Depreciation and amortization                     2,349           3,305
      Gain on disposal of equipment                        (4)              -
      Deferred rent                                      (621)           (239)
      Reorganization items                              7,874               -
      Stock subscription notes receivable
        valuation adjustment                                -            (708)
      Issuance of common stock to board members
        as compensation                                     -               5
      Other non-cash changes                              (71)              -
      Changes in operating assets and liabilities
        Merchandise inventory                          (8,366)        (33,840)
        Prepaid expenses and other assets              (2,225)          8,051
        Advances to vendor                                  -             (16)
        Repayments from vendor                             70               4
        Accounts payable                                7,756          15,883
        Income taxes payable                               (8)         (4,848)
        Accrued expenses and other liabilities         (1,740)            (17)
        Liabilities subject to compromise                 (94)              -
                                                   ------------    ------------
Net cash used in operating activities                  (7,431)        (15,141)

Cash flows from investing activities

  Purchases of leasehold improvements and equipment       (51)         (1,032)
                                                   ------------    -------------
Net cash used in investing activities                     (51)         (1,032)

Cash flows from financing activities
  Borrowings on revolving credit facility              66,702          42,507
  Payments on revolving credit facility               (63,687)        (37,272)
  Payments on long-term debt                               (9)              -
  Proceeds from debt financing                              -           7,500
  Proceeds from issuance of common stock, net               -           5,672
  Payment of deferred debt issuance costs                   -            (428)
  Payments of stock subscription notes receivable           -             143
                                                   ------------    -------------
Net cash provided by financing activities               3,006          18,122

Net increase (decrease) in cash                        (4,476)          1,949
Cash at the beginning of the period                     9,963           3,465
                                                   ------------    -------------
Cash at the end of the period                       $   5,487       $   5,414
                                                   ============    =============

Supplemental disclosure of cash flow information
  Cash paid during the period for
    Interest                                        $     206       $     347
    Incomes taxes                                   $       9       $      88

Supplemental disclosure of non-cash investing
  and financing activities
    Acquisition of equipment under notes payable    $       -       $      92

</TABLE>


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

                                      F-4

<PAGE>


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

(1)      Basis of Presentation
         ---------------------

         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 January 31, 2004 included in our Form 10-K as filed
         with the Securities and Exchange Commission.

         We believe that the unaudited financial statements as of and for the 13
         weeks ended May 1, 2004 and May 3, 2003 reflect all 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 fiscal 2004 financial statements.

         On January 13, 2004 (the "Petition Date"), we filed a voluntary
         petition to reorganize under Chapter 11 of the United States Bankruptcy
         Code (the "Bankruptcy Code") in the United States Bankruptcy Court for
         the District of Delaware (the "Court"), which is currently pending as
         case number 04-10111(PJW) (the "Chapter 11 filing"). We remain in
         possession of our properties and continue to operate our business as
         debtor-in-possession ("DIP") in accordance with the applicable
         provisions of the Bankruptcy Code.

         Since the Chapter 11 filing, we have applied the provisions of
         Statement of Position 90-7 "Financial Reporting by Entities in
         Reorganization under the Bankruptcy Code" ("SOP 90-7"), which does not
         significantly change the application of accounting principles generally
         accepted in the United States; however, it requires the financial
         statements for periods including and subsequent to filing Chapter 11
         petition distinguish transactions and events that are directly
         associated with the reorganization from the ongoing operations of the
         business.

         The accompanying financial statements are prepared on a going concern
         basis, which assumes continuity of operations and realization of assets
         and satisfaction of liabilities in the ordinary course of business. In
         accordance with SOP 90-7, all pre-petition liabilities subject to
         compromise have been segregated in the Balance Sheets as of May 1, 2004
         and January 31, 2004 and classified as Liabilities subject to
         compromise, at the estimated amount of allowable claims. Liabilities
         not subject to compromise are separately classified as current and
         non-current. Expenses, realized gains and losses, and provisions for
         losses resulting from the reorganization are reported separately as
         Reorganization items in the Statement of Operations for the 13 weeks
         ended May 1, 2004.


                                      F-5

<PAGE>


(2)      Accounting Policies
         -------------------

         Use of Estimates

         Our management has made a number of estimates and assumptions relating
         to the reporting of assets and liabilities and the disclosure of
         contingent assets and liabilities at the date of the financial
         statements and the reported amounts of revenues and expenses during the
         reporting period to prepare these financial statements in conformity
         with generally accepted accounting principles in the United States.
         Actual results could differ from these estimates.

         Stock-based Compensation

         We have elected under the  provisions of Statement of Financial
         Accounting Standard (the "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 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
         common share if we had applied the fair value recognition provisions of
         SFAS No. 148.

<TABLE>

                                           (in thousands, except per share data)
                                                     13 weeks ended
                                           -------------------------------------
                                             May 1,                May 3,
                                              2004                  2003
                                           ----------           -----------
<S>                                            <C>                  <C>
Net loss before stock-based
  compensation, as reported                $  (12,351)          $  (2,721)
Stock based compensation using the
  fair value method, net of tax                  (546)               (809)
                                           -----------          ----------
Pro-forma net loss                         $  (12,897)          $  (3,530)
                                           ===========          ==========
Pro-forma net loss per share,
  basic and diluted        $               $    (0.73)          $   (0.27)

</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 Black-Scholes option valuation model does
         not take into account our status as a debtor in possession, which
         may have a material effect on the value of our outstanding options.

                                      F-6

<PAGE>

         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
                                                       --------------
                                                    May 1,         May 3,
                                                     2004           2003
                                                    ------         ------
             <S>                                     <C>             <C>
             (i)     Expected dividend yield         0.00%           0.00%
             (ii)    Expected volatility           111.81%         103.68%
             (iii)   Expected life                   6 years       7 years
             (iv)    Risk-free interest rate        3.63 %          3.45%

</TABLE>



         Income (loss) per Share and Comprehensive Income

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

         Common stock equivalent shares totaling 0 and 108,437 for the 13 weeks
         ended May 1, 2004 and May 3, 2003, respectively, are not included in
         the computation of diluted loss per share because the effect would have
         been anti-dilutive.

         Comprehensive loss for the 13 weeks ended May 1, 2004 and May 3, 2003
         did not differ from net loss.

         Recent Accounting Pronouncements

         In March 2004, the Financial Accounting Standards Board (the "FASB")
         issued an exposure draft entitled "Share-Based Payment - an amendment
         of Statements No. 123 and 95 (Proposed Statements of Financial
         Accounting Standards)" The proposed statement would eliminate an
         issuer's ability to account for share-based compensation transactions
         using APB Opinion No. 25 and would generally require that such
         transactions be accounted for using a fair-value-based method of
         accounting. This accounting standard, if approved, will result in
         compensation expense charges to our future results of operations. The
         proposed statement, if adopted, would be applied to public entities
         prospectively for fiscal years beginning after December 15, 2004, as if
         all share-based compensation awards granted, modified or settled after
         December 15, 1994 had been accounted for using the fair-value method of
         accounting. Retrospective application of the proposed statement is not
         permitted.


(3)      Reorganization Items
         --------------------

         Reorganization items represent amounts we incurred as a result of the
         Chapter 11 filing, and are recorded and presented in accordance with
         SOP 90-7. Reorganization items for the 13 weeks ended May 1, 2004 were
         $8.2 million and consisted of: (1) a non-cash charge of $5.0 million
         for lease rejection claims associated with 31 lease rejections in
         conjunction with the 44 stores closed in the quarterly period ended May
         1, 2004, as part of our reorganization efforts; (2) $2.8 million of
         professional fees and other expenses incurred in our bankruptcy case
         and reorganization efforts; and (3) $366,000 of additional costs to
         close the 44 stores.

         Cash payments resulting from reorganization items during the 13 weeks
         ended May 1, 2004 were approximately $221,000.

                                      F-7

<PAGE>

(4)      Liabilities Subject to Compromise
         ---------------------------------

         Under the Bankruptcy Code, actions by creditors to collect indebtedness
         we owe prior to the Petition Date are stayed and certain other
         pre-petition contractual obligations may not be enforced against us. We
         have received approval from the Court to pay certain pre-petition
         liabilities including employee salaries and wages, benefits and other
         employee obligations. Except for secured debt, employee payroll and
         benefits, sales, use and other taxes, and capital lease obligations,
         all pre-petition liabilities have been classified as Liabilities
         subject to compromise in the Balance Sheets as of May 1, 2004 and
         January 31, 2004. Adjustments to pre-petition liabilities may result
         from negotiations, payments authorized by Court order, additional
         rejection of executory contracts including leases, or other events.
         Therefore, the amounts below in total may vary significantly from the
         stated amounts of proofs of claim that will be filed with the Court. We
         have mailed notices to all known creditors to inform them that the
         deadline for filing proofs of claim with the Court is June 15, 2004.

         The following table summarizes the components of Liabilities subject to
         compromise in our Balance Sheet as of May 1, 2004.

<TABLE>


(in thousands)                                            May 1,     January 31,
                                                           2004         2004
                                                          ------     -----------
<S>                                                         <C>          <C>
Trade and other accounts payable                        $ 41,987     $ 41,734
Junior subordinated notes, net of discount                10,349       10,349
Restructuring costs, primarily lease rejection claims      5,929        6,044
Lease rejection claims                                     5,065            -
General liability and workers compensation claims          2,273        2,283
Severance claims                                           1,385        1,385
Other                                                        998        1,267
                                                        --------     -----------
Liabilities subject to compromise                       $ 67,986     $ 63,062
                                                        --------     -----------

</TABLE>


                                      F-8

<PAGE>


(5)      Store Closures
         --------------

         On February 2, 2004, the Court authorized the closure of 44 stores. On
         February 11, 2004, the Court approved the agreement between the Great
         American Group ("Great American") and us in which Great American acted
         as an exclusive agent to conduct store closing sales at the 44 stores
         location. The store closing sales started on February 12, 2004. All 44
         stores were closed by March 18, 2004 and as of April 23, 2004, we have
         terminated or assigned a total of 13 leases of these stores and
         rejected the remaining 31 leases. As a result of these lease
         rejections, we recorded a non-cash charge of $5.0 million (included in
         Reorganization items) related to lease rejection claims per the maximum
         amount allowed under the Bankruptcy Code.

         Under the terms of the agreement with Great American, we receive a
         percentage of the aggregate retail price of the merchandise at the 44
         stores as of February 11, 2004, as defined. In addition, we receive
         reimbursement of sale expenses, as defined, incurred during the store
         closing sales. Sales proceeds, net of sales tax, received during the
         store closing sales goes to Great American. As of June 4, 2004, we have
         received $3.4 million as partial payment for the sale of inventory to
         Great American and are in the process of determining the remaining
         amount owed to us.  In addition, we have received approximately $1.5
         million of sale expense reimbursement.

         Other closing costs of approximately $366,000 not reimbursed by Great
         American have been included in Reorganization items for the 13 weeks
         ended May 1, 2004.


         On June 4, 2004, we filed a motion with the Court seeking authorization
         to close another 23 under-performing stores. Subject to the Court's
         approval, we currently plan to start the going-out-of-business sale
         process on or about July 1, 2004 and expect to close these stores by
         the end of August 2004.


 (6)     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.

         As of June 4, 2004, we have closed 20 of these 23 stores. We terminated
         the lease obligations on 14 of these closed stores prior to our Chapter
         11 filing, and in conjunction with our Chapter 11 filing we rejected
         the other 6 leases. The three remaining stores have not been closed at
         this time due to lease concessions agreed to by the landlords.

         The balance of the liability of $4.6 million as of May 1, 2004
         (included in "Liabilities subject to compromise" in the accompanying
         Balance Sheet) related to this fiscal 2002 restructuring charge was as
         follows:

<TABLE>

                               Balance at                 Non-cash    Balance at
                               January 31,     Cash      Charges and    May 1,
(in thousands)                    2004       Payments    Adjustments     2004
                               -----------   --------    -----------  ---------
<S>                                <C>          <C>          <C>          <C>
Lease termination costs           $ 4,463      $   -       $     -      $ 4,463
Employee termination costs             65        (43)            -           22
Other costs                           147        (58)            -           89
                               -----------   ---------   -----------  ----------
                                  $ 4,675      $(101)      $     -      $ 4,574
                               -----------   ---------   -----------  ----------

</TABLE>

         As of May 1, 2004, the balance of non-cash inventory liquidation costs
         related to this fiscal 2002 restructuring charge was zero.




                                      F-9

<PAGE>

 (7)     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.

         We closed all 28 stores during fiscal 2002. We had terminated the lease
         obligations on 23 of these stores prior to our Chapter 11 filing and
         rejected the remaining 5 leases during the bankruptcy proceeding.

         The balance of the liability of $1.4 million as of May 1, 2004
         (included in "Liabilities subject to compromise" in the accompanying
         Balance Sheet) related to the fiscal 2001 restructuring charge was as
         follows:

<TABLE>


                                Balance at                       Balance at
                                January 31,        Cash            May 1,
(in thousands)                    2004           Payments          2004
                                -----------     ---------        ----------
<S>                                 <C>            <C>               <C>
Lease termination costs           $ 1,249         $   -            $ 1,249
Other costs                           120           (14)               106
                                -----------     ---------        ----------
                                  $ 1,369         $ (14)           $ 1,355
                                -----------     ---------        ----------

</TABLE>


 (8)     DIP Financing Facility
         ----------------------

         In conjunction with our Chapter 11 filing, we entered into a financing
         agreement with The CIT Group/Business Credit, Inc. (the Tranche A
         Lender) and GB Retail Funding, LLC (the Tranche B Lender),
         (collectively the "Lenders") in which the Lenders provided us a $45.0
         million revolving credit facility for working capital needs and other
         general corporate purposes while we operate as a debtor-in-possession
         (the "DIP financing facility"). This DIP financing facility with a
         maturity date of January 14, 2005 has since been amended three times;
         on January 30, 2004, March 10, 2004, and May 27, 2004, respectively.
         The most recent amendment is subject to the Court's approval, a hearing
         for which is scheduled on June 15, 2004.

         The DIP financing facility has a superpriority claim status in our
         Chapter 11 case and is collateralized by first liens on substantially
         all of our assets, subject to valid and unavoidable pre-petition liens
         and certain other permitted liens. Under the terms of the DIP financing
         facility, we may borrow up to 85% of our eligible accounts receivable
         and up to 70% of our eligible inventory, as defined. However, the DIP
         financing facility provides for a $5.0 million availability block
         against our availability calculation, as defined. The DIP financing
         facility also includes a $20.0 million sub-facility for letters of
         credit. Interest on the outstanding borrowings under the DIP financing
         facility is payable monthly and accrues at the rate equal to, at our
         option, either the prime rate (as announced by JP Morgan Chase Bank)
         plus 1.50% per annum or LIBOR plus 3.5% per annum. In the event that
         there is any outstanding borrowing provided by the Tranche B Lender,
         such borrowing bears interest at 14.5% per annum payable monthly. We
         are also obligated to pay a monthly fee equal to 0.375% per annum on
         the unused available line of credit and a fee equal to 2.5% per annum
         on the outstanding letters of credit.



                                      F-10
<PAGE>

         Under the terms of the DIP financing facility, capital expenditure for
         fiscal 2004 is restricted to $2.0 million. In addition, we are required
         to be in compliance with financial covenants and other customary
         covenants. As of May 1, 2004, the financial covenants included average
         minimum availability, cumulative four-week rolling average of cash
         receipts from store sales and cumulative rolling four-week average of
         inventory receipts, as defined. The customary covenants include certain
         reporting requirements and covenants that restrict our ability to incur
         or create liens, indebtedness and guarantees, make dividend payments,
         sell or dispose of assets, change the nature of our business and enter
         into affiliate transactions, mergers and consolidations. Failure to
         satisfy these covenants would (in some cases, after the expiration of a
         grace period) result in an event of default that could cause, absent
         the receipt of appropriate waivers, the funds necessary to maintain our
         operations to become unavailable. The DIP financing facility contains
         other customary events of default including certain ERISA events, a
         change of control and the occurrence of certain specified events in the
         Chapter 11 case. In addition, during the period from December 28, 2004
         through January 11, 2005, we are not allowed to have any outstanding
         borrowings under the revolving credit facility and our outstanding
         letters of credit cannot exceed $11.0 million.

         As of May 1, 2004, we were in compliance with our covenants and had
         borrowings of $3.0 million outstanding under the revolving credit
         facility and outstanding letters of credit of $15.1 million under the
         sub-facility for letters for credit. As of May 1, 2004, based on our
         eligible inventory and accounts receivable, we were eligible to borrow
         $14.7 million under the revolving credit facility and had $8.5 million
         available after giving effect for the availability block, as defined.

         The May 27, 2004 amendment, still subject to the Court's approval,
         modified our financial covenants, whereby covenants will include
         minimum availability, five-day availability covenants at each month end
         and minimum inventory per store.  The Tranche B Lender will fully fund
         within five business days of the Court's approval of the amendment and
         we may repay the Tranche B amount after October 20, 2004 subject to
         certain conditions.


(9)      Provision for Income Taxes
         --------------------------

         Due to our significant net operating losses and our Chapter 11 filing,
         we provided for a 100% valuation allowance on all deferred tax assets
         as of January 31, 2004 because we cannot conclude that it is more
         likely than not that the deferred tax assets will be realized in the
         foreseeable future. Accordingly, for the 13 weeks ended May 1, 2004,
         our income tax benefit was zero as we established a 100% valuation
         allowance to offset such benefit.


(10)     Stock Options and Warrants
         --------------------------

         As of May 1, 2004, options to purchase 950,091 shares of our common
         stock and warrants to purchase 270,190 shares of our common stock were
         outstanding. The options have exercise prices in the range of $1.61 to
         $42.25 and expire on various dates between May 2004 and December 2013.
         The warrants have exercise prices in the range of $3.50 to $19.91 and
         expire on various dates between May 2005 and August 2006.


(11)     Legal Matters, Commitments and Contingencies
         --------------------------------------------

         On January 13, 2004, we filed a voluntary petition for reorganization
         under Chapter 11 of the Bankruptcy Code. We retain control of our
         assets and are authorized to operate the business as a
         debtor-in-possession while being subject to the jurisdiction of the
         Bankruptcy Court. As of the Petition Date, most pending litigation is
         stayed, and absent further order of the Court, substantially all
         pre-petition liabilitities are subject to settlement under a plan of
         reorganization. At this time, it is not possible to predict the outcome
         of the Chapter 11 case or its effect on our business. If it is
         determined that the liabilities subject to compromise in the Chapter 11
         case exceed the fair value of the assets, unsecured claims may be
         satisfied at less than 100% of their fair value and the equity
         interests of our shareholders may have no value.


                                      F-11

<PAGE>

         On or about April 28, 2003, Lynda Bray and Masis Manougian, two of our
         former employees, filed a lawsuit against us entitled Lynda Bray, Masis
         Manougian, etc., Plaintiffs v. Factory 2-U Stores, Inc., et al.,
         Defendants, Case No. RCV071918, in the Superior Court of the State of
         California for the County of San Bernardino (the "Bray Lawsuit"). The
         First Amended Complaint in the Bray Lawsuit alleges purported claims
         for: (1) "Failure to Record Hours and or Illegally Modify Recorded
         Hours Worked;" (2) "Failure to Pay Wages Under State Labor Code, Penal
         Code and IWC Wage Order 7, Injunctive and Monetary Relief;" (3) "Unfair
         Business Practice, Bus. & Prof. Code ss.17200 et. seq., Failure to Pay
         Wages and Record Hours Worked;" (4) "Equitable Conversion;" and (5)
         "False Advertising." The thrust of plaintiffs' claim is that the
         Company failed to pay wages and overtime for all hours worked, failed
         to document all hours worked, and failed to inform prospective or new
         employees of unpaid wage claims. Plaintiffs purport to bring this
         action on behalf of all persons who were employed in one of the
         California stores at anytime 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. All proceedings in the Bray Lawsuit are
         currently stayed pursuant to the automatic stay provisions of Section
         362 of the Bankruptcy Code, subject to the entry of an order by the
         Court lifting the automatic stay. In the event the Court enters an
         order lifting the automatic stay, we will continue to vigorously defend
         against the Bray Lawsuit. If the Bray Lawsuit is decided adversely, the
         potential exposure could be material to our results of operations.

         In November 2003, Virginia Camarena, a current employee in one of our
         California stores, filed a lawsuit against us entitled Virginia
         Camarena, Plaintiff, vs. Factory 2-U Stores Inc., etc., Defendants,
         Case No. BC305173 in the Superior Court of the State of California for
         the County of Los Angeles - Central District (the "Camarena Lawsuit").
         The plaintiff alleges that we violated the California Wage Orders,
         California Labor Code, California Business and Profession Code and the
         Federal Fair Labor Standards Act by failing to pay her wages and
         overtime for all hours worked, by failing to provide her with
         statements showing the proper amount of hours worked, and by wrongfully
         converting her property by failing to pay overtime wages owed on the
         next payday after they were earned. The plaintiff purports to bring
         this as an action on behalf of all persons who were employed in one of
         our California stores or outside the state of California. Plaintiffs
         seek compensatory, punitive and liquidated damages, restitution,
         interest, penalties and attorneys' fees. In December 2003, we filed an
         answer to the complaint and removed the Camarena Lawsuit to the United
         States District Court for the Central District of California, Case No.
         CV-03-8880 RGK (SHx), where it is currently pending.

         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 Camarena Lawsuit. All proceedings in the Camarena
         Lawsuit are currently stayed pursuant to the automatic stay provisions
         of Section 362 of the Bankruptcy Code, subject to the entry of an order
         by the Court lifting the automatic stay. In the event the Court enters
         an order lifting the automatic stay, we will continue to vigorously
         defend against the Camarena Lawsuit.

         There are numerous other matters filed with the Court in our
         reorganization proceedings by creditors, landlords or other third
         parties related to our business operations or the conduct of our
         reorganization activities. Although none of these individual matters
         which have been filed to date have had or are expected to have a
         material adverse effect on us, our ability to successfully manage the
         reorganization process and develop an acceptable reorganization plan
         could be negatively impacted by adverse determinations by the Court on
         certain of these matters.



                                      F-12

<PAGE>


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


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

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 this Quarterly Report on Form 10-Q and in our other filings with
the Securities and Exchange Commission.

In addition to the above general factors, the following bankruptcy related
factors, among others, could also affect our future results, performance or
achievements, causing these results to differ materially from those expressed in
any of our forward-looking statements: our ability to continue as a going
concern; our ability to operate pursuant to the terms of our
debtor-in-possession financing facility; our ability to obtain approval from the
Court with respect to motions in the Chapter 11 case from time to time; our
ability to negotiate, confirm and consummate a plan of reorganization in a
timely manner; risks associated with third parties seeking and obtaining court
approval to terminate or shorten the exclusivity period that we have to propose
and confirm one or more plans of reorganization, for the appointment of a
Chapter 11 trustee or to convert the Chapter 11 case to a case under Chapter 7
of title 11 of the Bankruptcy Code; our ability to offset the negative effects
that the filing for reorganization under Chapter 11 of the Bankruptcy Code has
had on our business, including the loss in customer traffic, the impairment of
vendor relations and the constraints placed on available capital; our ability to
obtain and maintain normal terms with vendors and service providers; the ability
of our vendors to obtain satisfactory credit terms from factors and other
financing sources; our ability to maintain contracts, including leases, which
are critical to our operations; the potential adverse impact of the Chapter 11
case on our liquidity or results of operations; our ability to develop a
long-term strategy to revitalize our business and return to profitability; and
our ability to fund and execute our business plan.

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.



                                       3

<PAGE>


Similarly, these and other factors, including the terms of the final plan of
reorganization, if any, ultimately confirmed, can affect the value of our
pre-petition liabilities and common stock. Until a plan of reorganization is
confirmed by the Court, the recoveries of pre-petition claim holders are subject
to change. Accordingly, no assurance can be given as to what values, if any,
will be ascribed in the bankruptcy case to each of these constituencies.

The final plan of reorganization, if any, confirmed by the Court may result in
the cancellation of our existing common stock with holders thereof receiving no
distributions under the plan of reorganization. In light of the foregoing, we
consider the value of our common stock to be highly speculative and caution
equity holders that the stock may ultimately be determined to have no value.
Accordingly, we urge that appropriate caution be exercised with respect to
existing and future investments in our common stock or any claims relating to
pre-petition liabilities.


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.

Despite our efforts in fiscal 2003 to improve sales and our liquidity, we were
unable to improve comparable sales growth and operating margin at a rate that
could generate sufficient cash flow to sustain ongoing operations. Accordingly,
on January 13, 2004, we filed a voluntary petition to reorganize under Chapter
11 of the Bankruptcy Code in the Court, which is currently pending.

We decided to seek judicial reorganization in order to implement a comprehensive
operational and financial restructuring due to the tightening of credit extended
by our vendors and the credit community and a decline in our liquidity caused by
declining sales volume and deteriorating operating margin in a very soft retail
environment. As the debtor, we are authorized to continue to operate as an
ongoing business, but may not engage in transactions outside the ordinary course
of business without the approval of the Court after notice and an opportunity
for a hearing.

At hearings held on January 14, 2004 concerning our first day motions, the Court
entered orders granting us authority, among other things, to (1) continue our
centralized cash management system, (2) pay pre-petition wages and continue our
employee benefit plans and other employee programs, (3) continue customer
related practices, (4) pay certain sales, use and other taxes, (5) pay suppliers
and vendors in full for all goods and services provided on or after the Petition
Date and (6) continue ongoing pre-petition "going out of business sales" for
four store locations completed by January 31, 2004. In addition, the Court also
gave interim approval for a $45.0 million DIP financing facility (DIP financing
facility) that was committed by The CIT Group/Business Credit, Inc. and GB
Retail Funding, LLC.

On February 2, 2004, the Court granted final approval of the $45.0 million DIP
financing facility. We intend to utilize this financing, in addition to cash
flow from operations, to fulfill business obligations during the Chapter 11
process.

Additionally, on February 2, 2004, the Court authorized the closure of 44
stores, or approximately 18% of our 239 stores. Stores were selected by
evaluating their market and financial performance. On February 11, 2004, the
Court approved our appointment of the Great American Group ("Great American") as
exclusive agent to conduct store closing sales at these 44 store locations. The
store closing sales started on February 12, 2004. All 44 stores were closed by
March 18, 2004 and as of April 23, 2004, we have terminated or assigned a total
of 13 leases of these stores and rejected the remaining 31 leases.

On February 17, 2004, we filed with the Court our schedules of assets and
liabilities and statements of financial affairs setting forth, among other
things, the assets and liabilities as shown on our books and records as of the
Petition Date, subject to the assumptions contained in certain notes filed in
connection therewith. The schedules of assets and liabilities and statements of
financial affairs remain subject to further amendment or modification. We have
mailed notices to all known creditors that the deadline for filing proofs of
claim with the Court is June 15, 2004. Differences between amounts we have
scheduled and claims by creditors will be investigated and resolved in
connection with our claims resolution process. As we are at an early stage of
the bankruptcy and we do not yet have a plan of reorganization, the ultimate
distribution with respect to allowed claims is not presently ascertainable.



                                       4

<PAGE>


The United States Trustee has appointed an unsecured creditors committee and may
consider the appointment of an equity committee. There can be no assurance that
the unsecured creditors committee or equity committee, if any, will support our
positions in the bankruptcy case or the plan of reorganization once proposed,
and any disagreements could protract the bankruptcy case, negatively impact our
ability to operate during bankruptcy, and/or delay our emergence from
bankruptcy.

Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as well
as most other pending litigation, are stayed and other contractual obligations
against us generally may not be enforced. Absent an order of the Court,
substantially all pre-petition liabilities are subject to compromise under a
plan of reorganization to be voted upon and approved by the Court. Although we
expect to file a reorganization plan that provides for emergence from
bankruptcy, there can be no assurance that a plan of reorganization will be
proposed by us or confirmed by the Court, or that any such plan will be
consummated.

We also may assume or reject executory contracts and unexpired leases, including
our store and distribution center leases, subject to the approval of the Court
and our satisfaction of certain other requirements. In the event we choose to
reject an executory contract or unexpired lease, parties affected by these
rejections may file claims with the Court-appointed claims agent as prescribed
by the Bankruptcy Code and/or orders of the Court. Unless otherwise agreed, the
assumption of an executory contract or unexpired lease will require us to cure
all prior defaults under such executory contract or lease, including all
pre-petition liabilities, some of which may be significant. In addition, in this
regard, we expect that liabilities that will be subject to compromise through
the Chapter 11 process will arise in the future as a result of the rejection of
additional executory contracts and/or unexpired leases, and from the
determination by the Court (or agreement by parties in interest) of allowed
claims for items that we now claim as contingent or disputed. Conversely, we
would expect that the assumption of additional executory contracts may convert
some liabilities shown on our financial statements as subject to compromise to
post-petition liabilities. Due to the uncertain nature of many of the potential
claims, we are unable to project the magnitude of such claims with any degree of
certainty. We have incurred, and will continue to incur, significant costs
associated with the reorganization.

Under the priority scheme established by the Bankruptcy Code, certain
post-petition liabilities and pre-petition liabilities need to be satisfied
before shareholders are entitled to receive any distribution. The ultimate
recovery to creditors and shareholders, if any, will not be determined until
confirmation of a plan of reorganization. We can give no assurance as to what
values, if any, will be ascribed in the bankruptcy case to each of these
constituencies.

A plan of reorganization could also result in holders of our common stock
receiving no distribution on account of their interests and cancellation of
their interests. In addition, under certain conditions specified in the
Bankruptcy Code, a plan of reorganization may be confirmed notwithstanding its
rejection by an impaired class of equity holders and notwithstanding the fact
that equity holders do not receive or retain property on account of their equity
interests under the plan. Moreover, as discussed above, there can be no
assurance that a plan of reorganization will be confirmed by the Court. In light
of the foregoing, we consider, as described above, the value of the common stock
to be highly speculative and caution equity holders that the stock may
ultimately be determined to have no value. Accordingly, we urge that appropriate
caution be exercised with respect to existing and future investments in our
common stock or in any claims related to pre-petition liabilities and our other
securities.

At this time, it is not possible to predict the effect of the Chapter 11 filing
on our business, various creditors and shareholders or when we will be able to
exit Chapter 11. Our future results are dependent upon our confirming and
implementing a plan of reorganization.

Our ability to continue as a going concern is predicated upon numerous issues,
including our ability to achieve the following:

  - developing and implementing a long-term strategy to revitalize our
    business and return to profitability; - taking appropriate actions to offset
    the negative impact the Chapter 11 filing has had on our business and the
    impairment of vendor relations;

  - operating within the framework of our DIP financing facility, including
    limitations on capital expenditures and compliance with financial covenants,

  - generating cash flows from operations or seeking other sources of financing
    and the availability of projected  vendor credit terms;

  - attracting, motivating and retaining key executives and associates; and
-   developing, negotiating, and, thereafter, having a plan of reorganization
    confirmed by the Court.



                                       5

<PAGE>


These challenges are in addition to other operational and competitive challenges
faced by us in connection with our business as an off-price retailer. See
"Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995" immediately preceding this session.

On May 5, 2004, the Court granted us authorization to adopt and implement the
key employee retention, emergence and severance plans.

On June 3, 2004, the Court issued an order, subject to certain conditions,
extending the period in which we have the exclusive right to file a proposed
plan or reorganization through December 3, 2004.

On June 4, 2004, we filed a motion with the Court seeking authorization to close
another 23 under-performing stores. Subject to the Court's approval, we
currently plan to start the going-out-of-business sale process on or about July
1, 2004 and expect to close these stores by the end of August 2004.

As in the last two fiscal years, we continue to operate our business in a very
soft retail environment. Our first quarter in fiscal 2004 started shortly after
we filed for bankruptcy protection under Chapter 11. Our inventory position
during the earlier part of the quarter was below our preferred level due, in
part, to the uncertainties surrounding our Chapter 11 filing.  Additionally,
the filing adversely affected our sales in the first quarter. We have
significantly reduced our marketing spend, in accordance with our marketing
strategy, which has also negatively impacted our top line since the beginning of
fiscal 2004, but which we believe will ultimately improve profitability.

As previously disclosed, we started our 44 store closings in mid-February via
a going-out-of-business process conducted by Great American. All 44 stores were
closed by March 18, 2004 and we have terminated the lease obligations of these
store locations either through mutual agreements with landlords or through lease
rejections as allowed by the Court.

As a result of a thorough review of the financial performance of our entire
store base after the completion of the first quarter, we have sought the Court's
approval to close an additional 23 stores to further improve our overall
financial performance and enable us to concentrate on growing our business at
our most productive locations.

Currently, we are focusing our efforts on implementing our inventory strategy,
enhancing distribution and store operating efficiency, and improving store
execution. All these efforts are intended to ensure that we are well prepared
for the upcoming back-to-school season.


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.

The financial statements have been prepared on a going concern basis, which
assumes continuity of operations and realization of assets and satisfaction of
liabilities in the ordinary course of business. Based on guidance in SOP 90-7,
all pre-petition liabilities subject to compromise have been segregated in the
Balance Sheet and are classified as Liabilities subject to compromise, at the
estimated amount of allowable claims. Liabilities not subject to compromise are
separately classified as current and non-current. Expenses, realized losses, and
provision for losses resulting from the reorganization are reported separately
as reorganization items.


                                       6

<PAGE>

We believe the following represents the areas where the most critical estimates
and assumptions are used in the preparation of the financial statements:

     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 82 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 May 1,  2004,  we had an  inventory
valuation  allowance of approximately $1.1 million  representing our estimate of
the cost in  excess  of the net  realizable  value of all  clearance  items.  In
addition, we had an allowance of approximately $921,000 representing  additional
inventory  shrink  reserve.  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.

     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.  In  conjunction  with our
Chapter 11 filing,  at the end of fiscal 2003, we recorded an impairment  charge
of $26.3  million for our  goodwill  and an  impairment  charge of $2.4  million
regarding fixed assets located at the 44 closed stores.

     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)." At the end of fiscal 2003, we evaluated our
accrued  restructuring costs and recorded a favorable adjustment of $1.5 million
primarily related to the adjustment of lease termination  costs,  which is based
on the maximum amount allowed by the Bankruptcy Code.

     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.


                                      7

<PAGE>

     o Liabilities subject to compromise.  Under the Bankruptcy Code, actions by
creditors to collect  indebtedness  we owe prior to the Petition Date are stayed
and  certain  other  pre-petition  contractual  obligations  may not be enforced
against us. Except for secured debt,  employee payroll and benefits,  sales, use
and other taxes, and capital lease obligations, all pre-petition liabilities per
our best estimate have been  classified as  liabilities  subject to  compromise.
Adjustments to pre-petition  liabilities may result from negotiations,  payments
authorized  by  Court  order,   additional  rejection  of  executory  contracts,
including leases, or other events. We have mailed notices to all known creditors
that the deadline  for filing  proofs of claims with the Court is June 15, 2004.
Differences  between  amounts we have  scheduled and claims by creditors will be
investigated and resolved in connection with our claims resolution process,  and
any necessary adjustments will be recorded accordingly.

     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  years ended  January 31, 2004 and 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
years ended January 31, 2004,  2003 and 2002 were estimated to be  approximately
$3.6 million,  $4.7 million and $4.3 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.

     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.  In light of our
significant  net operating  losses and our Chapter 11 filing,  we provided for a
100% valuation allowance on our deferred tax assets as of May 1, 2004.


Results of Operations

The financial statements contained herein have been prepared on a going concern
basis, which assumes continuity of operations and realization of assets and
satisfaction of liabilities in the ordinary course of business, and in
accordance with SOP 90-7. Upon emergence from bankruptcy, the amounts reported
in subsequent financial statements may materially change, due to the
restructuring of our assets and liabilities as a result of the plan of
reorganization, if any, and the application of "Fresh Start" accounting.

We operated 195 and 242 stores as of May 1, 2004 and May 3, 2003, respectively.
The average number of stores in operation during the 13-week period ended May 1,
2004 was 198 versus 243 during the same period last year.

Net sales were $80.3 million for the 13 weeks ended May 1, 2004 compared to
$104.3 million for the 13 weeks ended May 3, 2003, a decrease of $24.0 million,
or 23.0%. Comparable store sales for the 13-week period ended May 1, 2004
decreased 11.0% versus a decrease of 7.4% for the same period last year. The
decline in net sales was primarily due to fewer stores in operation and negative
comparable store sales. In addition, we believe reduced marketing efforts, as
provided in our strategic plan, adversely affected net sales.

Gross profit was $27.4 million for the 13 weeks ended May 1, 2004 compared to
$37.6 million for the 13 weeks ended May 3, 2003, a decrease of $10.2 million or
27.2%. As a percentage of net sales, gross profit was 34.1% for the 13 weeks
ended May 1, 2004 versus 36.1% for the same period last year. The decrease in
gross profit as a percentage of net sales for the 13 weeks ended May 1, 2004
from the comparable period last year was primarily due to higher markdowns and
shrink accrual, partially offset by higher initial mark-up.


                                      8

<PAGE>

Selling and administrative expenses were $31.2 million for the 13 weeks ended
May 1, 2004 compared to $41.3 million for the 13 weeks ended May 3, 2003, a
decrease of $10.1 million or 24.5%. As a percentage of net sales, selling and
administrative expenses were 38.8% and 39.5% for the 13 weeks ended May 1, 2004
and May 3, 2003, respectively. Selling and administrative expenses decreased as
a result of fewer stores in operation during the current quarter, lower
advertising spend and lower general and administrative costs at corporate. The
lower selling and administrative expenses were in line with our plan.

Pre-opening and closing expenses were $14,000 for the 13 weeks ended May 1, 2004
compared to $138,000 for the same period last year, a decrease of approximately
$124,000 or 89.9%. The decrease in pre-opening and closing expenses was due to
no store opening activity in the first quarter of fiscal 2004, versus one new
store opening during the same period last year and preopening costs incurred for
the Otay Mesa distribution center, which was opened in May 2003.

Reorganization items for the 13 weeks ended May 1, 2004 were $8.2 million and
consisted of: (1) a non-cash charge of $5.0 million for lease rejection claims
associated with 31 lease rejections in conjunction with the 44 stores closed in
the quarterly period ended May 1, 2004, as part of our reorganization efforts;
(2) $2.8 million of professional fees and other expenses incurred in our
bankruptcy case and reorganization efforts; and (3) $366,000 of additional costs
to close the 44 stores.

Interest expense, net was $375,000 for the 13 weeks ended May 1, 2004 compared
to $634,000 for the 13 weeks ended May 3, 2003, a decrease of $259,000 or 40.9%.
The decrease in interest expense for the current quarter was primarily due to
lower borrowings as compared to the same period last year.

Income tax benefit for the 13 weeks ended May 1, 2004 was zero as compared to
$1.7 million for the 13 weeks ended May 3, 2003. Due to our significant net
operating losses and our Chapter 11 filing, we provided for a 100% valuation
allowance on all deferred tax assets as of January 31, 2004 because we cannot
conclude that it is more likely than not that the deferred tax assets will be
realized in the foreseeable future. Accordingly, for the 13 weeks ended May 1,
2004, our income tax benefit was zero as we established 100% valuation allowance
to offset such benefit.

For the 13 weeks ended May 1, 2004, the net loss was $12.4 million as compared
to $2.7 million for the 13 weeks ended May 3, 2003. The increase in net loss was
primarily a result of the reorganization items discussed above.



                                      9

<PAGE>


Liquidity and Capital Resources


General

We finance our operations through credit provided by vendors and other
suppliers, amounts borrowed under our DIP financing facility, internally
generated cash flow, and other financing resources. Credit terms provided by
vendors and other suppliers have historically been approximately 30 days net,
although during the pendency of the Chapter 11 case, many of our vendors have
reduced the amount of time in which we must pay for goods. Amounts that may be
borrowed under the DIP financing facility are based on a percentage of eligible
inventory and accounts receivable, as defined.

At May 1, 2004, we were in compliance with all financial covenants under our DIP
financing facility, and had outstanding borrowings of $3.0 million and letters
of credit of $15.1 million under our DIP financing facility.  The financial
covenants have since been amended in accordance with the May 27, 2004
amendment, subject to the Court's approval.  This amendment modified our
financial covenants, whereby covenants will include minimum availability,
five-day availability covenants at each month end and minimum inventory per
store.  The Tranche B Lender will fully fund within five business days of the
Court's approval of the amendment and we may repay the Tranche B amount after
October 20, 2004 subject to certain conditions.

With respect to cash flows for the quarterly period ended May 1, 2004, we used
$7.4 million in operating activities, $51,000 in investing activities and
generated $3.0 million from financing activities, which resulted in a net
decrease in cash of $4.5 million. For the same period last year, we used $15.1
million in operating activities, $1.0 million in investing activities and
generated $18.1 million from financing activities, which resulted a net increase
in cash of $1.9 million. The decrease in cash used in operating activities was
primarily due to the lower number of stores in operation. The decrease in cash
used in investing activities was due to higher spending in the first quarter of
fiscal 2003 related to the equipment acquisition for the Otay Mesa distribution
facility. The decrease in cash generated from the financing activities was a
result of net proceeds received from the private offering and the borrowings on
the junior secured term loan in the same period last year.

Our cash needs are satisfied through working capital generated by our business
and funds available under our DIP financing facility. The level of cash
generated by our business is dependent, to a great extent, on our level of sales
and the credit extended by our vendors and the factor community. If we
experience a significant shortening of payment terms with our vendors, a
significant deterioration of credit terms with our factors, the DIP financing
facility for any reason becomes unavailable, or actual results differ materially
from those projected, our compliance with financial covenants and our cash
resources could be adversely affected.


Capital Expenditures

We anticipate capital expenditures of approximately $800,000 during the
remaining nine months of the fiscal year ending January 29, 2005, which include
necessary costs for replacement capital at existing stores. We intend to fund
the anticipated capital expenditures from our sources of cash, including the DIP
financing facility.


Store Closures and Restructuring Initiatives

On February 2, 2004, the Court authorized the closure of 44 stores. On February
11, 2004, the Court approved the agreement between the Great American Group
("Great American") and us in which Great American acted as an exclusive agent to
conduct store-closing sales at the 44 stores location. The store-closing sales
started on February 12, 2004. All 44 stores were closed by March 18, 2004. As of
June 4, 2004, we have terminated or assigned a total of 13 leases of these
stores and rejected the remaining 31 leases. We do not expect any significant
cash requirements relating to these 44 store closures for the remaining nine
months of fiscal 2004.


                                      10
<PAGE>

As of June 4, 2004 we have closed 20 of the 23 stores identified in our Fiscal
2002 restructuring efforts and all 28 of the stores identified in our Fiscal
2001 restructuring efforts. In conjunction with our Chapter 11 filing, we have
ceased to make cash payments for any remaining obligations regarding our Fiscal
2002 or 2001 restructuring plans except for the lease obligation of one of our
former San Diego distribution centers (located in the same building as our
corporate headquarters) and certain satellite communication service fee
obligations. The cash requirements relating to these obligations for the
remaining nine months of fiscal 2004 are expected to be approximately $991,000,
which we intend to fund from our sources of cash, including the DIP financing
facility.

In addition, on June 4, 2004, we filed a motion with the Court seeking
authorization to close another 23 under-performing stores. Subject to the
Court's approval, we currently plan to start the going-out-of-business sale
process on or about July 1, 2004 and expect to close these stores by the end of
August 2004. We do not expect any significant cash requirements relating to
these 23 store closures for the remaining nine months of fiscal 2004.


Contractual Obligations and Commitments

The following table summarizes, as of May 1, 2004, certain of our contractual
obligations, as well as estimated cash requirements related to our fiscal 2002
and 2001 restructuring initiatives. This table should be read in conjunction
with "Note 6 - Fiscal 2002 Restructuring Charge", "Note 7 - Fiscal 2001
Restructuring Charge", and "Note 8 - DIP Financing Facility" in the accompanying
unaudited financial statements, as well as our fiscal 2003 Annual Report on Form
10-K as filed with the Securities and Exchange Commission.


<TABLE>

                                         Payments due by period
                                         ----------------------
                                                   2005 and  2007 and
(in thousands)                  Total      2004      2006      2008   Thereafter
                              ---------  --------  --------  -------- ----------
<S>                              <C>       <C>        <C>       <C>      <C>
Operating lease obligations*  $ 109,393  $ 18,649  $ 37,220  $ 22,644  $ 30,880
Restructuing charges              2,000       991     1,009         -         -
Notes payable                       132        32        86        14         -
                              ---------  --------  --------  --------  --------
                              $ 111,525  $ 19,672  $ 38,315  $ 22,658  $ 30,880
                              =========  ========  ========  ========  ========

<FN>

* Operating lease obligations have changed significantly from the disclosure in
our most recent annual report on Form 10-K due to lease rejections associated
with the 44 store closures.
</FN>
</TABLE>


Certain amounts included in the above table are related to executory contracts
or lease obligations, which we have neither assumed nor rejected as of May 1,
2004. Under the Bankruptcy Code, we may assume or reject executory contracts,
including lease obligations. Therefore, the commitments shown in the above table
may not reflect actual cash outlays in the future periods.

Reorganization Items

Reorganization items represent amounts we incurred as a result of the Chapter 11
proceedings in accordance with SOP 90-7. The amounts for Reorganization items in
the Statements of Operations include: (1) a non-cash charge of $5.0 million for
lease rejection claims associated with 31 lease rejections in conjunction with
the 44 stores closed in the quarterly period ended May 1, 2004, as part of our
reorganization efforts; (2) $2.8 million of professional fees and other expenses
incurred in our bankruptcy case and reorganization efforts; and (3) $366,000 of
additional costs to close the 44 stores.

We project cash requirements of approximately $4.5 million of professional fees
and other related expenses for the remaining nine months of fiscal 2004. We
believe that our sources of cash, including the DIP financing facility, should
be adequate to fund the cash requirements for our reorganization efforts.



                                      11

<PAGE>

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Currently, our exposure to market risks results primarily from changes in
interest rates, principally with respect to the DIP financing facility, which is
a variable rate financing agreement. We do not use swaps or other interest rate
protection agreements to hedge this risk. As of May 1, 2004, we had $3.0 million
of borrowings outstanding under our DIP financing facility.


Item 4.    Controls and Procedures

Evaluation. We 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, as of the end of the period
covered by this report. 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, our 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.



PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

          See discussion of legal proceedings at Note 11 of the Notes to
          Financial Statements.


Item 6.   Exhibits and Reports on Form 8-K

          (a) Exhibits

              10.26 Factory 2-U Stores, Inc. 2004 Key Employee Retention Plan.

              10.27 Factory 2-U Stores, Inc. 2004 Key Employee Emergence Plan.

              10.28 Factory 2-U Stores, Inc. 2004 Key Employee Severance Plan.

              31.1  Certification of the Chief Executive Officer filed pursuant
                    to Section 302 of the Sarbanes-Oxley Act of 2002.

              31.2  Certification of the Chief Financial Officer filed pursuant
                    to Section 302 of the Sarbanes-Oxley Act of 2002.

              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
                    Norman G. Plotkin, 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
                    Norman Dowling, Executive Vice President and Chief Financial
                    Officer.

          (b) Reports on Form 8-K

              On June 4, 2004, we furnished a report on Form 8-K regarding
              the extension of our exclusive right to file a proposed Plan
              of Reorganization and the filing of a motion with the Court
              seeking authorization to close additional 23 stores. The full
              text of our press dated June 4, 2004 was furnished and
              attached as an exhibit to the Form 8-K.





                                       12


<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: June 10, 2004




By: /s/Norman Dowling
    -----------------
    Name: Norman Dowling
    Title:Executive Vice President and Chief Financial Officer
          (duly authorized officer and principal financial officer)





















                                       13