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 July 31, 1999

                                       Or

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
         OF THE SECURITIES EXCHANGE ACT OF 1934
            For the transition period from                to
                         Commission File Number: 1-10089

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

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


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

                                  (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 July
31, 1999, was 12,214,984 shares.




<PAGE>


                            FACTORY 2-U STORES, INC.

             FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999

                                      INDEX


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Factory 2-U Stores, Inc. Balance Sheets as of July 31, 1999
(Unaudited) and January 30, 1999 ............................................F-1


Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
13 weeks ended July 31, 1999 and August 1, 1998..............................F-3

Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
26 weeks ended July 31, 1999 and August 1, 1998 .............................F-4

Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the
26 weeks ended July 31 and August 1, 1998 ...................................F-5

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

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

PART II. OTHER INFORMATION

Item 1.   Legal Proceedings ...................................................7
Item 2.   Changes in Securities and Use of Proceeds............................7
Item 3.   Defaults Upon Senior Securities......................................7
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 ....................................9
          Signatures        ..................................................10
          Exhibit Index     ..................................................11





                                  2
<PAGE>



                                     PART I

Item 1.   Financial Statements

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

                                                  July 31,          January 30,
                                                    1999                1999
                                               --------------     --------------
                                                          (Unaudited)
ASSETS
Current assets:
     Cash                                      $     5,869            $    3,124
     Merchandise inventory                          45,408                31,353
     Prepaid expenses and other assets               3,276                 1,137
     Deferred income taxes                           1,747                 1,690
                                                    ------                 -----
          Total current assets                      56,300                37,304

Leasehold improvements and equipment,
     net of accumulated depreciation
     and amortization                               22,075                18,187

Deferred income taxes                                  937                 1,149
Other assets                                         2,027                 2,419

Excess of cost over net assets acquired,
 less accumulated amortization of $9,338
 and $8,537 at July 31, 1999 and
 January 30, 1999, respectively                     30,307                31,108
                                                   -------                ------

          Total assets                          $  111,646             $  90,167
                                                  ========                ======









                                   (continued)


                                       F-1



<PAGE>


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


                                                   July 31,          January 30,
                                                     1999                1999
                                                -------------       ------------
                                                           (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current maturities of long-term debt
     and capital lease obligations               $     1,281         $     1,818
     Accounts payable                                 30,486              21,258
     Income taxes payable                                960               2,656
     Accrued expenses                                 17,478              20,151
     Revolving credit notes                           15,453                   -
                                                     -------             -------
Total current liabilities                             65,658              45,883
                                                     -------              ------

Revolving credit notes                                     -               1,843
Long-term debt, less current maturities               10,489              10,530
Capital leases and other long-term obligations         3,286               2,257
Deferred rent                                          2,344               1,889
                                                      ------               -----

               Total liabilities                      81,777              62,402
                                                     -------              ------


Stockholders' equity:
  Series A  convertible  preferred  stock,
  $0.01 par value;  0 and 4,500,000
  shares  authorized,   0  shares  issued
  and  outstanding   (aggregate liquidation
  preference of $0) at July 31, 1999
  and January 30, 1999                                     -                   -

  Series B junior convertible, exchangeable
  preferred stock, $0.01 par value;
  40,000 shares authorized, 0 shares issued
  and outstanding  (aggregate liquidation
  preference of $0) at July 31, 1999
  and January 30, 1999, respectively                       -                   -

  Common stock, $0.01 par value,
  35,000,000 shares authorized and 12,214,984
  shares issued and outstanding at July 31, 1999,
  and 80,000,000 shares authorized and
  12,106,175 shares issued and outstanding at
  January 30, 1999                                       122                 121

  Stock subscription notes receivable                 (3,885)            (4,087)
  Additional paid-in capital                         103,603             103,248
  Accumulated deficit                                (69,971)           (71,517)
                                                    --------            --------

     Total stockholders' equity                       29,869              27,765
                                                     -------              ------

     Total liabilities and stockholders' equity  $   111,646         $    90,167
                                                 ============        ===========



   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
                                             -----------------------------------
                                                July 31, 1999     August 1, 1998
                                             ----------------  -----------------

Net sales                                         $    91,931        $    73,456

Cost of sales                                          58,272             48,494
                                                      -------             ------

        Gross profit                                   33,659             24,962
                                                       ------             ------

Selling and administrative expenses                    30,354             24,330
Amortization of intangibles                               590                590
                                                         ----                ---

        Operating income (loss)                         2,715                 42

Interest expense                                          663              1,094
                                                         ----              -----

Income (loss) before income taxes                       2,052            (1,052)

Income taxes                                              841                 25
                                                         ----               ----

        Income (loss) before dividends                  1,211            (1,077)

Preferred stock dividends - Series A                        -              (864)

Preferred stock dividends - Series B                        -              (728)
                                                         ----              -----

        Net Income (loss) available
          to common stockholders                   $    1,211       $    (2,669)
                                                    =========         ==========


Earnings (loss) per share:
        Basic                                      $    0.10        $     (1.77)
        Diluted                                    $    0.09        $     (1.77)



Weighted average common shares outstanding
        Basic                                          12,159              1,508
        Diluted                                        12,838              1,508








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)

                                                          26 Weeks Ended
                                                --------------------------------
                                                July 31, 1999     August 1, 1998

Net sales                                         $  177,030        $    139,951
Cost of sales                                        114,380              93,143
                                                    --------              ------

        Gross profit                                  62,650              46,808

Selling and administrative expenses                   57,650              45,524
Amortization of intangibles                            1,179               1,179
Special charges                                           -                1,500
                                                        ----               -----

        Operating income (loss)                        3,821             (1,395)

Interest expense                                       1,202               2,372
                                                      ------               -----

Income (loss) before income taxes and
 extraordinary item                                     2,619            (3,767)

Income taxes                                            1,074                 99
                                                       ------              -----

        Income (loss) before extraordinary item         1,545            (3,866)

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

        Income (loss) before dividends                  1,545            (6,616)

Preferred stock dividends - Series A                        -            (1,728)

Preferred stock dividends - Series B                        -            (1,431)
                                                       ------            -------

        Net income (loss) available
           to common stockholders                  $    1,545       $    (9,775)
                                                  ===========       ============

Earnings (loss) per share:
   Basic:
        Income (loss) before extraordinary item   $      0.13       $     (4.69)
        Extraordinary item                        $         -       $     (1.84)
        Net income (loss)                         $      0.13       $     (6.53)


   Diluted:
        Income (loss) before extraordinary item   $      0.12       $     (4.69)
        Extraordinary item                        $         -       $     (1.84)
        Net income (loss)                         $      0.12       $     (6.53)

Weighted average common shares outstanding
        Basic                                          12,133              1,497
        Diluted                                        12,707              1,497

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)

                                                           26 weeks ended
                                                  ------------------------------
                                                       July 31,        August 1,
                                                         1999             1998
                                                ----------------- --------------

Cash flows from operating activities:
   Income (loss) before dividends                     $    1,545    $    (6,616)
   Adjustments  to  reconcile  income  (loss)
     to net cash  used in  operating
     activities:
          Depreciation and amortization                    4,162           3,494
          Debt discount amortization                         559             881
          Extraordinary loss on debt extinguishment            -           2,750
          Loss on disposal of equipment                        -             148
          Deferred rent expense                                -            (79)
          Changes in operating assets and liabilities:
               Merchandise inventory                    (14,055)        (11,044)
               Prepaid expenses                          (1,503)         (2,178)
               Accounts payable                            9,228           5,355
               Accrued expenses and other                (2,757)               1
                                                    ------------    ------------

Net cash used in operating activities                    (2,821)         (7,288)
                                                    ------------    ------------

Cash flows from investing activities:
   Purchase of leasehold improvements and equipment      (7,339)         (1,979)

Net cash used in investing activities                    (7,339)         (1,979)
                                                    -------------   ------------












                                 (continued)


                                    F-5

<PAGE>

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


                                                         26 weeks ended
                                               ---------------------------------
                                                    July 31,           August 1,
                                                      1999                1998
                                                -------------       ------------
Cash flows from financing activities:
  Borrowings on revolving credit facility            201,847            163,854
  Payments on revolving credit facility             (188,236)          (149,520)
  Payments on notes payable and
    capital lease obligations                         (1,263)            (1,977)
  Proceeds from issuance of common stock                   1                   -
  Buyback of warrants                                   (457)                  -
  Proceeds from exercise of stock options                317                   -
  Proceeds from exercise of warrants                     412                   -
  Grant of stock options below market price               83                   -
  Payment of deferred debt issuance costs                  -                (46)
  Proceeds from stock subscription notes receivable      201                   -
  Payment of dividends on Series A preferred stock         -             (1,728)
                                                     --------            -------

Net cash provided by financing activities             12,905              10,583
                                                     --------            -------

Net increase in cash                                   2,745               1,316

Cash at the beginning of the period                    3,124               3,167
                                                     --------            -------

Cash at the end of the period                    $     5,869         $     4,483
                                                 ============        ===========

Supplemental disclosure of cash flow  information:
  Cash paid during the period for:
          Interest                               $       582         $     1,243
          Income taxes                           $     2,761         $        74

Supplemental disclosures of non-cash
    investing activities:

  Capital lease purchases                        $         -         $       882

Supplemental disclosures of non-cash
 financing activities:

      Series B preferred stock dividends         $         -         $     1,431




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

         The accompanying  unaudited financial  statements do not include all of
         the information and footnotes required by generally accepted accounting
         principles  for  annual  financial  statements  and  should  be read in
         conjunction  with the  financial  statements  for the fiscal year ended
         January  30,  1999  included  in the  Factory  2-U  Stores,  Inc.  (the
         "Company")  Form  10-K  as  filed  with  the  Securities  and  Exchange
         Commission.  The unaudited consolidated financial statements for the 13
         and 26 weeks  ending  August 1, 1998  include  the  accounts  of Family
         Bargain Corporation and its subsidiaries.  All significant intercompany
         transactions were eliminated in consolidation.

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

         In the opinion of management,  the unaudited financial statements as of
         and for the 13 and 26 weeks  ended  July 31,  1999 and  August  1, 1998
         reflect all adjustments  (which include normal  recurring  adjustments)
         necessary  to  present  fairly  the  financial  position,   results  of
         operations  and  cash  flows  for  the  periods  presented.  Due to the
         seasonal  nature of the Company's  business,  the results of operations
         for the interim period may not necessarily be indicative of the results
         of operations for a full year.

(2)      Long-term Debt

         As  of  July  31,   1999,   the  Company  had   outstanding   long-term
         indebtedness, less current maturities, in the principal amount of $10.5
         million.

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




                                         F-7


<PAGE>


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

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

         The New Junior  Subordinated  Notes have a face value of $17.3 million,
         are non-interest  bearing and are reflected on the accompanying balance
         sheets  at the  present  value  using  a  discount  rate  of  10%.  The
         unamortized  discount related to the New Junior  Subordinated Notes was
         $5.8  million at July 31, 1999,  resulting  in a net carrying  value of
         $11.5  million,  of  which  $1.0  million  is a  current  maturity,  as
         reflected   in  the  July  31,  1999  balance   sheet  (see   Financial
         Statements).  The  discount  is  amortized  to  interest  expense  as a
         non-cash  charge  until the notes  are paid in full.  Further,  the New
         Junior  Subordinated  Notes require principal  payments at December 31,
         1999 and  December 31, 2000 of $1.0  million,  at December 31, 2001 and
         December  31, 2002 of $2.0  million,  at December 31, 2003 and December
         31, 2004 of $3.0  million  and a final  payment at May 28, 2005 of $5.3
         million.

(3)      Revolving Credit Notes

         The Company  maintains a $50.0 million revolving credit facility with a
         financial institution secured by all the assets of the Company. Amounts
         which may be borrowed under the working capital facility are based on a
         percentage of eligible inventories,  as defined,  outstanding from time
         to time, as more fully described below.

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

                                      F-8

<PAGE>

         At July 31, 1999 the Company  could  borrow up to $50.0  million at the
         prime  rate plus  0.75%,  subject  to  limitations  based on  inventory
         levels.  At July 31,  1999,  the Company owed $15.5  million  under the
         Facility and had $25.5 million  available to borrow under the Facility.
         The Facility expires in March 2000 but is subject to one year automatic
         renewal periods,  unless  terminated by the Company or its lender.  The
         balance owed under the Facility  fluctuates  as the Company  borrows to
         meet working capital requirements and due to the seasonal nature of the
         Company's  business.  The  Company  pays  fees of 0.25%  on the  unused
         portion of the  Facility.  The Facility is secured by all the assets of
         the Company.

(4)      Earnings per Share

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

         The  preferred  stock  and  other  common  stock  equivalents  were not
         considered  as converted  for the thirteen  week period ended August 1,
         1998 because the calculation was anti-dilutive. At July 31, 1999, there
         were 1,560,415  potentially  dilutive common stock options and warrants
         outstanding.

(5)      Provision for Income Taxes

         The  Company  recorded a $0.8  million  provision  for income  taxes as
         reflected in the accompanying statements of operations for the 13 weeks
         ended July 31, 1999.

(6)      Stock Options and Warrants

         At July 31, 1999, the Company had outstanding  warrants exercisable for
         82,690  shares of common  stock  with an  exercise  price of $19.91 per
         share.

         As of July 31, 1999,  the Company had  outstanding  options to purchase
         1,477,725  shares of common stock.  Of those  options,  371,784  become
         exercisable  when  specified  market  price  hurdles for the  Company's
         common  stock have been  achieved  and  maintained  for 60  consecutive
         trading days,  subject to vesting conditions (92,960 are exercisable at
         a market  price  hurdle of $19.91;  92,961 are  exercisable  at $24.89;
         92,931 are  exercisable  at  $33.19;  and  92,932  are  exercisable  at
         $49.78).  Assuming  all  options  with market  price  hurdles are fully
         vested,  when the market price of the  Company's  common stock  reaches
         $19.91,  $24.89,  $33.19 and $49.78 for the specified  periods of time,
         the Company will be required to record aggregate non-cash  compensation
         expense in the minimum  amounts of $1.2  million,  $1.6  million,  $2.4
         million and $3.9 million, respectively.





                                       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 the
Company's  operations  during the 13 and 26 weeks ended July 31, 1999 and August
1, 1998.

Results of Operations

The following  discussion and analysis  should be read in  conjunction  with the
Company's Financial Statements and notes thereto included elsewhere in this Form
10-Q.  As of July 31,  1999  there were 178  stores in  operation  versus 162 at
August 1, 1998.

13 Weeks Ended July 31, 1999 Compared to the 13 Weeks Ended August 1, 1998

Net sales were $91.9  million for the 13 weeks  ended July 31, 1999  compared to
$73.5   million  for  the  13  weeks  ended  August  1,  1998,  an  increase  of
approximately $18.4 million,  or 25.2%.  Comparable store sales increased 13.1%.
The Company opened 12 new stores and closed 3 stores during the current period.

Gross profit was $33.7  million for the 13 weeks ended July 31, 1999 compared to
$25.0   million  for  the  13  weeks  ended  August  1,  1998,  an  increase  of
approximately $8.7 million, or 34.8%. As a percentage of sales, gross profit was
36.6% for the 13 weeks  ended July 31,  1999  compared to 34.0% for the 13 weeks
ended  August 1, 1998.  The  increase in the gross  profit  margin is  primarily
attributable to a higher markup, lower shrinkage and lower markdown volume.

Selling and  administrative  expenses  were $30.4 million for the 13 weeks ended
July 31, 1999  compared to $24.3  million for the 13 weeks ended August 1, 1998,
an increase of  approximately  $6.1 million,  or 24.8%. The increase was largely
attributable  to  expenses  associated  with  the  growth  in  net  sales.  As a
percentage of sales,  selling and administrative  expenses were 33.0% for the 13
weeks ended July 31, 1999 and 33.1% for the 13 weeks ended August 1, 1998.

Interest  expense was $0.7 million for the 13 weeks ended July 31, 1999 and $1.1
million for the 13 weeks ended August 1, 1998.  Lower average  borrowings  under
the Company's  revolving  credit  facility and the exchange of the Old Notes for
the New Notes  which  resulted  in a lower debt  discount  amortization  reduced
interest expense in the current year. See "Liquidity and Capital Resources."

Income  taxes were $0.8  million  for the 13 weeks ended July 31, 1999 and $0.03
million for the 13 weeks  ended  August 1, 1998.  Income  taxes  increased  as a
result of higher taxable income versus the same period a year ago.




                                   3

<PAGE>

The net income  available  to common  stockholders  was $1.2  million for the 13
weeks  ended  July  31,  1999  compared  to  a  net  loss  available  to  common
stockholders of $2.7 million for the 13 weeks ended August 1, 1998. The increase
in net income for the 13 weeks ended August 1, 1998 is a result of the operating
factors cited above.

26 Weeks Ended July 31, 1999 Compared to the 26 Weeks Ended August 1, 1998

Net sales were $177.0  million for the 26 weeks ended July 31, 1999  compared to
$140.0  million  for the 26 weeks  ended  August 1, 1998,  an  increase of $37.0
million, or 26.5%. Comparable store sales increased 17.1%. The Company opened 16
new stores and closed 6 stores.

Gross profit was $62.7  million for the 26 weeks ended July 31, 1999 compared to
$46.8  million  for the 26 weeks  ended  August 1, 1998,  an  increase  of $15.9
million,  or 33.8%. As a percentage of sales,  gross profit was 35.4% for the 26
weeks  ended July 31, 1999  compared  to 33.4% for the 26 weeks ended  August 1,
1998.  The increase in the gross profit  margin is primarily  attributable  to a
higher markup, lower shrinkage and lower markdown volume.

Selling and  administrative  expenses  were $57.7 million for the 26 weeks ended
July 31, 1999  compared to $45.5  million for the 26 weeks ended August 1, 1998,
an increase of approximately  $12.2 million,  or 26.6%. The increase was largely
sales volume  related.  As a  percentage  of sales,  selling and  administrative
expenses  were 32.6% for the 26 weeks ended July 31, 1999  compared to 32.5% for
the 26 weeks ended August 1, 1998.

The special charge of $1.5 million in fiscal 1998  represents  various  expenses
incurred in connection with hiring the President and CEO.

Interest  expense was $1.2 million for the 26 weeks ended July 31, 1999 and $2.4
million for the 26 weeks ended August 1, 1998.  Lower  average  borrowings  this
year under the Company's  revolving  credit facility and the exchange of the Old
Notes for the New Notes  which  resulted in a lower debt  discount  amortization
reduced  interest  expense in the  current  year.  See  "Liquidity  and  Capital
Resources."

Income taxes  increased to $1.1 for the 26 weeks ended July 31, 1999 compared to
$0.1 for the 26 weeks ended August 1, 1998.  Income taxes  increased as a result
of increased taxable income.

An  extraordinary  charge of $2.8  million was  incurred  for the 26 weeks ended
August 1, 1998 as a result of notes payable associated with the General Textiles
bankruptcy being  extinguished  early and new notes with terms more favorable to
the Company being issued.

The net income  available  to common  stockholders  was $1.5  million for the 26
weeks  ended  July  31,  1999  compared  to  a  net  loss  available  to  common
stockholders of $9.8 million for the 26 weeks ended August 1, 1998. The increase
in net income for the 26 weeks ended July 31, 1999 is a result of the  operating
factors cited above.


                                   4


<PAGE>

Liquidity and Capital Resources

General

As of July 31, 1999, the Company had  outstanding  indebtedness in the principal
amount of $26.9 million.

The Company finances its operations through credit provided by vendors and other
suppliers,  amounts  borrowed under its $50.0 million  revolving credit facility
and internally  generated cash flow.  Credit terms provided by vendors and other
suppliers  are usually  net 30 days.  Amounts  which may be  borrowed  under the
working capital facility are based on a percentage of eligible  inventories,  as
defined,  outstanding  from time to time, as more fully  described  elsewhere in
this  Form  10-Q.  See Note 2  (Long-term  Debt)  and Note 3  (Revolving  Credit
Facility) of Notes to Financial Statements.

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


Capital Expenditures

The  Company  anticipates   spending   approximately  $8.2  million  on  capital
expenditures  during the remainder of the current fiscal year ending January 29,
2000 which includes costs to open  approximately  17 new stores,  to renovate 24
existing  stores,  to relocate  approximately  9 existing  stores and to upgrade
information  systems.  Management  believes  that  future  expenditures  will be
financed from internal cash flow and the Facility.


Inflation

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


Minimum Wage Increases

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



                                 5

<PAGE>

Seasonality and Quarterly Fluctuations

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

Year 2000 Issue

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

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

The Company is  currently  seeking to insure  that the  software  and  operating
systems included in its new integrated software package are Year 2000 compliant.
The Company is also in the process of requesting information and assurances from
its major  vendors,  service  providers and customers  about their state of Year
2000 compliance and readiness.  In the event that  significant  Year 2000 issues
are identified  with such parties,  and in  contemplation  of the possibility of
such problems,  the Company intends to develop contingency plans such as the use
of alternate vendors or manual systems prior to October 1999.

Although,  based  on a review  of its data  processing,  operational  and  other
computer-based  systems,  the Company  does not  currently  believe that it will
experience  any  significant   adverse  effects  or  material  unbudgeted  costs
resulting  therefrom,  there can be no assurance in that regard.  The failure to
correct a material  Year 2000 problem  could result in an  interruption  in or a
failure of certain  normal  activities  or  operations.  Such  interruptions  or
failures  could  materially  and  adversely  affect  the  Company's  results  of
operations,   liquidity  and  financial  condition.  Because  there  is  general
uncertainty  about the Year 2000 problem,  including  uncertainty about the Year
2000 readiness of suppliers and customers, it is not possible to predict whether
Year 2000  problems will occur or what  consequences  such problems will have on
results of operations, liquidity or financial condition.



                                    6

<PAGE>

However,  the  Company's  plans to  address  Year 2000  issues are  intended  to
minimize,  to the extent  feasible,  the possibility of  interruptions of normal
operations.  There  can,  however,  be no  assurance  that the  Company  will be
successful in doing so.

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

Certain  statements  contained in this  Management's  Discussion and Analysis of
Financial  Condition  and Results of  Operations  or elsewhere in this Form 10-Q
that are not  related to  historical  results  are  forward-looking  statements.
Actual  results may differ  materially  from those  projected  or implied in the
forward-looking  statements.  Risks and  uncertainties  which  could  effect the
Company include,  but are not limited to, general and local economic and weather
conditions  that affect buying patterns of the Company's  customers,  changes in
consumer  spending and the Company's  ability to anticipate  buying patterns and
implement appropriate inventory  strategies,  continued  availability of capital
and financing,  competitive  factors,  expansion plans,  risks and uncertainties
associated  with the failure of the Company or its  suppliers or customers to be
Year 2000 compliant,  and other factors affecting the Company's  business beyond
the Company's  control as well as other factors described in the Company's 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  anticipated by the
Company  will be  realized  or that they will have the  expected  effects on the
Company or its business or operations.  Actual  results could differ  materially
from those contemplated or expressed in any forward-looking statements.


                           PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 2.   Changes in Securities and Use of Proceeds
                  None.

Item 3.   Defaults Upon Senior Securities
                  None.








                                7

<PAGE>


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

a. The Company's annual meeting of stockholders was held on June 23, 1999.

b. The directors elected at the meeting were as follows:


Director                         Votes           Votes
                                  For           Against            Withheld

Ira Neimark                    9,311,155               0             7,125

Michael Searles                9,311,155               0             7,125


Other  directors  whose  terms of  office  continued  after the  meeting  are as
follows:  Peter V. Handal,  Ronald  Rashkow,  H. Whitney  Wagner and Wm.  Robert
Wright II. James D.  Somerville  resigned as a director  effective June 23, 1999
and John J. Borer III did not stand for re-election.
c. Other  matters voted on at the meeting and the results of those votes were as
follows:

Approval of the  amendment  of the  Certificate  of  Incorporation  to reduce to
35,000,000  the number of shares of common  stock the Company is  authorized  to
issue.

Votes for:                     9,305,738
Votes against:                     2,959
Abstentions:                       9,583


Ratification of Arthur Andersen LLP as independent accountants

Votes for:                     9,224,835
Votes against:                    37,016
Abstentions:                      56,429


Item 5.   Other Information
                  None.






                                 8

<PAGE>


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.




































                                    9


<PAGE>



                                   SIGNATURES

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


FACTORY 2-U STORES, INC.

Date: September 13, 1999




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


























                                      10


<PAGE>



                                  EXHIBIT INDEX

Exhibit
Number Description Page

11.1       Computation of per share income (loss)                       12
27         Financial Data Schedule (for EDGAR filing only)              13







































                                   11


<PAGE>
<TABLE>


EXHIBIT 11.1


                     COMPUTATION OF PER SHARE INCOME (LOSS)

<CAPTION>


                                                   13 weeks ended                          39 weeks ended
                                                  --------------                           --------------
<S>                                          <C>                 <C>                 <C>                 <C>

                                             July 31, 1999       August 1, 1998      July 31, 1999       August 1, 1998

The computation of net income (loss)
 available and adjusted shares  outstanding
follows:

Income (loss) from continuing operations     $       1,211       $     (1,077)       $       1,545       $   (3,866)
Extraordinary item                                       -                  -                    -           (2,750)
Net income (loss)                                    1,211             (1,077)               1,545           (6,616)

Less:
 Series A preferred stock dividends                      -               (864)                   -           (1,728)
 Series B preferred stock dividends                      -               (728)                   -           (1,431)


Net income (loss) used for basic and
 diluted computation                         $       1,211       $     (2,669)       $       1,545       $   (9,775)

Weighted average number of common shares
 outstanding *                                  12,158,607           1,507,892          12,132,614        1,496,840

Add assumed exercise of:
  Warrants that are common stock equivalents        36,243                   -              18,122                -
  Options that are common stock equivalents        642,850                   -             556,702                -
          Series A Preferred                             -                   -                   -                -
          Series B Preferred                             -                   -                   -                -

Adjusted shares outstanding, used for
 diluted computation                            12,837,701           1,507,892          12,707,437        1,496,840

  Basic:
    Income (loss) before extraordinary item  $        0.10       $      (1.77)       $        0.13       $    (4.69)
    Extraordinary item per share                         -                  -                    -            (1.84)
    Net income (loss)                        $        0.10       $      (1.77)       $        0.13       $    (6.53)


  Diluted:
    Income (loss) before extraordinary item  $        0.09       $      (1.77)       $        0.12       $    (4.69)
    Extraordinary item per share                         -                  -                    -            (1.84)
    Net income (loss)                        $        0.09       $      (1.77)       $        0.12       $    (6.53)

</TABLE>

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














                                     12
<PAGE>