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

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

         For the quarterly period ended August 3, 2002
                                        --------------

                                            OR

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

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


                         Commission File Number: 1-10089

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

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


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

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


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

The number of shares outstanding of the registrant's common stock, as of
September 13, 2002 was 12,969,910 shares.



<PAGE>



                            FACTORY 2-U STORES, INC.

             FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 3, 2002

                                      INDEX


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Factory 2-U Stores, Inc. Balance Sheets as of August 3, 2002,
         August 4, 2001 (Unaudited) and February 2, 2002....................F-1

         Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
         13 weeks and 26 weeks ended August 3, 2002 and August 4, 2001 .....F-3

         Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the
         26 weeks ended August 3, 2002 and August 4, 2001 ..................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..........10

Item 4.  Controls and Procedures.............................................10


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings ..................................................11
Item 2.  Changes in Securities and Use of Proceeds...........................11
Item 3.  Defaults Upon Senior Securities.....................................11
Item 4.  Submission of Matters to a Vote of Security Holders.................11
Item 5.  Other Information ..................................................12
Item 6.  Exhibits and Reports on Form 8-K ...................................12
Signatures    ...............................................................13
Certifications ..............................................................14






                                        2


<PAGE>



                         PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

<TABLE>
<CAPTION>


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


                                                 August 3,       August 4,         February 2,
                                                   2002            2001               2002
                                               ------------    ------------      --------------
                                                (Unaudited)     (Unaudited)
<S>                                                 <C>             <C>               <C>
ASSETS
Current assets:
  Cash                                           $   7,446       $   8,229         $   17,390
  Merchandise inventory                             76,824          76,558             54,860
  Accounts receivable                                2,476           3,038              2,013
  Income taxes receivable                            5,913           1,253                  -
  Prepaid expenses                                   6,909           7,246              6,357
  Deferred income taxes                              3,553           2,503              3,553
                                                 ---------       ---------         ----------
    Total current assets                         $ 103,121       $  98,827         $   84,173

Leasehold improvements and equipment, net           36,957          42,265             37,042
Deferred income taxes                                7,182           4,992              7,182
Other assets                                           959           1,096              1,011
Excess of cost over net assets acquired, less
  accumulated amortization of $13,344, $12,543
  and $13,344, respectively                         26,301          27,102             26,301
                                                 ---------       ---------         ----------
    Total assets                                 $ 174,520       $ 174,282         $  155,709
                                                 =========       =========         ==========



</TABLE>







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


                                   (continued)





                                       F-1



<PAGE>


<TABLE>
<CAPTION>


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


                                                  August 3,       August 4,         February 2,
                                                    2002            2001              2002
                                                ------------    -------------     --------------
                                                 (Unaudited)     (Unaudited)
<S>                                                  <C>             <C>               <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt           $    2,001      $   2,099         $    2,019
  Accounts payable                                   52,714         48,218             36,271
  Taxes payable                                       3,150          3,262              3,332
  Accrued expenses                                   32,875         15,378             27,918
                                                 ----------      ---------         ----------
    Total current liabilities                        90,740         68,957             69,540

Revolving credit facility                             5,386         11,600                  -
Long-term debt                                        8,906          9,791              8,376
Other long-term obligations                           3,578          1,064              3,578
Deferred rent                                         3,295          3,654              3,649
                                                 ----------      ---------         ----------
    Total liabilities                               111,905         95,066             85,143
                                                 ----------      ---------         ----------


Stockholders' equity:
  Common stock, $0.01 par value; 35,000,000 shares
    authorized and 12,968,910 shares, 12,821,779
    shares and 12,842,146 shares issued and
    outstanding, respectively                           130            128                128
  Stock subscription notes receivable                (2,149)        (2,225)            (2,225)
  Additional paid-in capital                        122,319        120,767            121,370
  Accumulated deficit                               (57,685)       (39,454)           (48,707)
                                                  ----------     ----------        -----------
    Total stockholders' equity                       62,615         79,216             70,566
                                                  ----------     ----------        -----------
    Total liabilities and stockholders' equity    $ 174,520      $ 174,282         $  155,709
                                                  ==========     ==========        ===========

</TABLE>




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





                                       F-2


<PAGE>


<TABLE>
<CAPTION>

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


                                                       13 Weeks Ended                   26 Weeks Ended
                                                       --------------                   --------------
                                                  August 3,       August 4,        August 3,      August 4,
                                                    2002            2001             2002           2001
                                                 ----------      ----------       ----------     ----------
<S>                                                  <C>             <C>              <C>            <C>
Net sales                                        $ 128,088       $ 139,254        $ 245,039      $ 265,078
Cost of sales                                       87,059          89,434          162,852        173,499
                                                 ----------      ----------       ----------     ----------
  Gross profit                                      41,029          49,820           82,187         91,579

Selling and administrative expenses                 50,181          47,791           95,879         90,438
Pre-opening and closing expenses                       266           1,038              703          1,892
Amortization of intangibles                              -             422                -            845
Stock-based compensation expense                         -             456                -            456
                                                 ----------      ----------       ----------     ----------
  Operating income (loss)                           (9,418)            113          (14,395)        (2,052)

Interest expense, net                                  310             450              568            781
                                                 ----------      ----------       ----------     ----------
Loss before income taxes                            (9,728)           (337)         (14,963)        (2,833)
Income tax benefit                                  (3,891)           (142)          (5,985)        (1,190)
                                                 ----------      ----------       ----------     ----------
Net loss                                         $  (5,837)      $    (195)       $  (8,978)     $  (1,643)
                                                 ==========      ==========       ==========     ==========



Loss per share
  Basic                                          $   (0.45)      $   (0.02)       $   (0.69)     $   (0.13)
  Diluted                                        $   (0.45)      $   (0.02)       $   (0.69)     $   (0.13)



Weighted average common shares outstanding
  Basic                                             12,957          12,806           12,930         12,788
  Diluted                                           12,957          12,806           12,930         12,788


</TABLE>




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

                                       F-3

<PAGE>

<TABLE>
<CAPTION>


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


                                                        26 Weeks ended
                                                        --------------
                                                    August 3,       August 4,
                                                       2002            2001
                                                    ----------      ----------
<S>                                                     <C>             <C>
Cash flows from operating activities
  Net Loss                                          $  (8,978)      $  (1,643)
  Adjustments to reconcile net loss to net cash
    used in operating activities
      Depreciation and amortization                     7,466           8,109
      Loss on disposal of equipment                        51             125
      Deferred rent                                      (354)            214
      Stock-based compensation expense                      -             456

      Changes in operating assets and liabilities
        Merchandise inventory                         (21,964)        (24,114)
        Prepaid expenses and other assets              (6,902)         (2,398)
        Accounts payable                               16,442          23,024
        Accrued expenses and other liabilities          3,098          (4,635)
                                                    ----------      ----------
Net cash used in operating activities                 (11,141)           (862)
                                                    ----------      ----------

Cash flows from investing activities
  Purchases of leasehold improvements and equipment    (5,125)         (7,589)
                                                    ----------      ----------
Net cash used in investing activities                  (5,125)         (7,589)
                                                    ----------      ----------

Cash flows from financing activities
  Borrowings on revolving credit facility              25,760          59,872
  Payments on revolving credit facility               (20,374)        (48,272)
  Payments on long-term debt and capital
    lease obligations                                     (18)            (90)
  Payment of deferred debt issuance costs                 (40)            (40)
  Proceeds from exercise of stock options                 918             471
  Payments of stock subscription notes receivable          76               -
                                                    ----------      ----------
Net cash provided by financing activities               6,322          11,941
                                                    ----------      ----------
Net increase (decrease) in cash                        (9,944)          3,490
Cash at the beginning of the period                    17,390           4,739
                                                    ----------      ----------
Cash at the end of the period                       $   7,446       $   8,229
                                                    ==========      ==========


Supplemental disclosure of cash flow information
  Cash paid during the period for
    Interest                                        $      97       $     572
    Income taxes                                    $   1,102       $   5,521

Supplemental disclosure of non-cash financing activities
  Issuance of common stock to board members
    as compensation                                 $      33       $      69

</TABLE>

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

                                       F-4


<PAGE>


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

(1)      Unaudited Interim Financial Statements

         The accompanying unaudited financial statements do not include all of
         the information and footnotes required by accounting principles
         generally accepted in the United States for annual financial statements
         and should be read in conjunction with the financial statements for the
         fiscal year ended February 2, 2002 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 and 26 weeks ended August 3, 2002 and August 4, 2001
         reflect  all   adjustments   (which  include   normal   recurring
         adjustments)  necessary to present fairly the financial position,
         results of operations  and cash flows for the periods  presented.
         Due to the  seasonal  nature  of our  business,  the  results  of
         operations  for  the  interim  period  may  not   necessarily  be
         indicative of the results of operations for a full year.

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

(2)      Recent Accounting Pronouncements

         In August 2001, the Financial Accounting Standards Board (the "FASB")
         issued Statement of Financial Accounting Standards ("SFAS") No. 143,
         "Accounting for Asset Retirement Obligations." This statement addresses
         financial accounting and reporting for obligations associated with the
         retirement of tangible long-lived assets and the associated asset
         retirement costs. It applies to (a) all entities and (b) legal
         obligations associated with the retirement of long-lived assets that
         result from the acquisition, construction, development and/or normal
         operation of long-lived assets, except for certain obligations of
         lessees. This statement is effective for financial statements issued
         for fiscal years beginning after June 15, 2002. We do not expect the
         adoption of this statement will have a material impact on our financial
         position or results of operations.

         Also in August 2001, the FASB issued SFAS No. 144, "Accounting for the
         Impairment or Disposal of Long-Lived Assets", which establishes one
         accounting model to be used for long-lived assets to be disposed of by
         sale and broadens the presentation of discontinued operations to
         include more disposal transactions. SFAS No. 144 supersedes SFAS No.
         121, "Accounting for the Impairment of Long-Lived Assets and for
         Long-Lived Assets to Be Disposed Of" and the accounting and reporting
         provisions of APB Opinion No. 30, "Reporting the Results of
         Operations--Reporting the Effects of Disposal of a Segment of a
         Business, and Extraordinary, Unusual and Infrequently Occurring Events
         and Transactions" for the disposal of a segment of a business (as
         previously defined in that Opinion). The provisions of SFAS No. 144 are
         effective for financial statements issued for fiscal years beginning
         after December 15, 2001. The adoption of SFAS No. 144 had no impact on
         our financial position or results of operations.


                                       F-5

<PAGE>

         In April 2002,  the FASB issued SFAS No. 145,  "Rescission of FASB
         Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and
         Technical  Corrections",  which rescinds SFAS No. 4, "Reporting Gains
         and Losses from  Extinguishment of Debt" and an amendment of that
         Statement,  and SFAS No. 64,  "Extinguishments of Debt Made to Satisfy
         Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44,
         "Accounting  for Intangible  Assets of Motor  Carriers."  SFAS No. 145
         amends SFAS No. 13, "Accounting for Leases",  to eliminate an
         inconsistency between the required accounting for sale-leaseback
         transactions and the required  accounting  for certain  lease
         modifications that have  economic  effects that are similar to
         sale-leaseback transactions.  SFAS No. 145 also amends other existing
         authoritative  pronouncements to make various technical corrections,
         clarify  meanings,  or describe  their  applicability  under  changed
         conditions.  SFAS No. 145 is effective for fiscal years beginning
         after May 15, 2002. We do not expect the adoption of this statement
         will have a material  impact on our financial position or results of
         operations.

         In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
         Associated with Exit or Disposal Activities", which addresses
         significant issues regarding the recognition, measurement, and
         reporting of costs associated with exit and disposal activities,
         including restructuring activities. This statement requires that costs
         associated with exit or disposal activities be recognized when they are
         incurred rather than at the date of a commitment to an exit or disposal
         plan. SFAS No. 146 is effective for all exit or disposal activities
         initiated after December 31, 2002. We do not expect the adoption of
         this statement will have a material impact on our financial position or
         results of operations.

 (3)     Restructuring Charge

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

         As of September 17, 2002, we have closed 24 of the 28 under-performing
         stores and have completed the realignment of our field organization and
         workforce reductions. The balance of the liability related to the
         restructuring charge at August 3, 2002 was as follows:








                                       F-6

<PAGE>

<TABLE>
<CAPTION>


                               Balance at                            Balance at
                              February 2,     Cash       Non-cash     August 3,
                                 2002       Payments      Charges       2002
 (in thousands)               -----------   --------     --------    ----------
 <S>                               <C>         <C>          <C>         <C>
 Lease termination costs*      $   13,724   $ (1,540)    $    304    $  12,488
 Inventory liquidation costs        2,870          -       (1,289)       1,581
 Fixed asset write-downs            2,052          -       (1,390)         662
 Employee termination costs         1,159       (930)           -          229
 Other costs                        1,349       (849)           -          500
                              -----------   ---------    ---------   ----------
                               $   21,154   $ (3,319)    $ (2,375)   $  15,460
                              -----------   ---------    ---------   ----------

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

</TABLE>

 (4)     Adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
         ----------------------------------------------------------------

         In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other
         Intangible Assets", which requires that upon adoption, amortization of
         goodwill will cease and instead, the carrying value of goodwill be
         evaluated for impairment at least annually using a fair value test.
         Identifiable intangible assets will continue to be amortized over their
         useful lives and reviewed at least annually for impairment using a
         method appropriate to the nature of the intangible asset.

         As required, we adopted SFAS No. 142 on February 3, 2002 and ceased
         the amortization of goodwill accordingly. The following table presents
         the reconciliation of net income and per share data to what we would
         have reported had the new rules been in effect during the 13-week and
         26-week periods ended August 4, 2001 (in thousands, except per share
         data):

<TABLE>
<CAPTION>

                                      13 Weeks Ended          26 Weeks Ended
                                      --------------          --------------
                                   August 3,   August 4,   August 3,   August 4,
                                     2002        2001        2002        2001
                                   ---------   ---------   ---------   ---------
   <S>                                <C>         <C>         <C>         <C>
   Reported net loss               $  (5,837)  $   (195)  $  (8,978)   $ (1,643)
   Add back goodwill amortization,
     net of tax                         -           233        -            465
                                   ----------  ---------  ----------   ---------
   Adjusted net income (loss)      $  (5,837)  $     38   $  (8,978)   $ (1,178)
                                   ----------  ---------  ----------   ---------

   Basic and diluted net income (loss)
     per common share:
   Reported net loss               $   (0.45)  $  (0.02)  $   (0.69)   $  (0.13)
   Goodwill amortization,
     net of tax                    $     -     $   0.02   $     -      $   0.04
   Adjusted net income (loss)      $   (0.45)  $   0.00   $   (0.69)   $  (0.09)

</TABLE>



                                       F-7

<PAGE>

 (5)     Revolving Credit Facility

         We have a $50.0 million revolving credit facility, under which
         generally we may borrow up to 70% of our eligible inventory and 85% of
         our eligible accounts receivable, as defined.  Under the terms of the
         credit facility, the interest rate may increase or decrease subject to
         earnings before interest, tax obligations, depreciation and
         amortization expense (EBITDA), as defined, on a rolling four fiscal
         quarter basis.  Accordingly, prime rate borrowings could range from
         prime to prime plus 0.5% and LIBOR borrowings from LIBOR plus 1.5% to
         LIBOR plus 2.5%.  The credit facility expires on March 3, 2003, subject
         to automatic one-year renewal periods, unless terminated earlier by
         either party. We are obligated to pay fees equal to 0.125% per annum on
         the unused amount of the credit facility. The credit facility is
         secured by a first lien on accounts receivable and inventory and
         requires us to maintain specific levels of tangible net worth in the
         event that our borrowing availability is less than $7.5 million.

         On September 16, 2002, the credit facility was amended to extend the
         term until March 3, 2006.  The amendment also amended the interest rate
         ranges on borrowings from prime to prime plus 1.0% or LIBOR plus 1.5%
         to LIBOR plus 3.0%.  In addition, the amendment eliminated all
         financial covenants and provided for a $7.5 million availability block.
         Under the availability block, all borrowings require lender's
         authorization while availability under the facility is $7.5 million or
         less.

         At August 3, 2002, based on eligible inventory and accounts receivable,
         we were eligible to borrow $50.0 million under the revolving credit
         facility; and we were in compliance with all financial and tangible net
         worth covenants, as defined. At August 3, 2002, we had outstanding
         borrowings of $5.4 million; and we had a $4.4 million standby letter of
         credit outstanding.

(6)      Long-Term Debt

         Our long-term debt consists of Junior Subordinated Notes (the "Notes"),
         which are non-interest bearing and are reflected on our balance sheets
         at the present value using a discount rate of 10%. As of August 3,
         2002, the Notes had a face value of $13.3 million and a related
         unamortized discount of $2.4 million, resulting in a net carrying value
         of $10.9 million. The discount is amortized to interest expense as a
         non-cash charge over the term of the Notes. We made a principal
         payment on the Notes of $2.0 million in December 2001. Additional
         principal payments are scheduled on December 31, 2002 ($2.0 million),
         December 31, 2003 and December 31, 2004 ($3.0 million) and on May 28,
         2005 ($5.3 million).





                                      F-8

<PAGE>

(7)      Income (loss) per Share

         We compute income (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 earnings per share is computed based on the
         weighted average shares outstanding and potentially dilutive common
         equivalent shares.

         Common equivalent shares totaaling 13,078,881, 12,997,111, 13,183,665
         and 12,976,516, respectively, are not included in the computation of
         diluted loss per share for the 13 weeks and 26 weeks ended August 3,
         2002 and August 4, 2001 because the effect would be anti-dilutive.

(8)      Provision for Income Taxes

         Based on our estimated effective tax rate for the entire fiscal year,
         which is subject to ongoing review and evaluation, we recorded an
         income tax benefit of $3.9 million and $6.0 million for the 13 weeks
         and 26 weeks ended August 3, 2002, respectively.

(9)      Stock Options and Warrants

         As of August 3, 2002, we had outstanding options to purchase 1,254,275
         shares of our common stock. Included in these outstanding stock options
         are 4,520 performance-based options, which will become exercisable if
         the market price hurdle of $49.78 has been achieved and maintained for
         60 consecutive trading days. Should this occur, we will incur a
         non-cash compensation expense in the minimum amount of $187,000. These
         performance-based options will expire on or before April 29, 2003.

         During the 13 weeks ended August 4, 2001, we recorded a non-cash charge
         of $456,000 in conjunction with the removal of the price target of
         $49.78 for 19,361 stock options held by an executive officer who
         retired in August 2001.

         At August 3, 2002, warrants to purchase 82,690 shares of our common
         stock were outstanding. These warrants have an exercise price of $19.91
         and expire May 2005.

(10)     Other Receivable

         In July 2002, we entered into a temporary bridge financing agreement
         (the "Agreement") with one of our trade vendors (the "Borrower") in
         which we, subject to the terms and conditions of the Agreement, will
         provide a $4.0 million revolving line of credit facility to the
         Borrower. Advances made to the Borrower under this Agreement are
         secured by the Borrower's accounts receivable, inventory, personal
         property and other assets including cash. Borrowings under this
         facility are also secured by personal guarantees from the principals of
         the Borrower. This agreement will terminate on September 27, 2002. As
         of August 3, 2002, there were direct borrowings of approximately $1.2
         million under this Agreement.



                                      F-9

<PAGE>

(11)     Legal Matters, Commitments and Contingencies

         As disclosed in our financial statements for the fiscal year ended
         February 2, 2002 included in our Form 10-K as filed with the Securities
         and Exchange Commission, in December 2000, a former employee in our
         Alameda, California store filed a lawsuit against us (the "O'Hara
         Lawsuit"). This lawsuit alleged that we violated the California Labor
         Code and Internal Wage Commission Orders, by classifying store managers
         and assistant managers as exempt salaried employees and thereby failing
         to pay them overtime. In August 2002, we reached a tentative
         settlement, subject to court approval, to settle the O'Hara Lawsuit. On
         September 3, 2002, the court gave preliminary approval to the
         settlement and has scheduled a hearing on November 7, 2002 to consider
         final approval of the settlement.  In conjunction with this tentative
         settlement, we recorded a charge of $2.1 million during the 13 weeks
         ended August 3, 2002.

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


















                                      F-10

<PAGE>

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

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

General

As of August 3, 2002, we operated 257 stores compared to 263 stores as of August
4, 2001. We opened 3 new stores and closed 2 stores during the 13-week period
ended August 3, 2002, and opened 12 new stores during the same period last year.
For the 26-week period ended August 3, 2002, we opened 8 new stores and closed
30 stores as compared to 21 new store openings and 1 store closing for the
comparable period last year.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Specifically, we must make estimates in the following areas:

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




                                        3

<PAGE>

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

o  Accrued restructuring costs. We have estimated an amount for the charge and
   the related liability regarding our 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)." Materially different reported results would be likely if
   the timing and extent of the adopted restructuring plan were changed.

o  Litigation reserves. Based in part on the assessment 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 anticipate these reserves will be
   re-evaluated as new facts come to light in any particular case.

o  Worker's compensation accrual.  At the beginning of fiscal 2001,  we
   transitioned  to a self-insured  worker's compensation  program.  This new
   program has both specific and aggregate stop-loss amounts.  The maximum
   specific  stop-loss is $250,000 per occurrence and the deductible aggregate
   stop-loss is $3.2 million for the policy year ended January 31, 2002. We
   utilize internal actuarial methods,  as well as an independent third-party
   actuary for the purpose of estimating ultimate costs for a particular policy
   year. Based on these actuarial methods along with current available
   information and insurance industry statistics, the ultimate expected losses
   for the policy year ended January 31, 2002 were estimated to be approximately
   $2.6 million.  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.
   For the policy year ending January 31, 2003, our self-insured  worker's
   compensation program includes a maximum specific stop-loss amount of $250,000
   per occurrence with no deductible aggregate stop-loss amount.




                                        4

<PAGE>

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

Results of Operations

Net sales were $128.1 million for the 13 weeks ended August 3, 2002 compared to
$139.3 million for the 13 weeks ended August 4, 2001, a decrease of $11.2
million, or 8.0%. Comparable store sales for the 13-week period ended August 4,
2002 decreased 8.7% versus a decrease of 2.4% for the same period last year.

For the 26 weeks ended August 3, 2002, net sales were $245.0 million versus
$265.1 million the same period last year, a decrease of $20.0 million or 7.6%.
Comparable store sales decreased 10.2% in the first 26 weeks of this year
compared to a decrease of 4.2% for the same period last year.

The decline in net sales for the 13 and 26 weeks ended August 3, 2002 from the
comparable periods last year was primarily due to reduced customer traffic and
lower average size in customer purchases.

Gross profit was $41.0 million or 32.0% of net sales for the 13 weeks ended
August 3, 2002 compared to $49.8 million or 35.8% of net sales for the 13 weeks
ended August 4, 2001. For the 26 weeks ended August 3, 2002 and August 4, 2001,
gross profit was $82.2 million or 33.5% of net sales and $91.6 million or 34.5%
of net sales, respectively.

The decline in gross profit as a percentage of net sales for the 13 and 26 weeks
ended August 3, 2002 from the comparable periods last year was primarily related
to higher markdown volume, lower initial mark-up, partially offset by improving
efficiency in distribution operations. The higher markdown volume was primarily
a result of increased promotional activity this year, which included our July
chain-wide grand re-opening event, and clearing of slow-moving inventory.

Included in selling and administrative expenses for the 13 and 26 weeks
ended August 3, 2002 was a charge of $2.1 million related to the tentative
settlement, subject to court approval, of the O'Hara Lawsuit, as previously
discussed in this document. For the 13 and 26 weeks ended August 4, 2001,
selling and administrative expenses included a charge of $1.2 million related to
the retirement and replacement of an executive officer.




                                      5


<PAGE>

Excluding these charges, selling and administrative expenses were $48.1 million
or 37.5% of net sales and $46.6 million or 33.5% of net sales for the 13 weeks
ended August 3, 2002 and August 4, 2001, respectively. For the 26 weeks ended
August 3, 2002 and August 4, 2001, selling and administrative expenses,
excluding the charges, were $93.8 million or 38.3% of net sales and $89.3
million or 33.7% of net sales, respectively. The dollar increase in selling and
administrative expenses was primarily a result of increased spending for
advertising, store occupancy and consulting services. Selling and administrative
expenses increased as a percent of net sales due to lower average sales volume
per store and increased spending related to the items cited above.

Pre-opening and closing expenses were $266,000 for the 13 weeks ended August 3,
2002 compared to $1.0 million for the same period last year, a decrease of
approximately $772,000 or 74.3%. For the 26 weeks ended August 3, 2002,
pre-opening and closing expenses were $703,000 versus $1.9 million for the same
period last year, a decrease of approximately $1.2 million.

The decrease in pre-opening and closing expenses for the 13 and 26 weeks ended
August 3, 2002 from the comparable periods last year was due to the opening of
fewer new stores during the current periods versus the same periods last year.

We did not record any amortization of intangibles for the 13 weeks and 26 weeks
ended August 3, 2002 versus $422,000 and $845,000, respectively, recorded during
the same periods last year. This change was due to the elimination of goodwill
amortization in conjunction with the adoption of SFAS No. 142 and cessation of
amortization associated with prior business acquisitions.

Interest expense, net was $310,000 and $568,000 for the 13 weeks and 26 weeks
ended August 3, 2002, respectively, compared to $450,000 and $781,000 for the
comparable periods last year. The decrease in both periods was due to lower
average outstanding borrowings on the revolving credit facility.

We recorded an income tax benefit of $3.9 million and $6.0 million for the 13
weeks and 26 weeks ended August 3, 2002, respectively, compared to $142,000 and
$1.2 million for the 13 weeks and 26 weeks ended August 4, 2001. The increase in
income tax benefit was the result of an increased pre-tax loss versus the same
periods a year ago.

For the 13 weeks and 26 weeks ended August 3, 2002, the net loss was $5.8
million and $9.0 million as compared to $195,000 and $1.6 million for the 13
weeks and 26 weeks ended August 3, 2001. The increase in net loss was a result
of the operating and other factors cited above.













                                        6

<PAGE>

Liquidity and Capital Resources

General

We finance our operations through credit provided by vendors and other
suppliers, amounts borrowed under our $50.0 million revolving credit facility
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
revolving credit facility are based on a percentage of eligible inventory and
accounts receivable, as defined, outstanding from time to time, as more fully
described in Note 5 of Notes to Financial Statements. At August 3, 2002, we had
$5.4 million of outstanding borrowings under our revolving credit facility
versus $11.6 million as of August 4, 2001.

During the 26 weeks ended August 3, 2002, we used $11.1 million in operating
activities, $5.1 million in investing activities and generated $6.3 million from
financing activities. As a result, we had a net decrease in cash of $9.9 million
during the 26 weeks ended August 3, 2002 compared to a net increase in cash of
$3.5 million during the same period last year.

We believe that our sources of cash, including the revolving credit facility,
will be adequate to finance our operations, capital requirements and debt
obligations as they become due for at least the next twelve months.

Capital Expenditures

We anticipate capital expenditures of approximately $8.6 million for the
remainder of the current fiscal year ending February 1, 2003, which includes
costs to open new stores, to renovate and relocate existing stores, to upgrade
information systems and to develop a distribution center in San Diego,
California. This new distribution center will be approximately 600,000 square
feet and service store operations on the west coast, Arizona, Nevada, and parts
of New Mexico. We anticipate that it will become operational in our second
quarter of fiscal 2003. We anticipate capital expenditures of approximately $6.5
million for this facility, approximately $4.0 million of which will occur in
fiscal 2002. We believe the capital expenditures for this facility and other
capital requirements will be financed from internal cash flow.

Store Closures and Restructuring Initiatives

As previously discussed, we have closed 24 of the 28 under-performing stores as
part of our restructuring plan. In addition, we have closed six other stores
which were either due to non-renewable leases or relocation opportunities. The
majority of the store closures were part of our restructuring initiatives
intended to improve future financial performance. The cash charges to close a
store principally consisted of lease termination or sublease costs, employee
severance and tear-down costs. In addition to the closing of under-performing
stores, we also included the realignment of field organization and workforce
reductions as part of our restructuring initiatives. We estimate the cash
requirement during the remainder of fiscal 2002 for the restructuring will be
approximately $5.7 million. We believe that our sources of cash, including the
revolving credit facility, will be adequate to fund our restructuring efforts.

                                        7

<PAGE>

Contractual Obligations and Commitments

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

<TABLE>
<CAPTION>

                                                                (in thousands)

                             Junior                                                         Accenture
                          Subordinated      Operating      Capital       Restructuring      Consulting
                              Notes           Leases        Leases           Charge         Agreement          Total
                          ------------      ----------     -------       -------------      -----------     -----------
<S>                            <C>              <C>           <C>             <C>               <C>             <C>
Fiscal Year:
  2002 (remaining
  6 months)               $    2,000        $  15,822      $    1        $      5,702       $  1,200        $  24,725
  2003                         3,000           30,444           -               7,515              -           40,959
  2004                         3,000           26,865           -                   -              -           29,865
  2005                         5,300           20,159           -                   -              -           25,459
  2006                             -           13,836           -                   -              -           13,836
  Thereafter                       -           26,310           -                   -              -           26,310
                          ------------      ----------     ------        -------------      ---------       -----------
                          $   13,300        $ 133,436      $    1        $     13,217       $  1,200        $ 161,154
                          ------------      ----------     ------        -------------      ---------       -----------

</TABLE>

In the first quarter of fiscal 2002, we entered into a master Consulting
Services Agreement and a statement of work thereunder (the "Agreement") with
Accenture LLP ("Accenture") to provide consulting services on merchandise
assortment planning and in-season management, advertising effectiveness and
brand development. The consulting services include (1) identification of high
impact opportunities, (2) development of an approach plan to realize and sustain
the associated benefits of the identified opportunities, (3) assistance in the
execution of the approach plan and (4) development of procedures for the
company's management to ensure the continuation of the program on a long-term
basis. Under the Agreement, Accenture would receive approximately $3.9 million
for services scheduled to be completed by January 2003. In addition, Accenture
may become entitled to additional fees of up to $1.3 million for fiscal 2002 and
$1.0 million for fiscal 2003 if we achieve specified financial targets for
fiscal 2002 and fiscal 2003. The Agreement is generally terminable on 30-day
notice. If we terminate without cause, we may be obligated to reimburse
Accenture for specified termination fees. Through August 31, 2002, we paid
Accenture approximately $2.0 million under the Agreement.

Effective August 30, 2002, the Agreement was amended to reflect a reduction in
the scope of services to be provided by Accenture. Under the amended Agreement,
Accenture will receive approximately $1.2 million in fees and expenses for
services provided for the period from September 30, 2002 to January 31, 2003.



                                        8
<PAGE>

Forward-Looking Statements

In this Quarterly Report on Form 10-Q, we have made both historical and
forward-looking statements. All of our statements other than those of historical
fact are, or may be deemed to be, forward-looking statements 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 expectations concerning future
results and events. These forward-looking statements generally may be identified
by the use of phrases such as "believe", "expect", "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 important factors, among others, could affect our future results,
causing these results to differ materially from those expressed in any of our
forward-looking statements: general economic and business conditions, trends in
our business and consumer preferences, especially as may be impacted by economic
weakness on consumer spending, the effects 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
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 risk factors
described in our fiscal 2001 Annual Report on Form 10-K and in our other filings
with the Securities and Exchange Commission.

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














                                        9

<PAGE>

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate risk on our Junior Subordinated Notes, which are
non-interest bearing and discounted at an annual rate of 10%. At August 3,
2002, our long-term debt had a face value of $13.3 million with a net carrying
value of $10.9 million. While generally an increase in market interest rates
will decrease the value of this debt, and decreases in interest rates will have
the opposite effect, we are unable to estimate the impact that interest rate
changes will have on the value of this debt as there is no active public market
for the debt and we are unable to determine the market interest rate at which
alternate financing would have been available at August 3, 2002.


Item 4.    Controls and Procedures

There have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to their
evaluation in connection with our last annual audit, including any corrective
actions with regard to significant deficiencies and material weaknesses.
































                                       10

<PAGE>

                           PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

          As disclosed in our financial statements for the fiscal year ended
          February 2, 2002 included in our Form 10-K as filed with the
          Securities and Exchange Commission, in December 2000, a former
          employee in our Alameda, California store filed a lawsuit against us
          (the "O'Hara Lawsuit").  This Lawsuit alelged that we violated the
          California Labor Code and Internal Wage Commission Orders, by
          classifying store managers and assistant managers as exempt salaries
          employees and thereby failing to pay them overtime.  In August 2002,
          we reached a tentative settlement, subject to court approval, to
          settle the O'Hara Lawsuit.  On September 3, 2002, the court gave
          preliminary approval to the settlement and has scheduled a hearing on
          November 7, 2002 to consider final approval of the settlement.

Item 2.   Changes in Securities and Use of Proceeds

          None.

Item 3.   Defaults Upon Senior Securities

          None.

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

          Our annual meeting of stockholders was held on June 19, 2002.
          Michael M. Searles was re-elected at the meeting to hold the office of
          director and to serve until the annual meeting of stockholders in 2005
          or until his successor is elected.  The number of votes cast were as
          follows:

          Votes for:       8,320,831
          Votes withheld:          0

          Other directors whose terms of office continued after the meeting were
          Willem de Vogel, Peter V. Handal, Ronald Rashkow and Wm. Robert
          Wright II.

          The other matter voted on and approved at the meeting was the
          ratification of Ernst & Young LLP as independent accountants and the
          results of that vote were as follows:

          Votes for:      11,813,691
          Votes against:     240,253
          Votes withheld:     26,629

                                       11

<PAGE>


Item 5.   Other Information

          None.

Item 6.   Exhibits and Reports on Form 8-K
          (a)   Exhibit

                10.9   Fourth Amendment to the Financing  Agreement between the
                       CIT Group/Business Credit, Inc. (as Agent and a Lender)
                       and Factory 2-U Stores, Inc. (as Borrower) dated as of
                       September 16, 2002.

                99.1   Certification pursuant to 18 U.S.C. Section 1350, as
                       adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                       of 2002 by Michael M. Searles, President and Chief
                       Executive Officer.

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

          (b)   Reports on Form 8-K

                Item 5 - On August 20, 2002, we filed a report on Form 8-K
                regarding the resignation of Michael M. Searles,  the Company's
                President and Chief Executive Officer.

















                                       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: September 17, 2002




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






























                                       13

<PAGE>


                                 CERTIFICATIONS

I, Michael M. Searles, certify that:

        1.     I have reviewed this quarterly report on Form 10-Q of Factory 2-U
Stores, Inc. (the "Registrant").

        2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report.

        3.     Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this quarterly
report.


Date:  September 17, 2002           /s/Michael M. Searles
                                    ---------------------
                                    Name:  Michael M. Searles
                                    Title: President and Chief Executive Officer



I, Douglas C. Felderman, certify that:

        1.     I have reviewed this quarterly report on Form 10-Q of Factory 2-U
Stores, Inc. (the "Registrant").

        2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report.

        3.     Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this quarterly
report.


Date:  September 17, 2002           /s/Douglas C. Felderman
                                    -----------------------
                                    Name:  Douglas C. Felderman
                                    Title: Executive Vice President and
                                             Chief Financial Officer



                                       14