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 November 1, 2003
                                        ----------------

                         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

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

The  number  of shares  outstanding  of the  registrant's  common  stock,  as of
December 12, 2003 was 17,946,882 shares.


<PAGE>



                            FACTORY 2-U STORES, INC.

            FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1, 2003

                                      INDEX


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Balance  Sheets as of November 1, 2003  (Unaudited),  November 2,
         2002 (Unaudited) and February 1, 2003...............................F-1

         Statements of Operations  (Unaudited)  for the 13 and 39 weeks
         ended November 1, 2003 and November 2, 2002 ........................F-3

         Statements of Cash Flows (Unaudited) for the 39 weeks ended
         November 1, 2003 and November 2, 2002 ..............................F-4

         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...........11
Item 4.  Controls and Procedures .............................................12


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings....................................................13
Item 2.  Changes in Securities and Use of Proceeds............................13
Item 4.  Submission of Matters to a Vote of Security Holders..................13
Item 6.  Exhibits and Reports on Form 8-K ....................................14
Signatures    ................................................................16






                                        2
<PAGE>


PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

<TABLE>
<CAPTION>


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



                                        November 1,    November 2,   February 1,
                                           2003           2002          2003
                                        -----------    -----------   -----------
                                        (Unaudited)    (Unaudited)
<S>                                         <C>            <C>           <C>
ASSETS
Current assets:
      Cash and cash equivalents         $   5,731      $   5,922      $   3,465
      Merchandise inventory                85,207         83,461         32,171
      Accounts receivable, net                481          2,613            884
      Income taxes receivable                   -          7,820          8,200
      Prepaid expenses                      6,622          6,109          5,436
      Deferred income taxes                 9,753          3,553          9,732
                                        -----------    -----------    ----------
             Total current assets         107,794        109,478         59,888

      Leasehold improvements and
        equipment, net                     22,691         34,856         28,602
      Deferred income taxes                17,656          7,182         10,750
      Other assets                            781            985            963
      Goodwill                             26,301         26,301         26,301
                                        -----------    -----------    ----------

             Total assets               $ 175,223      $ 178,802      $ 126,504
                                        ===========    ===========    ==========

</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)
                                   (continued)


                                        November 1,    November 2,   February 1,
                                           2003           2002          2003
                                        -----------    -----------   -----------
                                        (Unaudited)    (Unaudited)
<S>                                        <C>             <C>          <C>

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
      Current portion of long-term
        debts                           $    3,035     $    2,000     $   3,000
      Junior secured term loans              7,500              -             -
      Accounts payable                      54,180         42,047        27,961
      Taxes payable                          4,859          3,234         5,840
      Accrued expenses and other
        liabilities                         23,117         26,322        27,831
                                        -----------    -----------    ----------
             Total current liabilities      92,691         73,603        64,632

Revolving credit facility                   17,751         30,046         6,300
Long-term debts                              7,280          9,181         6,445
Accrued restructuring charges                4,749          3,578         1,747
Deferred rent                                2,974          3,291         3,061
                                        -----------    -----------    ----------
             Total liabilities             125,445        119,699        82,185
                                        -----------    -----------    ----------


Stockholders' equity:
      Common stock, $0.01 par value;
        35,000 shares authorized and
        18,146 shares, 12,970 shares
        and 13,476 shares issued and
        outstanding, respectively              181            130           135
      Stock subscription notes receivable        -         (2,149)       (1,116)
      Additional paid-in capital           137,932        122,323       122,516
      Accumulated deficit                  (88,335)       (61,201)      (77,216)
                                        -----------    -----------    ----------
             Total stockholders' equity     49,778         59,103        44,319
                                        -----------    -----------    ----------

             Total liabilities and
                stockholders' equity    $  175,223     $  178,802     $ 126,504
                                        ===========    ===========    ==========
</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                  39 Weeks Ended
                                                     --------------                  --------------
                                                November 1,   November 2,       November 1,   November 2,
                                                   2003          2002              2003          2002
                                                -----------   -----------       -----------   -----------
<S>                                                <C>            <C>               <C>            <C>

Net sales                                       $  121,925    $  134,506        $  349,931    $  379,545
Cost of sales                                       80,269        89,854           232,071       252,706
                                                -----------   -----------       -----------   -----------
    Gross profit                                    41,656        44,652           117,860       126,839

Selling and administrative expenses                 45,579        49,057           133,082       144,936
Pre-opening and closing expenses                         -           366               221         1,069
                                                -----------   -----------       -----------   -----------
        Operating loss                              (3,923)       (4,771)          (15,443)      (19,166)

Interest expense, net                                  928           515             2,497         1,083
                                                -----------   -----------       -----------   -----------
Loss before income taxes                            (4,851)       (5,286)          (17,940)      (20,249)

Income tax benefit                                  (1,843)       (1,770)           (6,821)       (7,755)

Net loss                                        $   (3,008)   $   (3,516)       $  (11,119)   $  (12,494)
                                                ===========   ===========       ===========   ===========

Loss per share
  Basic                                         $    (0.17)   $    (0.27)       $    (0.71)   $     (0.97)
  Diluted                                       $    (0.17)   $    (0.27)       $    (0.71)   $     (0.97)

Weighted average common shares outstanding
  Basic                                             17,237        12,970            15,688          12,943
  Diluted                                           17,237        12,970            15,688          12,943


</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)


                                                          39 Weeks Ended
                                                          --------------
                                                  November 1,        November 2,
                                                     2003               2002
                                                  -----------        -----------
<S>                                                   <C>                <C>
Cash flows from operating activities
  Net loss                                        $  (11,119)        $  (12,494)
  Adjustments to reconcile net loss to
    net cash used in operating activities
     Depreciation and amortization                    10,079             11,424
     Loss on disposal of equipment                        19                 48
     Deferred income tax                              (6,821)                 -
     Deferred rent                                       (63)              (330)
     Stock subscription notes receivable
       valuation adjustment                             (708)                 -
     Issuance of common stock to board
       members as compensation                            12                 36
     Changes in operating assets and liabilities
       Merchandise inventory                         (53,036)           (28,601)
       Income tax receivable                           8,200             (7,820)
       Prepaid expenses and other assets                (585)             1,183
       Advances to vendor                                (51)            (3,314)
       Repayments from vendor                             86              1,834
       Accounts payable                               26,219              5,775
       Accrued expenses and other liabilities         (2,180)            (2,044)
                                                  -----------        -----------
Net cash used in operating activities                (29,948)           (34,303)

Cash flows from investing activities
  Purchases of leasehold improvements and equipment   (3,493)            (8,065)
                                                  -----------        -----------
Net cash used in investing activities                 (3,493)            (8,065)

Cash flows from financing activities
  Borrowings on revolving credit facility            111,076             74,421
  Payments on revolving credit facility              (99,625)           (44,375)
  Payments on long-term debt and capital lease
    obligations                                          (14)               (19)
  Proceeds from debt financing                         7,500                  -
  Payment of deferred debt issuance costs               (442)              (121)
  Proceeds from issuance of common stock, net         17,069                  -
  Proceeds from exercise of stock options                  -                918
  Payments of stock subscription notes receivable        143                 76
                                                  -----------        -----------
Net cash provided by financing activities             35,707             30,900

Net increase (decrease) in cash                        2,266            (11,468)
Cash at the beginning of the period                    3,465             17,390
                                                  -----------        -----------
Cash at the end of the period                     $    5,731         $    5,922
                                                  ===========        ===========
Supplemental disclosure of cash flow information
  Cash paid during the period for
    Interest                                      $    1,287         $      377
    Income taxes                                  $       94         $    1,323

Supplemental disclosure of non-cash investing and
  financing activities
    Acquisition of equipment under notes payable  $      151         $        -
    Foreclosure of collateral on stock
      subscription notes receivable               $    1,681         $        -

</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 1, 2003 included in our Form 10-K/A as filed
         with the Securities and Exchange Commission.

         We believe that the unaudited financial statements as of and for the 13
         weeks and 39 weeks ended  November 1, 2003 and November 2, 2002 reflect
         all adjustments  (consisting of 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's financial statements.

(2)      Recent Accounting Pronouncements

         In January 2003, the Financial  Accounting Standards Board (the "FASB")
         issued FIN 46 - "Consolidation of Variable  Interest  Entities." FIN 46
         clarifies  the  application  of Accounting  Research  Bulletin No. 51 -
         Consolidated   Financial   Statements  to  those  entities  defined  as
         "Variable  Interest  Entities"  (more  commonly  referred to as special
         purpose   entities)  in  which   equity   investors  do  not  have  the
         characteristics  of a "controlling  financial  interest" or do not have
         sufficient  equity at risk for the  entity to  finance  its  activities
         without additional  subordinated  financial support from other parties.
         FIN 46 applies  immediately to all Variable  Interest  Entities created
         after  January 31, 2003,  and by the  beginning of the first interim or
         annual  reporting  period  commencing  after June 15, 2003 for Variable
         Interest  Entities  created prior to February 1, 2003.  The adoption of
         this statement did not have a material impact on our financial position
         or results of operations.

         In April  2003,  the FASB  issued  Statement  of  Financial  Accounting
         Standard  (the  "SFAS")  No.  149,   "Amendment  of  Statement  133  on
         Derivative Instruments and Hedging Activities." This statement provides
         clarification  on the financial  accounting and reporting of derivative
         instruments and hedging  activities and requires contracts with similar
         characteristics  to be  accounted  for on a  comparable  basis.  We are
         currently in the process of assessing  the effect of SFAS No.149 and do
         not expect the adoption of it, which will be  effective  for  contracts
         entered into or modified after June 30, 2003, to have a material impact
         on our financial position or results of operations.


                                       F-5


<PAGE>


         In May 2003,  the FASB  issued SFAS No.  150,  "Accounting  for Certain
         Financial  Instruments  with  Characteristics  of both  Liabilities and
         Equity." This statement establishes standards on the classification and
         measurement  of  financial  instruments  with  characteristics  of both
         liabilities  and  equity and is  effective  for  financial  instruments
         entered  into or  modified  after May 31,  2003.  We do not  expect the
         adoption of this statement will have a material impact on our financial
         position or results of operations.

(3)      Fiscal 2002 Restructuring Charge

         In December 2002, we recorded a  restructuring  charge of $14.4 million
         in  conjunction  with the  decision  to close 23  stores  as well as to
         consolidate both our distribution center network and corporate overhead
         structure.  The  purpose  of  these  restructuring  initiatives  was to
         improve store profitability, reduce costs and improve efficiency.

         As of December 12, 2003, we closed 16 of these 23 stores and terminated
         the lease  obligations of 13 of these closed  stores.  Of the remaining
         seven  stores,  we have  decided to continue  to operate  four of these
         stores  as a result of  certain  landlord  concessions;  and we plan to
         close the  other  three  stores by March  2004.  In  addition,  we have
         completed the  consolidation  of our two former San Diego  distribution
         centers into one new distribution  center, which is also located in San
         Diego,  California.  We are currently seeking disposition of the leases
         for these two former San Diego distribution facilities,  as well as our
         distribution facility in Lewisville, Texas.

         The balance of the  liability  ($2.7  million was  included in "Accrued
         expenses  and other  liabilities"  and $3.0  million  was  included  in
         "Accrued  restructuring  charges" in the  accompanying  balance sheets)
         related to this  fiscal 2002  restructuring  charge at November 1, 2003
         was as follows:

<TABLE>


                                Balance at                           Balance at
                                February 1,    Cash      Non-cash    November 1,
(in thousands)                    2003       Payments     Charges       2003
                                -----------  --------    --------    -----------
<S>                                <C>         <C>         <C>           <C>
Lease termination costs*        $ 6,548      $(2,290)     $ 588        $ 4,846
Employee termination costs          908         (562)      (115)           231
Other costs                         786         (260)       115            641
                                -------      --------     ------       --------
                                $ 8,242      $(3,112)     $ 588        $ 5,718
                                =======      ========     ======       ========
<FN>

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

</FN>
</TABLE>

                                       F-6


<PAGE>


         The balances of non-cash  inventory  liquidation  costs and fixed asset
         write-downs  related  to  this  fiscal  2002  restructuring  charge  at
         November 1, 2003 were as follows:

<TABLE>

                                         Balance at                  Balance at
                                         February 1,     Usage/      November 1,
        (in thousands)                      2003      Adjustments       2003
                                         -----------  -----------    -----------
        <S>                                  <C>          <C>            <C>
        Inventory liquidation costs*     $   517      $  (103)        $   414
        Fixed asset write-downs**        $ 3,652      $  (656)        $ 2,996

<FN>


         * The balance of inventory liquidation costs of approximately  $414,000
         as of  November  1, 2003 was  recorded  as a  valuation  allowance  for
         merchandise inventory.

         ** The balance of fixed asset write-downs of approximately $3.0 million
         as of  November  1, 2003 was  recorded  as a  valuation  allowance  for
         leasehold improvements and equipment.
</FN>
</TABLE>

         We  continually  monitor and evaluate the adequacy of this reserve and,
         as new facts become available, will adjust this reserve as needed.

 (4)     Fiscal 2001 Restructuring Charge

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

         We closed 24 of these 28 stores during the first quarter of fiscal 2002
         and the remaining four stores in January 2003. As of December 12, 2003,
         we had terminated  the lease  obligations of 23 of these closed stores.
         In light of the  favorable  experience  related to the costs of closing
         these stores,  we recorded a non-cash  adjustment to reduce the reserve
         for the fiscal 2001  restructuring  initiatives by  approximately  $5.0
         million  during  the  fourth  quarter of fiscal  2002.  The  adjustment
         included (1) reduction of reserve for lease  termination  costs by $3.8
         million,  (2) reduction of reserve for inventory  liquidation  costs by
         $1.3  million,  offset by (3) an  additional  reserve  for fixed  asset
         write-downs of $94,000.

         The  balance  of the  liability  ($884,000  was  included  in  "Accrued
         expenses  and other  liabilities"  and $1.7  million  was  included  in
         "Accrued  restructuring  charges" in the  accompanying  balance sheets)
         related to this  fiscal 2001  restructuring  charge at November 1, 2003
         was as follows:

<TABLE>
                               Balance at               Non-cash    Balance at
                               February 1,    Cash    Charges and   November 1,
(in thousands)                    2003      Payments  Adjustments      2003
                               -----------  --------  -----------  ------------
<S>                               <C>         <C>         <C>           <C>
Lease termination costs        $ 4,275      $ (1,765)    $    -       $ 2,510
Employee termination costs          70           (16)       (54)            -
Other costs                        277          (127)       (78)           72
                               -----------  --------- -----------  -------------
                               $ 4,622      $ (1,908)    $ (132)      $ 2,582
                               ===========  ========= ===========  =============
</TABLE>

                                       F-7
<PAGE>

         The balances of non-cash  inventory  liquidation  costs and fixed asset
         write-downs  related  to  this  fiscal  2001  restructuring  charge  at
         November 1, 2003 were as follows:
<TABLE>

                                          Balance at                 Balance at
                                          February 1,     Usage/     November 1,
        (in thousands)                       2003       Adjustments     2003
                                          -----------  -----------   -----------
        <S>                                   <C>          <C>           <C>
        Inventory liquidation costs*      $    19        $   -        $     19
        Fixed asset write-downs**         $   133        $  35        $    168

<FN>

         * The balance of inventory  liquidation costs of approximately  $19,000
         as of  November  1, 2003 was  recorded  as a  valuation  allowance  for
         merchandise inventory.

         ** The balance of fixed asset write-downs of approximately  $168,000 as
         of November 1, 2003 was recorded as a valuation allowance for leasehold
         improvements and equipment.
</FN>
</TABLE>

         We  continually  monitor and evaluate the adequacy of this reserve and,
         as new facts become available, adjust this reserve as needed.


 (5)     Revolving Credit Facility

         On March 3, 2000,  we entered  into a $50.0  million  revolving  credit
         facility  agreement  (the  "Financing   Agreement")  with  a  financial
         institution.  Under the Financing Agreement, we may borrow up to 70% of
         our eligible inventory and 85% of our eligible accounts receivable,  as
         defined,  up to $50.0 million.  The revolving credit facility  provides
         for  a  $7.5  million   availability  block  against  our  availability
         calculation,  as defined. The Financing Agreement also includes a $15.0
         million  sub-facility  for  letters of  credit.  Under the terms of the
         revolving 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 1.0 % and LIBOR  borrowings from LIBOR plus 1.5% to
         LIBOR plus 3.0%. The Financing  Agreement  expires on March 3, 2006. We
         are  obligated  to pay fees  equal to 0.125%  per  annum on the  unused
         amount of the credit  facility.  We are  contractually  prohibited from
         paying  cash  dividends  on our  common  stock  under  the terms of the
         Financing  Agreement  without the consent of the lender.  As amended on
         April 10, 2003,  the credit  facility is secured by a first lien on all
         company assets excluding furniture, fixtures, machinery and equipment.

         On  February  14,  2003,  we  obtained  the  lender's  consent  to  the
         incurrence  by us of up to $10.0  million in  additional  indebtedness,
         which may be secured by a junior lien on the Collateral, as defined.

         On April 10, 2003, we amended the terms of our Financing Agreement (the
         "Amended and Restated Financing Agreement") to add $7.5 million of term
         loans,  to add  financial  covenants,  and to amend  certain  reporting
         provisions  and other terms.  The term loans  consist of a $6.5 million
         junior term note  secured by all company  assets  excluding  furniture,
         fixtures,  machinery and equipment and a $1.0 million  junior term note
         secured by furniture,  fixtures,  machinery and equipment.  These notes
         bear interest at the rate of 14.5% per annum on the then current


                                       F-8
<PAGE>
         outstanding  balance,  and mature on April 10,  2004.  The $6.5 million
         junior  term  note can be  extended  for an  additional  term of twelve
         months, provided we are in compliance with certain financial conditions
         and  requirements,  as specified in the Amended and Restated  Financing
         Agreement.  The  financial  covenant,  which is related to  achieving a
         minimum  earnings before interest,  tax  obligations,  depreciation and
         amortization  expense (EBITDA),  as defined, is subject to testing only
         if the Triggering Availability,  as defined, is less than $10.0 million
         on the last three days of each fiscal month  commencing on May 3, 2003.
         In addition,  during the period from  December 22 through  January 5 of
         each fiscal year, there shall be no outstanding  direct  borrowings and
         letters of credit  cannot  exceed $12.2  million.  These two  financial
         covenants  will terminate at such time that the $7.5 million term loans
         are no longer outstanding.

         At  November  1,  2003,  we  were  in  compliance  with  all  financial
         covenants,  as defined, and had outstanding borrowings of $17.8 million
         and  letters  of credit of $12.1  million  under our  revolving  credit
         facility.  In  addition,  based  on  eligible  inventory  and  accounts
         receivable,  we  were  eligible  to  borrow  $49.7  million  under  our
         revolving  credit  facility and had $12.3 million  available for future
         borrowings after deducting the $7.5 million availability block.

(6)      Long-Term Debts

         Our long-term debts primarily consist 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%. We
         are prohibited from paying cash dividends on our common stock under the
         terms of the Notes without the consent of the Notes holders.

         As of November 1, 2003, the Notes had a face value of $11.3 million and
         a related  unamortized  discount of $1.2  million,  resulting  in a net
         carrying value of $10.1 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  January  2003.
         Additional  principal payments are scheduled on December 31, 2003 ($3.0
         million),  December 31, 2004 ($3.0  million) and a final payment on May
         28, 2005 ($5.3 million).

         We are  currently  in  negotiations  with the  holders  of the Notes to
         restructure  the  terms of the  Notes.  In the event  that a  scheduled
         principal  payment is not made when due, we are  permitted to make such
         payment  within  three months from the due date,  provided  that we pay
         interest  at ten percent  per annum on the  outstanding  balance of the
         Notes.

(7)      Loss per Share and Comprehensive Loss

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


                                       F-9
<PAGE>

         Common  stock  equivalent  shares  totaling  195,357 and 192,822 for 13
         weeks and 39 weeks  ended  November  1, 2003,  respectively,  and 0 and
         92,783 for 13 weeks and 39 weeks ended November 2, 2002,  respectively,
         are not included in the  computation  of diluted loss per share because
         the effect would be anti-dilutive.

         Our  comprehensive  loss  equaled  our net loss for the 13 weeks and 39
         weeks ended November 1, 2003 and November 2, 2002.

 (8)     Stock-based Compensation

         We have elected under the provisions of SFAS No. 123,  "Accounting  for
         Stock-Based  Compensation" to continue using the intrinsic value method
         of accounting for employee stock-based  compensation in accordance with
         Accounting  Principles  Board No. 25,  "Accounting  for Stock Issued to
         Employees." Under the intrinsic value method,  compensation  expense is
         recognized only in the event that the exercise price of options granted
         is less than the market  price of the  underlying  stock on the date of
         grant. The fair value method generally  requires  entities to recognize
         compensation  expense over the vesting  period of options  based on the
         estimated fair value of the options granted.  We have disclosed the pro
         forma  effect of using the fair value  based  method to account for our
         stock-based  compensation as required by SFAS No. 148,  "Accounting for
         Stock-Based Compensation - Transition and Disclosure."

         The following table illustrates the effect on net loss and net loss per
         share if we had applied the fair value  recognition  provisions of SFAS
         No. 148.

<TABLE>

                                                           (in thousands, except per share data)
                                                        13 weeks ended                39 weeks ended
                                                        --------------                --------------
                                                  November 1,   November 2,     November 1,   November 2,
                                                     2003          2002            2003          2002
                                                  -----------   -----------     -----------   -----------
<S>                                                   <C>            <C>           <C>            <C>
Net loss before stock-based compensation,         $  (3,008)    $  (3,516)      $  (11,119)   $  (12,494)
   as reported
Stock-based compensation, using the fair               (474)         (786)          (1,537)       (2,377)
   value method, net of tax
                                                  -----------   -----------     -----------   -----------
Pro-forma net loss                                $  (3,482)    $  (4,302)      $  (12,656)   $  (14,871)
                                                  -----------   -----------     -----------   -----------
Pro-forma net loss per share                      $   (0.20)    $   (0.33)      $    (0.81)   $    (1.15)
</TABLE>

         The  Black-Scholes  option  valuation  model was  developed  for use in
         estimating  the fair  value of  traded  options  that  have no  vesting
         restrictions and are fully  transferable.  Option valuation models also
         require  the input of highly  subjective  assumptions  such as expected
         option life and expected stock price  volatility.  Because our employee
         stock-based   compensation  plan  has   characteristics   significantly
         different  from  those of traded  options  and  because  changes in the
         subjective  input  assumptions  can  materially  affect  the fair value
         estimate,  we believe that the existing option  valuation models do not
         necessarily  provide a  reliable  single  measure  of the fair value of
         awards from those plans.

                                      F-10
<PAGE>

         The  weighted-average  fair value of each option  grant is estimated on
         the date of grant using the Black-Scholes option-pricing model with the
         following weighted-average assumptions:
<TABLE>

                                          13 weeks ended              39 weeks ended
                                          --------------              --------------
                                     November 1,  November 2,    November 1,    November 2,
                                        2003         2002           2003           2002
                                     -----------  -----------    -----------    -----------
<S>                                     <C>           <C>           <C>             <C>
    (i)    Expected dividend yield      0.00%        0.00%          0.00%          0.00%
    (ii)   Expected volatility        103.53%      104.01%        103.61%        104.01%
    (iii)  Expected life              7 years      8 years        7 years        8 years
    (iv)   Risk-free interest rate      3.80%        3.55%          3.75%          3.55%
</TABLE>

(9)      Provision for Income Taxes

         Based on our  estimated  effective tax rate for the entire fiscal year,
         which is dependent on our ability to generate future taxable income and
         to utilize the net operating loss carryforwards,  we recorded an income
         tax benefit of $1.8  million  and $6.8  million for the 13 weeks and 39
         weeks ended November 1, 2003, respectively.

(10)     Private Offerings

         On March 6, 2003, we completed a private  offering of 2,515,379  shares
         of our common stock for net  proceeds of  approximately  $5.7  million,
         after deducting placement fees and other offering expenses. In addition
         to the  placement  fees,  the  placement  agent  received  warrants  to
         purchase  75,000  shares of our common  stock at an  exercise  price of
         $3.50 per share, a 30% premium over the closing price of $2.68 on March
         6, 2003. These warrants will expire in March 2006.

         On August 20, 2003, we completed  another private offering of 2,450,000
         shares of our common  stock for net  proceeds  of  approximately  $11.4
         million,  after deducting  placement fees and other offering  expenses.
         This  transaction also provides for warrants to purchase 490,000 shares
         at the same price as the initial shares  purchased,  exercisable  until
         December 23, 2003.  In addition to the  placement  fees,  the placement
         agent received  warrants to purchase 112,500 shares of our common stock
         at an exercise  price of $6.00 per share, a 7% premium over the closing
         price of $5.62 on August 20, 2003. These warrants will expire in August
         2006.  Depending  on the  number  of  additional  shares  purchased  by
         investors,  the placement agent is entitled to receive  additional fees
         and an additional  warrant to purchase up to 22,500 shares at $6.00 per
         share.

         We used the net proceeds of these two private  offerings  primarily for
         working capital purposes.

(11)     Stock Subscription Notes Receivable

         As of  February  1, 2003,  the  outstanding  stock  subscription  notes
         receivable balance was $1.1 million, net of a valuation allowance.  All
         outstanding stock subscription notes receivable,  which were secured by
         the  underlying  common stock of the Company,  at that time were either
         due from current or former members of management  with a five-year term
         and had maturity dates ranging from April 29, 2003 to July 29, 2003 and
         an interest rate of 8.0% per annum.

                                      F-11
<PAGE>

         On March 21, 2003, two stock subscription notes in the principal amount
         of $92,642 and $50,000,  respectively,  plus accrued interest were paid
         in full by current members of management.

         On April 29, 2003, the remaining stock  subscription  notes matured and
         we  foreclosed  on the  shares  of our  common  stock  that  served  as
         collateral  as of the close of  business.  The  principal  and  accrued
         interest on the note due from Michael M. Searles,  our former President
         and Chief Executive Officer, was $1,458,608 and the collateral's market
         value on April 29, 2003 was  $1,198,750,  resulting in a deficiency  of
         $259,858,  for which Mr.  Searles was not  personally  liable under the
         terms of the note. In addition,  the principal and accrued  interest on
         two notes due from  Jonathan  W.  Spatz,  our  former  Chief  Financial
         Officer,  were $688,197 and the collateral's  market value on April 29,
         2003 was $376,744, resulting in a deficiency of $311,453, for which Mr.
         Spatz is  personally  liable for $136,614 of the  deficiency  under the
         terms of his notes. Additionally,  on April 29, 2003, the principal and
         accrued interest on the notes due from Tracy W. Parks, our former Chief
         Operating  Officer,  was $117,042 and the collateral had a market value
         of $82,197,  resulting  in a  deficiency  of  $34,845,  for which he is
         personally liable under the terms of his notes.

         In conjunction  with the  foreclosures as discussed  above, we recorded
         income of  approximately  $708,000  to adjust the  valuation  allowance
         established  as of February 1, 2003 as a result of the  increase in the
         market  value of our  common  stock on April 29,  2003 as  compared  to
         February 1, 2003.

         In August 2003, we received payment in full from Mr. Parks to repay the
         outstanding  principal balance of his note plus interest.  Based on Mr.
         Spatz's current financial condition,  we have elected, at this time, to
         forbear our  collection  efforts  regarding  the amount for which he is
         personally  liable.  The amount of $136,614  plus accrued  interest was
         fully reserved as of November 1, 2003.

(12)     Stock Options and Warrants

         As of  November  1,  2003,  we  had  outstanding  options  to  purchase
         1,533,224 shares of our common stock.

         At November 1, 2003,  warrants to purchase 760,190 shares of our common
         stock were  outstanding.  These  warrants have  exercise  prices in the
         range of $3.50 to $19.91 (weighted average exercise price of $6.62) and
         expire on various dates between December 2003 and August 2006.



                                      F-12
<PAGE>

(13)     Note 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,  agreed
         to 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 were also secured by personal  guarantees  from the principals
         of the Borrower. This Agreement expired on October 11, 2002.

         Through  May 27,  2003,  we made  cash  advances  in the  aggregate  of
         approximately  $3.1 million to the Borrower and received  cash payments
         in  the  aggregate  of   approximately   $811,000.   We  also  received
         approximately  $1.5 million of inventory from the Borrower to partially
         offset the  advances.  On this  date,  we filed a lawsuit  against  the
         Borrower  and the two  guarantors  seeking the  remaining  balance plus
         interest of approximately  $1.1 million due under the Agreement.  As of
         November 1, 2003, this amount was fully reserved.

         On September 17, 2003, we entered into a settlement  agreement with the
         Borrower in which the Borrower agreed to make payments in the amount of
         $500,000  with  interest at the rate of 7.5% per annum as full  payment
         for the balance due under the  Agreement.  The first payment of $50,000
         under this  settlement  agreement  was due on  September  30,  2003 and
         through December 12, 2003 we have received $32,000. As a result of this
         default,  under  the  settlement  agreement,  we  reserve  the right to
         reinstate the original amount due under the Agreement.

(14)     Legal Matters, Commitments and Contingencies

         On March 19, 2003, we entered into a settlement agreement with a former
         candidate for an executive  level position who alleged that we breached
         an oral  agreement  to employ him for one year.  Under the terms of the
         settlement agreement,  we are obligated to pay $390,000,  payable in 52
         equal bi-weekly installments.

         In April 2003, Lynda Bray and Masis Manougian,  two of our then current
         employees,  filed a lawsuit  against us  entitled  "Lynda  Bray,  Masis
         Manougian,  etc.,  Plaintiffs,  vs.  Factory  2-U Stores,  Inc.,  etc.,
         Defendants",  Case No.  RCV071918 in the Superior Court of the State of
         California for the County of San Bernardino (the "Bray  Lawsuit").  The
         First  Amended  Complaint in the Bray Lawsuit  alleges that we violated
         the California  Labor Code,  Industrial Wage Commission  Orders and the
         California Unfair  Competition Act by failing to pay wages and overtime
         for all hours  worked,  by failing to  document  all hours  worked,  by
         threatening to retaliate against employees who sought to participate in
         the  settlement  of  the  O'Hara  Lawsuit  and  by  failing  to  inform
         prospective  employees  of unpaid wage  claims.  Plaintiffs  purport to
         bring this action on behalf of all persons who were  employed in one of
         our California stores at any time after April 25, 2003. Plaintiffs



                                      F-13
<PAGE>

         seek   compensatory  and  exemplary   damages,   interest,   penalties,
         attorneys'  fees and  disgorged  profits in an amount which  plaintiffs
         estimated  to be not  less  than  $100,000,000.  Plaintiffs  also  seek
         injunctive   relief  requiring   correction  of  the  alleged  unlawful
         practices.

         Although at this stage of the litigation it is difficult to predict the
         outcome of the case with certainty, we believe that we have meritorious
         defenses to the Bray Lawsuit and we are  vigorously  defending  against
         it.

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

         Although at this stage of the litigation it is difficult to predict the
         outcome of the case with certainty, we believe that we have meritorious
         defenses  to the  Camarena  Lawsuit  and we  are  vigorously  defending
         against it.

         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.

(15)     Subsequent Event

         On December 10,  2003,  William R. Fields  resigned as Chief  Executive
         Officer, Chairman and a Director of the company, effective immediately,
         to pursue retirement.

         In his place, our Board of Directors established an Executive Committee
         to manage the  day-to-day  business  affairs  and  appointed  Norman G.
         Plotkin to hold the position of interim  Chief  Executive  Officer.  In
         addition to Mr. Plotkin, the Executive Committee consists of Douglas C.
         Felderman,  Executive Vice President and Chief Financial Officer;  A.J.
         Nepa,  Executive Vice President and General  Merchandise  Manager;  and
         Melvin C. Redman, Executive Vice President-Operations and Distribution.



                                      F-14

<PAGE>

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

Forward-Looking Statements

Certain  statements in this  Quarterly  Report on Form 10-Q are  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
expectation   concerning  future  results  and  events.  These   forward-looking
statements  generally may be identified by the use of phrases such as "believe",
"expect",  `estimate",  "anticipate",  "intend",  "plan",  "foresee",  "likely",
"will" or other similar words or phrases.  Similarly,  statements  that describe
our objectives,  plans or goals are or may be forward-looking statements.  These
forward-looking  statements  involve known and unknown risks,  uncertainties and
other factors which may cause our actual results, performance or achievements to
be different from any future results,  performance or achievements  expressed or
implied by these statements.

The  following  factors,   among  others,   could  affect  our  future  results,
performance or  achievements,  causing these results to differ  materially  from
those expressed in any of our forward-looking  statements:  general economic and
business conditions (both nationally and in regions where we operate); trends in
our business and consumer preferences, especially as may be impacted by economic
weakness  on  consumer  spending;  the  effect  of  government  regulations  and
legislation;  litigation  and other claims that may be asserted  against us; the
effects of intense competition;  our ability to successfully  implement business
strategies  and  otherwise  execute  planned  changes in various  aspects of the
business;  the challenges and costs  associated  with  maintaining and improving
technology;  the costs and  difficulties  of attracting and retaining  qualified
personnel;  the effects of increasing labor,  utility,  fuel and other operating
costs;  our ability to obtain  adequate  quantities of suitable  merchandise  at
favorable prices and on favorable terms and conditions;  our ability to maintain
adequate  liquidity;   the  effectiveness  of  our  operating   initiatives  and
advertising and promotional strategies and other factors described in the Annual
Report for the  fiscal  year ended  February  1, 2003 on Form  10-K/A 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.

General

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

As of November 1, 2003,  we operated 243 "Factory 2-U"  off-price  retail stores
which sell branded casual apparel for the family, as well as selected  domestics
and household merchandise at prices which generally are significantly lower than
the prices offered by other discount  chains.  We had 261 stores in operation as
of November 2, 2002.

                                        3
<PAGE>

During the 13-week  period ended  November 1, 2003, we did not open or close any
stores.  For the same period last year,  we opened four new stores.  The average
number of stores in  operation  were 243 and 258 for the 13-week  periods  ended
November 1, 2003 and November 2, 2002,  respectively.  In addition,  we averaged
230 and 221  comparable  stores  for the 13 weeks  ended  November  1,  2003 and
November 2, 2002, respectively.

During the 39-week  period ended  November 1, 2003, we opened two new stores and
closed three stores.  For the same period last year, we opened 12 new stores and
closed 30 stores. The average number of stores in operation were 243 and 260 for
the 39-week  periods ended November 1, 2003 and November 2, 2002,  respectively.
In addition,  we averaged 227 and 214  comparable  stores for the 39 weeks ended
November 1, 2003 and November 2, 2002, respectively.

We define comparable stores as follows:

o New stores are considered comparable after 18 months from date of opening.
o When a store  relocates  within the same market,  it is considered  comparable
  after 6 months of operations.
o Store expansion greater than 25% of the original store size are treated like a
  new store and become comparable after 18 months of operations. Store expansion
  less than 25% of the original store size remains in the comparable store base.

Operating  results for the 13-week period ended November 1, 2003 were lower than
originally  anticipated  primarily due to a weak  back-to-school  sale season in
August,  unseasonably warmer weather in a number of our markets and the combined
effect of the wildfires and labor strikes in the southern  California  region in
October.  The unfavorable  sales impact on operating results was slightly offset
by lower than  anticipated  markdown  volume and  distribution  costs during the
quarter.

Operating  results for the 39-week period ended November 1, 2003 were lower than
originally anticipated as well. In addition to the factors we experienced in the
third  quarter,  our lower than  expected  operating  results for the first nine
months of fiscal  2003 were due to low  inventory  levels  for most of the first
quarter  and  a  very  soft  retail   environment   for  retailers  in  general,
particularly in apparel.  Also contributing to the lower than expected operating
results were increased in-store  promotional costs and start-up costs associated
with our new  distribution  center in San  Diego,  California  during the second
quarter.

In an effort to improve our liquidity,  obtain more  favorable  credit terms and
provide for a consistent flow of merchandise, we initiated a series of financing
transactions, and took steps to accelerate the receipt of refunds related to tax
loss carry-back benefits. On March 6, 2003, we completed the private offering of
2,515,379  shares of our common  stock for net  proceeds of  approximately  $5.7
million,  after  deducting the placement  fees and other offering  expenses.  In
addition,  during March of 2003, we received an $8.2 million  federal tax refund
as a result of utilizing  tax loss  carry-back  benefits.  On April 10, 2003, we
completed a $7.5 million debt financing transaction consisting of a $6.5 million
junior term note and a $1.0 million term note. On August 20, 2003, we completed

                                        4
<PAGE>

a private  offering of 2,450,000  shares of our common stock for net proceeds of
approximately  $11.4  million,  after  deducting  the  placement  fees and other
offering  expenses.  We continue to  experience a very soft retail  environment,
affected  by  general  price  deflation  and heavy  promotion  within the retail
industry,  particularly in apparel.  This has been a very difficult  environment
for us,  especially  during the first quarter,  when we  experienced  lower than
normal  inventory  levels due to the tightening of credit terms from vendors and
the  credit  community.  Though we  experienced  a  significant  improvement  in
inventory levels near the end of the first quarter,  the soft economy  continues
to drive aggressive pricing and a deflationary retail environment. In our second
quarter, in response to a very competitive retail environment,  we increased our
advertising  expenditures above originally planned levels and equivalent to last
year. We also increased our in-store  promotional  efforts with weekly  in-store
specials.  During our third  quarter,  we continued to  experience a soft retail
environment, particularly in fashion oriented apparel. As we look forward to the
remainder of the year,  we  anticipate a  competitive  retail  environment  will
continue as a result of heavy  discounting  during the  holiday  season and soft
consumer  demand  for  apparel.  In the  event  that we do not meet our  current
financial  expectations for the fourth quarter as disclosed in our press release
dated  November 12, 2003,  which was furnished on Form 8-K, we may  experience a
tightening of credit terms from our vendors and/or credit community, encounter a
disruption  of inventory  flow of our spring and summer  merchandise  and not be
able to satisfy our current debt obligations.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted  in  the  United  States  of  America  requires  us to  make
estimates,  assumptions and judgments that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date
of the financial  statements  and the reported  amounts of revenues and expenses
during the reporting  period.  Actual results could differ from those estimates.
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  sub-departments  in which fairly
     homogeneous  classes of  merchandise  items having similar gross margin are
     grouped. In addition,  failure to take markdowns currently may result in an
     overstatement  of cost under the lower of cost or market  principle.  As of
     November  1,  2003,   we  had  an  inventory   valuation   allowance  of

                                       5
<PAGE>

     approximately  $1.3 million,  which  represents our estimate of the cost in
     excess of the net  realizable  value of  slow-moving  inventory  items.  We
     believe  that our RIM  provides  an  inventory  valuation  that  reasonably
     approximates cost and results in carrying inventory at the lower of cost or
     market.

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

o    Accrued  restructuring costs. We have estimated amounts for the charges and
     the  related  liabilities   regarding  our  fiscal  2002  and  fiscal  2001
     restructuring  initiatives  including  store  closures,  realignment of our
     field organization and workforce reductions in accordance with the Emerging
     Issues Task Force ("EITF") Issue 94-3,  "Liability  Recognition for Certain
     Employee   Termination  Benefits  and  Other  Costs  to  Exit  an  Activity
     (including  Certain Costs Incurred in a  Restructuring)."  Depending on our
     ability to dispose of the  remaining  lease  obligations  for the store and
     distribution   center   closures,   the  actual   costs  to  complete   the
     restructuring initiatives may be different from our estimated costs. Future
     restructuring  efforts,  if any, will be accounted  for in accordance  with
     SFAS No.  146,  "Accounting  for Costs  Associated  with  Exit or  Disposal
     Activities."  We  continuously  monitor and  evaluate  the  adequacy of our
     reserves for restructuring charges and, as new facts become available, will
     adjust these reserves as needed.

o    Litigation  reserves.  Based in part on the  advice of our  legal  counsel,
     estimated  amounts for  litigation  and claims that are probable and can be
     reasonably  estimated are recorded as liabilities in the balance sheet. The
     likelihood  of a  material  change  in these  estimated  reserves  would be
     dependent on new claims as they may arise and the favorable or  unfavorable
     outcome of the particular litigation. We continuously evaluate the adequacy
     of these  reserves and, as new facts come to light,  adjust these  reserves
     when necessary.

o    Workers'  compensation  accrual.  At  the  beginning  of  fiscal  2001,  we
     transitioned to a partially self-insured workers' compensation program. The
     program for the policy year ended  January 31, 2002 had both a specific and
     aggregate stop loss amount of $250,000 and $3.2 million,  respectively. The
     program for the policy  year ended  January 31, 2003 and policy year ending
     January  31,  2004 has a  specific  stop loss  amount of  $250,000  with no
     aggregate stop loss limit. We utilize internal actuarial  methods,  as well
     as an  independent  third-party  actuary  for  the  purpose  of  estimating
     ultimate  costs for a  particular  policy  year.  Based on these  actuarial
     methods along with current  available  information  and insurance  industry
     statistics, the ultimate expected losses for the policy years ended January


                                        6
<PAGE>

     31, 2003 and 2002 were estimated to be approximately  $3.4 million and $3.7
     million ($3.2 million aggregate stop loss), respectively.  We are currently
     in the process of performing an actuarial  analysis to project the ultimate
     expected  losses for the policy year ending  January 31, 2004. Our estimate
     is  based  on  average  claims  experience  in our  industry  and  our  own
     experience in terms of frequency  and severity of claims,  with no explicit
     provision  for  adverse  fluctuation  from year to year and is  subject  to
     inherent variability.  This variability may lead to ultimate payments being
     either greater or less than the amounts presented above.

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

Results of Operations

13 weeks ended November 1, 2003 compared to 13 weeks ended November 2, 2002

Net sales were $121.9  million for the 13 weeks ended  November 1, 2003 compared
to $134.5 million for the same period last year, a decrease of $12.6 million, or
9.4%.  Comparable  store sales for the  13-week  period  ended  November 1, 2003
decreased  6.9% versus a decrease  of 5.6% for the same  period  last year.  The
decline in net sales was primarily due to fewer stores in operation and negative
comparable  store  sales.  Though we recorded an increase of 4.3% in  comparable
transaction  counts and an increase of 13.1% in comparable average purchase size
in units,  our  comparable  average  unit retail  price point was 21.1% lower as
compared to the same period last year.

Gross profit was $41.7 million for the 13 weeks ended  November 1, 2003 compared
to $44.7  million for the same period last year,  a decrease of $3.0  million or
6.7%.  As a  percentage  of net sales,  gross  profit was 34.2% for the 13 weeks
ended  November  1,  2003  versus  33.2%  for the same  period  last  year.  The
improvement  in gross profit as a percentage of net sales for the 13 weeks ended
November 1, 2003 from the comparable period last year was primarily due to lower
markdown volume and lower distribution costs,  partially offset by lower initial
mark-up as a result of lower retail price points.

Selling and  administrative  expenses  were $45.6 million for the 13 weeks ended
November  1, 2003  compared to $49.1  million  for the same period last year,  a
decrease of $3.5 million or 7.1%. Selling and administrative  expenses decreased
as a result of (1) reduced  variable  costs due to lower sales  volume (2) fewer
stores in operation during the current quarter, (3) reduced consulting and legal
fees, and (4) lower advertising  spending. As a percentage of net sales, selling
and  administrative  expenses were 37.4% for the 13 weeks ended November 1, 2003
as compared to 36.5%, for the same period last year. The increase in selling and
administrative  expenses  as a  percentage  of net  sales was due to the loss of
sales volume.


                                        7
<PAGE>

We did not record any  pre-opening  and closing  expenses for the 13 weeks ended
November  1, 2003  compared  to  $366,000  for the same  period  last year.  The
decrease in pre-opening and closing expenses was due to no store openings during
the current quarter versus four new store openings in the same period last year.

Interest  expense,  net was  $928,000  for the 13 weeks  ended  November 1, 2003
compared to $515,000  for the 13 weeks  ended  November 2, 2002,  an increase of
$413,000 or 80.2%.  The increase in interest expense for the current quarter was
due to higher interest rates.

We recorded  an income tax  benefit of $1.8  million for both the 13 weeks ended
November 1, 2003 and the 13 weeks ended November 2, 2002.

For the 13 weeks  ended  November  1,  2003,  the net loss was $3.0  million  as
compared to $3.5 million for the 13 weeks ended  November 2, 2002.  The decrease
in net loss was a result of the factors cited above.

39 weeks ended November 1, 2003 compared to 39 weeks ended November 2, 2002

Net sales were $349.9  million for the 39 weeks ended  November 1, 2003 compared
to $379.5 million for the same period last year, a decrease of $29.6 million, or
7.8%.  Comparable  store sales for the  39-week  period  ended  November 1, 2003
decreased  4.7% versus a decrease  of 8.5% for the same  period  last year.  The
decline  in net  sales  was  due to  fewer  stores  in  operation  and  negative
comparable  store  sales.  Though we recorded an increase of 5.4% in  comparable
transaction  counts and an increase of 12.8% in comparable average purchase size
in units,  our  comparable  average  unit retail  price point was 19.8% lower as
compared to the same period last year.

Gross profit was $117.9 million for the 39 weeks ended November 1, 2003 compared
to $126.8  million for the same period last year,  a decrease of $9.0 million or
7.1%.  As a  percentage  of net sales,  gross  profit was 33.7% for the 39 weeks
ended  November 1, 2003 versus 33.4% for the same period last year.  Compared to
the nine-month  period last year, our initial mark-up was lower by approximately
220 basis points as a result of lower retail price points,  and our distribution
costs were  approximately  40 basis points higher due to the start-up of our new
distribution  center in San Diego,  California.  The effect of these unfavorable
variances was partially offset by the favorable adjustment recorded in the first
quarter to the inventory  valuation  allowance  established  at our prior fiscal
year end, and lower markdowns during the year.

Selling and  administrative  expenses were $133.1 million for the 39 weeks ended
November  1, 2003  compared to $144.9  million for the same period last year,  a
decrease of $11.9  million or 8.2%.  The decrease in selling and  administrative
expenses was primarily a result of (1) reduced variable costs due to lower sales
volume,  (2) fewer stores in operation  during the current  period,  (3) reduced
consulting and legal fees, (4) non-recurring  income of $708,000 recorded during
the first  quarter  related to an  adjustment  to the stock  subscription  notes
receivable valuation allowance as discussed at Note 11 in the Notes to Financial
Statements,  and (5) a charge  of $2.1  million  related  to a legal  settlement
recorded in the second quarter of last year.  Excluding the non-recurring income
of $708,000 and the legal settlement charge of $2.1 million, selling and

                                        8
<PAGE>

administrative  expenses, as a percentage of net sales, were 38.2% and 37.7% for
the 39 weeks ended  November 1, 2003 and  November  2, 2002,  respectively.  The
increase in selling and administrative expenses as a percentage of net sales was
primarily due to the loss of sales volume.

Pre-opening  and closing  expenses were $221,000 for the 39 weeks ended November
1,  2003,  primarily  consisting  of  start-up  expenses  incurred  for  our new
distribution  center.  Pre-opening  and closing  expenses for the 39 weeks ended
November 2, 2002 were $1.1  million.  The decrease of $848,000 or 79.3% from the
same period last year was due to the opening of ten fewer new stores  during the
current 39-week period versus the same period last year.

Interest  expense,  net was $2.5 million for the 39 weeks ended November 1, 2003
compared to $1.1 million for the 39 weeks ended November 2, 2002, an increase of
$1.4 million or 130.6%.  The  increase in interest  expense from the same period
last year was due to increased borrowings and higher interest rates.

We  recorded  an income  tax  benefit  of $6.8  million  for the 39 weeks  ended
November  1, 2003  compared to $7.8  million for the 39 weeks ended  November 2,
2002.  The  decrease in income tax benefit was the result of  decreased  pre-tax
loss compared to the same period a year ago.

For the 39 weeks  ended  November  1,  2003,  the net loss was $11.1  million as
compared to $12.5 million for the 39 weeks ended  November 2, 2002. The decrease
in net loss was a result of factors cited above.

Liquidity and Capital Resources

General

We  finance  our  operations  through  credit  provided  by  vendors  and  other
suppliers,  amounts  borrowed under our revolving  credit  facility,  internally
generated cash flow,  and other  financing  resources.  Credit terms provided by
vendors and other  suppliers  are  generally  net 30 days.  Amounts  that may be
borrowed  under the  revolving  credit  facility  are based on a  percentage  of
eligible inventory and accounts receivable, as defined.

Since  February 1, 2003,  we have  completed a series of financing  transactions
designed to improve liquidity and strengthen our financial position. On March 6,
2003, we completed the private  offering of 2,515,379 shares of our common stock
for net proceeds of  approximately  $5.7 million,  after deducting the placement
fees and other offering expenses. On April 10, 2003, we completed a $7.5 million
debt  financing  transaction,  which consists of a $6.5 million junior term note
and a $1.0 million term note.  In addition,  we received a federal tax refund of
$8.2 million in March 2003. On August 20, 2003, we completed a private  offering
of 2,450,000 shares of our common stock for net proceeds of approximately $11.4,
after deducting the placement fees and other offering expenses.




                                        9
<PAGE>

Following  the  completion  of our  private  equity  offerings,  debt  financing
transaction  and  receipt  of the  federal  tax  refund,  the  vendor and credit
community provided support and extended credit terms for merchandise  shipments.
Based on the credit support provided by our vendors and the credit community, we
received  merchandise on credit terms necessary to meet inventory levels for the
holiday season. Any further extension of credit will be contingent upon improved
operating  results and  liquidity.  We can make no assurance  that our revolving
credit facility and internal cash flow will provide  sufficient funds to finance
our operations and capital expenditures,  pay our debt obligations, and complete
the  closing of stores and  distribution  centers  included  in our fiscal  2002
restructuring and fiscal 2001 restructuring efforts over the next twelve months.

At November 1, 2003, we were in  compliance  with all  financial  covenants,  as
defined,  and had outstanding  borrowings of $17.8 million and letters of credit
of $12.1 million  under our revolving  credit  facility.  In addition,  based on
eligible  inventory  and accounts  receivable,  we were eligible to borrow $49.7
million under our revolving credit facility and had $12.3 million  available for
future borrowings after deducting the $7.5 million availability block.

With  respect to cash flows for the 39-week  period ended  November 1, 2003,  we
used $29.9 million in operating activities, $3.5 million in investing activities
and generated $35.7 million from financing  activities,  which resulted in a net
increase in cash of $2.3  million.  For the same period last year, we used $34.3
million in  operating  activities,  $8.1  million in  investing  activities  and
generated $30.9 million from financing activities, which resulted a net decrease
in cash of $11.5 million.  The decrease in cash used in operating activities was
primarily due to improved  vendor  payment  terms.  The decrease in cash used in
investing  activities  was  primarily  due  to  fewer  new  store  openings  and
completion of our new distribution  center.  The increase in cash generated from
financing  activities  was a result of net  proceeds  received  from the private
equity offerings and the borrowings on the junior secured term loans.

Capital Expenditures

We anticipate capital  expenditures of approximately  $250,000 for the remaining
three months of the current  fiscal year ending  January 31, 2004,  primarily in
connection  with  maintenance  capital at our stores and  corporate  office.  We
believe the capital  expenditures  will be financed  from internal cash flow and
borrowings under our revolving credit facility.

Store Closures and Restructuring Initiatives

As of December 12,  2003,  we had closed 16 of the 23 stores  identified  in our
Fiscal 2002 restructuring efforts, as well as completed the consolidation of our
corporate overhead structure.  Of the remaining seven stores, we have decided to
continue  to  operate  four of these  stores  as a result  of  certain  landlord
concessions;  and we plan to close the other  three  stores  by March  2004.  In
addition,  we have  completed  the  consolidation  of our two  former  San Diego
distribution  centers into one distribution center, which is also located in San
Diego,  California.  We estimate the cash  requirement for the remainder of this
current  fiscal  year  for  the  Fiscal  2002  restructuring   efforts  will  be
approximately  $684,000,  which we  intend  to fund  from our  sources  of cash,
including the revolving credit facility.


                                       10
<PAGE>

In  regards  to our  Fiscal  2001  restructuring  efforts,  we  closed  24 of 28
under-performing  stores in the first  quarter of fiscal 2002 and the  remaining
four stores in January 2003. We estimate the cash  requirement for the remainder
of this current  fiscal year for the Fiscal 2001  restructuring  efforts will be
approximately  $221,000,  which we  intend  to fund  from our  sources  of cash,
including the revolving credit facility.

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
November 1, 2003. These should be read in conjunction with "Note 3 - Fiscal 2002
Restructuring  Charge",  "Note 4 - Fiscal 2001 Restructuring  Charge", "Note 5 -
Revolving Credit  Facility",  and "Note 6 - Long-Term Debts" in the accompanying
unaudited financial statements, as well as our fiscal 2002 Annual Report on Form
10-K/A as filed with the Securities and Exchange Commission.

<TABLE>

                                                             (in thousands)
                                                             --------------
                      Revolving         Junior
                        Credit       Subordinated    Junior Secured     Operating      Restructuring
                       Facility          Notes         Term Loans        Leases          Charges*          Total
                      ---------      ------------    --------------     ---------      -------------       -----
<S>                      <C>              <C>              <C>             <C>              <C>             <C>
Fiscal Year:
2003 (remaining
  3 months)           $      -        $   3,000        $    500         $   7,460         $   905       $  11,865
2004                         -            3,000           7,000            28,390           5,916          44,306
2005                         -            5,300               -            26,488           1,489          33,277
2006                    17,751                -               -            20,229               -          37,980
2007                         -                -               -            15,034               -          15,034
Thereafter                   -                -               -            46,708               -          46,708
                      --------        ---------        --------         ---------        --------       ---------
                      $ 17,751        $  11,300        $  7,500         $ 144,309        $  8,310       $ 189,170
                      --------        ---------        --------         ---------        --------       ---------
<FN>

* Amounts  reflect  management's  estimate to complete  store closures and other
previously announced restructuring initiatives.
</FN>
</TABLE>


We can make no assurance  that our internal cash flow and  borrowings  under our
revolving  credit  facility will provide  sufficient  funds to service the above
contractual obligations over the next twelve months.

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 November 1,
2003, our Junior Subordinated Notes had a face value of $11.3 million with a net
carrying value of $10.1 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 November 1, 2003.






                                       11
<PAGE>


Item 4.    Controls and Procedures

Evaluation.  We have evaluated the  effectiveness of the design and operation of
our disclosure  controls and procedures as defined under Rule 13a-15(e) and Rule
15d-15(e) of the Securities  Exchange Act of 1934, as amended,  as of the end of
the period covered by this Quarterly Report.  This evaluation was done under the
supervision  and with the  participation  of  management,  including our Interim
Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Conclusions.  Based upon our evaluation,  the Interim CEO and CFO have concluded
that our disclosure controls and procedures were effective as of the end of such
period to ensure that material information relating to the Company is made known
to management,  including the Inteim CEO and CFO, particularly during the period
when our periodic reports are being prepared.

Changes in Internal Controls. There were no changes during the period covered by
this Quarterly  Report in our internal  controls over  financial  reporting that
have materially  affected,  or are reasonably likely to materially  affect,  our
internal controls over financial reporting.






























                                       12


<PAGE>



PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

           See  discussion  of  legal  proceedings  at Note 14 in the  Notes  to
           Financial Statements.

Item 2.   Changes in Securities and Use of Proceeds

           On August 20,  2003,  we  completed a private  offering of  2,450,000
           shares of our common  stock for net proceeds of  approximately  $11.4
           million,  after  deducting  the  placement  fees and  other  offering
           expenses of $0.9  million.  We used the net proceeds of this offering
           primarily  for  working  capital  purposes.   This  transaction  also
           provides for warrants to purchase 490,000 shares at the same price as
           the initial shares purchased, exercisable until December 23, 2003. In
           addition to the placement fees, the placement agent received warrants
           to purchase  112,500  shares of our common stock at an exercise price
           of $6.00 per share,  a 7% premium over the closing  price of $5.62 on
           August 20, 2003. These warrants will expire in August 2006. Depending
           on the  number of  additional  shares  purchased  by  investors,  the
           placement  agent  is  entitled  to  receive  additional  fees  and an
           additional  warrant  to  purchase  up to  22,500  shares at $6.00 per
           share. This offering was exempt from  registration  under Rule 506 of
           Regulation D of the Securities Act of 1933.

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

           We held our annual stockholders meeting on September 17, 2003. Willem
           de  Vogel  was  re-elected  at this  meeting  to hold the  office  of
           director and to serve until the annual  stockholders  meeting in 2006
           or until his successor is elected.  The numbers of votes cast were as
           follows:

               For                     13,102,868
               Against                  1,260,398

           Other  directors  whose terms of office  continued after this meeting
           were  William R.  Fields,  Peter V.  Handal,  Ronald  Rashkow and Wm.
           Robert Wright II.

           The other  matters  voted on and  approved  at this  meeting  were as
           follows:

           (1) An amendment to the Amended and Restated Factory 2-U Stores, Inc.
               1997 Stock Option Plan which increases by 1,000,000 the number of
               shares of common  stock  issuable  upon  exercise of options from
               2,157,980   to   3,157,980   and  adds  other   forms  of  equity
               compensation.

                        For            8,795,537
                        Against        5,385,234
                        Abstain          182,495


                                       13
<PAGE>

           (2)  The  ratification  of  Ernst  &  Young  LLP as  our  independent
                accountants.

                        For           13,909,799
                        Against            2,473
                        Abstain          450,994


Item 6.   Exhibits and Reports on Form 8-K

(a)      Exhibit

         10.19      Employment Agreement,  dated as of November 10, 2003, by and
                    between Factory 2-U Stores, Inc. and A.J. Nepa.

         31.1       Certification  pursuant to Rule  13a-14(a)  and 15d-14(a) of
                    the Securities  Exchange Act of 1934, as amended,  by Norman
                    G. Plotkin, Interim Chief Executive Officer.

         31.2       Certification  pursuant to Rule  13a-14(a)  and 15d-14(a) of
                    the Securities  Exchange Act of 1934, as amended, by Douglas
                    C.  Felderman,  Executive Vice President and Chief Financial
                    Officer.

         32.1       Certification pursuant to 18 U.S.C. Section 1350, as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
                    Norman G. Plotkin, Interim Chief Executive Officer.

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

(b) Reports on Form 8-K

                  Item 5:

                  On November  18, we filed a report on Form 8-K  regarding  the
                  appointment  of A.J.  Nepa as  Executive  Vice  President  and
                  General  Merchandise  Manager.  The  full  text  of our  press
                  release dated  November 13, 2003 was attached as an exhibit to
                  the Form 8-K.

                  On December  11, we filed a report on Form 8-K  regarding  the
                  resignation of William R. Fields as Chief  Executive  Officer,
                  Chairman and a Director of the company, effective immediately.
                  The full text of our press release dated December 10, 2003 was
                  attached as an exhibit to the Form 8-K.



                                       14


<PAGE>



                  Item 12:

                  On  November  6,  2003,  we  furnished  a  report  on Form 8-K
                  regarding the announcement of sales for the four-week, 13-week
                  and 39-week  periods ended  November 1, 2003. The full text of
                  our press  release  dated  November  5, 2003 was  attached  as
                  exhibit to the Form 8-K.

                  On  November  13,  2003,  we  furnished  a report  on Form 8-K
                  regarding  the  announcement  of  operating  results  for  the
                  13-week and 39-week  periods ended  November 1, 2003. The full
                  text of our press release dated November 12, 2003 was attached
                  as exhibit to the Form 8-K.




































                                       15


<PAGE>


                                   SIGNATURES

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


FACTORY 2-U STORES, INC.

Date: December 16, 2003



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
































                                       16