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

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

         For the quarterly period ended May 3, 2003
                                        -----------

                                            OR

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

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


                         Commission File Number: 1-10089

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

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


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

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


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

The number of shares outstanding of the registrant's common stock, as of June
13, 2003 was 15,658,137 shares.



<PAGE>



                            FACTORY 2-U STORES, INC.

              FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 3, 2003

                                      INDEX


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Factory 2-U Stores, Inc. Balance Sheets as of May 3, 2003 (Unaudited),
         May 4, 2002 (Unaudited) and February 1, 2003 .......................F-1

         Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
         13 weeks ended May 3, 2003 and May 4, 2002 .........................F-3

         Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the
         13 weeks ended May 3, 2003 and May 4, 2002 .........................F-4

         Factory 2-U Stores, Inc. Notes to Financial Statements (Unaudited)..F-5

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk............9

Item 4.  Controls and Procedures...............................................9


PART II. OTHER INFORMATION

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






                                        2


<PAGE>



PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements



<TABLE>
<CAPTION>

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



                                                          May 3, 2003           May 4, 2002        February 1, 2003
                                                          -----------           -----------        ----------------
                                                          (Unaudtied)           (Unaudited)
<S>                                                           <C>                   <C>                   <C>
ASSETS
Current assets:
  Cash and cash equivalents                                 $   5,414            $   8,360             $   3,465
  Merchandise inventory                                        66,012               64,369                32,171
  Accounts receivable, net                                        623                1,014                   884
  Income taxes receivable                                         -                    -                   8,200
  Prepaid expenses                                              6,258                6,832                 5,436
  Deferred income taxes                                         9,753                3,553                 9,732
                                                          -----------           -----------        ----------------
             Total current assets                              88,060               84,128                59,888

  Leasehold improvements and equipment, net                    26,594               34,771                28,602
  Deferred income taxes                                        10,750                7,182                10,750
  Other assets                                                    936                1,006                   963
  Goodwill, less accumulated amortization of $13,344           26,301               26,301                26,301
                                                          -----------           -----------        ----------------
             Total assets                                   $ 152,641            $ 153,388             $ 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, except share and per share data)
                                   (continued)


                                                          May 3, 2003           May 4, 2002        February 1, 2003
                                                          -----------           -----------        ----------------
                                                          (Unaudited)           (Unaudited)
<S>                                                           <C>                   <C>                   <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debts                     $   3,021            $   2,004           $   3,000
  Junior secured term loans                                     7,500                  -                    -
  Accounts payable                                             43,844               37,230              27,961
  Taxes payable                                                   992                  690               5,840
  Accrued expenses                                             27,693               29,729              27,831
                                                          -----------           -----------        -----------------
             Total current liabilities                         83,050               69,653              64,632

Revolving credit facility                                      11,535                  -                 6,300
Long-term debts                                                 6,754                8,638               6,445
Accrued restructuring charges                                   1,747                3,578               1,747
Deferred rent                                                   2,822                3,263               3,061
                                                          -----------           -----------        -----------------
             Total liabilities                                105,908               85,132              82,185
                                                          -----------           -----------        -----------------


Stockholders' equity:
  Common stock, $0.01 par value; 35,000,000 shares authorized
    and 15,657,387 shares, 12,943,137 shares and 13,475,705 shares
    issued and outstanding, respectively                          157                  129                 135
  Stock subscription notes receivable                             -                 (2,149)             (1,116)
  Additional paid-in capital                                  126,513              122,124             122,516
  Accumulated deficit                                         (79,937)             (51,848)            (77,216)
                                                          ------------          -----------        -----------------
             Total stockholders' equity                        46,733               68,256              44,319
                                                          ------------          -----------        -----------------
             Total liabilities and stockholders' equity     $ 152,641            $ 153,388           $ 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
                                                         --------------
                                                  May 3, 2003       May 4, 2002
                                                  -----------       -----------
<S>                                                   <C>               <C>
Net sales                                          $  104,347        $  116,951
Cost of sales                                          66,712            75,793
                                                  -----------       -----------
      Gross profit                                     37,635            41,158

Selling and administrative expenses                    41,255            45,698
Pre-opening and closing expenses                          138               437
                                                  -----------       -----------
      Operating loss                                   (3,758)           (4,977)

Interest expense, net                                     634               258
                                                 ------------       -----------
Loss before income taxes                               (4,392)           (5,235)
Income tax benefit                                     (1,671)           (2,094)
                                                 ------------       -----------
Net loss                                           $   (2,721)       $   (3,141)
                                                 ============       ===========

Loss per share
  Basic                                             $  (0.19)          $  (0.24)
  Diluted                                           $  (0.19)          $  (0.24)



Weighted average common shares outstanding
  Basic                                                14,620            12,903
  Diluted                                              14,620            12,903


</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)


                                                          13 Weeks Ended
                                                          --------------
                                                  May 3, 2003       May 4, 2002
                                                  -----------       -----------
<S>                                                   <C>               <C>
Cash flows from operating activities
  Net loss                                          $ (2,721)        $ (3,141)
  Adjustments to reconcile net loss to net cash
    used in operating activities
      Depreciation and amortization                    3,305            3,757
      Loss on disposal of equipment                      -                 41
      Deferred rent                                     (239)            (386)
      Stock subscription notes receivable
        valuation adjustment                            (708)             -
      Changes in operating assets and liabilities
        Merchandise inventory                        (33,840)          (9,509)
        Prepaid expenses and other assets              8,039              536
        Accounts payable                              15,883              958
        Accrued expenses and other liabilities        (4,860)          (1,506)
                                                    ---------        ----------
Net cash used in operating activities                (15,141)          (9,250)

Cash flows from investing activities
  Purchases of leasehold improvements and equipment   (1,032)            (538)
                                                    ---------        ----------
Net cash used in investing activities                 (1,032)            (538)

Cash flows from financing activities
  Borrowings on revolving credit facility             42,507              -
  Payments on revolving credit facility              (37,272)             -
  Payments on long-term debt and
    capital lease obligations                            -                (15)
  Proceeds from debt financing                         7,500              -
  Proceeds from issuance of common stock, net          5,672              -
  Payment of deferred debt issuance costs              (428)              (40)
  Proceeds from exercise of stock options                -                737
  Payments of stock subscription notes receivable       143                76
                                                    ---------        ----------
Net cash provided by financing activities             18,122              758

Net increase (decrease) in cash                        1,949           (9,030)
Cash at the beginning of the period                    3,465           17,390
                                                    ---------        ----------
Cash at the end of the period                       $  5,414         $  8,360
                                                    =========        ==========
Supplemental disclosure of cash flow information
  Cash paid during the period for
    Interest                                        $    347         $     38
    Income taxes                                    $     88         $  1,102

Supplemental disclosure of non-cash investing and financing activities
  Acquisition of equipment under notes payable      $    92          $    -
  Issuance of common stock to board members
    as compensation                                 $     5          $     17

</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 as filed
         with the Securities and Exchange Commission.

         We believe that the unaudited financial statements as of and for the 13
         weeks ended May 3, 2003 and May 4, 2002 reflect all adjustments
         necessary to present fairly the financial position, results of
         operations and cash flows for the periods presented. Due to the
         seasonal nature of our business, the results of operations for the
         interim period may not necessarily be indicative of the results of
         operations for a full year.

(2)      Recent Accounting Pronouncements

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

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



                                       F-5

<PAGE>

         In November 2002, the FASB issued Interpretation No. ("FIN") 45,
         "Guarantor's Accounting and Disclosure Requirements for Guarantees,
         Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
         which requires elaborating on the disclosures that must be made by a
         guarantor in financial statements about its obligations under certain
         guarantees. It also requires that a guarantor recognize, at the
         inception of certain types of guarantees, a liability for the fair
         value of the obligation undertaken in issuing the guarantee. The
         disclosure requirements of FIN 45 are effective for financial
         statements issued after December 15, 2002, and have been applied in the
         presentation of the accompanying consolidated financial statements. The
         recognition requirements of FIN 45 are applicable for guarantees issued
         or modified after December 31, 2002. We have not yet determined the
         effect, if any, the recognition requirement for guarantees issued or
         modified after December 31, 2002 will have on our business, results of
         operations and financial condition.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
         Stock-Based Compensation - Transition and Disclosure." This statement
         amends SFAS No. 123, "Accounting for Stock-Based Compensation" to
         provide alternative methods of transition for a voluntary change to the
         fair value based method of accounting for stock-based employee
         compensation. SFAS No. 148 also amends the disclosure requirements of
         SFAS No. 123 to require prominent disclosures in both annual and
         interim financial statements about the method of accounting for
         stock-based compensation and the effect of the method used on reported
         results. Certain of the disclosure modifications are required for
         fiscal years ending after December 15, 2002. We have not yet completed
         the final evaluation of the transitioning options presented by SFAS No.
         148. However, during fiscal 2003, we expect to reach a determination of
         whether and, if so, when to change our existing accounting for
         stock-based compensation to the fair value method in accordance with
         the transition alternatives of SFAS No. 148.

         In January 2003, 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. We do not
         expect the adoption of this statement will have a material impact on
         our financial position or results of operations.







                                       F-6


<PAGE>

 (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 June 13, 2003, we had closed 15 of these 23 stores and terminated
         the lease obligations of 12 of these closed stores. In addition, we had
         completed the consolidation of our two former San Diego distribution
         centers into the new Otay Mesa distribution center. We are currently
         seeking disposition of the leases for these two former San Diego
         distribution facilities.

         The balance of the liability ($5.4 million was included in the accrued
         expenses and $1.7 million was included in the accrued restructuring
         charges in the accompanying balance sheets) related to the fiscal 2002
         restructuring charge at May 3, 2003 was as follows:

<TABLE>
                                                                                 Balance at
                                 Restructuring        Cash        Non-cash         May 3,
(in thousands)                       Charge         Payments       Charges          2003
                                 -------------      --------      ---------      ----------
<S>                                   <C>              <C>           <C>             <C>
Lease termination costs*            $  6,513        $  (817)        $ 226          $ 5,922
Employee termination costs             1,027           (405)            -              622
Other costs                              807           (235)            -              572
                                 -------------      --------      ---------      ----------
                                    $  8,347        $(1,457)        $ 226          $ 7,116
                                 =============      ========      =========      ==========
<FN>

         * The non-cash charge portion consists primarily of the write-off of
           deferred rent.
</FN>
</TABLE>

 (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 June 13, 2003, we
         had terminated the lease obligations of 21 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.

                                       F-7

<PAGE>

         The balance of the liability (included in the accrued expenses in the
         accompanying balance sheets) related to the fiscal 2001 restructuring
         charge at May 3, 2003 was as follows:

<TABLE>
<CAPTION>

                                                                    Non-cash     Balance at
                                   Restructuring       Cash       Charges and      May 3,
(in thousands)                         Charge        Payments      Adjustment       2003
                                   -------------     --------     -----------    ----------
<S>                                     <C>             <C>            <C>           <C>
Lease termination costs               $ 13,724       $ (6,972)     $ (3,496)      $ 3,256
Employee termination costs               1,206         (1,152)           -             54
Other costs                              1,379         (1,199)           -            180
                                   -------------     ---------    -----------    ----------
                                      $ 16,309       $ (9,323)     $ (3,496)      $ 3,490
                                   =============     =========    ===========    ==========

</TABLE>


 (5)     Revolving Credit Facility

         We have a $50.0 million revolving credit facility with a financial
         institution. Under this revolving credit facility, we may borrow up to
         70% of our eligible inventory and 85% of our eligible accounts
         receivable, as defined, up to $50.0 million. The revolving credit
         facility provides for a $7.5 million availability block against our
         availability calculation as defined. The credit facility also includes
         a $15.0 million sub-facility for letters of credit. Under the terms of
         the credit facility, the interest rate may increase or decrease subject
         to earnings before interest, tax obligations, depreciation and
         amortization expense (EBITDA), as defined, on a rolling four fiscal
         quarter basis. Accordingly, prime rate borrowings could range from
         prime to prime plus 1.0 % and LIBOR borrowings from LIBOR plus 1.5% to
         LIBOR plus 3.0%. The credit facility 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. The credit facility is secured by a first lien on
         accounts receivable and inventory. We are contractually prohibited from
         paying cash dividends on our common stock under the terms of the
         revolving credit facility without the consent of the lender.

         On February 14, 2003, we obtained the approval from the lender to
         expand the scope of the collateral securing the obligations under our
         revolving credit facility and increased the sub-facility for letters of
         credit to $15.0 million. In addition, 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.

         On April 10, 2003, we amended the terms of our revolving credit
         facility 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 primarily by
         inventory and accounts receivable and a $1.0 million junior term note
         secured primarily by equipment and other assets. These notes bear
         interest at the rate of 14.5% per annum on the then current outstanding
         balance, and mature on April 10, 2004. The $6.5 million junior term
         note can be extended for one additional year. The financial covenant,


                                      F-8

<PAGE>

         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
         month commencing on May 3, 2003. In addition, there shall not be any
         outstanding borrowings and outstanding letters of credit cannot exceed
         $12.2 million under the revolving credit facility during the period
         from December 22 through January 7 of each year. These financial
         covenants will terminate at such time that the $7.5 million term loans
         are no longer outstanding.

         At May 3, 2003, we were in compliance with all financial covenants, as
         defined, and had outstanding borrowings of $11.5 million and letters of
         credit of $12.3 million under our revolving credit facility. In
         addition, based on eligible inventory and accounts receivable, we were
         eligible to borrow $48.0 million under our revolving credit facility
         and had $16.4 million available for future borrowings after giving
         effect for the $7.5 million availability block, as defined.

(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 note holders.

         As of May 3, 2003, the Notes had a face value of $11.3 million and a
         related unamortized discount of $1.7 million, resulting in a net
         carrying value of $9.6 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).

(7)      Income (loss) per Share and Comprehensive Income

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

         Common stock equivalent shares totaling 108,437 and 146,950,
         respectively, are not included in the computation of diluted loss per
         share for the 13 weeks ended May 3, 2003 and May 4, 2002 because the
         effect would be anti-dilutive.

         We had no items of comprehensive income for the 13 weeks ended May 3,
         2003 and May 4, 2002.




                                       F-9


<PAGE>


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

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

<TABLE>

                                                       -----(in thousands)-----
                                                            13 Weeks Ended
                                                            --------------
                                                       May 3, 2003   May 4, 2002
                                                       -----------   -----------
<S>                                                        <C>           <C>
Net loss before stock-based compensation,
  as reported                                           $ (2,721)     $ (3,141)
Stock-based compensation, using the fair
  value method, net of tax                                  (809)         (599)
                                                        ---------     ---------
Pro-forma net loss available to common shareholders     $ (3,530)     $ (3,740)
                                                        ---------     ---------

Pro-forma loss per common share                         $  (0.27)     $  (0.26)

</TABLE>


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

         The weighted-average fair value of each option grant is estimated on
         the date of grant using the Black-Scholes option pricing model using
         the following weighted-average assumptions: (i) expected dividend yield
         of 0.00%, (ii) expected volatility of 103.68% and 104.01% for 13 weeks
         ended May 3, 2003 and May 4, 2002, respectively, (iii) expected life of
         7years for 13 weeks ended May 3, 2003 and 8 years for 13 weeks ended
         May 4, 2002, and (iv) risk-free interest rate of 3.45% and 3.55% for 13
         weeks ended May 3, 2003 and May 4, 2002, respectively.



                                      F-10


<PAGE>


(9)      Provision for Income Taxes

         Based on our estimated effective tax rate for the entire fiscal year,
         which is subject to ongoing review and evaluation, we recorded an
         income tax benefit of $1.7 million for the 13 weeks ended May 3, 2003.

(10)     Private Offering

         On March 6, 2003, we completed a private offering of 2,532,679 shares
         of our common stock for net proceeds of approximately $5.7 million,
         after deducting the placement fees and other offering expenses. We used
         the net proceeds of this private offering for working capital purposes.
         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.

(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 are 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 from April 29, 2003 to July 29, 2003 and an
         interest rate of 8.0% per annum.

         On March 21, 2003, two stock subscription notes in the principal amount
         of $99,548 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 is 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.




                                      F-11

<PAGE>

         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.

         We are currently pursuing collection efforts for the remaining amounts
         due from Mr. Parks and Mr. Spatz.

(12)     Stock Options and Warrants

         As of May 3, 2003, we had outstanding options to purchase 1,216,365
         shares of our common stock. Included in these outstanding stock options
         are 450,000 stock options granted to certain of our new senior
         management members as an inducement to accept employment at the time
         they were hired, subject to shareholder approval of an appropriate
         amendment to our stock option plan. In the event that such an amendment
         is not approved, we are nevertheless contractually obligated to grant
         such options, which would not be granted under our stock option plan.

         At May 3, 2003, warrants to purchase 157,690 shares of our common stock
         were outstanding. These warrants have exercise prices in the range of
         $3.50 to $19.91 and expire on various dates between May 2005 and March
         2006.

(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,
         provided a $4.0 million revolving line of credit facility to the
         Borrower. Advances made to the Borrower under this Agreement are
         secured by the Borrower's accounts receivable, inventory, personal
         property and other assets including cash. Borrowings under this
         facility are also secured by personal guarantees from the principals of
         the Borrower. This Agreement expired on October 11, 2002, and we have
         not made any direct advances to the Borrower thereafter.

         As of May 3, 2003, the outstanding borrowings plus accrued interest
         under this Agreement were approximately $1.2 million, which was fully
         reserved. On May 27, 2003, we initiated legal action against the
         Borrower and guarantors to collect the outstanding sums due under this
         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
         oral agreement to employ him. Under the terms of the settlement
         agreement, we are obligated to pay $390,000, payable in 52 equal
         bi-weekly installments.



                                      F-12

<PAGE>

         In April 2003, Lynda Bray and Masis Manougian, two of our 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
         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 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.

         We believe that the material allegations of the complaint in the Bray
         Lawsuit are false and that each of the claims asserted in the Bray
         Lawsuit is meritless. We intend to vigorously defend against the Bray
         Lawsuit.

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























                                      F-13


<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, which are within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are not based on historical facts, but rather reflect
our current expectation concerning future results and events. These
forward-looking statements generally may be identified by the use of phrases
such as "believe", "expect", `estimate", "anticipate", "intend", "plan",
"foresee", "likely", "will" or other similar words or phrases. Similarly,
statements that describe our objectives, plans or goals are or may be
forward-looking statements. These forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be different from any future results,
performance or achievements expressed or implied by these statements.

The following factors, among others, could affect our future results,
performance or achievements, causing these results to differ materially from
those expressed in any of our forward-looking statements: general economic and
business conditions (both nationally and in regions where we operate); trends in
our business and consumer preferences, especially as may be impacted by economic
weakness on consumer spending; the effect of government regulations and
legislation; litigation and other claims that may be asserted against us; the
effects of intense competition; changes in our business strategy or development
plans, including anticipated growth strategies and capital expenditures; the
challenges and costs associated with maintaining and improving technology; the
costs and difficulties of attracting and retaining qualified personnel; the
effects of increasing labor, utility, fuel and other operating costs; our
ability to obtain adequate quantities of suitable merchandise at favorable
prices and on favorable terms and conditions; the effectiveness of our operating
initiatives and advertising and promotional strategies and other factors
described in this Annual Report on Form 10-K and in our other filings with the
Securities and Exchange Commission.

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

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 May 3, 2003, we operated 242 "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 256 stores in operation as of
May 4, 2002.


                                        3

<PAGE>

During the 13-week period ended May 3, 2003, we opened one new store and closed
three stores, one of which was closed on a temporary basis for structural
repairs. For the same period last year, we opened five new stores and closed 28
stores. The average numbers of stores in operation were 243 and 264 for the
13-week periods ended May 3, 2003 and May 4, 2002, respectively. In addition, we
averaged 223 and 205 comparable stores for the 13 weeks ended May 3, 2003 and
May 4, 2002, respectively.  We define comparable stores as follows:

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

Operating results for the 13-week period ended May 3, 2003 were lower than
originally anticipated due to our low inventory levels for most of the 13-week
period and a very soft retail environment for retailers in general, particularly
in apparel. We ended the quarter in a much stronger inventory position than we
began.

In an effort to improve our liquidity position, obtain more reasonable credit
terms and provide for a consistent flow of merchandise, we initiated a series of
financing transactions, as well as initiated steps to accelerate the recognition
of tax loss carry-back benefits. On March 6, 2003, we completed the private
offering of approximately 2.5 million 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 a tax loss carry-back
benefit. On April 10, 2003, we completed a $7.5 million debt financing
transaction consisting of a $6.5 million junior term note secured primarily by
inventory and a $1.0 million term note secured primarily by equipment and other
assets.

We continue to experience a very soft retail environment, affected by general
price deflation and heavy promotion within the retail industry. 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 factors. Though we experienced a significant improvement
in inventory levels near the end of the first quarter and expect this to
continue for our second quarter, excess inventories generally held by retailers
and the continuing soft economy will likely contribute to a continuation of
aggressive pricing and soft retail sales for the industry. For our second
quarter, in response to a very competitive retail environment, we have increased
our advertising expenditures above originally planned levels and equivalent to
last year. We also anticipate increasing our in-store promotional efforts with
weekly in-store specials. Our current outlook for the second quarter is for
comparable store sales to range from a negative 2% to a positive 2% and a net
loss per share in the range of $0.19 to $0.25.

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



                                        4


<PAGE>


     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 May 3, 2003, we had an
     inventory valuation allowance of approximately $1.3 million, which
     represents our estimate of the cost in excess of the net realizable value
     of slow-moving 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.

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.





                                        5

<PAGE>



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 had
     a specific stop loss amount of $250,000  with no aggregate  stop loss
     limit. We utilize internal actuarial methods,  as well as an independent
     third-party  actuary for the purpose of  estimating  ultimate  costs  for a
     particular  policy  year.  Based  on  these  actuarial  methods  along
     withcurrent  available  information and insurance  industry  statistics,
     the ultimate expected losses for the policy year ended January 31, 2003 and
     2002 were estimated to be  approximately  $3.4 million and $3.7 million
     ($3.2 million  aggregate stop loss),  respectively.  Our estimate is based
     on average claims experience in our industry and our own experience in
     terms of frequency and severity of claims,  with no explicit  provision for
     adverse  fluctuation  from year to year and is subject to inherent
     variability.  This variability may lead to ultimate payments being either
     greater or less than the amounts presented above.

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

Results of Operations

Net sales were $104.3 million for the 13 weeks ended May 3, 2003 compared to
$117.0 million for the 13 weeks ended May 4, 2002, a decrease of $12.6 million,
or 10.8%. Comparable store sales for the 13-week period ended May 3, 2003
decreased 7.4% versus a decrease of 11.8% for the same period last year. The
decline in net sales was primarily due to fewer stores in operation and negative
comparable store sales.

Gross profit was $37.6 million for the 13 weeks ended May 3, 2003 compared to
$41.2 million for the 13 weeks ended May 4, 2002, a decrease of $3.5 million or
8.6%. As a percentage of net sales, gross profit was 36.1% for the 13 weeks
ended May 3, 2003 versus 35.2% for the same period last year. The improvement in
gross profit as a percentage of net sales for the 13 weeks ended May 3, 2003
from the comparable period last year was primarily due to (1) lower markdowns
taken during the current quarterly period, (2) higher purchase discounts, (3) a
favorable adjustment to the inventory valuation allowance established at the end
of fiscal 2002, partially offset by (4) lower initial mark-up as a result of
lower retail price points.

Selling and administrative expenses were $41.3 million for the 13 weeks ended
May 3, 2003 compared to $45.7 million for the 13 weeks ended May 4, 2002, a
decrease of $4.4 million or 9.7%. Selling and administrative expenses decreased
as a result of (1) fewer stores in operation



                                        6

<PAGE>

during the current quarter, (2) reduced consulting and legal fees, and (3)
non-recurring income of $708,000 recorded in conjunction with the foreclosures
of certain stock subscription notes. As a percentage of net sales, selling and
administrative expenses were 39.5% and 39.1% for the 13 weeks ended May 3, 2003
and May 4, 2002, respectively. The increase in selling and administrative
expenses ratio was due to lower sales volume, partially offset by the decrease
in consulting and legal fees and the non-recurring income as mentioned above.

Pre-opening and closing expenses were $138,000 for the 13 weeks ended May 3,
2003 compared to $437,000 for the same period last year, a decrease of
approximately $299,000 or 68.4%. The decrease in pre-opening and closing
expenses was due to the opening of four fewer new stores during the current
quarterly period versus the same period last year.

Interest expense, net was $634,000 for the 13 weeks ended May 3, 2003 compared
to $258,000 for the 13 weeks ended May 4, 2002, an increase of $376,000 or
145.7%. The increase in interest expense for the current quarter was primarily
due to higher average outstanding borrowings on the revolving credit facility
and interest related to the junior secured term loan.

We recorded an income tax benefit of $1.7 million for the 13 weeks ended May 3,
2003 compared to $2.1 million for the 13 weeks ended May 4, 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 13 weeks ended May 3, 2003, the net loss was $2.7 million as compared to
$3.1 million for the 13 weeks ended May 4, 2002. The decrease in net loss was a
result of the operating and other factors cited above.

Liquidity and Capital Resources

General

We finance our operations through credit provided by vendors and other
suppliers, amounts borrowed under our $50.0 million revolving credit facility,
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, outstanding from time to
time, as more fully described in Note 5 of Notes to Financial Statements.

Since February 1, 2003, we have completed a series of financing transactions
designed to add liquidity and strengthen our financial position. On March 6,
2003, we completed the private offering of approximately 2.5 million 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 secured primarily by inventory and accounts receivable and a
$1.0 million term note secured primarily by equipment and other assets. In
addition, we received a federal tax refund of $8.2 million in March 2003.

                                        7

<PAGE>

Since the completion of our private equity offering and debt financing
transaction, and receipt of the federal tax refund, the vendor and credit
community have begun to provide support and extend credit terms for merchandise
shipments.  Based on the current credit support being provided by our vendors
and  the credit community, we expect to receive merchandise receipts on credit
terms necessary to meet our desired inventory levels.  While we have experienced
an improvement in support from the credit community, any further improvement in
credit will be contingent upon improved operating results and liquidity.
Provided we do not experience comparable store sales declines  and a
tightening of credit from our vendors and/or the credit community in the future,
we believe our $50.0 million revolving credit facility and internal cash flow
should 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.  In the event we experience a
shortage of cash, we anticipate raising equity capital in one or more
transactions.

At May 3, 2003, we were in compliance with all financial covenants, as defined,
and had outstanding borrowings of $11.5 million and letters of credit of $12.3
million under our revolving credit facility. In addition, based on eligible
inventory and accounts receivable, we were eligible to borrow $48.0 million
under our revolving credit facility and had $16.4 million available for future
borrowings after giving effect for the $7.5 million availability block, as
defined.

With respect to cash flows for the quarterly period ended May 3, 2003, we used
$15.1 million in operating activities, $1.0 million in investing activities and
generated $18.1 million from financing activities, which resulted in a net
increase in cash of $1.9 million. For the same period last year, we used $9.3
million in operating activities, $538,000 in investing activities and generated
$758,000 from financing activities, which resulted a net decrease in cash of
$9.0 million. The increase in cash used in operating activities was primarily
due to replenishment of inventory. The increase in cash used in investing
activities was related to the equipment acquisition for our new Otay Mesa
distribution facility. The increase in cash generated from the financing
activities was a result of borrowings against the revolving credit facility, net
proceeds received from the private offering and the borrowings on the junior
secured term loan.

Capital Expenditures

We anticipate capital expenditures of approximately $3.1 million for the
remainder of the current fiscal year ending January 31, 2004, primarily in
connection with equipment purchases in our new Otay Mesa distribution center and
information systems replacement at our 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 June 9, 2003, we had closed 15 of the 23 stores identified in our Fiscal
2002 restructuring efforts, as well as completed the consolidation of our
corporate overhead structure. In addition, in May 2003, we completed the
consolidation of our two former San Diego distribution centers into our new Otay
Mesa distribution facility. We estimate the cash requirement for the remainder
of this current fiscal year for the Fiscal 2002 restructuring efforts will be
approximately $5.4 million, which we intend to fund from our sources of cash,
including the revolving credit facility.





                                        8


<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 $3.5 million, 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
May 3, 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 as filed with the Securities and Exchange Commission.

<TABLE>

                               -----------------------------------(in thousands)------------------------------------
                               Revolving       Junior
                                 Credit     Subordinated    Junior Secured      Operating   Restructuring
                                Facility        Notes          Term Loan         Leases       Charges*         Total
                               ----------   ------------    ---------------     ---------   -------------      -----
<S>                               <C>           <C>               <C>              <C>           <C>            <C>
Fiscal Year:
2003 (for remaining 9 months)  $      -     $     3,000     $        500        $  22,301   $     8,859      $ 34,660
2004                                  -           3,000            7,000           27,328         1,747        39,075
2005                                  -           5,300                -           24,372             -        29,672
2006                             11,535               -                -           18,335             -        29,870
2007                                  -               -                -           13,256             -        13,256
Thereafter                            -               -                -           44,713             -        44,713
                               ----------   ------------    ------------        ----------  -------------    --------
                               $ 11,535     $    11,300     $      7,500        $ 150,305   $    10,606      $191,246
                               ----------   ------------    ------------        ----------  -------------    --------
<FN>
* Amounts reflect management's best estimate to complete store closures and
  other restructuring initiatives.
</FN>
</TABLE>


We believe our internal cash flow and borrowings under our revolving credit
facility 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 May 3, 2003,
our long-term debt had a face value of $11.3 million with a net carrying value
of $9.6 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 May 3, 2003.





                                        9

<PAGE>

Item 4.    Controls and Procedures

Evaluation. Within 90 days prior to the date of this Quarterly Report on Form
10-Q, we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as defined under Rule 13a-14 and Rule 15d-14
of the Securities Exchange Act of 1934, as amended. This evaluation was done
under the supervision and with the participation of management, including our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

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

Changes in Internal Controls. There have not been any significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of our last evaluation of such internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.


PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

           As disclosed in our financial statements for the fiscal year ended
           February 1, 2003 included in our Form 10-K as filed with the
           Securities and Exchange Commission, in April 2003, Lynda Bray and
           Masis Manougian, two of our 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 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 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.

           We believe that the material allegations of the First Amended
           Complaint in the Bray Lawsuit are false and that each of the claims
           asserted in the Bray Lawsuit is meritless. We intend to vigorously
           defend against the Bray Lawsuit.


                                       10
<PAGE>

Item 2.   Changes in Securities and Use of Proceeds

          On March 6, 2003, we completed the private offering of 2,515,379
          shares of our common stock to accredited investors for aggregate
          proceeds of $5,712,804 (net of placement agent fees of $217,415),
          together with a warrant to purchase an additional 75,000 shares of
          our common stock. The warrant, issued to the placement agent, is
          exercisable at a purchase price of $3.50 per share and expires on
          March 6, 2006. This offering was exempt from registration under Rule
          506 of Regulation D of the Securities Act of 1933.

Item 3.   Defaults Upon Senior Securities

          None.

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

          None.

Item 5.   Other Information

          None.

Item 6.   Exhibits and Reports on Form 8-K

          (a)   Exhibit

                10.17   Employment Agreement, dated as of May 20,  2003, by and
                        between  Factory 2-U Stores, Inc. and Douglas C.
                        Felderman.

                10.18   Employment  Agreement,  dated as of May 20, 2003 by and
                        between Factory 2-U Stores, Inc. and Norman G. Plotkin.

                99.1    Certification pursuant to 18 U.S.C. Section 1350, as
                        adopted pursuant to Section 906 of the Sarbanes-Oxley
                        Act of 2002 by William R. Fields, Chief Executive
                        Officer.

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








                                       11

<PAGE>

          (b)   Reports on Form 8-K

                Items 7 and 12:

                On May 9, 2003, we filed a report on Form 8-K regarding the
                announcement of sales for the four-week and 13-week periods
                ended May 3, 2003. The full text of our press release dated
                May 7, 2003 was attached as exhibit to the Form 8-K.

                On May 15, 2003, we filed a report on Form 8-K regarding the
                announcement of operating results for the 13-week period ended
                May 3, 2003. The full text of our press release dated May 14,
                2003 was attached as exhibit to the Form 8-K.









































                                       12
<PAGE>

                                   SIGNATURES

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


FACTORY 2-U STORES, INC.

Date: June 17, 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)




























                                       13


<PAGE>



                                  CERTIFICATION


I, William R. Fields, certify that:

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

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

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

4.   The  Registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

     (a)   designed such disclosure controls and procedures to ensure that
           material information relating to the Registrant, including its
           consolidated subsidiaries, is made known to us by others within those
           entities, particularly during the period in which this quarterly
           report is being prepared;

     (b)   evaluated the effectiveness of the Registrant's disclosure controls
           and procedures as of a date within 90 days prior to the filing date
           of this quarterly report (the "Evaluation Date"); and

     (c)   presented in this quarterly report our conclusions about the
           effectiveness of the disclosure controls and procedures based on our
           evaluation as of the Evaluation Date;

5.   The Registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  Registrant's  auditors  and the audit
     committee of  Registrant's  board of directors (or persons  performing  the
     equivalent function):

     (a)   all significant deficiencies in the design or operation of internal
           controls which could adversely affect the Registrant's ability to
           record, process, summarize and report financial data and have
           identified for the Registrant's auditors any material weaknesses in
           internal controls; and



                                       14


<PAGE>

     (b)   any fraud, whether or not material, that involves management or other
           employees who have a significant role in the Registrant's internal
           controls; and

6.   The  Registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.



Date:  June 17, 2003                      /s/ William R. Fields
                                          ---------------------
                                          Name:  William R. Fields
                                          Title: Chief Executive Officer































                                       15


<PAGE>


                                  CERTIFICATION


I, Douglas C. Felderman, certify that:

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

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

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

4.   The  Registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

    (a)   designed such disclosure controls and procedures to ensure that
          material information relating to the Registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this quarterly
          report is being prepared;

    (b)   evaluated the effectiveness of the Registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

    (c)   presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The Registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  Registrant's  auditors  and the audit
     committee of  Registrant's  board of directors (or persons  performing  the
     equivalent function):

    (a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the Registrant's ability to
          record, process, summarize and report financial data and have
          identified for the Registrant's auditors any material weaknesses in
          internal controls; and




                                       16


<PAGE>

    (b)  any fraud, whether or not material, that involves management or other
         employees who have a significant role in the Registrant's internal
         controls; and

6.   The  Registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.



Date:  June 17, 2003                      /s/ Douglas C. Felderman
                                          ------------------------
                                          Name:  Douglas C. Felderman
                                          Title: Executive Vice President and
                                                 Chief Financial Officer






























                                       17