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

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

                  For the quarterly period ended July 29, 2000
                                 --------------



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

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


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


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



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

The number of shares outstanding of the registrant's of common stock, as of July
29, 2000, was 12,603,831 shares.




<PAGE>


                            FACTORY 2-U STORES, INC.

             FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 29, 2000

                                      INDEX


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Factory 2-U Stores, Inc. Balance Sheets as of July 29, 2000
(Unaudited) and January 29, 2000 ............................................F-1

Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
13 weeks ended July 29, 2000 and July 31, 1999...............................F-3

Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
26 weeks ended July 29, 2000 and July 31, 1999 ..............................F-4

Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the
26 weeks ended July 29, 2000 and July 31, 1999 ..............................F-5

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

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

PART II. OTHER INFORMATION

Item 1.     Legal Proceedings 8
Item 2.     Changes in Securities and Use of Proceeds..........................8
Item 3.     Defaults Upon Senior Securities....................................8
Item 4.     Submission of Matters to a Vote of Security Holders................8
Item 5.     Other Information 9
Item 6.     Exhibits and Reports on Form 8-K ..................................9
              Signatures        ..............................................10
              Exhibit Index     ..............................................11







                                        2


<PAGE>



                                     PART I

Item 1.   Financial Statements

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

<TABLE>
<CAPTION>
                                                                    July 29,          January 29,
                                                                      2000                2000
                                                                ----------------    -----------------
                                                                  (Unaudited)
<S>                                                             <C>                  <C>
ASSETS
Current assets:
     Cash                                                            $     6,897          $    9,473
     Merchandise inventory                                                65,302              35,048
     Prepaid expenses and other assets                                     6,007               2,291
     Deferred income taxes                                                 2,184               2,184
                                                                          ------              ------
          Total current assets                                            80,390              48,996

Leasehold improvements and equipment,
     net of accumulated depreciation and amortization                     33,831              27,425
Deferred income taxes                                                      1,032               1,032
Other assets                                                               1,363               1,507
Excess of cost  over net  assets  acquired,
    less  accumulated  amortization  of
    $10,941 and $10,139 at July 29, 2000 and
    January 29, 2000, respectively                                        28,704              29,506
                                                                         -------             -------

          Total assets                                               $   145,320         $   108,466
                                                                    ============         ===========




</TABLE>














                                   (continued)


                                       F-1



<PAGE>


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


<TABLE>
<CAPTION>
                                                                    July 29,          January 29,
                                                                      2000                2000
                                                                ----------------   -----------------
                                                                  (Unaudited)
<S>                                                             <C>                <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current maturities of long-term debt
        and capital lease obligations                                $     1,206         $     1,251
     Accounts payable                                                     43,946              19,994
     Income taxes payable                                                  1,774               4,235
     Accrued expenses                                                     21,729              22,275
                                                                         -------             -------
               Total current liabilities                                  68,655              47,755

Revolving credit facility                                                  7,000                   -
Long-term debt, less current maturities                                   10,632              10,067
Capital leases and other long-term obligations                             1,498               1,658
Deferred rent                                                              2,821               2,556
                                                                          ------              ------
               Total liabilities                                          90,606              62,036


Stockholders' equity:
     Series A 9-1/2%  convertible  preferred stock,
     $0.01 par value;  4,500,000 shares  authorized,
     0 shares issued and outstanding at July 29, 2000
     and January 29, 2000                                                      -                   -

     Series B junior convertible, exchangeable preferred stock,
     $0.01 par value; 40,000 shares authorized, 0 shares issued
     and outstanding at July 29, 2000 and January 29, 2000                     -                   -

     Common stock, $0.01 par value; 35,000,000 shares authorized,
     12,603,831 and 12,390,817  shares  issued and outstanding
     at July 29,  2000 and January 29, 2000, respectively                    126                 124

     Stock subscription notes receivable                                 (2,542)             (2,710)
     Additional paid-in capital                                          112,941             108,091
     Accumulated deficit                                                (55,811)            (59,075)
                                                                        --------            --------

          Total stockholders' equity                                      54,714              46,430
                                                                        --------             -------

          Total liabilities and stockholders' equity                 $   145,320         $   108,466
                                                                     ===========         ===========

</TABLE>


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


                                       F-2


<PAGE>


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

<TABLE>
<CAPTION>
                                                                         13 Weeks Ended
                                                                ----------------------------------
                                                                    July 29,           July 31,
                                                                      2000              1999
                                                                 ---------------  ----------------
<S>                                                              <C>              <C>
Net sales                                                            $   116,678        $    91,931
Cost of sales                                                             74,543             58,272
                                                                         -------           --------
  Gross profit
                                                                          42,135             33,659

Selling and administrative expenses (exclusive of non-cash
   stock-based compensation expense shown below)                          36,112             29,282
Pre-opening expenses                                                         664              1,072
Amortization of intangibles                                                  559                590
Condemnation award                                                       (1,240)                  -
Stock-based compensation expense                                           2,751                  -
                                                                          ------                  -
  Operating income                                                         3,289              2,715

Interest expense                                                             473                663
                                                                          ------             ------

Income before income taxes                                                 2,816              2,052

Income taxes                                                               1,155                841
                                                                       ---------            -------

  Net income                                                          $    1,661        $     1,211
                                                                     ===========        ===========


Earnings per share:
  Basic                                                               $     0.13        $      0.10
  Diluted                                                             $     0.13        $      0.09



Weighted average common shares outstanding:
  Basic                                                                   12,492             12,159
  Diluted                                                                 13,030             12,838



</TABLE>








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

                                       F-3

<PAGE>


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

<TABLE>
<CAPTION>
                                                                         26 Weeks Ended
                                                                 -----------------------------------
                                                                    July 29,          July 31,
                                                                      2000              1999
                                                                 ---------------  ------------------
<S>                                                              <C>              <C>
Net sales                                                             $  225,053        $    177,030
cost of sales
                                                                         144,693             114,380
                                                                        --------            -------
  Gross profit
                                                                          80,360              62,650

Selling and administrative expenses (exclusive of non-cash
   stock-based compensation expense shown below)                          68,958              55,586
Pre-opening expenses                                                       2,362               2,064
Amortization of intangibles                                                1,148               1,179
Condemnation award                                                       (1,240)                   -
Stock-based compensation expense                                           2,751                   -
                                                                        --------            --------
  Operating income                                                         6,381               3,821

Interest expense                                                             823               1,202
                                                                        --------            --------

Income before income taxes                                                 5,558               2,619

Income taxes                                                               2,295               1,074
                                                                        --------            --------

  Net income                                                          $    3,263          $     1,545
                                                                      ==========          ===========


Earnings per share:
   Basic                                                              $     0.26         $      0.13
   Diluted                                                            $     0.25         $      0.12

Weighted average common shares outstanding:
  Basic                                                                   12,452              12,133
  Diluted                                                                 12,929              12,707




</TABLE>











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

                                       F-4

<PAGE>



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

<TABLE>
<CAPTION>
                                                                         26 Weeks Ended
                                                                -------------------------------
                                                                    July 29,         July 31,
                                                                      2000             1999
                                                               ----------------- ---------------
<S>                                                            <C>               <C>
Cash flows from operating activities:
     Income from operating activities                                 $    3,263      $    1,545
     Adjustments to reconcile income to net cash
          used in operating activities:
               Depreciation                                                4,743           2,983
               Amortization of intangibles                                 1,148           1,179
               Amortization of debt discount                                 565             559
               Loss on disposal of equipment                                 554             468
               Deferred rent expense                                         277              62
               Stock-based compensation expense                            2,751               -
               Other non-cash items                                           79             144
               Changes in operating assets and liabilities:
                    Merchandise inventory                               (30,254)        (14,055)
                    Prepaid expenses and other assets                    (4,020)         (1,971)
                    Accounts payable                                      23,952           9,228
                    Accrued expenses and other liabilities               (3,531)         (2,819)
                                                                ----------------   --------------

Net cash used in operating activities                                      (473)         (2,677)
                                                                ----------------   --------------

Cash flows used in investing activities:
     Purchase of leasehold improvements and equipment                   (10,265)         (7,339)
                                                                ----------------   --------------

Net cash used in investing activities                                   (10,265)         (7,339)
                                                               -----------------   --------------



</TABLE>















                                  (continued)


                                      F-5

<PAGE>


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

<TABLE>
<CAPTION>

                                                                         26 Weeks Ended
                                                               -------------------------------------
                                                                    July 29,            July 31,
                                                                      2000                1999
                                                               -----------------   -----------------
<S>                                                            <C>                 <C>
Cash flows from financing activities:
     Borrowings on revolving credit facility                              77,011             201,847
     Payments on revolving credit facility                              (70,011)           (188,236)
     Payments on notes payable and capital lease obligations               (136)             (1,263)
     Repurchase of warrants                                                    -               (457)
     Proceeds from exercise of stock options and warrants                  1,404                 669
     Payments of deferred financing costs                                  (275)                   -
     Payments of stock subscription notes receivable                         169                 201
                                                                          ------              ------

Net cash provided by financing activities                                  8,162              12,761
                                                                          ------              ------

Net increase (decrease) in cash                                          (2,576)               2,745

Cash at the beginning of the period                                        9,473               3,124
                                                                          ------              ------
Cash at the end of the period                                        $     6,897         $     5,869
                                                                     ===========         ===========

Supplemental  disclosure of cash flow  information:
  Cash paid during the period for:
          Interest                                                   $       257         $       582
          Income taxes                                               $     4,587         $     2,761



</TABLE>













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



                                       F-6

<PAGE>


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

(1)      Unaudited Interim Financial Statements

         Our accompanying  unaudited financial  statements do not include all of
         the information and footnotes required by generally accepted accounting
         principles  for  annual  financial  statements  and  should  be read in
         conjunction  with our  financial  statements  for the fiscal year ended
         January 29, 2000 included in our Form 10-K as filed with the Securities
         and Exchange Commission.

         In the opinion of our management, the unaudited financial statements as
         of and for the 13 and 26 weeks  ended July 29,  2000 and July 31,  1999
         reflect all adjustments  (which include normal  recurring  adjustments)
         necessary  to  present  fairly  the  financial  position,   results  of
         operations  and  cash  flows  for  the  periods  presented.  Due to the
         seasonal  nature of our  business,  the results of  operations  for the
         interim  period may not  necessarily  be  indicative  of the results of
         operations for a full year.

(2)      New Accounting Pronouncements

         In December 1999, the Securities and Exchange  Commission  issued Staff
         Accounting Bulletin ("SAB") No. 101, "Revenue  Recognition in Financial
         Statements."  This SAB summarizes the SEC's view in applying  generally
         accepted  accounting  principles  to revenue  recognition  in financial
         statements.  This  SAB  was  amended  by SAB  101B,  which  defers  the
         effective date for all  registrants  with fiscal years that begin after
         December 15, 1999 to allow for the option of implementing no later than
         the fourth  quarter of fiscal  2000.  Our  management  has reviewed the
         impact of SAB No. 101 on our financial statements, and does not believe
         that  its  adoption  will  have a  material  impact  on  our  financial
         statements.

         In June 1998, the Financial Accounting Standards Board issued Statement
         of Financial  Accounting  Standards  ("SFAS") No. 133,  "Accounting for
         Derivative  Instruments  and  Hedging  Activities",  which  establishes
         accounting  and reporting  standards  for  derivative  instruments  and
         hedging activities.  SFAS No. 133 requires that an entity recognize all
         derivatives  as  either  assets  or  liabilities  in the  statement  of
         financial  position and measure those  instruments at fair value.  This
         Statement was amended by SFAS No. 137,  which defers the effective date
         to all fiscal  quarters of fiscal years  beginning after June 15, 2000.
         SFAS No. 133 is  effective  for our first  quarter  in the fiscal  year
         beginning  February  4, 2001 and we do not expect it to have a material
         effect on our financial position or results of operations.






                                       F-7

<PAGE>



(3)      Revolving Credit Facility

         In March 2000,  we entered into a new $50.0  million  revolving  credit
         facility with a financial  institution and terminated a prior revolving
         credit facility.  Under the new revolving credit facility we may borrow
         up to 70% of our eligible  inventory  and 85% of our eligible  accounts
         receivables,  as defined, up to $50.0 million.  The new credit facility
         also provides a $5.0 million  sub-facility for letters of credit. As of
         July 29, 2000, interest on the credit facility is at the prime rate, or
         at our  election,  LIBOR plus 1.50%.  Under the terms of the new credit
         facility,  the  interest  rate may  increase  or  decrease  subject  to
         earnings   before   interest,   tax   obligations,   depreciation   and
         amortization  expense  (EBITDA),  as defined,  on a rolling four fiscal
         quarter  basis.  Accordingly,  prime rate  borrowings  could range from
         prime to prime plus 0.50% and LIBOR borrowings from LIBOR plus 1.50% to
         LIBOR plus  2.50%.  The new credit  facility  expires on March 3, 2003,
         subject  to  automatic  one-year  renewal  periods,  unless  terminated
         earlier by either  party.  We are obligated to pay fees equal to 0.125%
         per annum on the  unused  amount of the new  credit  facility.  The new
         credit  facility is secured by a first lien on accounts  receivable and
         inventory and requires us to maintain  specified levels of tangible net
         worth in the  event  that our  borrowing  availability  is less  than a
         specified amount.

         At July 29, 2000, based on eligible inventory and accounts  receivable,
         we had $42.3  million  available to borrow under the  revolving  credit
         facility.  Of the $42.3  million  available  to  borrow,  we had a $7.0
         million 30-day LIBOR loan  outstanding and the effective  interest rate
         was 8.15%.

(4)      Long-term Debt

         As of July 29, 2000, we had outstanding  long-term  indebtedness,  less
         current  maturities,  of  $10.6  million.  The  long-term  indebtedness
         consists of the New Junior  Subordinated  Notes, which are non-interest
         bearing and are  reflected on our balance  sheets at the present  value
         using a  discount  rate of 10%.  As of July 29,  2000,  the New  Junior
         Subordinated  Notes  had a face  value of $16.3  million  and a related
         unamortized discount of $4.7 million, resulting in a net carrying value
         of $11.6  million.  The discount is amortized to interest  expense as a
         non-cash  charge until the notes are paid in full.  We made a principal
         payment  on the  New  Junior  Subordinated  Notes  of $1.0  million  in
         December 1999.  Additional principal payments are scheduled on December
         31, 2000 ($1.0 million),  December 31, 2001 and December 31, 2002 ($2.0
         million), December 31, 2003 and December 31, 2004 ($3.0 million) and on
         May 28, 2005 ($5.3 million).






                                      F-8
<PAGE>

(5)      Earnings per Share

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

         At July 29, 2000 and July 31, 1999, we had 15,500 and no  anti-dilutive
stock options outstanding, respectively.

(6)      Provision for Income Taxes

         We recorded a $1.2 million  provision for income taxes for the 13 weeks
         ended July 29, 2000.  The  provision for income taxes is based upon our
         estimated  effective tax rate for the entire fiscal year. Our estimated
         effective tax rate is subject to ongoing review and evaluation.

(7)      Stock Options and Warrants

         On July 12, 2000, our common stock achieved a market price of $24.89 or
         greater for 60  consecutive  trading  days.  As a result,  92,961 stock
         options with a market price hurdle of $24.89 became  exercisable and we
         recorded non-cash stock-based compensation expense of $2.8 million.

         As of July 29, 2000, we had options to purchase 1,406,424 shares of our
         common stock outstanding.  Subsequent to July 29, 2000, 71,419 of these
         stock  options  became  exercisable  when our common  stock  achieved a
         market  price of $33.19 or greater  for 60  consecutive  trading  days.
         Consequently,  we will record non-cash stock-based compensation expense
         of $2.1 million in the quarter ending October 28, 2000.

         An  additional  71,417 stock options will become  exercisable  once our
         common  stock has  achieved  and  maintained  a price of $49.78  for 60
         consecutive  trading  days. At that time, we will be required to record
         non-cash compensation expense in the minimum amount of $3.0 million.

         At July 29,  2000,  warrants  to purchase  82,690  shares of our common
         stock outstanding with an exercise price of $19.91 per share.

(8)      Condemnation Award

         In  October  1998,  the City of San Diego  filed an action in San Diego
         County  Superior Court seeking  condemnation of real property leased by
         us for our store  located in downtown  San Diego,  California.  In July
         2000,  we reached a settlement  with the City in which the City paid us
         $1.2  million  for our  loss of  goodwill,  recovery  for the  value of
         property, plant and equipment abandoned and loss of operating income.


                                      F-9
<PAGE>

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

General

Management's  discussion of the results of operations  provides  analysis of our
operations during the 13 and 26 weeks ended July 29, 2000 and July 31, 1999.

Results of Operations

The following  discussion and analysis  should be read in  conjunction  with our
Financial  Statements and notes thereto included elsewhere in this Form 10-Q. As
of July 29, 2000, we operated 211 stores compared to 178 as of July 31, 1999.

13 Weeks Ended July 29, 2000 Compared to the 13 Weeks Ended July 31, 1999

Net sales were $116.7  million for the 13 weeks ended July 29, 2000  compared to
$91.9  million  for the 13 weeks  ended  July 31,  1999,  an  increase  of $24.7
million,  or 26.9%.  Comparable  store sales  increased  2.7%.  We opened 11 new
stores and closed 3 stores during the current period.

Gross profit was $42.1  million for the 13 weeks ended July 29, 2000 compared to
$33.7 million for the 13 weeks ended July 31, 1999, an increase of $8.5 million,
or 25.2%. As a percentage of net sales,  gross profit was 36.1% for the 13 weeks
ended July 29, 2000 compared to 36.6% for the 13 weeks ended July 31, 1999.  The
gross  profit  percentage  of 36.6%  for the 13 weeks  ended  July 31,  1999 was
favorably  impacted by approximately 80 basis points.  This favorable impact was
the result of  refinements  in our costing of inventory in the second quarter of
last  year.  These  refinements  were  related  to the  implementation  of a new
merchandise software package installed in the first quarter of last year. Giving
effect for this  improved costing  information,  gross profit  margin for the 13
weeks ended July 29, 2000  improved 30 basis points to 36.1%.  This  improvement
was the result of improved merchandise mark-up and lower inventory shrink.

Selling and  administrative  expenses were  $36.1million  for the 13 weeks ended
July 29, 2000 compared to $29.3 million for the 13 weeks ended July 31, 1999, an
increase of $6.8 million,  or 23.3%. The increase in spending was related to the
growth of new stores. As a percentage of net sales,  selling and  administrative
expenses  were 31.0% for the 13 weeks  ended July 29,  2000 and 31.9% for the 13
weeks ended July 31, 1999.  The  improvement  in the selling and  administrative
ratio was due to sales volume leverage.

Pre-opening  expenses  were $0.7  million  for the 13 weeks  ended July 29, 2000
compared to $1.1  million for the 13 weeks  ended July 31,  1999,  a decrease of
$0.4 million,  or 38.1%.  Pre-opening  expenses were higher last year due to our
remodel program last year during which we completed 70 remodels.


                                        3

<PAGE>

We recorded a non-recurring gain of $1.2 million for the 13 weeks ended July 29,
2000  related  to a  condemnation  award  from the City of San Diego for a store
located in downtown  San Diego,  California.  See Note 8 of "Notes to  Financial
Statements."

We recorded non-cash stock-based compensation expense of $2.8 million for the 13
weeks ended July 29, 2000 related to certain  performance  based stock  options.
See Note 7 of "Notes to Financial Statements."

Interest  expense was $0.5 million for the 13 weeks ended July 29, 2000 compared
to $0.7  million  for the 13 weeks  ended  July 31,  1999,  a  decrease  of $0.2
million.  The decrease was due to lower  average  outstanding  borrowings on our
revolving credit facility.

Income  taxes were $1.2  million  for the 13 weeks  ended July 29, 2000 and $0.8
million for the 13 weeks ended July 31, 1999. Income taxes increased as a result
of higher taxable income versus the same period a year ago.

Net income was $1.7  million for the 13 weeks  ended July 29,  2000  compared to
$1.2  million for the 13 weeks ended July 31,  1999.  The increase in net income
was a result of the operating and other factors cited above.

26 Weeks Ended July 29, 2000 Compared to the 26 Weeks Ended July 31, 1999

Net sales were $225.1  million for the 26 weeks ended July 29, 2000  compared to
$177.0  million  for the 26 weeks  ended July 31,  1999,  an  increase  of $48.0
million,  or 27.1%.  Comparable  store sales  increased  3.4%.  We opened 36 new
stores and closed 12 stores during the current period.

Gross profit was $80.4  million for the 26 weeks ended July 29, 2000 compared to
$62.7  million  for the 26 weeks  ended  July 31,  1999,  an  increase  of $17.7
million,  or 28.3%. As a percentage of net sales, gross profit was 35.7% for the
26 weeks ended July 29,  2000  compared to 35.4% for the 26 weeks ended July 31,
1999.  The increase in gross profit as a percentage  of net sales was  primarily
attributable  to a higher  initial  markup on  merchandise  purchases  and lower
inventory shrink.

Selling and  administrative  expenses  were $69.0 million for the 26 weeks ended
July 29, 2000 compared to $55.6 million for the 26 weeks ended July 31, 1999, an
increase of $13.4 million, or 24.1%. The increase in spending was related to the
growth of new stores. As a percentage of net sales,  selling and  administrative
expenses  were 30.6% for the 26 weeks  ended July 29,  2000 and 31.4% for the 26
weeks ended July 31, 1999.  The  improvement  in the selling and  administrative
expense ratio was due to sales volume leverage.

Pre-opening  expenses  were $2.4  million  for the 26 weeks  ended July 29, 2000
compared to $2.1  million for the 26 weeks ended July 31,  1999,  an increase of
$0.3  million,  or 14.4%.  The increase in  pre-opening  expenses was related to
greater  pre-opening  expenses  for 36 new stores  this year versus 19 new store
openings and 70 remodels last year.


                                        4

<PAGE>

We recorded a non-recurring gain of $1.2 million for the 26 weeks ended July 29,
2000  related  to a  condemnation  award  from the City of San Diego for a store
located in downtown  San Diego,  California.  See Note 8 of "Notes to  Financial
Statements."

We recorded non-cash stock-based compensation expense of $2.8 million for the 26
weeks ended July 29, 2000 related to certain  performance  based stock  options.
See Note 7 of "Notes to Financial Statements."

We recorded a non-recurring  gain in the amount of $1.2 million for the 26 weeks
ended July 29, 2000 related to a  condemnation  award from the City of San Diego
for a store located in downtown San Diego, California.

Interest  expense was $0.8 million for the 26 weeks ended July 29, 2000 compared
to $1.2  million  for the 26 weeks  ended  July 31,  1999,  a  decrease  of $0.4
million.  The decrease was due to lower  average  outstanding  borrowings on our
revolving credit facility.

Income  taxes were $2.3  million  for the 26 weeks  ended July 29, 2000 and $1.1
million for the 26 weeks ended July 31, 1999. Income taxes increased as a result
of higher taxable income versus the same period a year ago.

Net income was $3.3  million for the 26 weeks  ended July 29,  2000  compared to
$1.5  million for the 26 weeks ended July 31,  1999.  The increase in net income
was a result of the operating and other factors cited above.

Liquidity and Capital Resources

General

As of July 29, 2000, we had outstanding indebtedness and capital leases of $20.3
million.

We  finance  our  operations  through  credit  provided  by  vendors  and  other
suppliers,  amounts  borrowed under our $50.0 million  revolving credit facility
and internally  generated cash flow.  Credit terms provided by vendors and other
suppliers  are usually  net 30 days.  Amounts  which may be  borrowed  under the
revolving  credit  facility are based on a percentage of eligible  inventory and
accounts  receivable,  as defined,  outstanding from time to time, as more fully
described in Note 3 of Notes to Financial Statements. At July 29, 2000, based on
our eligible inventory and accounts  receivable,  we had $42.3 million available
to borrow under our revolving credit facility. Of the $42.3 million available to
borrow,  we had a $7.0 million 30-day LIBOR loan  outstanding  and the effective
interest rate was 8.15%.

Our management believes that our sources of cash, including the revolving credit
facility, will be adequate to finance operations,  capital requirements and debt
obligations as they become due for at least the next twelve months.  See Notes 3
and 4 of Notes to Financial Statements.




                                        5

<PAGE>

Capital Expenditures

We anticipate  capital  expenditures of  approximately  $11.0 million during the
remainder  of the current  fiscal year ending  February 3, 2001,  which  include
costs to open  approximately  26 new stores,  to  construct  a new  distribution
center,  to  upgrade   information  systems  and  to  renovate  and  expand  our
administrative  offices.  Our  management  believes  that internal cash flow and
borrowings under the revolving credit facility will be sufficient to fund future
capital expenditures.

Inflation

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

Minimum Wage Increases

We employ, both in our stores and in our corporate  headquarters,  a substantial
number of employees who earn hourly wages near or at the minimum  wage.  Actions
by both the  federal  and  certain  state  governments  have  increased  and may
continue  to  increase  the  hourly  wages  that we must  pay to our  employees.
Historically,  we have mitigated these increases  through policies to manage our
ratio of wages to sales.  However, we can make no assurances that these measures
and other  steps taken will be adequate to control the impact of any hourly wage
increases in the future and they may have a negative impact on  profitability in
the future.

Seasonality and Quarterly Fluctuations

We  historically  have realized our highest level of sales and income during the
third and fourth quarters of our fiscal year (the quarters ending in October and
January) as a result of the "Back to School"  (August and September) and Holiday
(November and December)  seasons.  The  seasonally  lower sales in our first two
quarters  (February  through  July),  can result in losses during those quarters
even in years in which we will have full year profits.

Year 2000 Issue

The Year 2000 issue was the result of  computer  systems and  software  products
coded to accept  only 2 digit  entries in the date code  field.  This could have
resulted in system  failure or the  generation of erroneous data in systems that
do not properly recognize such information.

We diligently addressed the potential Year 2000 issue by utilizing both internal
and external  resources as  applicable,  to identify,  correct or reprogram  our
internal systems for Year 2000 compliance.  In fiscal 1999, we implemented a new
integrated  software  package to  support  future  growth and to address  issues
associated with the Year 2000 at a cost of approximately $2.8 million.


                                        6

<PAGE>

To date, we have not experienced any significant  business disruptions or system
failures  as a result  of the Year 2000  issue  and none of our  major  vendors,
service  providers  and  customers  has reported  substantial  Year 2000 related
problems.

Although the Year 2000 event has  occurred,  and while there can be no assurance
that there will be no problems  related to the Year 2000 issue after  January 1,
2000, we believe we will not be adversely impacted by the Year 2000 issue.

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

In December 1995, Congress enacted the Private Securities  Litigation Reform Act
of 1995.  The Act  contains  amendments  to the  Securities  Act of 1933 and the
Securities  Exchange  Act of 1934 which  provide  protection  from  liability in
private lawsuits for "forward-looking"  statements made by specified persons. We
desire to take advantage of the "safe harbor" provisions of the Act.

Certain statements in this Form 10-Q, or in documents  incorporated by reference
into this Form  10-Q,  are  forward-looking  statements.  Those  forward-looking
statements  are subject to  uncertainties  that may cause the actual  results to
differ from the results anticipated by the forward-looking  statements.  Factors
which  may  cause   actual   results  to  differ  from  those   anticipated   by
forward-looking  statements include, among others, general economic and business
conditions (both nationally and in the regions in which we operate);  government
regulations   (including   regulations   regarding   temporary   immigration  of
agricultural works and minimum wages of agricultural and other workers);  claims
asserted  against  us;   competition;   changes  in  our  business  strategy  or
development plans;  difficulties  attracting and retaining qualified  personnel;
the inability to obtain adequate  quantities of merchandise at favorable prices;
and the other  factors  described in our other filings with the  Securities  and
Exchange  Commission.  Consequently,  all of the forward-looking  statements are
qualified by these cautionary  statements and there can be no assurance that the
results or  developments  that we anticipate  will be realized or that they will
have the expected effects on our business or operations.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate risk on our fixed rate debt obligations. At July
29, 2000, our fixed rate debt obligations totaled $16.3 million.  The fixed rate
debt obligations are  non-interest  bearing and are discounted at a rate of 10%,
resulting in a net carrying value of $11.6 million. Maturities are $1.0 million,
$2.0  million,  $2.0  million,  $3.0  million,  $3.0 million and $5.3 million in
fiscal year 2000, 2001, 2002, 2003, 2004 and 2005, respectively. While generally
an increase in market  interest  rates will decrease the value of this debt, and
decreases in 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
July 29, 2000.


                                        7


<PAGE>

                           PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

                  None.

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

Item 3.   Defaults Upon Senior Securities
                  None.

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

Our annual meeting of stockholders  was held on June 27, 2000. H. Whitney Wagner
was elected a director at the meeting with 10,673,639 votes cast for and 663,785
votes  withheld.  Other  directors  whose  terms of office  continued  after the
meeting were as follows: Peter V. Handal, Ira Neimark,  Ronald Rashkow,  Michael
M. Searles and Wm. Robert Wright II.

Other  matters  voted on and  approved  at the  meeting and the results of those
votes were as follows:

          To approve the Factory 2-U Stores, Inc. Employee Stock Purchase Plan

          Votes for:                       10,023,015
          Votes against:                      318,718
          Withheld:                            18,212


         To approve an amendment to the Amended and Restated Factory 2-U Stores,
         Inc.  1997 Stock  Option Plan which  increases by 350,000 the number of
         shares of common stock issuable upon exercise of options from 1,807,980
         to 2,157,980

          Votes for:                      6,816,533
          Votes against:                  3,317,844
          Withheld:                         225,568


          Ratification of Arthur Andersen LLP as independent accountants

          Votes for:                     10,782,276
          Votes against:                    538,616
          Abstentions:                       16,041




                                       8
<PAGE>

Item 5.   Other Information
                  None.

Item 6.   Exhibits and Reports on Form 8-K

(a)      Exhibits

11.1     Computation of per share loss (1 page)

27       Financial Data Schedule (1 page)

(b)      Reports on Form 8-K
                  None.


































                                        9

<PAGE>

                                  SIGNATURES

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


FACTORY 2-U STORES, INC.

Date: September 7, 2000




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






























                                       10

<PAGE>

                                 EXHIBIT INDEX

Exhibit
Number    Description                                                  Page

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





































                                       11


<PAGE>


EXHIBIT 11.1



                        COMPUTATION OF EARNINGS PER SHARE
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                         13 weeks ended                        26 weeks ended
                                                         --------------                        --------------
                                                 July 29, 2000      July 31, 1999        July 29, 2000    July 31, 1999
                                                 -------------      -------------        -------------    -------------

<S>                                               <C>                <C>                  <C>              <C>
Net income                                         $    1,661         $    1,211           $    3,263       $   1,545


Weighted average number of common shares
outstanding                                            12,492             12,159               12,452          12,133

Effect of dilutive securities:

     Warrants that are common stock                        38                 36                   29              18
equivalents

     Options that are common stock equivalents            500                643                  448             556

Adjusted common shares outstanding used for
diluted computation                                    13,030             12,838               12,929          12,707

Earnings per share:

  Basic                                            $     0.13         $     0.10           $     0.26       $    0.13
  Diluted                                          $     0.13         $     0.09           $     0.25       $    0.12

</TABLE>







                                       12


<PAGE>