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

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

         For the quarterly period ended November 3, 2001
                                        ----------------

                                            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
December 17, 2001 was 12,824,370 shares.




<PAGE>


                            FACTORY 2-U STORES, INC.

            FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 3, 2001

                                      INDEX


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

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

         Factory 2-U Stores, Inc. Statements of Operations (Unaudited) for the
         13 weeks ended November 3, 2001 and October 28, 2000; 39 weeks ended
         November 3, 2001 and October 28, 2000 ..............................F-3

         Factory 2-U Stores, Inc. Statements of Cash Flows (Unaudited) for the
         39 weeks ended November 3, 2001 and October 28, 2000 ...............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............8


PART II. OTHER INFORMATION

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




                                        2


<PAGE>



                                     PART I

Item 1.   Financial Statements


<TABLE>
<CAPTION>


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

                                                               November 3,      February 3,
                                                                  2001             2001
                                                               -----------      -----------
<S>                                                            <C>              <C>
                                                               (Unaudited)
ASSETS
Current assets
  Cash                                                          $   6,059       $   4,739
  Merchandise inventory                                            85,416          52,444
  Accounts receivable                                               1,823           3,160
  Prepaid expenses                                                  6,393           4,716
  Deferred income taxes                                             2,503           2,503
                                                                ----------      ----------
             Total current assets                                 102,194          67,562

Leasehold improvements and equipment,
  net of accumulated depreciation and amortization                 42,311          40,632
Deferred income taxes                                               4,992           4,992
Other assets                                                        1,066           1,176
Excess of cost over net assets acquired, less accumulated
  amortization of $12,944 and $11,742, respectively                26,701          27,903
                                                                ----------      ----------
             Total assets                                       $ 177,264       $ 142,265
                                                                ==========      ==========

</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 data)
                                   (continued)


                                                               November 3,      February 3,
                                                                  2001             2001
                                                               -----------      -----------
<S>                                                            <C>              <C>
                                                               (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
  Current maturities of long-term debt and capital leases       $   2,058       $   2,170
  Accounts payable                                                 50,472          25,194
  Taxes payable                                                     1,821           8,144
  Accrued expenses                                                 17,711          13,158
                                                                ----------      ----------
             Total current liabilities                             72,062          48,666

Revolving credit facility                                           8,143            -
Long-term debt                                                     10,088           9,218
Deferred taxes and other long-term obligations                      4,346           1,126
Deferred rent                                                       3,706           3,518
                                                                ----------      ----------
             Total liabilities                                     98,345          62,528
                                                                ----------      ----------


Stockholders' equity
  Common stock, $0.01 par value; 35,000,000 shares authorized and
    12,823,370 shares and 12,759,304 shares issued and outstanding,
    respectively                                                      128             127
  Stock subscription notes receivable                              (2,225)         (2,225)
  Additional paid-in capital                                      120,794         119,646
  Accumulated deficit                                             (39,778)        (37,811)
                                                                ----------      ----------
             Total stockholders' equity                            78,919          79,737
                                                                ----------      ----------

             Total liabilities and stockholders' equity         $ 177,264       $ 142,265
                                                                ==========      ==========

</TABLE>











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





                                       F-2


<PAGE>

<TABLE>
<CAPTION>



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


                                                          13 Weeks Ended                 39 Weeks Ended
                                                          --------------                 --------------
                                                   November 3,    October 28,     November 3,    October 28,
                                                      2001           2000            2001           2000
                                                   -----------    -----------     -----------    -----------
<S>                                                <C>            <C>             <C>            <C>
Net sales                                           $ 145,568      $ 136,831       $ 410,646      $ 361,884
Cost of sales                                          95,308         87,874         268,807        232,567
                                                   -----------    -----------     -----------    -----------
      Gross profit                                     50,260         48,957         141,839        129,317

Selling and administrative expenses                    49,065         38,759         139,503        107,717
Pre-opening and closing expenses                          989          1,548           2,881          3,910
Amortization of intangibles                               422            482           1,267          1,630
Condemnation award                                       -              -               -            (1,240)
Stock-based compensation expense                         -             2,056             456          4,807
                                                   -----------    -----------     -----------    -----------
      Operating income (loss)                            (216)         6,112          (2,268)        12,493

Interest expense, net                                     342            441           1,123          1,264
                                                   -----------    -----------     -----------    -----------
Income (loss) before income taxes                        (558)         5,671          (3,391)        11,229
Income tax provision (benefit)                           (234)          (165)         (1,424)         2,130
                                                   -----------    -----------     -----------    -----------
Net income (loss)                                   $    (324)     $   5,836       $  (1,967)     $   9,099
                                                   ===========    ===========     ===========    ===========


Income (loss) per share
      Basic                                         $   (0.03)     $    0.46       $   (0.15)     $    0.73
      Diluted                                       $   (0.03)     $    0.44       $   (0.15)     $    0.70


Weighted average common shares outstanding
      Basic                                            12,823         12,686          12,780         12,530
      Diluted                                          12,823         13,168          12,780         13,009

</TABLE>





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



                                       F-3

<PAGE>

<TABLE>
<CAPTION>


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




                                                                     39 Weeks Ended
                                                                     --------------
                                                                November 3,     October 28,
                                                                   2001            2001
                                                                -----------     -----------
<S>                                                             <C>             <C>
Cash flows from operating activities:
  Income (loss) from operating activities                        $  (1,967)      $  9,099
    Adjustments to reconcile net income to net cash
      used in operating activities:
        Depreciation                                                10,300          7,433
        Amortization of intangibles                                  1,268          1,630
        Amortization of debt discount                                  870            858
        Loss on disposal of equipment                                  133            554
        Deferred rent expense                                          296            596
        Stock-based compensation expense                               456          4,807
        Changes in operating assets and liabilities:
          Merchandise inventory                                    (32,972)       (42,388)
          Prepaid expenses and other assets                           (256)        (4,999)
          Accounts payable                                          25,278         24,004
          Accrued expenses and other liabilities                        88         (4,624)
                                                                 ----------      ---------
Net cash provided by (used in) operating activities                  3,494         (3,030)
                                                                 ----------      ---------
Cash flows from investing activities:
  Purchase of leasehold improvements and equipment                 (10,622)       (17,105)
                                                                 ----------      ---------
Net cash used in investing activities                              (10,622)       (17,105)
                                                                 ----------      ---------
Cash flows from financing activities:
  Borrowings on revolving credit facility                           76,146        102,201
  Payments on revolving credit facility                            (68,003)       (89,201)
  Payments on long-term debt and capital lease obligations            (132)          (207)
  Payment of deferred debt issuance costs                              (40)          (275)
  Payments of stock subscription notes receivable                     -             2,389
  Proceeds from exercise of stock options                              477            285
                                                                 ----------      ---------
Net cash provided by financing activities                            8,448         15,192
                                                                 ----------      ---------
Net increase (decrease) in cash                                      1,320         (4,943)
Cash at the beginning of the period                                  4,739          9,473
                                                                 ----------      ---------
Cash at the end of the perod                                     $   6,059       $  4,530
                                                                 ==========      =========

Supplemental disclosure of cash flow information:
  Cash paid durng the period for:
    Interest                                                     $     320       $    424
    Income taxes                                                 $   5,523       $  5,628

Supplemental disclosure of non-cash financing activities:
    Issuance of common stock to board members as compensation    $      90       $    122

</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 generally accepted accounting
         principles for annual financial statements and should be read in
         conjunction with the financial statements for the fiscal year ended
         February 3, 2001 included in our Form 10-K as filed with the Securities
         and Exchange Commission.

         We believe that the unaudited financial statements as of and for the 13
         weeks and 39 weeks ended November 3, 2001 and October 28, 2000 reflect
         all adjustments (which include normal recurring adjustments) necessary
         to present fairly our financial position, results of operations and
         cash flows for the periods presented. Due to the seasonal nature of our
         business, the results of operations for the interim period may not
         necessarily be indicative of the results of operations for a full year.

         Certain prior period amounts have been reclassified to conform their
         presentation to the fiscal 2001 financial statements.

(2)      New Accounting Pronouncements

         In June 2001, the Financial Accounting Standards Board (the "FASB")
         issued two new pronouncements: Statement of Financial Accounting
         Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142,
         "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
         purchase method of accounting be used for all business combinations
         initiated after June 30, 2001 and that the use of the
         pooling-of-interests method is no longer permitted. SFAS No. 142
         requires that upon adoption, amortization of goodwill will cease and
         instead, the carrying value of goodwill will be evaluated for
         impairment at least annually using a fair value test. Identifiable
         intangible assets will continue to be amortized over their useful lives
         and reviewed at least annually for impairment using a method
         appropriate to the nature of the intangible asset. We are required to
         implement SFAS No.141 on July 1, 2001 and SFAS No. 142 at the beginning
         of our next fiscal year, February 3, 2002. We are currently evaluating
         the impact of the adoption of these standards and have not yet
         determined the full effect that their adoption will have on our
         financial position or results of operations. Goodwill amortization for
         the 13 weeks and 39 weeks ended November 3, 2001 was approximately
         $400,000 and $1.2 million, respectively.




                                         F-5


<PAGE>


         In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
         Retirement Obligations." This statement addresses financial accounting
         and reporting for obligations associated with the retirement of
         tangible long-lived assets and the associated asset retirement costs.
         It applies to (a) all entities and (b) legal obligations associated
         with the retirement of long-lived assets that result from the
         acquisition, construction, development and/or normal operation of
         long-lived assets, except for certain obligations of lessees. This
         statement amends SFAS No. 19, "Financial Accounting and Reporting by
         Oil and Gas Producing Companies" and is effective for financial
         statements issued for fiscal years beginning after June 15, 2002. We do
         not believe the adoption of this statement will have a material impact
         on our consolidated financial position or results of operations.

         Also in August 2001, the FASB issued SFAS No. 144, "Accounting for the
         Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
         financial accounting and reporting for the impairment or disposal of
         long-lived assets and supersedes SFAS No. 121, "Accounting for the
         Impairment of Long-Lived Assets and for Long-Lived Assets to Be
         Disposed Of" and the accounting and reporting provisions of APB Opinion
         No. 30, "Reporting the Results of Operations--Reporting the Effects of
         Disposal of a Segment of a Business, and Extraordinary, Unusual and
         Infrequently Occurring Events and Transactions" for the disposal of a
         segment of a business (as previously defined in that Opinion). The
         provisions of SFAS No. 144 are effective for financial statements
         issued for fiscal years beginning after December 15, 2001. We do not
         expect the adoption of this statement will have a material impact on
         our consolidated financial position or results of operations.

 (3)     Revolving Credit Facility

         We have a $50.0 million revolving credit facility, under which we may
         borrow up to 70% of our eligible inventory and 85% of our eligible
         accounts receivable, as defined. The credit facility includes a $5.0
         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 0.50% and LIBOR borrowings from LIBOR plus 1.50% to
         LIBOR plus 2.50%. The credit facility expires on March 3, 2003, subject
         to automatic one-year renewal periods, unless terminated earlier by
         either party. We are obligated to pay fees equal to 0.125% per annum on
         the unused amount of the credit facility. The credit facility is
         secured by a first lien on accounts receivable and inventory and
         requires us to maintain specified levels of tangible net worth in the
         event that our borrowing availability is less than $10.0 million.

         At November 3, 2001, based on eligible inventory and accounts
         receivable, we were eligible to borrow $50.0 million under the
         revolving credit facility, of which $8.1 million was outstanding at a
         prime rate of 5.5%.



                                       F-6

<PAGE>

(4)      Long-term Debt
         ---------------

         Our long-term debt consists of 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 November 3, 2001, the
         Junior Subordinated Notes had a face value of $15.3 million and a
         related unamortized discount of $3.2 million, resulting in a net
         carrying value of $12.1 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 Junior Subordinated Notes of $1.0 million in
         December 2000. Additional principal payments are scheduled on 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).

 (5)     Earnings (loss) per Share

         We compute earnings (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
         stock equivalent shares. At November 3, 2001, we had 1,452,457
         anti-dilutive stock options outstanding. Common stock equivalent shares
         are not included in the computation of diluted loss per share for the
         13 weeks and 39 weeks ended November 3, 2001 because the effect would
         be anti-dilutive.

         The following table sets forth the computation of basic and diluted
         earnings per share for the periods indicated.

<TABLE>
<CAPTION>

                                                          13 Weeks Ended                39 Weeks Ended
                                                          --------------                --------------
                                                    November 3,    October 28,    November 3,   October 28,
                                                       2001           2000           2001          2000
                                                    -----------    -----------    -----------   -----------
<S>                                                 <C>            <C>            <C>           <C>
                                                              (in thousands, except per share data)
Net income (loss)                                    $   (324)      $   5,836      $  (1,967)    $   9,099

Weighted average number of common shares outstanding   12,823          12,686         12,780        12,530

Effect of dilutive securities:
  Warrants that are common stock equivalents             -                 34           -               31
  Options that are common stock equivalents              -                448           -              448

Adjusted common shares outstanding used for
  diluted computation                                  12,823          13,168         12,780        13,009

Earnings (loss) per share:
  Basic                                              $  (0.03)      $    0.46      $   (0.15)    $    0.73
  Diluted                                            $  (0.03)      $    0.44      $   (0.15)    $    0.70

</TABLE>



                                       F-7

<PAGE>

 (6)     Stock Options and Warrants

         As of November 3, 2001, we had outstanding options to purchase
         1,369,767 shares of our common stock. Included in these outstanding
         stock options are 46,144 performance-based options. These
         performance-based options are designed to become exercisable when the
         closing price of our common stock remains at or above the price target
         of $49.78 for 60 consecutive trading days. If they become exercisable,
         we will incur a minimum non-cash charge of $1.9 million. Of these
         performance-based options, 36,201 will expire on April 3, 2002 and the
         balance will expire on various dates through April 29, 2003.

         During the second quarter, we removed the price target of $49.78 for
         19,361 stock options held by a former Executive Vice President who
         retired in August 2001. As a result of the removal of the price target,
         we incurred a non-cash charge of $456,000 for the 13 weeks ended August
         4, 2001.

         At November 3, 2001, we had outstanding warrants to purchase 82,690
         shares of our common stock. These warrants have an exercise price of
         $19.91 and expire in May 2005.

(7)      Contingencies and commitments

         We have developed and from time-to-time revise financial hurdles for
         each of our existing and proposed stores. Prior to a decision to locate
         and open any new store, we evaluate, among other factors, the
         likelihood that the store will be able to achieve then current
         financial performance criteria, including initial sales volume, sales
         growth, store opening and operating costs, store contribution,
         cash-on-cash return and return on net assets. These financial criteria
         are considered not only in connection with the decision to open a new
         store but also are constantly evaluated after a store has been opened
         for a reasonable period of time to determine if they continue to be
         met.

         As a result of our ongoing store evaluation process, we have closed 36
         stores over the past three years, generally as a result of declining
         financial performance due to demographic shifts in specific markets.
         During this same time frame, we accelerated our store growth opening
         147 new stores, including 65 stores in 9 states in which we had not
         previously operated. As a result of a significantly larger and younger
         store base built during this period, through our ongoing store
         evaluation process, we have identified approximately 30 stores that are
         not currently meeting the minimum financial performance criteria. Our
         current plan is to evaluate these stores again after the Holiday
         season and, at that time, make a determination as to whether we should
         continue to operate some or all of these stores. The time table for
         potential closing of any store is based on many factors, including the
         lease expiration date, the store cash flow and lease operating
         covenants. If it is determined that some or all of the stores currently
         identified as "under performers" should be closed, charges for the
         estimated costs to close those stores would be taken in the fourth
         quarter of Fiscal 2001.

                                      F-8
<PAGE>

         The charges to close a store would principally consist of lease
         termination or sublease costs, inventory liquidation expenses, a
         provision for fixed asset write-offs, tear down costs, and employee
         severance.  Our current analysis suggests that the average cost to
         close a store would be $550,000 per store.

         On December 15, 2000, Pamela Jean O'Hara ("O'Hara"), a former employee
         in our Alameda, California store, filed a lawsuit against us, entitled
         "Pamela Jean O'Hara, Plaintiff vs. Factory 2-U Stores, Inc., et al.,
         Defendants," Case No. 834123-5, in the Superior Court of the State of
         California for the County of Alameda (the "O'Hara Lawsuit"). On August
         2, 2001, O'Hara and four other former employees in our California
         stores, filed a Second Amended Complaint in the O'Hara Lawsuit.

         The Second Amended Complaint in the O'Hara Lawsuit alleges that we
         violated the California Labor Code and Industrial Wage Commission
         Orders, as well as the California Unfair Competition Act, by failing to
         pay overtime to the plaintiffs. Plaintiffs purport to bring this action
         on behalf of themselves and all other store managers, assistant store
         managers and other undescribed "similarly-situated employees" in our
         California stores from December 15, 1996 to present. The Second Amended
         Complaint seeks compensatory damages, interest, penalties, attorneys'
         fees and disgorged profits, all in unspecified amounts. The Second
         Amended Complaint also seeks injunctive relief requiring payment of
         overtime to "non-exempt" employees. On September 4, 2001, we filed an
         answer in which we denied the material allegations of the Second
         Amended Complaint.

         Pursuant to an Order dated December 3, 2001, the Court in the O'Hara
         Lawsuit granted Plaintiff's motion for certification of two plaintiff
         clauses: (1) all persons who have been employed as assistant store
         managers at one of our California stores at any time after December 15,
         1996, and who worked hours which would have entitled them to overtime
         had they not been exempt employees; and (2) all persons who have been
         employed as store managers at one of our California stores at any time
         after December 15, 1996, and who worked hours which would have entitled
         them to overtime had they not been exempt employees.

         The Court has scheduled the trial for July 22, 2002.

         Although at this stage of the litigation is difficult to predict the
         outcome of the case with certainty, we believe that we have meritorious
         defenses to the O'Hara Lawsuit and are vigorously defending against it.
         If the O'Hara Lawsuit is decided adversely to us, the potential
         exposure could be material to our results of operations for the year in
         which the case is ultimately decided.

         In addition, 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 advice 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-9


<PAGE>


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

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

General

As of November 3, 2001, we operated 273 stores compared to 231 stores as of
October 28, 2000, an increase of 42 stores or 18.2%. We opened 12 new stores and
closed 2 stores during the 13-week period ended November 3, 2001, and opened 20
new stores in the same period last year. For the 39 weeks ended November 3,
2001, we opened 33 new stores and closed 3 stores as compared to 56 new store
openings and 12 store closings for the comparable period last year.

Due to the Company's 53-week fiscal year last year, the Company's comparable
sales weeks are compared to an adjusted comparable sales period for last year.

Results of Operations

Net sales were $145.6 million for the 13 weeks ended November 3, 2001 compared
to $136.8 million for the 13 weeks ended October 28, 2000, an increase of $8.7
million, or 6.4%. Comparable store sales for the third quarter decreased 10.5%
versus an increase of 8.2% for the same period last year.

For the 39 weeks ended November 3, 2001, net sales were $410.6 million versus
$361.9 million the same period last year, an increase of $48.8 million or 13.5%.
Comparable store sales decreased 6.6% in the first 39 weeks of this year
compared to an increase of 5.2% for the same period last year.

The increase in sales for the 13 and 39 weeks ended November 3, 2001, compared
to the same periods in the prior year, reflected an increase in the number of
stores in operation, offset by a decrease in comparable store sales.

Gross profit was $50.3 million or 34.5% of net sales for the 13 weeks ended
November 3, 2001 compared to $49.0 million or 35.8% for the 13 weeks ended
October 28, 2000.

For the 39 weeks ended November 3, 2001 and October 28, 2000, gross profit was
$141.8 million or 34.5% of net sales and $129.3 million or 35.7% of net sales,
respectively.

The increase in gross profit dollars for the 13 and 39 weeks ended November 3,
2001 versus the comparable periods last year was due to more stores in operation
this year. The decline in gross profit as a percentage of net sales for both
periods was primarily attributable to higher markdown volume, partially offset
by a higher initial mark up on merchandise purchases.




                                        3

<PAGE>

Selling and administrative expenses were $49.1 million or 33.7% of net sales for
the 13 weeks ended November 3, 2001 compared to $38.8 million or 28.3% of net
sales for the 13 weeks ended October 28, 2000.

For the 39 weeks ended November 3, 2001, selling and administrative expenses
were $139.5 million or 34.0% of net sales versus $107.7 million or 29.8% of net
sales for the same period last year.

The dollar increase in selling and administrative expenses for the 13 and 39
weeks ended November 3, 2001 versus the same periods last year was a result of
additional new stores, increased labor rates due to minimum wage increases,
higher advertising costs, occupancy costs and utility costs in certain operating
areas. In addition, included in the year-to-date selling and administrative
expenses was a charge of $1.2 million recorded in the second quarter related to
the retirement and replacement of a former Executive Vice President. The
increase in selling and administrative expenses as a percent of sales for both
the 13 and 39 weeks ended November 3, 2001 was due to lower sales volume from
new stores, a decline in comparable store sales and the items cited above.

Pre-opening and closing expenses were $1.0 million for the 13 weeks ended
November 3, 2001 compared to $1.5 million for the same period last year, a
decrease of approximately $559,000. The decrease was primarily attributable to 8
fewer new store openings in the current quarter.

For the 39 weeks ended November 3, 2001, the pre-opening and closing expenses
were $2.9 million versus $3.9 million the same period last year, a decrease of
approximately $1.0 million. The decrease was primarily due to 23 fewer new store
openings during the current period.

During the 39 weeks ended October 28, 2000, we recorded a non-recurring gain of
$1.2 million related to a condemnation award from the City of San Diego for a
store located in downtown San Diego, California.

Interest expense was $342,000 and $1.1 million for the 13 weeks and 39 weeks
ended November 3, 2001, respectively, versus $441,000 and $1.3 million for the
comparable periods last year. The continued decrease in interest expense for
both periods was primarily due to lower average outstanding borrowings and lower
interest rates on the revolving credit facility.

Income tax benefit was $234,000 and $1.4 million for the 13 weeks and 39 weeks
ended November 3, 2001, respectively, versus income tax benefit of $165,000 and
income tax provision of $2.1 million for the comparable periods last year.
Income tax provision/benefit is based upon our estimated effective tax rate for
the entire fiscal year. During the third quarter of last year, our $2.3 million
provision for income taxes was offset by a favorable adjustment of $2.5 million
to our income tax provision for a reduction in our tax valuation allowance.

We incurred a net loss of $324,000 and $2.0 million for the 13 weeks and 39
weeks ended November 3, 2001 compared to net income of $5.8 million and $9.1
million for the comparable periods last year. The decline in net income was a
result of the operating and other factors cited above.

                                        4

<PAGE>

Liquidity and Capital Resources

General

We finance our operations through credit provided by vendors and other
suppliers, amounts borrowed under our $50.0 million revolving credit facility
and internally generated cash flow. Credit terms provided by vendors and other
suppliers are usually 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 3 of Notes to Financial Statements.

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

Cash Flows

For the 39 weeks ended November 3, 2001, net cash generated from operating
activities was $3.5 million versus net cash of $3.0 million used in the same
period last year. The increase in cash flow from operating activities was
primarily due to the timing of vendor payments. Cash used in investing
activities for the 39 weeks ended November 3, 2001 was $10.1 million as compared
to $17.1 million in the same period last year. Investing activities relate
primarily to capital expenditures for both new and existing stores. The decrease
in capital expenditures from the prior year was a result of 23 fewer new stores
opened in fiscal 2001. Cash provided by financing activities, primarily from
borrowings on our revolving credit facility, for the 39 weeks ended November 3,
2001 was $8.4 million versus $15.2 million in the same period last year. The
decrease in borrowings was primarily due to the timing of vendor payments and
lower capital spending. For the 39 weeks ended November 3, 2001, the net
increase in cash was $1.3 million versus a decrease of $4.9 million for the same
period last year.

Capital Expenditures

We anticipate capital expenditures of approximately $2.1 million during the
remainder of the current fiscal year ending February 2, 2002, which include
primarily costs to open 6 new stores in November.

We are currently developing a plan to relocate and expand our current
distribution center in San Diego, California. We expect that the new
distribution center will be approximately 600,000 square feet and it is intended
to service our California, Washington, Oregon, Arizona, and Nevada markets. We
anticipate that it will become operational during the first quarter of fiscal
2003. We anticipate capital expenditures of approximately $5.0 million for this
facility, most of which will occur in fiscal 2002. We currently plan to finance
the development of this new distribution facility from internally generated cash
flow.




                                     5
<PAGE>

Evaluation of Store Performance

We have developed and from time-to-time revise financial hurdles for each of our
existing and proposed stores. Prior to a decision to locate and open any new
store, we evaluate, among other factors, the likelihood that the store will be
able to achieve then current financial performance criteria, including initial
sales volume, sales growth, store opening and operating costs, store
contribution, cash-on-cash return and return on net assets. These financial
criteria are considered not only in connection with the decision to open a new
store but also are constantly evaluated after a store has been opened for a
reasonable period of time to determine if they continue to be met.

As a result of our ongoing store evaluation process, we have closed 36 stores
over the past three years, generally as a result of declining financial
performance due to demographic shifts in specific markets.  During this same
time frame, we accelerated our store growth opening 147 new stores, including
65 stores in 9 states in which we had not previously operated. As a result of a
significantly larger and younger store base built during this period, through
our ongoing store evaluation process, we have identified approximately 30 stores
that are not currently meeting the minimum financial performance criteria. Our
current plan is to evaluate these stores again after the Holiday season and, at
that time, make a determination as to whether we should continue to operate some
or all of these stores. The time table for potential closing of any store is
based on many factors, including the lease expiration date, the store cash flow
and lease operating covenants. If it is determined that some or all of the
stores currently identified as "under performers" should be closed, charges for
the estimated costs to close those stores would be taken in the fourth quarter
of Fiscal 2001. The charges to close a store would principally consist of lease
termination or sublease costs, inventory liquidation expenses, a provision for
fixed asset write-offs, tear down costs, and employee severance.  Our current
analysis suggests that the average cost to close a store would be $550,000 per
store.

Inflation

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

Minimum Wage Increases

We employ a substantial number of employees in our stores 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 such employees. Historically, we have attempted to partially
mitigate such 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, which may have a negative effect on our future profitability.





                                       6


<PAGE>

California Utility Costs

In California, where we currently operate 123 stores, representing 44% of our
total store base, utility costs for electricity and natural gas have risen
significantly over the past year. These costs may continue to increase due to
the actions of federal and state governments and agencies, as well as other
factors beyond our control. We have attempted to mitigate such increases through
energy conservation measures and other cost reduction steps. However, we can
make no assurances that these measures and other steps taken will be adequate to
control the impact of these utility cost increases in the future, nor can we
make assurances as to what impact these utility cost increases may have on our
sales related to our core customer base in California.

Seasonality and Quarterly Fluctuations

We have historically 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, respectively) 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 these quarters even in years in which we will have full year profits.

Cautionary Statement Concerning Forward-Looking Statements

In this Quarterly Report on Form 10-Q, we have made both historical and
forward-looking statements. All of our statements other than those of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are not based on
historical facts, but rather reflect our current expectations concerning future
results and events. These forward-looking statements generally may be identified
by the use of phrases such as "believe", "expect", "anticipate", "intend",
"plan", "foresee", "likely", "will" or other similar words or phrases.
Similarly, statements that describe our objectives, plans or goals are or may be
forward-looking statements. These forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be different from any future results,
performance or achievements expressed or implied by these statements.

The following important factors, among others, could affect our future results,
causing these results to differ materially from those expressed in any of our
forward-looking statements: general economic and business conditions, trends in
our business and consumer preferences, especially as may be impacted by economic
weakness on consumer spending, the effects of government regulations and
legislation, litigation and other claims that may be asserted against us, the
effects of intense competition, changes in our business strategy or development
plans, including anticipated growth strategies and capital expenditures, the
costs and difficulties of attracting and retaining qualified personnel, the
effects of increasing labor, utility, fuel and other



                                        7



<PAGE>

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 that may be described from time to time in our
Annual Report on Form 10-K and other filings that we may make 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.


Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate risk on our long-term debt, which is
non-interest bearing and is discounted at an annual rate of 10%. At November 3,
2001, our long-term debt had a face value of $15.3 million with a net carrying
value of $12.1 million. While generally an increase in market interest rates
will decrease the value of this debt, and decreases in interest rates will have
the opposite effect, we are unable to estimate the impact that interest rate
changes will have on the value of this debt as there is no active public market
for the debt and we are unable to determine the market interest rate at which
alternate financing would have been available at November 3, 2001. In addition,
we are exposed to interest rate risk on our revolving credit facility, with the
outstanding balance accruing interest at variable rates, based on either prime
or LIBOR. Depending upon prevailing market conditions, the base prime or LIBOR
rates at which our borrowings are charged interest could be affected.




















                                        8

<PAGE>

                           PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

On December 15, 2000, Pamela Jean O'Hara ("O'Hara"), a former employee in our
Alameda, California store, filed a lawsuit against us, entitled "Pamela Jean
O'Hara, Plaintiff vs. Factory 2-U Stores, Inc., et al., Defendants," Case No.
834123-5, in the Superior Court of the State of California for the County of
Alameda (the "O'Hara Lawsuit"). On August 2, 2001, O'Hara and four other former
employees in our California stores, filed a Second Amended Complaint in the
O'Hara Lawsuit.

The Second Amended Complaint in the O'Hara Lawsuit alleges that we violated the
California Labor Code and Industrial Wage Commission Orders, as well as the
California Unfair Competition Act, by failing to pay overtime to the plaintiffs.
Plaintiffs purport to bring this action on behalf of themselves and all other
store managers, assistant store managers and other undescribed
"similarly-situated employees" in our California stores from December 15, 1996
to present. The Second Amended Complaint seeks compensatory damages, interest,
penalties, attorneys' fees and disgorged profits, all in unspecified amounts.
The Second Amended Complaint also seeks injunctive relief requiring payment of
overtime to "non-exempt" employees. On September 4, 2001, we filed an answer in
which we denied the material allegations of the Second Amended Complaint.

Pursuant to an Order dated December 3, 2001, the Court in the O'Hara Lawsuit
granted Plaintiff's motion for certification of two plaintiff clauses: (1) all
persons who have been employed as assistant store managers at one of our
California stores at any time after December 15, 1996, and who worked hours
which would have entitled them to overtime had they not been exempt employees;
and (2) all persons who have been employed as store managers at one of our
California stores at any time after December 15, 1996, and who worked hours
which would have entitled them to overtime had they not been exempt employees.

The Court has scheduled the trial for July 22, 2002.

Although at this stage of the litigation is difficult to predict the outcome of
the case with certainty, we believe that we have meritorious defenses to the
O'Hara Lawsuit and are vigorously defending against it. If the O'Hara Lawsuit is
decided adversely to us, the potential exposure could be material to our results
of operations for the year in which the case is ultimately decided.

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





                                       9
<PAGE>

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
                  None.

Item 5.   Other Information
                  None.

Item 6.   Exhibits and Reports on Form 8-K
                  None.































                                       10


<PAGE>


                                   SIGNATURES

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


FACTORY 2-U STORES, INC.

Date: December 18, 2001




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





























                                       11
<PAGE>