UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                              ----------------------

                                    FORM 10-Q

(Mark One)
 [ X ]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
              SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended                August 1, 1998                    

                                            OR

 [    ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
              SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number        0-19526                                           
                                      Goody's Family Clothing, Inc.             
              (Exact name of registrant as specified in its charter)

         Tennessee                                     62-0793974               
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                       Identification Number)
400 Goody's Lane,               Knoxville, Tennessee              37922        
(Address of principal executive offices)                        (Zip Code)

                            (423) 966-2000                                     
              (Registrant's telephone number, including area code)

     (Former name,  former address and former fiscal year, if changed since last
report.)

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. Yes X No

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the latest practicable date.

Common Stock, no par value, 33,327,130 shares outstanding as of August 27, 1998.




<PAGE>


                          Goody's Family Clothing, Inc.
                               Index to Form 10-Q
                                 August 1, 1998



Part I - Financial Information:

     Item 1 - Financial Statements

         Consolidated Statements of Operations.........................   3

         Consolidated Balance Sheets...................................   4

         Consolidated Statements of Cash Flows.........................   5

         Notes to Consolidated Financial Statements...................   6 - 7

         Independent Accountants' Review Report........................   8

     Item 2 - Management's Discussion and Analysis of Financial Condition and
                Results of Operations................................   9 - 13

     Item 3 - Quantitative and Qualitative Disclosures about Market Risk  13


Part II - Other Information.............................................  14

     Item 1.  Legal Proceedings
     Item 2.  Changes in Securities and Use of Proceeds
     Item 3.  Defaults upon Senior Securities
     Item 4.  Submission of Matters to a Vote of Security Holders
     Item 5.  Other Information
     Item 6.  (a)  Exhibits
     Item 6.  (b)  Reports on Form 8-K


Signatures.............................................................. 15















<PAGE>



PART 1 - FINANCIAL INFORMATION

--------------------------------------------------------------------------------

Item 1  - Consolidated Financial Statements

Goody's Family Clothing, Inc. and Subsidiaries
Consolidated Statements of Operations - Unaudited
(In thousands, except per share amounts)
<TABLE>
<CAPTION>


                                                     Thirteen                            Twenty-six
                                                  Weeks Ended                           Weeks Ended           
                                           August 1,           August 2,          August 1,         August 2,
                                             1998                1997               1998               1997   
<S>                                       <C>               <C>                 <C>                 <C>
Sales                                     $    249,489       $    212,206       $    476,203      $    402,263
Cost of sales and occupancy expenses           178,345            154,036            337,139           289,116
Gross profit                                    71,144             58,170            139,064           113,147

Selling, general and administrative
   expenses                                     57,632             49,800            113,536            97,045
Earnings from operations                        13,512              8,370             25,528            16,102

Interest expense                                    87                 94                181               219
Investment income                                  462                392                998               878
Earnings before income taxes                    13,887              8,668             26,345            16,761

Provision for income taxes                       5,229              3,250              9,919             6,285

Net earnings                              $      8,658       $      5,418       $     16,426      $     10,476

Earnings per common share (a)
   Basic                                  $       0.26       $       0.17       $       0.49      $       0.32
   Diluted                                $       0.25       $       0.16       $       0.47      $       0.31

Weighted average common
shares outstanding (a)
   Basic                                        33,538             32,496             33,384            32,421
   Diluted                                      34,989             33,579             34,836            33,406

</TABLE>


     (a)  Earnings  per share and related  data for the periods  ended August 2,
1997 have been  restated to reflect a two-for-one  stock split  effected in July
1998.






     See accompanying Notes to Consolidated Financial Statements and Independent
Accountants' Review Report.


<PAGE>


Goody's Family Clothing, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
                                                               August 1,          January 31,        August 2,
                                                                 1998                1998               1997   
                                                              (unaudited)                           (unaudited)
<S>                                                         <C>                 <C>                <C>

ASSETS
Current Assets
   Cash and cash equivalents                                 $     41,872        $     64,174      $     41,667
   Investments                                                          -               1,555             1,512
   Inventories                                                    201,295             151,667           153,653
   Accounts receivable and other current assets                    23,178              10,519            15,836
   Total current assets                                           266,345             227,915           212,668
Property and equipment, net                                       100,446              97,468            90,355
Other assets                                                        3,037               2,933             3,200

   Total assets                                              $    369,828        $    328,316      $    306,223


LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
    Accounts payable                                         $    126,420        $    105,231      $    118,530
    Accrued expenses                                               44,341              42,194            38,136
    Income taxes payable                                                -               6,674                -
    Current portion of long- term debt                                263                 263               239
    Total current liabilities                                     171,024             154,362           156,905
Long-term debt                                                        608                 608               871
Other long-term liabilities                                         3,381               3,023             2,639
Deferred income taxes                                              10,368              10,266             9,668
    Total liabilities                                             185,381             168,259           170,083

Commitments and Contingencies


Shareholders' Equity
    Preferred stock $1.00 par value;
      Authorized - 2,000,000 shares;
        Issued and outstanding - none
    Class B Common stock no par value;
      Authorized - 50,000,000 shares;
        Issued and outstanding - none
    Common stock no par value;
      Authorized - 50,000,000 shares;
        Issued  and outstanding- 33,326,130, 32,703,716
        and 32,590,214 shares, respectively                        28,034              25,097            24,560
Paid-in capital                                                     9,748               4,721             4,151
Retained earnings                                                 146,665             130,239           107,429
         Total shareholders' equity                               184,447             160,057           136,140

Total liabilities and shareholders' equity                   $    369,828        $    328,316      $    306,223

</TABLE>

     See accompanying Notes to Consolidated Financial Statements and Independent
Accountants' Review Report.


<PAGE>



Goody's Family Clothing, Inc.  and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(In thousands)
<TABLE>
<CAPTION>
                                                                                   Twenty-six Weeks Ended      
                                                                                  August 1,          August 2,
                                                                                    1998                1997   
<S>                                                                             <C>                 <C>    

Cash Flows from Operating Activities
Net earnings                                                                     $     16,426      $     10,476
Adjustments to reconcile net earnings to net cash used
  in operating activities:
     Depreciation and amortization                                                      6,587             5,522
     Net loss on asset disposals and write-down                                           649               488
     Changes in assets and liabilities:
         Inventories                                                                  (49,628)          (46,159)
         Accounts payable                                                              17,862            33,634
         Income taxes                                                                 (12,754)           (8,716)
         Other assets and liabilities                                                  (3,035)             (315)
             Cash used in operating activities                                        (23,893)           (5,070)

Cash Flows from Investing Activities
Acquisitions of property and equipment                                                (10,242)           (7,414)
Proceeds from sale of property and equipment                                                28                4
             Cash used in investing activities                                        (10,214)           (7,410)

Cash Flows from Financing Activities
Exercise of stock options                                                               7,964             2,088
Changes in cash management accounts                                                     3,841             8,743
             Cash provided by financing activities                                     11,805            10,831

Cash and cash equivalents
Net decrease for the period                                                           (22,302)           (1,649)
Balance, beginning of period                                                           64,174            43,316
Balance, end of period                                                           $     41,872      $     41,667

Supplemental Disclosures
     Income tax payments                                                         $     17,205      $     14,163
     Interest payments                                                                    133               151

</TABLE>












     See accompanying Notes to Consolidated Financial Statements and Independent
Accountants' Review Report.


<PAGE>



Goody's Family Clothing, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

(1)  Basis of Presentation

     The accompanying  condensed  consolidated  financial  statements of Goody's
Family Clothing,  Inc. and  subsidiaries  (the "Company") are unaudited and have
been  prepared  pursuant  to the rules and  regulations  of the  Securities  and
Exchange Commission. Although certain information normally included in financial
statements prepared in accordance with generally accepted accounting  principles
has been condensed or omitted,  the Company  believes that the  disclosures  are
adequate to make the information presented not misleading. In the opinion of the
Company's  management,   the  accompanying   unaudited   consolidated  financial
statements include all adjustments, consisting primarily of normal and recurring
adjustments,  necessary  for a  fair  presentation  of the  Company's  financial
position,  results  of  operations  and  cash  flows  for  the  interim  periods
presented.  Due to the seasonal nature of the Company's business, the results of
operations for the interim periods are not necessarily indicative of the results
that may be achieved for the entire year. The condensed  consolidated  financial
statements should be read in conjunction with the audited consolidated financial
statements  and the notes thereto  contained in the Company's 1997 Annual Report
on Form 10-K for its fiscal year ended January 31, 1998.

 (2) Credit Arrangements

     On May 26, 1998, the Company amended its credit agreement with a consortium
of banks for an  unsecured  revolving  line of credit  which  provides  for cash
borrowings for general corporate purposes as well as for the issuance of letters
of credit of up to  $130,000,000  and which expires on May 31, 2001. The Company
is committed to pay (i) interest on the cash  borrowings at a  fluctuating  base
rate or LIBOR plus an applicable margin, as defined,  (ii) letter of credit fees
based  on the  number  of days a letter  of  credit  is  outstanding  times  the
applicable fee and (iii) an annual  commitment fee payable quarterly in advance.
The terms of this credit agreement require,  among other things,  maintenance of
minimum levels of shareholders' equity, compliance with certain financial ratios
and Mr.  Robert  M.  Goodfriend  remaining  as  Chairman  of the  Board or Chief
Executive  Officer  of  the  Company,   and  place  restrictions  on  additional
indebtedness, asset disposals, investments and capital expenditures.

(3)  Stock Split

In June 1998, the Company's  Board of Directors  authorized a two-for-one  stock
split to be  effected  as a dividend  consisting  of one share of the  Company's
common stock for each share outstanding. The stock dividend was paid on July 17,
1998 to  shareholders  of record at the close of business  on July 1, 1998.  All
previously  reported  earnings per share and related data for the periods  ended
August 2, 1997 have been restated to reflect such two-for-one stock split.

(4)  Earnings per Share

The  Company  adopted  Statement  of  Financial  Accounting  Standards  No. 128,
"Earnings  per  Share"  as  required  in the  fourth  quarter  of  fiscal  1997.
Accordingly, all previously reported earnings per share and related data for the
periods ended August 2, 1997 have been restated to conform to this new standard.
Basic  earnings  per common  share is computed by dividing  net  earnings by the
weighted  average  number of common  shares  outstanding.  Diluted  earnings per
common share is computed by dividing net earnings by the weighted average number
of common shares outstanding and potentially dilutive common shares (solely from
the effect of stock options outstanding).



<PAGE>


Goody's Family Clothing, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
(Unaudited)

(5) Recent Accounting Pronouncements

Segment Reporting

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  About  Segments of an
Enterprise  and Related  Information"  ("SFAS No. 131").  SFAS No. 131, which is
effective  beginning  with the  Company's  fiscal  year  1998,  establishes  new
standards for reporting  information  about key segments by public  enterprises.
The Company does not expect the implementation of SFAS No. 131 to have an effect
on its current reporting and disclosure practices.

Accounting for Costs of Computer Software

In  March  1998,  the  American  Institute  of  Certified  Public   Accountants'
Accounting  Standards Executive Committee issued Statement of Position No. 98-1,
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal Use" ("SOP No. 98-1"). SOP No. 98-1, which is effective  beginning with
the  Company's  fiscal  year 1999,  requires  that costs  incurred to develop or
obtain  software for internal use be  capitalized.  SOP No. 98-1 will be adopted
for the  Company's  fiscal year ending  January 29, 2000 and is not  expected to
have a material effect on the Company's financial statements.

 (6) Reclassifications

Certain  reclassifications  have been made to the financial  statements of prior
periods to conform to the current period presentation.


<PAGE>



INDEPENDENT ACCOUNTANTS' REVIEW REPORT

Board of Directors and Shareholders
Goody's Family Clothing, Inc.
Knoxville, Tennessee:

We have  reviewed the  accompanying  condensed  consolidated  balance  sheets of
Goody's Family  Clothing,  Inc. and subsidiaries as of August 1, 1998 and August
2, 1997 and the related consolidated statements of operations and cash flows for
the thirteen and twenty-six week periods then ended. These financial  statements
are the responsibility of the Company's management.

We  conducted  our  reviews in  accordance  with  standards  established  by the
American  Institute  of  Certified  Public  Accountants.  A  review  of  interim
financial  information consists principally of applying analytical procedures to
financial data and of making inquiries of persons  responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the  expression  of an opinion  regarding the  financial  statements  taken as a
whole.
Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with generally
accepted accounting principles.

We have  previously  audited,  in accordance  with generally  accepted  auditing
standards,  the consolidated balance sheet of Goody's Family Clothing,  Inc. and
subsidiaries as of January 31, 1998 and the related  consolidated  statements of
operations,  shareholders'  equity  and cash  flows for the year then ended (not
presented  herein);  and in our report  dated March 18,  1998,  we  expressed an
unqualified  opinion  on  those  financial  statements.   In  our  opinion,  the
information set forth in the accompanying  condensed  consolidated balance sheet
as of January 31, 1998 is fairly stated, in all material  respects,  in relation
to the consolidated balance sheet from which it has been derived.

/s/Deloitte & Touche LLP
Atlanta, Georgia
August 18, 1998











<PAGE>


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

Forward-looking Statements

This Quarterly  Report contains  certain  forward-looking  statements  which are
based upon current expectations,  plans and estimates and involve material risks
and uncertainties  including,  but not limited to, customer demand and trends in
the apparel and retail industry and acceptance of merchandise  acquired for sale
by the Company, the effectiveness of planned advertising and promotional events,
the impact of  competitors'  pricing and store  expansion,  the ability to enter
into leases for new store locations, individual store performance, including new
stores,  adverse weather conditions,  employee  relations,  the general economic
conditions within the Company's markets and the effect of the Year 2000 issue on
the Company and third parties who provide goods and services to the Company. The
Company  does not  undertake  to publicly  update or revise its  forward-looking
statements even if experience or future changes make it clear that any projected
results   expressed  or  implied  therein  will  not  be  realized.   Additional
information  on  risk  factors  that  could  potentially  affect  the  Company's
financial  results  may be  found  in the  Company's  public  filings  with  the
Securities  and  Exchange  Commission.  Certain of such  filings may be accessed
through the Securities and Exchange Commission's web site, http://www.sec.gov.

Results of Operations

The following table sets forth unaudited results of operations,  as a percent of
sales, for the periods indicated:
<TABLE>
<CAPTION>

                                                             Thirteen                    Twenty-six
                                                           Weeks Ended                 Weeks Ended        
                                                      August 1,    August 2,        August 1,   August 2,
                                                      1998            1997          1998          1997    
<S>                                               <C>             <C>           <C>             <C>    

    Sales                                            100.0%          100.0%        100.0%        100.0%
    Cost of  sales and occupancy expenses             71.5            72.6          70.8          71.9
    Gross profit                                      28.5            27.4          29.2          28.1
    Selling, general and administrative expenses      23.1            23.5          23.8          24.1
    Earnings from operations                           5.4             3.9           5.4           4.0
    Interest expense                                     -             -             0.1           -
    Investment income                                  0.2             0.2           0.2           0.2
    Earnings before income taxes                       5.6             4.1           5.5           4.2
    Provision for income taxes                         2.1             1.5           2.1           1.6
    Net earnings                                       3.5%            2.6%          3.4%          2.6%
</TABLE>

     Thirteen  Weeks Ended August 1, 1998  Compared  with  Thirteen  Weeks Ended
August 2, 1997

Overview - During the second quarter of fiscal 1998, the Company opened five new
stores,  relocated  three  stores,  remodeled  one store and  closed  one store,
bringing  the total  number of  stores  in  operation  at August 1, 1998 to 233,
compared  with 212 at August 2,  1997.  During the  corresponding  period of the
previous  fiscal year, the Company opened four new stores,  relocated two stores
and closed one store.  Net earnings  for the second  quarter of fiscal 1998 were
$8,658,000,  or 3.5% of sales,  compared with $5,418,000,  or 2.6% of sales, for
the second quarter of fiscal 1997.

Sales - Sales for the second quarter of fiscal 1998 were  $249,489,000,  a 17.6%
increase over the  $212,206,000  in sales for the second quarter of fiscal 1997.
This  increase of  $37,283,000  consisted of (i) a 6.6%  increase in  comparable
store sales of $13,307,000 over such sales for the  corresponding  period of the
previous fiscal year and (ii) additional sales from new and transition stores of
$23,976,000.  Sales for the  thirteen  weeks ended August 1, 1998 were driven by
continuing   customer   acceptance  of  certain  brand-name  and  private  label
merchandise.


<PAGE>



Gross  Profit  -  Gross  profit  for the  second  quarter  of  fiscal  1998  was
$71,144,000,  or 28.5% of sales, a $12,974,000  increase over the $58,170,000 in
gross  profit,  or 27.4% of  sales,  generated  for the  second  quarter  of the
previous fiscal year. The 1.1% increase in gross profit,  as a percent of sales,
in the second  quarter of fiscal 1998 compared with the second quarter of fiscal
1997  consists  of (i) a decrease in cost of sales by 0.9% as a result of better
inventory  management and control and continuing  customer acceptance of certain
key merchandise items, including private label merchandise,  and (ii) a decrease
in primarily  fixed  occupancy  costs by 0.2% due to a  substantial  increase in
sales for the second quarter of fiscal 1998.

Selling,   General   and   Administrative   Expenses  -  Selling,   general  and
administrative  expenses for the second quarter of fiscal 1998 were $57,632,000,
or 23.1% of sales,  an  increase of  $7,832,000  from  $49,800,000,  or 23.5% of
sales,  for the second  quarter of fiscal  1997.  The 0.4%  decrease in selling,
general  and  administrative  expenses,  as a percent  of sales,  for the second
quarter of fiscal 1998 compared with the second  quarter of fiscal 1997 resulted
from (i) a 0.4% decrease in advertising and promotional expenses and (ii) a 0.3%
decrease in payroll  expenses  which were  offset by (x) a 0.2%  increase in the
provision for store  relocation  costs and (y) a 0.1% increase in other selling,
general and administrative expenses.

     Interest  Expense - Interest  expense for the second quarter of fiscal 1998
decreased by $7,000  compared  with the second  quarter of the  previous  fiscal
year.

Investment  Income -  Investment  income for the second  quarter of fiscal  1998
increased by $70,000  compared  with the second  quarter of the previous  fiscal
year primarily as a result of an increase in invested funds during the period.

Income Taxes - The provision  for income taxes for the second  quarter of fiscal
1998 was  $5,229,000,  an effective tax rate of 37.7% of earnings  before income
taxes,  compared  with  $3,250,000,  an effective  tax rate of 37.5% of earnings
before income taxes,  for the second  quarter of the previous  fiscal year.  The
increase in the effective tax rate is primarily due to a modest  increase in the
combined state income tax rates.

     Twenty-Six  Weeks Ended August 1, 1998 Compared with Twenty-Six Weeks Ended
August 2, 1997

Overview - During the twenty-six  weeks ended August 1, 1998, the Company opened
12 new  stores,  relocated  four  stores,  remodeled  two  stores and closed two
stores,  bringing  the total  number of stores in operation at August 1, 1998 to
233, compared with 212 at August 2, 1997. During the corresponding period of the
previous  fiscal year, the Company  opened 11 new stores,  relocated four stores
and closed two stores.  Net  earnings for the  twenty-six  weeks ended August 1,
1998 were $16,426,000, or 3.4% as a percent of sales, compared with $10,476,000,
or 2.6% as a percent of sales, for the twenty-six weeks ended August 2, 1997.

Sales - Sales for the twenty-six  weeks ended August 1, 1998 were  $476,203,000,
an 18.4% increase over the $402,263,000 in sales for the corresponding period of
the previous fiscal year.  This increase of $73,940,000  consisted of (i) a 6.9%
increase  in  comparable  store  sales of  $26,451,000  over such  sales for the
corresponding  period of the previous fiscal year and (ii) additional sales from
new and transition  stores of $47,489,000.  Sales for the twenty-six weeks ended
August  1, 1998  were  driven  by  continuing  customer  acceptance  of  certain
brand-name and private label merchandise.

Gross  Profit - Gross profit for the  twenty-six  weeks ended August 1, 1998 was
$139,064,000, or 29.2% of sales, a $25,917,000 increase over the $113,147,000 in
gross profit, or 28.1% of sales,  generated for the corresponding  period of the
previous fiscal year. The 1.1% increase in gross profit,  as a percent of sales,
for the twenty-six weeks ended August 1, 1998 compared with the twenty-six weeks
ended August 2, 1997  resulted  from (i) a 0.9%  increase in gross  margins as a
result of better  inventory  management  and  control  and  continuing  customer
acceptance  of  certain  key   merchandise   items,   including   private  label
merchandise,  and  (ii) a 0.2%  decrease  in  primarily  fixed  occupancy  costs
resulting from leverage achieved from higher sales.



<PAGE>


Selling,   General   and   Administrative   Expenses  -  Selling,   general  and
administrative  expenses  for the  twenty-six  weeks  ended  August 1, 1998 were
$113,536,000, or 23.8% of sales, an increase of $16,491,000 from $97,045,000, or
24.1% of sales,  for the  corresponding  period of the previous fiscal year. The
0.3% decrease in selling,  general and administrative  expenses, as a percent of
sales,  for the  twenty-six  weeks  ended  August  1,  1998  compared  with  the
twenty-six  weeks  ended  August 2, 1997  resulted  from (i) a 0.3%  decrease in
advertising  and  promotional  expenses  and  (ii) a 0.3%  decrease  in  payroll
expenses  which were offset by (x) a 0.2%  increase in the  provision  for store
relocation  costs  and  (y) a  0.1%  increase  in  other  selling,  general  and
administrative expenses.

     Interest  Expense - Interest  expense for the twenty-six weeks ended August
1, 1998  decreased  by $38,000  compared  with the  corresponding  period of the
previous fiscal year.

Investment  Income - Investment  income for the twenty-six weeks ended August 1,
1998  increased  by  $120,000  compared  with the  corresponding  period  of the
previous  fiscal year  primarily  as a result of an  increase in invested  funds
during the period.

Income Taxes - The  provision  for income taxes for the  twenty-six  weeks ended
August 1, 1998 was $9,919,000, an effective tax rate of 37.7% of earnings before
income  taxes,  compared  with  $6,285,000,  an  effective  tax rate of 37.5% of
earnings  before  income  taxes,  for the  corresponding  period of the previous
fiscal year. The increase in the effective tax rate is primarily due to a modest
increase in the effective state income tax rates.

Liquidity and Capital Resources

Financial  Position - The Company's  primary sources of liquidity are cash flows
from  operations,  including  credit terms from vendors and borrowings under its
credit  agreement.  At  August  1,  1998,  the  Company's  working  capital  was
$95,321,000 compared with $55,763,000 at August 2, 1997. For the twenty-six week
period  ended  August  1, 1998  compared  with the  corresponding  period of the
previous year, (i) cash, cash equivalents and investment securities decreased by
$1,307,000,  (ii) net property and  equipment  increased by  $10,091,000,  (iii)
inventories  increased by  $47,642,000  and (iv) accounts  payable  increased by
$7,890,000. The increase in inventories was primarily due to (i) inventories for
new  stores  and (ii) the  strategic  build-up  of  inventory  for  certain  new
merchandise categories in all stores. Trade payables as a percent of inventories
decreased to 62.8% at August 1, 1998 as compared with 77.1% at August 2, 1997.

At August 1, 1998, the Company had an unsecured  revolving line of credit from a
consortium of banks,  which provides for cash  borrowings for general  corporate
purposes as well as for the issuance of letters of credit of up to  $130,000,000
and which expires on May 31, 2001. The terms of this credit  agreement  require,
among other  things,  maintenance  of minimum  levels of  shareholders'  equity,
compliance with certain financial ratios and Mr. Robert M. Goodfriend  remaining
as Chairman of the Board or Chief  Executive  Officer of the Company,  and place
restrictions  on  additional  indebtedness,  asset  disposals,  investments  and
capital  expenditures.  At August 1, 1998,  the Company  had no cash  borrowings
under this credit  agreement and $68,840,000 was in use for outstanding  letters
of  credit,  compared  with no cash  borrowings  and  $64,466,000  utilized  for
outstanding letters of credit at August 2, 1997. In addition, there were no cash
borrowings  during the twenty-six weeks ended August 1, 1998 and August 2, 1997.
Letters of credit outstanding  averaged  $66,988,000 during the twenty-six weeks
ended August 1, 1998 compared with $53,984,000 during the twenty-six weeks ended
August 2, 1997. The highest balance of letters of credit  outstanding during the
twenty-six  weeks ended August 1, 1998 was  $80,142,000  (in May 1998)  compared
with  $71,900,000  (in June 1997)  during the  twenty-six  weeks ended August 2,
1997.

Cash Flows - Operating  activities  used cash of  $23,893,000  in the twenty-six
weeks ended August 1, 1998 compared with  $5,070,000  used in the  corresponding
period of the previous fiscal year. Cash used for increases in inventory  during
the  twenty-six  weeks ended August 1, 1998 and August 2, 1997 were  $49,628,000
and $46,159,000, respectively. Accounts payable provided cash of $17,862,000 and
$33,634,000  in the  twenty-six  weeks ended  August 1, 1998 and August 2, 1997,
respectively.   Depreciation  and  amortization  expenses  were  $6,587,000  and
$5,522,000  for the  twenty-six  weeks ended  August 1, 1998 and August 2, 1997,
respectively.



<PAGE>


Cash flows from investing  activities reflected a $10,214,000 and $7,410,000 net
use of cash for the  twenty-six  weeks ended  August 1, 1998 and August 2, 1997,
respectively.  Cash was used primarily to fund capital  expenditures for new and
existing  stores as well as  relocated  and  remodeled  stores  during the first
twenty-six weeks of fiscal 1998 and 1997.

Cash provided by financing  activities for the twenty-six  weeks ended August 1,
1998 was $11,805,000  compared with $10,831,000 for the corresponding  period of
the previous  fiscal year. Cash  management  programs  maintained by the Company
provided  cash of  $3,841,000  in the  twenty-six  weeks  ended  August  1, 1998
compared with  $8,743,000 for the  corresponding  period of the previous  fiscal
year.  During the twenty-six  weeks ended August 1, 1998,  the Company  received
$2,937,000  in cash and  realized a tax  benefit of  $5,027,000,  compared  with
$1,196,000 in cash and a tax benefit of $892,000 during the corresponding period
of the  previous  year from the  issuance of common  stock upon the  exercise of
stock options.

Outlook - The Company plans to open approximately 28 to 30 new stores,  relocate
or  remodel  approximately  10 to 12  stores,  close  two  stores  and open four
temporary  stores in four new test markets during fiscal 1998.  During the third
quarter to date, the Company has opened five new stores and remodeled one store.
Management  estimates  that  capital  expenditures   aggregating   approximately
$20,000,000 will be required for opening new and temporary stores, relocating or
remodeling  existing stores,  purchasing  computer systems and equipment and for
other capital expenditure requirements during the remainder of fiscal 1998.

The Company's  primary needs for capital resources are for the purchase of store
inventories,  capital  expenditures  and normal operating  expenses.  Management
believes that cash flows from  operations,  including  credit terms from vendors
and the borrowings  available under the credit agreement,  will be sufficient to
meet the Company's  operating and capital  expenditure  requirements  through at
least the remainder of fiscal 1998.

Impact of the Year 2000 Issue

The Year 2000 issue is the result of computer  programs  being written using two
digits  rather than four to define the  applicable  year.  Any of the  Company's
computer programs that have  date-sensitive  software may recognize a date using
"00" as the year 1900  rather  than the year 2000.  This could  result in system
failure or miscalculations causing disruptions of operations,  including,  among
other things, a temporary inability to process transactions or engage in similar
normal business activities.

The State of Readiness

In the normal course of business,  the Company  initiated plans for replacements
or enhancements to its core business  systems in fiscal 1996 which would also be
Year 2000  compliant.  During fiscal 1998, the Company  established an oversight
committee,  consisting of  individuals  from each of its  functional  areas,  to
review  all of the  Company's  computer  systems  and  programs,  as well as the
computer  systems of the third  parties  upon whose  data or  functionality  the
Company relies in any material  respect,  and to assess their ability to process
transactions  in the year 2000.  This  committee  meets  regularly to review the
progress of the Company's Year 2000 compliance issues. Based on this review, the
Company has determined  that a significant  portion of its computer  systems and
programs  still needs to be modified or replaced  and tested to ensure that they
are Year 2000 compliant. The Company is currently utilizing significant internal
and  external  resources  to modify or  replace  and test its  various  software
programs and systems for Year 2000 compliance.  The Company  anticipates that it
will  complete  the Year 2000  project  during the first half of fiscal 1999 and
believes  that  all of its  Year  2000  compliance  issues  will  be  adequately
addressed with the planned modifications,  replacements and testing. However, if
such  modifications,  replacements and testing are not completed before the year
2000, there could be a material adverse impact on the Company.

 In addition,  the Company has  contacted  its  significant  suppliers and other
service  providers to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate their own Year 2000 issues.  There can
be no guarantee  that the computer  systems of these third  parties on which the
Company's systems rely will be timely converted, or that a failure to convert by
another  company,  or a  conversion  that is  incompatible  with  the  Company's
systems,  would not have material adverse effect on the Company.  The Company is
not yet in a position to assess any third  party's  compliance  efforts with the
Year 2000  issues or the impact on the  Company if any third  party's  Year 2000
compliance efforts fail.

Costs to Address Year 2000 Issues

During the  twenty-six  weeks ended  August 1, 1998,  the costs  incurred by the
Company  for Year 2000  issues  amounted to  approximately  $140,000,  including
$110,000  for external and existing  internal  resources  that were  expensed as
incurred.  The remaining  costs of  compliance  for the Company are estimated at
$1,200,000,  which  primarily  consist  of (i)  $200,000  for  the  purchase  of
capitalizable  software and hardware and (ii) $1,000,000  representing  external
and existing internal  resources that will be expensed as incurred.  The Company
does not  believe  that the costs  relating  to the Year 2000 issues will have a
material adverse impact on the Company.

Risks of Year 2000 Issues

The costs of the project and the date on which the Company plans to complete the
Year  2000   modifications   and  replacements  to  its  systems  are  based  on
management's  best estimates,  utilizing  numerous  assumptions of future events
including  the  continued   availability  of  certain  resources,   third  party
modification  plans and other factors.  However,  there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those  plans.  Specific  factors  that  might  cause such  material  differences
include,  but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
failure of third parties on which the Company relies and similar uncertainties.

Contingency Plans

In an attempt to  mitigate  the above  risks,  the  Company is in the process of
developing contingency plans for its core systems applications and any unplanned
interruptions  arising  from the date  change as well as from the failure of any
third party's compliance.

Seasonality  and  inflation 

     The  Company's  business  is  seasonal  by  nature.  The  Christmas  season
(beginning the Sunday before Thanksgiving and ending on the first Saturday after
Christmas), the back-to-school season (beginning approximately the first week of
August and continuing through the first week of September) and the Easter season
(beginning  approximately  two weeks  before  Easter  Sunday  and  ending on the
Saturday preceding Easter) collectively accounted for approximately 34.5% of the
Company's  annual  sales based on the  Company's  last three  fiscal years ended
January 31,  1998.  In general,  sales  volume  varies  directly  with  customer
traffic,  which is  heaviest  during the third and fourth  quarters  of a fiscal
year.  Because of the  seasonality  of the Company's  business,  results for any
quarter are not  necessarily  indicative of the results that may be achieved for
the full year.

Inflation  can affect the costs  incurred by the Company in the  purchase of its
merchandise,  the leasing of its stores and certain  components  of its selling,
general, and administrative  expenses.  During the last three fiscal years ended
January 31, 1998,  inflation has not adversely affected the Company's  business,
although  there can be no  assurance  that  inflation  will not have a  material
adverse effect in the future.

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

The  Company  has no  material  investments  or risks in market  risk  sensitive
instruments.




<PAGE>


PART II - OTHER INFORMATION


Item 1 - Legal Proceedings  -  None

Item 2. -  Changes in Securities  -  None

Item 3.  -  Defaults Upon Senior Securities  -  None

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

The Company held its Annual Meeting of Shareholders  (the "Meeting") on June 17,
1998 at which the election of directors was submitted to a vote of shareholders.

At the Meeting,  the following  persons were elected as directors of the Company
for three year terms expiring at the 2001 Annual Meeting of Shareholders:

Robert M. Goodfriend - 15,202,043  shares of common stock were voted in favor of
his election;  98,669 shares of common stock were withheld; and 1,185,378 shares
of common stock were not voted.

Robert F. Koppel - 15,200,392  shares of common stock were voted in favor of his
election;  100,320 shares of common stock were withheld; and 1,185,378 shares of
common stock were not voted.

The other  directors of the Company  include Irwin L.  Lowenstein  and Cheryl L.
Turnbull,  whose terms expire at the 1999 Annual  Meeting of  Shareholders,  and
Harry M. Call and  Samuel  J.  Furrow,  whose  terms  expire at the 2000  Annual
Meeting of Shareholders.

Item 5.  -  Other Information  - None

Item 6.  -  Exhibits and Reports on Form 8-K
        a)   Exhibits -
     
     10.51 Third Amendment  Agreement dated May 26, 1998 between the Registrant,
GOODY'S MS, L.P.,  GOODY'S IN, L.P., GFCTX,  L.P., GFCTN,  L.P., GFCGA, L.P. and
GFC FS, Inc. as borrowers,  TREBOR of TN, Inc., SYDOOG, Inc. and GOFAMCLO,  Inc.
as guarantors,  Lenders as identified  therein and First Tennessee Bank National
Association as Administrative Agent.

     10.52 Employment Agreement between Goody's Family Clothing,  Inc. and Harry
M. Call dated May 20, 1998.

     10.53 Employment Agreement between Goody's Family Clothing, Inc. and Edward
R. Carlin dated May 20, 1998.

     10.54 Employment Agreement between Goody's Family Clothing, Inc. and Thomas
R. Kelly, Jr. dated May 20, 1998.

     10.55 Employment Agreement between Goody's Family Clothing,  Inc. and David
R. Mullins dated May 20, 1998.

     11      Statement re: Computation of Per Share Earnings

     15      Accountants' Awareness Letter

     27      Financial Data Schedule

        b)   Reports on Form 8-K  -  None



<PAGE>





                          GOODY'S FAMILY CLOTHING, INC.



                                   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.





                                                   GOODY'S FAMILY CLOTHING, INC.
                                                                    (Registrant)




             Date:    September 9, 1998   /s/ Harry M. Call                    
                                          Harry M. Call
                                          Director, President and
                                          Chief Operating Officer



             Date:    September 9, 1998   /s/ Edward R. Carlin               
                                          Edward R. Carlin
                                          Executive Vice President,
                                          Chief Financial Officer and Secretary
                                          (Principal Financial Officer)



             Date:    September 9, 1998   /s/ David G. Peek              
                                          David G. Peek
                                          Vice President, Corporate Controller 
                                          and Chief Accounting Officer
                                          (Principal Accounting Officer)




<PAGE>