The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," "thinks," and similar expressions are forward-looking statements.
Forward-looking statements include statements about our expected results of operations, capital expenditures and store openings. Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that our goals will be achieved. These forward-looking statements are made as of the date of this Form 10-Q, and we assume no obligation to update or revise them or provide reasons why actual results may differ. Factors that might cause such a difference include, but are not limited to, our ability to respond to changing fashion trends, miscalculation of the demand for our products,

effective management of our growth, decline in comparable store sales performance, ongoing competitive pressures in the apparel industry, changes in the level of consumer spending or preferences in apparel, our ability to attract and retain key management personnel and/or other factors discussed in "Risk Factors" and elsewhere in this Form 10-Q.

OVERVIEW

We design, develop and produce a distinctive line of contemporary women's apparel and accessories. While we attract a broad audience, our target customer is a 18 to 34-year-old woman who seeks current fashion trends to suit her lifestyle. The "bebe look" appeals to a hip, sexy, sophisticated, body-conscious woman who takes pride in her appearance. The bebe customer expects value in the form of current fashion and high quality at a competitive price.

Our distinctive product offering includes a full range of separates, tops, sweaters, dresses, active wear and accessories in the following lifestyle categories: career, evening, casual and active. We design and develop the majority of our merchandise in-house, which is manufactured to our specifications. The remainder of our merchandise is sourced directly from third-party manufacturers.

We market our products under the bebe, BEBE SPORT, bbsp and 2b bebe brand names through our 308 retail stores, of which 212 are bebe stores, 62 are BEBE SPORT stores, 15 are 2b bebe stores, 18 are bebe outlet stores and 1 is a bebe accessories store as of April 4, 2009. These stores are located in 35 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Canada. In addition, we have an on-line store at www.bebe.com and our licensees operate 30 international stores as of April 4, 2009. During the nine months ended April 4, 2009, we opened 12 stores, including 6 bebe stores, 1 BEBE SPORT store and 5 2b bebe stores and closed 5 bebe stores and 2 BEBE SPORT stores. We expect to open approximately 14 stores, including approximately 6 bebe stores, 1 BEBE SPORT store and 7 2b bebe stores and to convert all of our existing bebe outlet stores to 2b bebe stores during our fiscal 2009. We also plan to renovate 4 existing stores and relocate or expand 3 existing stores, resulting in square footage growth of approximately 2.9%.

bebe stores. We were founded by Manny Mashouf, our Chief Executive Officer and Chairman of the Board. We opened our first store in San Francisco, California in 1976, which was also the year we incorporated. We also operate one bebe accessory store that features a limited assortment of bebe merchandise, including outerwear, shoes and accessories.

BEBE SPORT. We launched BEBE SPORT during fiscal 2003 to address the performance and active lifestyle needs of the bebe customer. We offer a selection of sportswear and footwear under the BEBE SPORT and bbsp brand names.

bebe outlets. We utilize the outlets as a clearance vehicle for merchandise from our retail stores. In addition, the inventory includes a strong presentation of bebe logo merchandise and special cuts produced under the 2b bebe label exclusively for the outlet stores. In fiscal 2009, we plan to convert all our existing bebe outlet stores to 2b bebe stores.

2b bebe stores. During fiscal 2009, we plan to open 7 new 2b bebe stores in outlet centers which offer a strong presentation of bebe logo merchandise similar to our outlet stores and special cuts produced under the 2b bebe label. We will also use these stores as a clearance vehicle for retail but on a much smaller scale than we do currently.

On-line. bebe.com is an extension of the bebe store experience and provides a complete assortment of bebe and BEBE SPORT merchandise. It is also used as an advertising vehicle to communicate with our customers. We are currently able to ship to customers in the United States, Canada, Puerto Rico and U.S. Protectorates.

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America.

The preparation of these financial statements requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements. We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. Our most critical accounting policies are those related to revenue recognition, stock based compensation, inventories, marketable securities, impairment of long lived assets, uncertain tax positions and liabilities for self-insurance. We continually evaluate these accounting policies and estimates and we make adjustments when facts and circumstances dictate a change. Our accounting policies are described in Note 1 to the consolidated financial statements in our annual report on Form 10-K for the fiscal year ended July 5, 2008. This discussion and analysis should be read in conjunction with such discussion and with our condensed consolidated financials statements and related notes included in Part 1, Item 1 of this quarterly report.

RESULTS OF OPERATIONS

Our fiscal year is a 52 or 53 week period, each period ending on the first Saturday after June 30. Fiscal years 2009 and 2008 each include 52 weeks. The three months ended April 4, 2009 and April 5, 2008 each included 13 weeks. The nine months ended April 4, 2009 and April 5, 2008 both included 39 weeks.

The following table sets forth certain financial data as a percentage of net sales for the periods indicated:

                                      Three Months Ended        Nine Months Ended
                                    April 4,     April 5,     April 4,     April 5,
                                      2009         2008         2009         2008

Net sales                               100.0 %      100.0 %      100.0 %      100.0 %
Cost of sales, including
production and occupancy (1)             62.2         56.2         59.4         54.1

Gross margin                             37.8         43.8         40.6         45.9
Selling, general and
administrative expenses (2)              44.5         38.9         37.6         34.5

Operating income (loss)                  (6.7 )        4.9          3.0         11.4
Interest and other income, net            0.5          3.4          1.2          2.5

Income (loss) before income
taxes                                    (6.2 )        8.3          4.2         13.9
Provision (benefit) for income
taxes                                    (2.2 )        2.8          1.5          4.8

Net income (loss)                        (4.0 )%       5.5 %        2.7 %        9.1 %

(2) Selling, general and administrative expenses primarily consist of non-occupancy store costs, corporate overhead and advertising costs.

Net Sales. Net sales decreased to $127.7 million during the three months ended April 4, 2009 from $151.7 million for the comparable period of the prior year, a decrease of $24 million, or 15.8%. The decrease in sales was primarily due to a 23.5% decrease in comparable store sales and a 10.4% decrease in our on-line sales. These decreases were partially offset by an increase in stores not included in the comparable store sales and an increase in wholesale sales to international licensees. Contributing to our performance were merchandising opportunities in bebe and BEBE SPORT as well as a difficult macro economic environment which negatively impacted mall traffic and forced us to drive sales with increased promotions.

For the nine months ended April 4, 2009, net sales decreased to $472.8 million from $516.1 million for the comparable period of the prior year, a decrease of $43.3 million, or 8.4%. The decrease in sales was primarily due to a 18.2% decrease in comparable store sales and a 2.0% decrease in our on-line sales. This decrease was partially offset by an increase in stores not included in the comparable store sales, an increase in wholesale sales to international licensees and other revenue increases including royalty revenue and reversal of deferred expense related to expiration of loyalty points. Contributing to our performance were merchandising opportunities in bebe and BEBE SPORT as well as a difficult macro economic environment which negatively impacted mall traffic and forced us to drive sales with increased promotions.

                                      Three Months Ended          Nine Months Ended
                                    April 4,      April 5,      April 4,      April 5,
                                      2009          2008          2009          2008

Net sales (In thousands)           $  127,657    $  151,729    $  472,819    $  516,140

Total net sales increase
(decrease) percentage                   (15.8 )%       (1.7 )%       (8.4 )%        1.6 %

Comparable store sales decrease
percentage                              (23.5 )%       (7.6 )%      (18.2 )%       (8.3 )%

Net sales per average square
foot (1)                           $      106    $      141    $      396    $      495

Square footage at end of period
(In thousands)                          1,157         1,060         1,157         1,060

Number of store locations:
Beginning of period                       312           290           303           273
New store locations                         1             4            12            21
Closed store locations                      5             4             7             4
Number of stores open at end of
period                                    308           290           308           290

Gross Margin. Gross margin decreased to $48.3 million during the three months ended April 4, 2009 from $66.3 million for the comparable period of the prior year, a decrease of $18 million, or 27.1%. As a percentage of net sales, gross margin decreased to 37.8% for the three months ended April 4, 2009 from 43.8% in the comparable period of the prior year. The decrease in gross margin as a percentage of net sales was primarily due to higher markdowns and unfavorable occupancy leverage.

For the nine months ended April 4, 2009, gross margin decreased to $191.7 million from $236.9 million for the comparable period of the prior year, a decrease of $45.2 million, or 19.1%. As a percentage of net sales, gross margin decreased to 40.6% for the nine months ended April 4, 2009 from 45.9% in the comparable period of the prior year. The decrease in gross margin as a percentage of net sales was primarily due to higher markdowns and unfavorable occupancy leverage.

Selling, General and Administrative Expenses.Selling, general and administrative expenses, which primarily consist of non-occupancy store costs, corporate overhead and advertising costs, decreased to $56.8 million during the three months ended April 4, 2009 from $59.0 million for the comparable period of the prior year, a decrease of $2.2 million, or 3.7 %. As a percentage of net sales, selling, general and administrative expenses increased to 44.5% during the three months ended April 4, 2009 from 38.9% in the comparable period of the prior year. The decrease in selling, general and administrative expenses was primarily due to lower total compensation expense offset by an increase in depreciation expense and approximately $2.5 million in impairment charges and fixed asset write-offs related to underperforming stores and store closures.

For the nine months ended April 4, 2009, selling, general and administrative expenses decreased to $177.4 million from $177.9 for the comparable period of the prior year, a decrease of $0.5 million, or 0.3%. As a percentage of net sales, selling, general and administrative expenses increased to 37.6% from 34.5% in the comparable period of the prior year. The decrease in selling, general and administrative expenses was primarily due to lower total compensation expense offset by an increase in depreciation expense and approximately $3.9 million in impairment charges and fixed asset write-offs related to underperforming stores and store closures.

Interest and Other Income, Net.We generated approximately $0.7 million of interest and other income (net of other expenses) during the three months ended April 4, 2009 compared to approximately $5.2 million in the comparable period of the prior year. The decrease was primarily the result of lower investment in higher yielding tax-exempt investments, more investments in low yielding money market funds and an approximately $0.1 million impairment charge on our trading securities.

For the nine month period ending April 4, 2009, we generated approximately $5.6 million of interest and other income (net of other expenses), compared to $13.0 million in the comparable period of the prior year. The decrease was primarily the result of lower investment in higher yielding tax-exempt investments, more investments in low yielding money market funds and an approximately $0.6 million impairment charge on our trading securities.

Provision for Income Taxes.Our effective tax rate increased to 35.3% for the three months ended April 4, 2009 from 33.6% for the comparable period in the prior year primarily due to deleveraging of permanent items, including stock based compensation expense, and lower tax-exempt interest income as a percent of taxable income.

For the nine months ended April 4, 2009, our effective tax rate increased to 34.9% from 34.5% for the comparable period in the prior year primarily due to deleveraging of permanent items, including stock based compensation expense, and lower tax-exempt interest income as a percent of taxable income.

Seasonality of Business and Quarterly Results

Our business varies with general seasonal trends that are characteristic of the retail and apparel industries. As a result, our typical store generates a higher percentage of our annual net sales and profitability in the second quarter of our fiscal year, which includes the holiday selling season, compared to the other quarters of our fiscal year. If for any reason our sales were below seasonal norms during the second quarter of our fiscal year, our annual operating results would be negatively impacted. Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital requirements vary widely throughout the year and generally peak during the first and second fiscal quarters. At April 4, 2009, we had approximately $316.0 million of cash and equivalents and long term investments on hand of which approximately $193.0 million, net of impairment charges of $27.9 million, were invested in auction rate securities ("ARS"). We do not anticipate the lack of liquidity in the ARS to impact our ability to fund our operations in the foreseeable future and believe we have sufficient cash and equivalents to fund ongoing operations. In addition, we have a revolving line of credit, under which we may borrow or issue letters of credit up to a combined total of $25 million. As of April 4, 2009, there were no cash borrowings outstanding under the line of credit, and letters of credit outstanding totaled $2.9 million. As of April 4, 2009, we were not in compliance with one covenant of this agreement requiring net quarterly income. We obtained a waiver with respect to this matter and do not anticipate to breach this covenant in future quarters.

At April 4, 2009, we had cash and equivalents of $123.1 million held in accounts managed by third-party financial institutions consisting of invested cash and cash in our operating accounts. The invested cash is invested in interest bearing funds managed by third party financial institutions. These funds invest in direct obligations of the government of the United States. To date, we have experienced no loss or lack of access to our invested cash or equivalents; however, we can provide no assurances that access to our invested cash and equivalents will not be impacted by adverse conditions in the financial markets.

At any point in time we also have approximately $100 to $140 million of invested cash and cash in operating accounts that are with third party financial institutions. These balances exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to invested cash or cash in our operating accounts.

Net cash provided by operating activities for the nine months ended April 4, 2009 was $27.7 million versus $64.7 million for the nine months ended April 5, 2008. Cash provided by operating activities for the period was primarily generated by net income of $13 million adjusted for stock compensation of $4.3 million, depreciation of $19.7 million, deferred rent of $0.8 million, impairment of trading securities of $0.6 million and net loss on disposal of property of $3.9 million related to impairment charges and fixed asset write-offs, store closures and store remodels, as well as changes in working capital. The changes in working capital were primarily due to a decrease in inventory of $5.1 million, offset by an increase in prepaid expenses and other assets of $14.8 million and a decrease in accrued liabilities of $3.6 million.

Net cash used by investing activities for the nine months ended April 4, 2009 was $1.0 million versus net cash provided by investing activities of $28.5 million for the nine months ended April 5, 2008. Cash used by investing activities for the period was primarily due to capital expenditures of $23.7 million related to the opening of new stores, investments in information systems and technology and office equipment, partially offset by proceeds on our sales of ARS of $22.7 million. We opened 12 new stores in the nine months ended April 4, 2009 and expect to open a total of approximately 14 stores during fiscal 2009. We estimate that total capital expenditures will be below $30 million in fiscal 2009.

Net cash used by financing activities was $25.9 million for the nine months ended April 4, 2009 versus $78.0 million for the nine months ended April 5, 2008. Cash used by financing activities for the period was primarily due to payments of quarterly dividends for the fourth quarter of fiscal 2008 and the first two quarters of fiscal 2009 totaling $13.1 million and stock repurchases of $13.3 million. The Company declared a quarterly dividend at the end of the quarter totaling $4.3 million which was accrued at the end of the current quarter and paid in the following quarter.

We hold a variety of interest bearing ARS consisting of federally insured student loan backed securities and insured municipal authority bonds. As of April 4, 2009, our ARS portfolio totaled approximately $193 million, $70 million (net of an impairment charge of $12.9 million) classified as trading securities and $123 million (net of temporary impairment charge of $15 million) classified as available for sale securities. Our ARS portfolio includes approximately 98% federally insured student loan backed securities and 2% municipal authority bonds. Our ARS portfolio consists of approximately 51% AAA rated investments, 15%

AA rated investments, 24% A rated investments and 10% BBB rated investments. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The uncertainties in the credit markets that began in February 2008 have affected our holdings in ARS investments and auctions for our investments in these securities have failed to settle on their respective settlement dates. Typically the fair value of ARS investments approximates par value due to the frequent resets through the auction process. While we continue to earn interest on our ARS investments at the maximum contractual rate, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of ARS no longer approximates par value. Consequently, the investments are not currently liquid, and we will not be able to access these funds until a future auction of these investments is successful, the issuer redeems the securities, or at maturity. Maturity dates for these ARS investments range from 2010 to 2044 with principal distributions occurring on certain securities prior to maturity. We currently have the ability and intent to hold these ARS investments until a recovery of the par value or until maturity.

In November 2008, we entered into a settlement agreement related to our ARS held with UBS Financial Services, Inc. ("UBS") that grants us certain rights related to these ARS (the "Right"). Beginning June 30, 2010, at our request, UBS has agreed to purchase all of our ARS currently held with them at par value. Conversely, UBS has the right, in its discretion, to purchase or sell our ARS at any time until July 2, 2012, so long as we receive payment at par value upon any sale or disposition. The enforceability of the Right results in a put option which should be recognized as a free standing asset separate from the ARS. Upon acceptance of the offer from UBS, we recorded the put option at fair value of $11.6 million, with a corresponding credit to interest income. The put option does not meet the definition of a derivative instrument under SFAS No. 133. Therefore, we have elected to measure the put option at fair value under SFAS NO. 159, which permits an entity to elect the fair value option for recognized financial assets. As a result, unrealized gains and losses are included in earnings. The increase in the fair value of the put option of $0.7 million has been recorded with a corresponding credit to interest and other income, net, in the condensed consolidated statements of operations.

Prior to accepting the UBS offer, we recorded our ARS held with UBS as investments available for sale, with an associated unrealized loss included in other comprehensive income. In connection with our acceptance of the UBS offer in November 2008, we transferred approximately $84.4 million in ARS subject to the UBS settlement from investments available for sale to trading securities in accordance with SFAS No. 115 and recorded a loss on investments of approximately $12.1 million. As a result, changes in fair value of the ARS have been recorded as a component of net income.

In October 2008, our board of directors authorized a program to repurchase up to $30 million of our common stock. We may, from time to time, as business conditions warrant, purchase stock in the open market or through private transactions. Purchases may be increased, decreased or discontinued at any time without prior notice. The plan does not obligate us to repurchase any specific number of shares and may be suspended at any time at management's discretion. During the third quarter of fiscal 2009, we repurchased 1,851,000 shares at an average price per share of $5.47 for an aggregate purchase price of approximately $10 million.

During our first quarter of fiscal 2008, we entered into an agreement with our former Vice Chairperson Neda Mashouf to purchase 5 million shares of our common stock beneficially owned by Ms. Mashouf at a price per share of $13.39, an aggregate purchase price of $66,950,000. We may purchase additional shares from Ms. Mashouf or other shareholders in the future.

We believe that our cash on hand, together with our cash flows from operations, will be sufficient to meet our capital and operating requirements for at least the next twelve months. Our future capital requirements, however, will depend on numerous factors, including without limitation, liquidity of our auction rate securities, the size and number of new and expanded stores and/or store concepts, investment costs for management information systems, potential acquisitions and/or joint ventures, repurchase of stock and future results of operations.