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, obtain raw materials and find manufacturing facilities, attract and retain key management personnel, develop new concepts, successfully open future stores, successfully manage our online business, maintain and protect information technology, respond effectively to competitive pressures in the apparel industry and adverse economic conditions and protect our intellectual property as well as declines in comparable store sales performance, changes in the level of consumer spending or preferences in apparel 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 21 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 251 retail stores, of which 207 are bebe stores, including an on-line store at www.bebe.com, and 44 are 2b bebe stores, including an on-line store at www.2bstores.com, as of March 31, 2012. These stores are located in 36 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Japan. In addition, our licensees operate 110 international point-of-sale locations in 19 countries as of March 31, 2012. During the nine months ended March 31, 2012, we opened 2 bebe stores and 4 2b bebe stores, as well as migrated our 2b product offerings from www.bebe.com to www.2bstores.com. During the remainder of fiscal 2012, we expect to open up to 3 2b bebe stores; our international licensees are also anticipated to grow by up to 5 point-of-sale locations. Also during the last quarter of this fiscal year we entered into a termination agreement with our bebe.com third-party service provider. We anticipate migrating to a company managed platform in the first quarter of fiscal 2013. In addition, as part of our long-term strategy to manage store distribution as well as direct to consumer fulfillment for both bebe.com and 2bstores.com, in the fourth quarter of fiscal 2012, we have purchased our existing distribution facility in Benicia, California for $18 million. We believe both of these decisions will support our long-term growth objectives across our multi-channel platform.

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. bebe.com is our bebe on-line retail store and an extension of the bebe store experience that provides a complete assortment of bebe and BEBE SPORT merchandise and is used as a vehicle to communicate with our clients.

PH8. In the fourth quarter of fiscal 2010, we decided to discontinue operations of our PH8 division, allowing us to focus our efforts on improving bebe sales and profitability, expanding internationally and continuing to develop our 2b bebe business. We closed all of our 49 PH8 stores during fiscal 2011, converting one store to a 2b bebe store. We have recorded the net costs associated with the disposition of these stores during fiscal 2011 as the stores closed and the related assets are disposed of. Prior year results for these stores have been classified within discontinued operations on our consolidated statements of operations.

2b bebe stores. As of March 31, 2012, we operated 26 2b bebe stores and 18 stores operating in the outlet store design under the 2b bebe name. The stores operating in the 2b bebe design sell bebe logo, 2b bebe merchandise and a small percentage of bebe retail markdowns. The stores operating in the outlet design sell bebe logo, 2b bebe merchandise and a larger percentage of bebe retail markdowns. 2bstores.com is our 2b bebe on-line retail store and an extension of the 2b bebe store experience that provides a complete assortment of 2b bebe merchandise and is also used as a vehicle to communicate with our clients.

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 and uncertain tax positions. 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 2, 2011. This discussion and analysis should be read in conjunction with such discussion and with our condensed consolidated financial 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 2012 and 2011 each include 52 weeks. The three months ended March 31, 2012 and April 2, 2011 each include 13 weeks. The nine months ended March 31, 2012 and April 2, 2011 each include 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
                                          March 31,           April 2,          March 31,          April 2,
                                             2012               2011               2012              2011
Net sales                                      100.0 %            100.0 %            100.0 %           100.0 %
Cost of sales, including production
and occupancy (1)                               61.3               63.2               60.4              61.9

Gross margin                                    38.7               36.8               39.6              38.1
Selling, general and administrative
expenses (2)                                    39.0               41.1               36.1              38.6

Operating income (loss)                         (0.3 )             (4.3 )              3.5              (0.5 )
Interest and other income, net                   0.2                0.1                0.2               0.2

Income (loss) from continuing
operations before income taxes                  (0.1 )             (4.2 )              3.7              (0.3 )
Provision (benefit) for income taxes             0.1               (1.8 )              1.5              (0.1 )

Income (loss) from continuing
operations, net of tax                          (0.2 )             (2.4 )              2.2              (0.2 )
Loss from discontinued operations,
net of tax                                        -                  -                  -               (1.6 )

Net income (loss)                               (0.2 )%            (2.4 )%             2.2 %            (1.8 )%

(1) Cost of sales includes the cost of merchandise, occupancy costs, distribution center costs and production costs.

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

Net Sales. Net sales from continuing operations increased to $121.0 million during the three months ended March 31, 2012 from $109.5 million for the comparable period of the prior year, an increase of $11.5 million, or 10.5%. The increase in net sales was primarily due to a 7.2% increase in comparable store sales driven by better customer acceptance of our bebe and 2b merchandise, as well as a $3.1 million increase in wholesale sales to our international licensees.

For the nine months ended March 31, 2012, net sales from continuing operations increased to $399.3 million from $361.0 million for the comparable period of the prior year, an increase of $38.3 million, or 10.6%. The increase in net sales was primarily due to an 8.1% increase in comparable store sales driven by better customer acceptance of our bebe and 2b merchandise, as well as a $9.4 million increase in wholesale sales to our international licensees.

                                             Three Months Ended                   Nine Months Ended
                                         March 31,         April 2,          March 31,         April 2,
                                            2012             2011               2012             2011
Net sales (In thousands)                 $  121,035        $ 109,490         $  399,294        $ 360,956
Total net sales increase percentage            10.5 %            0.6 %             10.6 %            0.9 %
Comparable store increase (decrease)
percentage (1)                                  7.2 %           (0.7 )%             8.1 %           (1.8 )%
Net sales per average square foot
(2)                                      $       95        $     108         $      325        $     339
Square footage at end of period (In
thousands)                                      998              998                998              998
Number of store locations:
Beginning of period                             256              253                253              298
New store locations                               3                2                  8                6
Closed store locations                            8                6                 10               55
Number of stores open at end of
period                                          251              249                251              249

(1) We calculate comparable store sales by including the net sales of stores that have been open at least one year. Therefore, a store is included in the comparable store sales base beginning with its thirteenth month. Stores that have been expanded or remodeled by 15 percent or more or have been permanently relocated are excluded from the comparable store sales base. In addition, we calculate comparable store sales using a same day sales comparison. Beginning in the first quarter of fiscal 2012, we are reporting comparable store sales results inclusive of our on-line stores. We believe that given the similar nature and process of inventory planning, allocation and return policy for the on-line stores and all other retail stores, the inclusion of the on-line stores is a more meaningful way of reporting our comparable store sales results. In addition, we have been implementing cross-channel marketing initiatives, which benefit all retail sales, including our on-line stores. The inclusion of the on-line stores increased the comparable store percentage by 4.2% and 3.4% for the three and nine month periods ended March 31, 2012.

(2) We calculate net sales per average square foot using net store sales less on-line net sales and monthly average store square footage.

Gross Margin. Gross margin from continuing operations increased to $46.8 million during the three months ended March 31, 2012 from $40.3 million for the comparable period of the prior year, an increase of $6.5 million, or 16.2%. As a percentage of net sales, gross margin increased to 38.7% for the three months ended March 31, 2012 from 36.8% in the comparable period of the prior year. The increase in gross margin as a percentage of net sales was primarily due to positive occupancy leverage and an increase in merchandise margin.

For the nine months ended March 31, 2012, gross margin from continuing operations increased to $158.2 million from $137.4 million for the comparable period of the prior year, an increase of $20.8 million, or 15.2%. As a percentage of net sales, gross margin from continuing operations increased to 39.6% for the nine months ended

March 31, 2012 from 38.1% in the comparable period of the prior year. The increase in gross margin as a percentage of net sales was primarily due to positive occupancy leverage and an increase in merchandise margin, partially offset by an increase in reserves and write-offs. The increase in merchandise margin was fueled by lower markdowns, partially offset by the growth of 2b and international wholesale sales which were at a lower merchandise margin.

Selling, General and Administrative Expenses. Selling, general and administrative expenses from continuing operations increased to $47.2 million during the three months ended March 31, 2012 from $45.0 million for the comparable period of the prior year, an increase of $2.2 million, or 4.8 %. As a percentage of net sales, selling, general and administrative expenses decreased to 39.0% during the three months ended March 31, 2012 from 41.1% in the comparable period of the prior year. The dollar increase over the prior year was primarily due to higher compensation expense.

For the nine months ended March 31, 2012, selling, general and administrative expenses from continuing operations increased to $144.2 million from $139.3 million for the comparable period of the prior year, an increase of $4.8 million, or 3.5%. As a percentage of net sales, selling, general and administrative expenses decreased to 36.1% from 38.6% in the comparable period of the prior year. The dollar increase over the prior year was primarily due to higher compensation expenses and advertising cost partially offset by insurance and settlement proceeds combined with lower impairment and store closure costs.

Provision for Income Taxes. Our effective tax rate from continuing operations is 43.8% expense for the three months ended March 31, 2012 from 42.8% benefit for the comparable period in the prior year. The tax expense of $65 thousand for the current year third quarter was unfavorably affected by discrete items incurred during the quarter.

For the nine months ended March 31, 2012, our effective tax rate from continuing operations decreased to 40.8% expense from 46.0% benefit for the comparable period for the prior year. The effective tax rate varies due to fluctuation in the various discrete items year over year.

Discontinued Operations. In the fourth quarter of fiscal 2010, we decided to discontinue operations of the PH8 division, allowing us to focus our efforts on improving bebe sales and profitability, expanding internationally and continuing to develop our 2b bebe business. We closed 24 PH8 stores in the first fiscal quarter of 2011 and during the second fiscal quarter of 2011, closed the remaining 25 PH8 stores. The results of the PH8 stores closed to date, net of income tax benefit, which consisted of 49 stores for the three and nine months ending April 2, 2011 have been presented as a discontinued operation in the accompanying consolidated statements of operations for all periods presented and are as follows:

                                                   Three Months Ended                 Nine Months Ended
                                              March 31,           April 2,        March 31,        April 2,
                                                 2012               2011            2012             2011
                                                                      (In thousands)
Net sales                                     $       -          $       -       $        -        $   7,850
Cost of sales, including production and
occupancy                                             -                  -                -           13,368

Gross margin                                          -                  -                -           (5,518 )
Selling, general and administrative
expenses                                              -                  -                -            4,116

Loss from discontinued operations, before
income tax benefit                                    -                  -                -           (9,634 )
Income tax benefit                                    -                  -                -           (3,799 )

Loss from discontinued operations, net of
tax benefit                                   $       -          $       -       $        -        $  (5,835 )

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. As of March 31, 2012, we had approximately $257.6 million of cash and equivalents and investments on hand of which $113.2 million were cash and equivalents, $57.0 million were invested in government treasury bills, $23.0 million were invested in certificates of deposit and $64.4 million, net of temporary impairment charges of $9.6 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 March 31, 2012, there were no cash borrowings or trade letters of credit outstanding under the line of credit, and a standby letter of credit outstanding that totaled $3.0 million. This credit facility requires us to maintain a $2.5 million compensating balance and to comply with certain covenants, including amounts for minimum tangible net worth, unencumbered liquid assets and profitability, and certain restrictions on making loans and investments. As of March 31, 2012, we were in compliance with all covenants.

As of March 31, 2012, we had cash and equivalents of $113.2 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.

We hold our operating and invested cash and cash in 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 March 31, 2012 was $22.7 million versus $5.8 million for the nine months ended April 2, 2011. The increase of $16.9 million from the comparable period was due to an overall increase in net income of $15.2 million over the prior period, a decrease in our

prepaid income tax balance over the prior year primarily related to income tax paid in the current period, as well as an increase in accounts payable related to the timing of payments. These increases have been partially offset by non-cash decreases to deferred income tax assets due to rule changes and our treatment of prior period deferred tax balances.

Net cash provided by investing activities for the nine months ended March 31, 2012 was $0.3 million versus $10.6 million used for investing activities for the nine months ended April 2, 2011. The increase of $10.9 million versus the prior year comparable period was primarily due to proceeds received from sales of short term available for sale securities, partially offset by increased capital expenditures over the prior year. We expect that total capital expenditures will be approximately $45 million in fiscal 2012. The total capital expenditures for the year include the purchase of our distribution center in Benicia, California completed in the fourth quarter of fiscal 2012 for $18 million.

Net cash used by financing activities was $5.0 million for the nine months ended March 31, 2012 versus $102.5 million for the nine months ended April 2, 2011. The decrease of $97.5 million from the prior year comparable period was primarily due to the payout of the special $1 per share dividend declared in the fourth quarter of fiscal 2010 and the increased purchases of our common stock made during the prior year period.

We hold a variety of interest bearing ARS consisting of federally insured student loan backed securities and insured municipal authority bonds. As of March 31, 2012, our ARS portfolio totaled approximately $64.4 million classified as available for sale securities. As of that date, our ARS portfolio included approximately 95% federally insured student loan backed securities and 5% municipal authority bonds and consisted of approximately 30% AAA rated investments, 24% AA rated investments, 30% A rated investments, 7% BBB rated investments and 9% CCC rated investments. As of July 2, 2011, our ARS portfolio consisted of 42% AAA rated investments, 7% AA rated investments, 35% A rated investments, 7% BBB rated investments and 9% CCC 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. Historically the fair value of ARS investments had approximated 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 2016 to 2044 with principal distributions occurring on certain securities prior to maturity. During the nine months ended March 31, 2012, $1.0 million of ARS were settled at par.

We also hold short-term available for sale securities totaling $79.9 million at March 31, 2012 that consist of treasury bills and certificates of deposit.

In October 2008, our board of directors authorized a program to repurchase up to $30 million of our common stock. No shares were repurchased during the nine months ended March 31, 2012. During the nine months ended April 2, 2011, we repurchased 2,137,344 shares at an average price per share of $5.84. We have repurchased the full authorization of $30 million of shares, but may repurchase additional shares in the future.

We believe that our cash and cash equivalents on hand 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.