**UNITED STATESSECURITIES AND EXCHANGECOMMISSION****Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended January 5, 2008**

 

**OR**

 

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

** **

**Commission File Number 0-24395**

 

**bebestores, inc.**(Exact name of registrant as specified in its charter)

 

| **California**(State or  Jurisdiction of   Incorporation or Organization) | ** ** | **94-2450490**(IRS Employer  Identification Number) |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|

 

**400 Valley Drive Brisbane, California 94005**(Address ofprincipal executive offices)

 

Telephone:**(415) 715-3900**

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  xYes o No

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer (as defined in Rule 12b-2 of the SecuritiesExchange Act).  o Large accelerated filer  x Accelerated filer  o Non - accelerated filer

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b–2 of the Exchange Act).o Yes xNo

 

The number of shares of the registrant’s common stock,par value $0.001 per share, outstanding as of January 31, 2008 was 88,819,967.

 

 

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**bebestores, inc.**

 

#### **TABLEOF CONTENTS**

#### ** **

| ** **         | ** **                                                                                                                       | **Page No****.** |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------|------------------|
|               |                                                                                                                             |             |
| **PART I.**   | **FINANCIAL INFORMATION**                                                                                                        |             |
|               |                                                                                                                             |             |
| ITEM 1.            | Condensed Consolidated  Financial Statements                                                                                     |             |
|               |                                                                                                                             |             |
|               | Condensed  Consolidated Balance Sheets as of January 5, 2008, July 7, 2007 and  December 30, 2006                 | 3                |
|               |                                                                                                                             |             |
|               | Condensed  Consolidated Statements of Income for the three and six months ended  January 5, 2008 and December 30, 2006 | 4                |
|               |                                                                                                                             |             |
|               | Condensed  Consolidated Statements of Cash Flows for the six months ended  January 5, 2008 and December 30, 2006       | 5                |
|               |                                                                                                                             |             |
|               | Notes to Condensed  Consolidated Financial Statements                                                                            | 6                |
|               |                                                                                                                             |             |
| ITEM 2.            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                      | 13               |
|               |                                                                                                                             |             |
| ITEM 3.            | Quantitative  and Qualitative Disclosures about Market Risk                                                                      | 20               |
|               |                                                                                                                             |             |
| ITEM 4.            | Controls and  Procedures                                                                                                         | 21               |
|               |                                                                                                                             |             |
| **PART II.**  | **OTHER INFORMATION**                                                                                                            |             |
|               |                                                                                                                             |             |
| ITEM 1.            | Legal Proceedings                                                                                                                | 23               |
|               |                                                                                                                             |             |
| ITEM 1A.           | Risk Factors                                                                                                                     | 23               |
|               |                                                                                                                             |             |
| ITEM 2.            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                     | 27               |
|               |                                                                                                                             |             |
| ITEM 3.            | Defaults  Upon Senior Securities                                                                                                 | 27               |
|               |                                                                                                                             |             |
| ITEM 4.            | Submission  of Matters to a Vote of Security Holders                                                                             | 28               |
|               |                                                                                                                             |             |
| ITEM 5.            | Other Information                                                                                                                | 28               |
|               |                                                                                                                             |             |
| ITEM 6.            | Exhibits                                                                                                                         | 28               |
|               |                                                                                                                             |             |
| **SIGNATURE**      |                                                                                                                             | 29               |
|               |                                                                                                                             |             |
| **EXHIBIT  INDEX** |                                                                                                                             | 30               |
|                    |                                                                                                                                  |                  |  |  |  |  |  |

 

2

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**PART I.**       **FINANCIAL INFORMATION**

 

ITEM 1.       Condensed Consolidated FinancialStatements

 

**bebe stores, inc.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                      | ** ** | **As of**      | ** ** | **As of**    | ** ** | **As of**        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                      | ** ** | **January 5,** | ** ** | **July 7,**  | ** ** | **December 30,** | ** ** |
| ** **                                                                                                                                      | ** ** | **2008**            | ** ** | **2007 (a)** | ** ** | **2006**              | ** ** |
|                                                                                                                                            | ** ** | ** **          | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Assets:**                                                                                                                                     |       |                |       |              |       |                  |       |
| Current assets:                                                                                                                                 |       |                |       |              |       |                  |       |
| Cash and  equivalents                                                                                                                           |       | $                   | 69,395     |              | $          | 65,603                |       | $ | 67,461 |   |
| Short term  marketable securities                                                                                                               |       | 296,050             |       | 327,100           |       | 314,467               |       |
| Receivables (net  of allowance of $1,171, $1,094 and $1,015)                                                                                    |       | 8,435               |       | 6,720             |       | 8,376                 |       |
| Inventories                                                                                                                                     |       | 46,242              |       | 44,064            |       | 46,343                |       |
| Deferred income  taxes, net                                                                                                                     |       | 9,070               |       | 9,068             |       | —                |       |
| Prepaid and  other                                                                                                                              |       | 10,631              |       | 13,314            |       | 14,212                |       |
| Total current  assets                                                                                                                           |       | 439,823             |       | 465,869           |       | 450,859               |       |
| Property and  equipment, net                                                                                                                    |       | 123,611             |       | 116,595           |       | 102,557               |       |
| Deferred income  taxes, net                                                                                                                     |       | 25,258              |       | 20,330            |       | —                |       |
| Other assets                                                                                                                                    |       | 4,194               |       | 4,234             |       | 17,879                |       |
| Total assets                                                                                                                                    |       | $                   | 592,886    |              | $          | 607,028               |       | $ | 571,295 |   |
|                                                                                                                                            |       |                |       |              |       |                  |       |
| **Liabilities  and Shareholders’ Equity:**                                                                                                 |       |                |       |              |       |                  |       |
| Current  liabilities:                                                                                                                           |       |                |       |              |       |                  |       |
| Accounts payable                                                                                                                                |       | $                   | 24,609     |              | $          | 28,052                |       | $ | 36,842 |   |
| Accrued  liabilities                                                                                                                            |       | 39,573              |       | 33,982            |       | 34,323                |       |
| Income taxes  payable                                                                                                                           |       | 2,154               |       | —            |       | —                |       |
| Current portion  of capital leases                                                                                                              |       | 150                 |       | 223               |       | 224                   |       |
| Total current  liabilities                                                                                                                      |       | 66,486              |       | 62,257            |       | 71,389                |       |
| Long term  portion of capital leases                                                                                                            |       | —              |       | 38                |       | 150                   |       |
| Deferred rent  and other lease incentives                                                                                                       |       | 43,484              |       | 40,143            |       | 36,708                |       |
| Uncertain tax  positions                                                                                                                        |       | 5,353               |       | —            |       | —                |       |
| Total  liabilities                                                                                                                              |       | 115,323             |       | 102,438           |       | 108,247               |       |
|                                                                                                                                            |       |                |       |              |       |                  |       |
| Commitments and  contingencies                                                                                                                  |       | —              |       | —            |       | —                |       |
|                                                                                                                                            |       |                |       |              |       |                  |       |
| Shareholders’  equity:                                                                                                                     |       |                |       |              |       |                  |       |
| Preferred stock-authorized  1,000,000 shares at $0.001 par value per share; no shares issued and  outstanding                                   |       | —              |       | —            |       | —                |       |
| Common stock-authorized  135,000,000 shares at $0.001 par value per share; issued and outstanding  88,815,825, 93,543,604 and 93,002,916 shares |       | 89                  |       | 94                |       | 93                    |       |
| Additional paid-in  capital                                                                                                                     |       | 135,393             |       | 126,744           |       | 116,056               |       |
| Accumulated  other comprehensive income                                                                                                         |       | 11,482              |       | 9,139             |       | 1,530                 |       |
| Retained  earnings                                                                                                                              |       | 330,599             |       | 368,613           |       | 345,369               |       |
| Total  shareholders’ equity                                                                                                                |       | 477,563             |       | 504,590           |       | 463,048               |       |
| Total  liabilities and shareholders’ equity                                                                                                |       | 592,886             |       | $                 | 607,028    |                  | $          | 571,295 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

----

(a) Derived fromaudited financial statements.

 

3

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**bebe stores, inc.CONDENSED CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data)(unaudited)**

** **
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **January 5,**              | ** ** | **December 30,**          | ** ** | **January 5,** | ** ** | **December 30,** | ** ** |
| ** **                                         | ** ** | **2008**                         | ** ** | **2006**                       | ** ** | **2008** | ** ** | **2006** | ** ** |
|                                               | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                          |       | $                                | 203,329    |                           | $          | 196,802 |   | $ | 364,411 |   | $ | 353,861 |   |
| Cost of sales,  including production and occupancy |       | 109,328                          |       | 102,457                        |       | 193,896 |   | 180,229 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Gross margin                                       |       | 94,001                           |       | 94,345                         |       | 170,515 |   | 173,632 |   |
| Selling, general  and administrative expenses      |       | 62,755                           |       | 58,948                         |       | 118,935 |   | 109,239 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Operating income                                   |       | 31,246                           |       | 35,397                         |       | 51,580 |   | 64,393 |   |
| Interest and  other income, net                    |       | 4,058                            |       | 2,497                          |       | 7,753 |   | 5,670 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Income before  income taxes                        |       | 35,304                           |       | 37,894                         |       | 59,333 |   | 70,063 |   |
| Income tax  provision                              |       | 11,936                           |       | 13,621                         |       | 20,587 |   | 25,363 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Net income                                         |       | $                                | 23,368     |                           | $          | 24,273 |   | $ | 38,746 |   | $ | 44,700 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Basic earnings  per share                          |       | $                                | 0.26       |                           | $          | 0.26 |   | $ | 0.43 |   | $ | 0.48 |   |
| Diluted earnings  per share                        |       | $                                | 0.26       |                           | $          | 0.26 |   | $ | 0.42 |   | $ | 0.47 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Basic weighted  average shares outstanding         |       | 88,712                           |       | 92,833                         |       | 90,697 |   | 92,406 |   |
| Diluted weighted  average shares outstanding       |       | 90,167                           |       | 95,184                         |       | 92,173 |   | 94,835 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**bebe stores, inc.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(unaudited)**

 
| ** **                                                                     | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **January 5,**            | ** ** | **December 30,** | ** ** |
| ** **                                                                     | ** ** | **2008**                       | ** ** | **2006** | ** ** |
|                                                                           |       |                           |       |   |   |
| Cash flows from  operating income:                                             |       |                           |       |   |   |
| Net income                                                                     |       | $                              | 38,746     |   | $ | 44,700 |   |
| Adjustments to  reconcile net income to cash  provided by operating activities |       |                           |       |   |   |
|                                                                           |       |                           |       |   |
| Non-cash  compensation expense                                                 |       | 6,238                          |       | 5,034 |   |
| Depreciation and  amotization                                                  |       | 10,947                         |       | 9,412 |   |
| Net loss on  disposal of property                                              |       | 42                             |       | 3 |   |
| Deferred rent  and other lease incentives                                      |       | 3,280                          |       | 3,364 |   |
| Deferred income  taxes                                                         |       | (1,860                         | )          | (1,289 | ) |
| Changes in  operating assets and liabilities:                                  |       |                           |       |   |   |
| Receivables                                                                    |       | (2,855                         | )          | (1,222 | ) |
| Inventories                                                                    |       | (2,106                         | )          | (4,290 | ) |
| Prepaid expenses  and other                                                    |       | 4,452                          |       | (576 | ) |
| Accounts payable                                                               |       | (3,821                         | )          | 13,904 |   |
| Accrued  liabilities                                                           |       | 12,245                         |       | 4,888 |   |
| Net cash  provided by operating activities                                     |       | 65,308                         |       | 73,928 |   |
|                                                                           |       |                           |       |   |   |
| Cash flows from  investing activities:                                         |       |                           |       |   |   |
| Purchase of  property and equipment                                            |       | (18,563                        | )          | (18,755 | ) |
| Purchase of  marketable securities                                             |       | (245,775                       | )          | (183,595 | ) |
| Proceeds from  sales of marketable securities                                  |       | 276,825                        |       | 157,945 |   |
| Net cash  provided (used) by investing activities                              |       | 12,487                         |       | (44,405 | ) |
|                                                                           |       |                           |       |   |   |
| Cash flows from  financing activities:                                         |       |                           |       |   |   |
| Net proceeds  from issuance of common stock                                    |       | 1,979                          |       | 8,631 |   |
| Purchase of  common stock                                                      |       | (66,950                        | )          | — |   |
| Excess of tax  benefit from options exercised                                  |       | 594                            |       | 6,624 |   |
| Cash dividends  paid                                                           |       | (13,795                        | )          | (13,865 | ) |
| Other                                                                          |       | (111                           | )          | (136 | ) |
| Net cash  provided (used) by financing activities                              |       | (78,283                        | )          | 1,254 |   |
|                                                                           |       |                           |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                          |       | (488                           | )          | 30,777 |   |
| Effect of  exchange rate changes on cash                                       |       | 4,280                          |       | (1,972 | ) |
| Cash and equivalents:                                                          |       |                           |       |   |   |
| Beginning of  period                                                           |       | 65,603                         |       | 38,656 |   |
| End of period                                                                  |       | $                              | 69,395     |   | $ | 67,461 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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##### **bebestores, inc.**

##### ** **

##### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

##### ** **

##### **INTERIMFINANCIAL STATEMENTS**

##### ** **

The accompanyingcondensed consolidated balance sheets of bebe stores, inc. (the “Company”) asof January 5, 2008, July 7, 2007 and December 30, 2006, thecondensed consolidated statements of income for the three and six months ended January 5,2008 and December 30, 2006 and the condensed consolidated statements ofcash flows for the six months ended January 5, 2008 and December 30,2006 have been prepared in accordance with accounting principles generallyaccepted in the United States of America for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X,without audit. Accordingly, they do not include all of the information requiredby accounting principles generally accepted in the United States of America forannual financial statements. Therefore, these condensed consolidated financialstatements should be read in conjunction with our Annual Report on Form 10-Kfor the year ended July 7, 2007.

 

In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary to present fairly the financial position at the balancesheet dates and the results of operations for the periods presented have beenincluded. The condensed consolidated balance sheet at July 7, 2007,presented herein, was derived from the audited balance sheet included in the Form 10-Kfor the fiscal year ended July 7, 2007.

 

Our business isaffected by the pattern of seasonality common to most retail apparelbusinesses. The results for the periods presented are not necessarilyindicative of future financial results.

 

##### **FISCALYEAR**

##### ** **

Our fiscal year is a 52or 53 week period, each period ending on the first Saturday after June 30.  Fiscal years 2008 and 2007 include 52 weeksand 53 weeks, respectively.

 

##### **The three month periods ended January 5, 2008 and December 30,2006 both included 13 weeks.  The sixmonth periods ended January 5, 2008 and December 30, 2006 bothincluded 26 weeks.**

##### ** **

6

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** **

**INVENTORIES**

 

The Company’s inventoriesconsist of:

 
| ** **                      | ** ** | **As of**      | ** ** |
|---------------------------------|------------|---------------------|------------|
| ** **                      | ** ** | **January 5,** | ** ** | **July 7,** | ** ** | **December 30,** | ** ** |
| ** **                      | ** ** | **2008**            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                      |       | **(In  thousands)** |       |
| Raw materials                   |       | $                   | 7,558      |   | $ | 7,136 |   | $ | 9,723 |   |
| Merchandise  available for sale |       | 38,684              |       | 36,928 |   | 36,620 |   |
| Inventories                     |       | $                   | 46,242     |   | $ | 44,064 |   | $ | 46,343 |   |

 

##### **EARNINGSPER SHARE**

##### ** **

Basic earnings per shareis computed as net earnings divided by the weighted average number of commonshares outstanding for the period. Diluted earnings per share reflects thepotential dilution that could occur from common shares issuable through theexercise of dilutive stock options.

 

The following is areconciliation of the number of shares used in the basic and diluted earningsper share computations:

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                     | ** ** | **January 5,  2008**        | ** ** | **December 30,  2006**    | ** ** | **January 5,  2008** | ** ** | **December 30,  2006** | ** ** |
| ** **                                                     | ** ** | **(In thousands)**          | ** ** | **(In thousands)**        | ** ** |
| Basic weighted  average number of shares outstanding           |       | 88,712                           |       | 92,833                         |       | 90,697 |   | 92,406 |   |
| Incremental shares  from the assumed issuance of stock options |       | 1,455                            |       | 2,351                          |       | 1,476 |   | 2,429 |   |
|                                                           |       |                             |       |                           |       |   |   |   |   |
| Diluted weighted  average number of shares outstanding         |       | 90,167                           |       | 95,184                         |       | 92,173 |   | 94,835 |   |

 

The number of incrementalshares from the assumed issuance of stock options is calculated applying thetreasury stock method.

 

Excluded from thecomputation of the number of diluted weighted average shares outstanding wereoptions of 2,989,000, and 1,345,000 for the three months ended January 5,2008 and December 30, 2006, respectively, and 2,657,000, and 1,424,000 forthe six months ended January 5, 2008 and December 30, 2006,respectively, which in each case would have been anti-dilutive.

 

##### **COMMONSTOCK PURCHASES**

##### ** **

On September 13,2007, the Company entered into an agreement with the Company’s former ViceChairperson Neda Mashouf to purchase 5 million shares of its outstanding commonstock beneficially owned by Ms. Mashouf at a price per share of $13.39, anaggregate purchase price of $66,950,000. The Company completed thepurchase and retired the shares during the first quarter of fiscal 2008.

 

7

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##### ** **

##### **COMPREHENSIVEINCOME**

##### ** **

Comprehensive incomeconsists of net income and other comprehensive income (income, expenses, gainsand losses that bypass the income statement and are reported directly as aseparate component of equity).  TheCompany’s comprehensive income consists of net income and foreign currencytranslation adjustments for all periods presented.

 
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **January 5,  2008**        | ** ** | **December 30,  2006**    | ** ** | **January 5,  2008** | ** ** | **December 30,  2006** | ** ** |
| ** **                  | ** ** | **(In thousands)**          | ** ** |
| Net income                  |       | $                                | 23,368     |                           | $          | 24,273 |   | $ | 38,746 |   | $ | 44,700 |   |
| Other  comprehensive income |       | (699                             | )          | (881                           | )          | 2,343 |   | (887 | ) |
|                        |       |                             |       |                           |       |   |   |   |   |
| Total comprehensive  income |       | $                                | 22,669     |                           | $          | 23,392 |   | $ | 41,089 |   | $ | 43,813 |   |

 

##### **CREDITFACILITIES**

##### ** **

**The Company has an unsecured commercial line ofcredit agreement with a bank, which provides for borrowings and issuance ofletters of credit up to a combined total of $25 million and expires on March 31,2009. The outstanding balance bears interest at either the bank’s referencerate (which was 7.25% as of January 5, 2008) or the LIBOR rate plus 1.75percentage points. As of January 5, 2008, there were no outstandingborrowings, and there was $1.6 million outstanding in letters of credit.**

** **

**This credit facility requires the Company to complywith certain financial covenants, including amounts for minimum tangible networth, unencumbered liquid assets and profitability, and certain restrictionson making loans and investments.**

** **

##### **STOCKBASED COMPENSATION**

##### ** **

The 1997 Stock Plan as amended (the “Stock Plan”)provides for the grant of incentive stock options, non-qualified stock options,stock purchase rights, stock awards and restricted stock units. Although theStock Plan allows for stock options and related awards to be granted at pricesbelow fair market value, the Company has historically granted such options atthe fair market value of the stock on the date of grant.  Stock optionsand related awards have a maximum term of ten years.  Options andrestricted stock units granted to employees and options granted to Directorsgenerally vest over four years with 20% of the award vested in each of thefirst and second years, and 30% vested in each of the remaining twoyears.  Restricted stock units awarded to Directors generally vest over aperiod of one year from the date of grant.  As of January 5, 2008,the Company has reserved 7,441,316 shares of common stock for issuance underthe Stock Plan and there were 610,163 shares available for future grant.

 

The Company accounts for share-based compensationunder the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment”(“SFAS No. 123(R)”), which requires share-based payment compensation relatedto stock options to be measured based on the estimated fair value at the dateof grant using an option pricing model.

 

The Company recognized share-based compensationexpense of $3.3 million and $2.7 million in the three months ended January 5,2008 and December 30, 2006, respectively, as a component of selling,general and administrative 

 

8

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expenses. TheCompany recognized share-based compensation expense of $6.3 million and $5.0million in the six months ended January 5, 2008 and December 30,2006, respectively.  As of January 5,2008, there was $9.3 million (before any related tax benefit) of totalunrecognized compensation cost related to nonvested share-based compensationthat is expected to be recognized over a weighted-average period of 2.9 years.

 

The fair value of each option grant was estimated onthe date of the grant using the Black-Scholes valuation model.  Theexpected life of the options represents the period of time the options are expectedto be outstanding and is based on historical trends. The expected stock pricevolatility is based on an average of the historical volatility of the Company’sstock for a period approximating the expected life and the implied volatilitybased on traded options of the Company’s stock. The expected dividendyield is based on the Company’s most recent annual dividend payout. The risk-freeinterest rate is based on the U.S. Treasury yield curve in effect at the timeof grant and has a term that approximates the expected life.

 

The following table presents the weighted averageassumptions used in the option pricing model for the stock options granted inthe three and six months ended January 5, 2008 and December 30, 2006:

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **January 5,**              | ** ** | **December 30,**          | ** ** | **January 5,** | ** ** | **December 30,** | ** ** |
| ** **                     | ** ** | **2008**                         | ** ** | **2006**                       | ** ** | **2008** | ** ** | **2006** | ** ** |
| Expected  dividend rate        |       | 1.7                              | %          | 1.0                            | %          | 1.4 | % | 0.9 | % |
| Volatility                     |       | 48.2                             | %          | 48.6                           | %          | 46.9 | % | 49.3 | % |
| Risk-free  interest rate       |       | 3.9                              | %          | 4.6                            | %          | 4.0 | % | 4.7 | % |
| Expected lives  (years)        |       | 4.3                              |       | 4.1                            |       | 4.3 |   | 4.1 |   |
| Fair value per  option granted |       | $                                | 5.18       |                           | $          | 9.56 |   | $ | 5.29 |   | $ | 9.26 |   |
|                                |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

9

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##### ** **

##### **The following table summarizes stock option activityduring the six months ended January 5, 2008:**

 
| ** **                        | ** ** | **Options**             | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------|------------|-------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **(In thousands)** | ** ** |
| Outstanding, July 7, 2007    |       | 6,098                   |       | $                                                          | 11.95      |                                                |       |                                |       |   |
| Granted                           |       | 1,213                   |       | 13.29                                                      |       |                                                |       |                                |       |
| Exercised                         |       | (259                    | )          | 7.47                                                       |       |                                                |       |                                |       |
| Cancelled                         |       | (239                    | )          | 17.15                                                      |       |                                                |       |                                |       |
|                              |       |                    |       |                                                       |       |                                                |       |                                |       |
| Outstanding, January 5, 2008 |       | 6,813                   |       | $                                                          | 12.18      |                                                | 7.17       |                                | $          | 20,210 |   |
|                              |       |                    |       |                                                       |       |                                                |       |                                |       |
| Exercisable, January 5, 2008 |       | 4,091                   |       | $                                                          | 9.80       |                                                | 6.12       |                                | $          | 18,590 |   |

##### ** **

**Intrinsic value for stock options is defined as thedifference between the current market value and the grant price. For the threemonths and six months ended January 5, 2008, the total intrinsic value ofstock options exercised was $1.2 million and $1.7 million, respectively. Cashreceived from stock options exercised during the three and six months ended January 5,2008 was $1.6 million and $1.9 million, respectively, and the actual taxbenefit realized for tax deductions from stock options exercised totaled $0.4million and $0.6 million, respectively.**

** **

**The following table summarizes restricted stock unitactivity during the six months ended January 5, 2008:**

 
| ** **                      | ** ** | **Shares**              | ** ** | **Weighted  Average Grant  Date Fair Value  Per Share** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **(In thousands)** | ** ** |
| Nonvested, July 7, 2007    |       | 67                      |       | $                                                                           | 17.23      |   |
| Granted                         |       | 33                      |       | $                                                                           | 13.16      |   |
| Vested                          |       | (10                     | )          | $                                                                           | 21.34      |   |
| Cancelled                       |       | (2                      | )          | $                                                                           | 20.60      |   |
| Nonvested, January 5, 2008 |       | 88                      |       | $                                                                           | 16.42      |   |

##### ** **

**INCOME TAXES**

 

Effective July 8,2007, the Company adopted Financial Accounting Standards Board (“FASB”)Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).  The cumulative effect of adoption was adecrease to retained earnings of approximately $0.6 million.  As of July 8, 2007, the totalunrecognized tax benefits were approximately $5.2 million. Of this amount,approximately $2.0 million would reduce our effective tax rate if recognized.

 

The Company accounts forinterest and penalties related to unrecognized tax benefits as a component ofincome tax expense. As of the date of adoption, the Company had $0.7 million ofinterest and penalties accrued associated with unrecognized tax benefits.

 

The Company could besubject to Federal and state tax examinations for years 2002 and forward. TheCompany may also be subject to audits in Canada for

 

10

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years 2000 and forward.The Company is currently under state income tax audit in Arizona and Michiganand expects the commencement of certain state tax audits in the near term.  At this time, the Company does not believethat the outcome of any examination will have a material impact on the Company’sfinancial statements.

 

As of July 8, 2007,the total amount of unrecognized tax benefits was approximately $5.2 million,and there has been no material change to the amount of unrecognized taxbenefits as of that date. The Company currently does not expect significantchanges related to unrecognized tax benefits through July 5, 2008.

 

##### **LEGALMATTERS**

##### ** **

A former employee suedbebe, purportedly on behalf of a class of all hourly, non-managerial employeessimilarly situated, in a complaint filed on April 28, 2005 in the UnitedStates District Court for the Northern District of California (case no.C050177) alleging violations under the Fair Labor Standards Act, specificallythat bebe obligated her to buy and wear its brand clothing as a uniform,without reimbursement or credit, and the net effect of deducting the value ofsuch required purchases from her wages would often result in her not being paidminimum wages. The lawsuit seeks compensatory, statutory and injunctive relief.On January 25, 2008, the Court preliminarily approved the confidentialsettlement we previously reached in this case and we are moving forward withclass notification.  We have accrued anamount that we believe reasonably estimates the potential liability, which doesnot have a material impact on our financial position or results of operations.

 

A former employee suedbebe in a complaint filed July 27, 2006 in the Superior Court ofCalifornia, San Mateo County (case no. CIV 456550) alleging a failure to payall wages, failure to pay overtime wages, failure to pay minimum wages, failureto provide meal periods, violation of Labor Code §450, violation of Labor Code§2802 and California Code of Regulations §11040(9)(A), statutory wageviolations (late payment of wages), unlawful business practices under Businessand Professions Code §16720 and §17200, conversion of wages and violation ofCivil Code §52.1. The plaintiff purports to bring the action also on behalf ofcurrent and former California bebe employees who are similarly situated. Thelawsuit seeks compensatory, statutory, punitive, restitution and injunctiverelief. We reported last quarter discovery had been postponed; it is nowanticipated that discovery will resume shortly. The Court has set a hearing forJune, 2008 regarding whether class certification would be appropriate.

 

The previously reportedcomplaint filed by a former employee on July 24, 2007 in the SuperiorCourt of California, Orange County (case no. 07CC08220) alleging a failure topay overtime wages, failure to provide for meal and rest breaks, and unfairbusiness practices has been dismissed with no liability to us.

 

A former employee suedbebe in a complaint filed September 20, 2007 in the United States DistrictCourt for the District of New Jersey (case no. 07-cv-4514 (D.N.J.)) allegingvarious state and federal statutory breaches based on a failure to pay allwages, including overtime wages and bonus, failure to provide and/or pay formeal and rest break periods, failure to credit vacation time and other benefitsand retaliation, wrongful termination, breach of contract, breach of covenantof good faith and fair dealing, and unjust enrichment.  Plaintiff purports to bring the action on behalfof current and former store management employees who are or were similarlysituated.  The complaint seekscompensatory, statutory and punitive damages and equitable relief.  We filed our answer in January 2008 and thematter is in the pre-discovery stage.

 

A customer sued thecompany in a complaint filed December 14, 2006 in the Superior Court ofContra Costa County (case no. C06-02630) alleging that we utilized a certaintype of preprinted credit card form in a return transaction in violation ofCalifornia Civil Code §1747.08. The plaintiff purports to bring the 

 

11

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action also on behalf ofother customers who are similarly situated. The lawsuit seeks compensatory, statutory, and injunctive relief.  This matter is in the discovery stage.

 

On February 9, 2007,a customer, purportedly on behalf of other customers similarly situated, filedsuit against bebe in the Central District of California (case no. CV-07-0972)alleging we violated the Fair Credit Reporting Act (the “FCRA”) by printing onreceipts more than the last five digits of the credit or debit card numbersand/or the expiration date. The suit seeks statutory and punitive damages,attorney’s fees and injunctive relief. On October 11, 2007, the Courtstayed this case in its entirety pending the outcome of an interlocutory appealin the Ninth Circuit Court of Appeals involving class certification issues in asimilar FCRA action entitled, Soualian v. International Coffee and Tea, LLC,Case No. CV-07-00502-RGK, United States District Court for the CentralDistrict of California, Appellate Case No. 07-56377.

 

We are also involved invarious other legal proceedings arising in the normal course of business. Noneof these matters nor the matters listed above are expected, individually or inthe aggregate, to have a material adverse effect on our business, financialcondition or results of operations.

 

We intend to defendourself vigorously against each of these claims. However, the results of anylitigation are inherently uncertain. We cannot assure you that we will be ableto successfully defend ourself in these lawsuits. Where required, and/orotherwise appropriate, we have recorded an estimate of potential liabilitiesthat we believe is reasonable. Any estimates are revised as further informationbecomes available.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements*”*.  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 appliesunder other accounting pronouncements that require or permit fair valuemeasurements and accordingly does not require any new fair valuemeasurements.  The provisions of SFAS No. 157are to be applied prospectively as of the beginning of the fiscal year in whichit is initially applied, with any transition adjustment recognized as acumulative-effect adjustment to the opening balance of retained earnings.  The provisions of SFAS No. 157 areeffective for fiscal years beginning after November 15, 2007.  The Company is in the process of determiningthe impact that the adoption of SFAS No. 157 will have on its financialposition and results of operations.

 

In February 2007,the FASB issued SFAS No. 159,  “TheFair Value Option for Financial Assets and Financial Liabilities-Including anamendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure eligible itemsat fair value at specified election dates and report unrealized gains andlosses on items for which the fair value option has been elected in earnings ateach subsequent reporting date. SFAS No. 159 is effective for fiscal yearsbeginning after November 15, 2007. We are currently in the process ofassessing the impact the adoption of SFAS No. 159 will have on ourfinancial position and results of operations.

** **

**12**

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**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following Management’s Discussion and Analysis ofFinancial Condition and Results of Operations contains forward-lookingstatements, which involve risks and uncertainties. Our actual results maydiffer materially from those anticipated in these forward-looking statements. Statements that are predictive in nature, that depend upon or refer tofuture events or conditions or that include words such as “expects,” “anticipates,”“intends,” “plans,” “believes,” “estimates,” “thinks,” and similar expressionsare forward-looking statements.   Forward-looking statements includestatements about our expected results of operations, capital expenditures andstore openings.  Although we believe that these statements are based uponreasonable 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 whyactual 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 ourgrowth, decline in comparable store sales performance, ongoing competitivepressures in the apparel industry, changes in the level of consumer spending orpreferences in apparel, our ability to attract and retain key managementpersonnel and/or other factors discussed in “Risks Factors” and elsewhere inthis Form 10-Q.

 

##### **OVERVIEW**

##### ** **

We design, develop and produce a distinctive line ofcontemporary women’s apparel and accessories. While we attract a broadaudience, our target customer is a 21 to 35-year-old woman who seeks currentfashion trends to suit her lifestyle. The “bebe look” appeals to a hip, sexy,sophisticated, body-conscious woman who takes pride in her appearance. The bebecustomer expects value in the form of current fashion and high quality at acompetitive price.

 

Our distinctive product offering includes a full rangeof separates, tops, sweaters, dresses, active wear and accessories in thefollowing lifestyle categories:  career, evening, casual and active. Wedesign and develop the majority of our merchandise in-house, which ismanufactured to our specifications. The remainder of our merchandise is sourceddirectly from third-party manufacturers.

 

We market our products under the bebe, BEBE SPORT,bbsp and bebe O brand names through our 290 retail stores, of which 208 arebebe stores, 61 are BEBE SPORT stores, 20 are bebe outlet stores and 1 is abebe accessories store as of January 5, 2008. These stores are located in35 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands andCanada. In addition, we have an on-line store at www.bebe.com and our licenseesoperate 19 international stores, including shop in shops. During the threemonths ended January 5, 2008, we opened 11 stores, including 6 bebe storesand 5 BEBE SPORT stores.  During the sixmonths ended January 5, 2008, we opened 17 stores, including 10 bebestores and 7 BEBE SPORT stores.  Weexpect to open approximately 35 stores, including approximately 19 bebe stores,9 BEBE SPORT stores and 7 bebe outlet stores during our fiscal 2008. Duringfiscal 2008, we anticipate closing up to 4 stores. We also plan to renovate 2existing stores and relocate or expand 7 existing stores, resulting in squarefootage growth of approximately 14%.

 

*bebestores.*  Wewere founded by Manny Mashouf, Chairman of the Board. We opened our first storein San Francisco, California in 1976, which was also the year we incorporated.

 

*BEBESPORT.* Welaunched BEBE SPORT during fiscal 2003 to address the performance and activelifestyle needs of the bebe customer.

 

13

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*bebeoutlets.*  Weutilize the outlets as a clearance vehicle for merchandise from our retailstores. In addition, the inventory includes a strong presentation of bebe logomerchandise and special cuts produced under the bebe O label exclusively forthe outlet stores.  In the last quarterof 2008, we plan to open 7 new outlet stores under the new name 2b bebe andwill continue to offer a selection of bebe logo product, bebe saleconsolidations and an expanded assortment of product made exclusively for ouroutlet stores under the new name 2b bebe.

 

*On-line.* bebe.com is an extension of the bebestore experience and provides a complete assortment of bebe and BEBE SPORTmerchandise. It is also used as an advertising vehicle to communicate with ourcustomers.  We are currently able to shipto customers in the United States and Canada.

 

*bebeaccessories*. In September 2006,we opened our first accessory concept store featuring shoes imported fromItaly, Brazil and China and a selection of fine leather goods, bebe logo merchandise,outerwear and gift items.

 

##### **CRITICALACCOUNTING POLICIES**

##### ** **

Management’s Discussion and Analysis of FinancialCondition and Results of Operations are based upon our consolidated financialstatements, which have been prepared in conformity with accounting principlesgenerally accepted in the United States of America.

 

The preparation of these financial statements requiresthe appropriate application of certain accounting policies, many of whichrequire us to make estimates and assumptions about future events and theirimpact on amounts reported in our financial statements and related notes. Sincefuture events and their impact cannot be determined with certainty, the actualresults will inevitably differ from our estimates. Such differences could be materialto the financial statements. We believe our application of accounting policies,and the estimates inherently required therein, are reasonable. These accountingpolicies and estimates are constantly reevaluated, and adjustments are madewhen facts and circumstances dictate a change. Our accounting policies are morefully described in Note 1 to the consolidated financial statements in ourannual report on Form 10-K for the fiscal year ended July 7, 2007.

 

We have identified certain critical accountingpolicies, which are described below:

 

*Revenuerecognition.  *We recognize revenue at the time the products are received by thecustomers in accordance with the provisions of Staff Accounting Bulletin (“SAB”)No. 101, “Revenue Recognition in Financial Statements” as amended by SAB No. 104,“Revenue Recognition”.  We recognizerevenue for store sales at the point at which the customer receives and paysfor the merchandise at the register with either cash or credit card. Foron-line sales, we recognize revenue at the time the customer receives theproduct. We estimate and defer revenue and the related product costs forshipments that are in transit to the customer. Customers typically receivegoods within one week of shipment. Amounts related to shipping billed tocustomers are reflected in net sales and the related costs are reflected incost of goods sold. Sales tax collected from customers on retail sales arerecorded net of retail sales at the time of the transaction.

 

We record a reserve for estimated product returns based on historicalreturn trends. As of January 5, 2008 and December 30, 2006, thereserve was $1,898,000 and $1,728,000, respectively. If actual returns aregreater than those projected, additional sales returns may be recorded in thefuture.

 

14

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Discounts offered to customers consist primarily of point of salemarkdowns and are recorded at the time of the related sale as a reduction ofrevenue.

 

We include the value of points and rewards earned by our loyaltyprogram members as a liability and a reduction of revenue at the time thepoints and rewards are earned based on historical conversion and redemptionrates.  We recognize revenue when therewards are redeemed or expire.

 

We carry gift certificates sold as a liability and we recognize revenuewhen the gift certificate is redeemed or four years after issuance if the giftcertificate is unredeemed.  Similarly,customers may receive a store credit in exchange for returned goods. We carrystore credits as a liability until redeemed or three years after issuance ifthe store credit is unredeemed.

 

We ship bebe goods to various international locations and recognizerevenue from these wholesale sales when the licensee receives the shipment.

 

We record royalty revenue from product licensees as earned, which isbased on the licensee’s sales.

 

*StockBased Compensation.*Weaccount for stock options and awards issued to employees in accordance with thefair value recognition provisions of Financial Accounting Standards Board (“FASB”)Statement No. 123(R) (“SFAS No. 123(R)”), “Share-Based Payment,”using the modified prospective transition method. Under SFAS No. 123(R),stock-based awards to employees are required to be recognized as compensationexpense, based on the calculated fair value on the date of grant. We determinethe fair value using the Black Scholes option pricing model. This modelrequires subjective assumptions, including future stock price volatility andexpected term, which affect the calculated values.

 

*Inventories.* Our inventories are stated at the lowerof weighted average cost or market. Market is determined based on the estimatednet realizable value, which is generally the merchandise selling price. Toensure that our raw material is properly valued we age the fabric inventory andrecord a reserve in accordance with our established policy, which is based onhistorical experience. To ensure our finished goods inventory is properlyvalued we review the age and turnover of our inventory and record a reserve ifthe selling price is marked down below cost. These assumptions can have animpact on current and future operating results and financial position. Weestimate shrinkage for the period between the last physical count and balancesheet date based on historic shrinkage trends.

 

*Long-livedassets.* We reviewlong-lived assets for impairment whenever events or changes in circumstances,such as store closures or poor performing stores, indicate that the carryingvalue of an asset may not be recoverable. If the undiscounted cash flows fromthe long-lived assets are less than the carrying value we record an impairmentcharge equal to the difference between the carrying value and the asset’s fairvalue. In addition, at the time a decision is made to close a store, we recordan impairment charge, if appropriate, or accelerate depreciation over therevised useful life of the asset. Historically, our impairment charges havebeen immaterial.  During the six months ended January 5, 2008 and December 30,2006 we recorded $42,000 and $0, respectively, of impairment charges.  Webelieve at this time that the long-lived assets’ carrying values and usefullives continue to be appropriate.

 

*AccruedLitigation.* We accrue estimates of probable liabilities associated with lawsuits andclaims. The results of any litigation are inherently uncertain. As informationbecomes available, we assess the potential liabilities related to pendinglitigation and may revise our estimates as necessary. Such revisions of estimatescould materially impact the results of operations and financial position.

 

15

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*SelfInsurance*.  We use a combination of insurance and self insurance for employee relatedhealth care benefits. We record self insurance liabilities based on claimsfiled and an estimate of those claims incurred but not reported. Any projectionof losses concerning our liability is subject to a high degree of variability.Among the causes of this variability are unpredictable external factors such asfuture inflation rates, changes in severity, benefit level changes, medicalcosts and claim settlement patterns. Should a different amount of claims occurcompared to what was estimated or costs of the claims increase or decrease beyondwhat was anticipated, reserves may need to be adjusted in the future.

 

*IncomeTaxes*.   On July 8, 2007, we adopted FIN 48. FIN48 prescribes a recognition threshold that a tax position is required to meetbefore being recognized in the financial statements and provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition issues. To the extent that ourestimates change or the final tax outcome of these matters is different thanthe amounts recorded, such differences will impact the income tax provision inthe period in which such determinations are made. Our effective tax rate in agiven financial statement period may be materially impacted by changes in themix and level of earnings, changes in the expected outcome of audits or changesin the deferred tax valuation allowance.

 

##### **RESULTSOF OPERATIONS**

##### ** **

##### **Our fiscal year is a 52 or 53 week period, each periodending on the first Saturday after June 30.  Fiscal years 2008 and2007 include 52 weeks and 53 weeks, respectively.  The three months ended January 5, 2008and December 30, 2006 both include 13 weeks.  The six months ended January 5, 2008 andDecember 30, 2006 both include 26 weeks.**

##### ** **

 

16

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The following table setsforth certain financial data as a percentage of net sales for the periodsindicated:

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **January 5,**              | ** ** | **December 30,**          | ** ** | **January 5,** | ** ** | **December 30,** | ** ** |
| ** **                                               | ** ** | **2008**                         | ** ** | **2006**                       | ** ** | **2008** | ** ** | **2006** | ** ** |
|                                                     | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** |   |
| Net sales                                                |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of sales,  including production   and occupancy (1) |       | 53.8                             |       | 52.1                           |       | 53.2 |   | 50.9 |   |
|                                                     |       |                             |       |                           |       |   |   |   |   |
| Gross margin                                             |       | 46.2                             |       | 47.9                           |       | 46.8 |   | 49.1 |   |
| Selling, general  and administrative expenses (2)        |       | 30.9                             |       | 30.0                           |       | 32.6 |   | 30.9 |   |
|                                                     |       |                             |       |                           |       |   |   |   |   |
| Operating income                                         |       | 15.3                             |       | 17.9                           |       | 14.2 |   | 18.2 |   |
| Interest and  other income, net                          |       | 2.0                              |       | 1.3                            |       | 2.1 |   | 1.6 |   |
|                                                     |       |                             |       |                           |       |   |   |   |   |
| Income before  income taxes                              |       | 17.3                             |       | 19.2                           |       | 16.3 |   | 19.8 |   |
| Provision for  income taxes                              |       | 5.9                              |       | 6.9                            |       | 5.6 |   | 7.2 |   |
|                                                     |       |                             |       |                           |       |   |   |   |   |
| Net income                                               |       | 11.4                             | %          | 12.3                           | %          | 10.7 | % | 12.6 | % |

 

----

(1)                                 Cost of salesincludes the cost of merchandise, occupancy costs, distribution center andproduction costs.

 

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

 

*Net Sales.* Net sales increased to $203.3 million during thethree months ended January 5, 2008 from $196.8 million for the comparableperiod of the prior year, an increase of $6.5 million, or 3.3%.The increase in sales was primarily dueto a $16.9 million increase in sales for stores not included in the comparablestore sales base, a $2.2 million increase in on-line sales, a $1.2 millionincrease in wholesale sales to international licensees and a $0.4 milliondecrease in deferred loyalty revenue. The increase was partially offset by a 7.9% decrease in comparable storesales totaling $14.1 million during the three months ended January 5, 2008as compared to the same period in the prior year.

 

 For the sixmonths ended January 5, 2008, net sales increased to $364.4 million from$353.9 million for the comparable period of the prior year, an increase of$10.5 million, or 3.0%. The increase in sales was primarily due to a $30.5million increase in sales for stores not included in the comparable store salesbase, a $3.7 million increase in on-line sales, a $2.6 million increase inwholesale sales to international licensees and a $0.7 million decrease indeferred loyalty revenue.  The increasewas partially offset by an 8.5% decrease in comparable store sales totaling$27.2 million during the six months ended January 5, 2008 as compared tothe same period in the prior year.

 

17

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| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **January 5,**              | ** ** | **December 30,**          | ** ** | **January 5,** | ** ** | **December 30,** | ** ** |
| ** **                                             | ** ** | **2008**                         | ** ** | **2006**                       | ** ** | **2008** | ** ** | **2006** | ** ** |
|                                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** |   |
| Net sales (In  thousands)                              |       | $                                | 203,329    |                           | $          | 196,802 |   | $ | 364,411 |   | $ | 353,861 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Total net sales  increase percentage                   |       | 3.3                              | %          | 17.2                           | %          | 3.0 | % | 20.3 | % |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Comparable store  sales increase (decrease) percentage |       | (7.9                             | )%         | 5.5                            | %          | (8.5 | )% | 8.6 | % |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net sales per  average square foot (1)                 |       | $                                | 195        |                           | $          | 214 |   | $ | 353 |   | $ | 388 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Square footage  at end of period (In thousands)        |       | 1,051                            |       | 937                            |       | 1,051 |   | 937 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Number of store  locations:                            |       |                             |       |                           |       |   |   |   |   |
| Beginning of  period                                   |       | 279                              |       | 248                            |       | 273 |   | 242 |   |
| New store  locations                                   |       | 11                               |       | 10                             |       | 17 |   | 16 |   |
| Closed store  locations                                |       | 0                                |       | 0                              |       | 0 |   | 0 |   |
| Number of stores  open at end of period                |       | 290                              |       | 258                            |       | 290 |   | 258 |   |

 

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(1)  We calculatenet sales per average square foot using net store sales and a monthly averagestore square footage.

 

*Gross Margin.*Gross margin decreased to $94.0 million during thethree months ended January 5, 2008 from $94.3 million for the comparableperiod of the prior year, a decrease of $0.3 million, or 0.3%. As a percentageof net sales, gross margin decreased to 46.2% for the three months ended January 5,2008 from 47.9% in the comparable period of the prior year.  The decrease in gross margin as a percentageof net sales resulted primarily due to higher markdowns and unfavorableoccupancy leverage, partially offset by a reduction in raw material reserves.

 

Forthe six months ended January 5, 2008, gross margin decreased to $170.5million from $173.6 million for the comparable period of the prior year, adecrease of $3.1 million, or 1.8%. As a percentage of net sales, gross margindecreased to 46.8% for the six months ended January 5, 2008 from 49.1% inthe comparable period of the prior year. The decrease in gross margin as a percentage of net sales resultedprimarily due to higher markdowns and unfavorable occupancy leverage, partiallyoffset by a reduction in raw material reserves.

 

*Selling, General and Administrative Expenses.*Selling, general and administrativeexpenses, which primarily consist of non-occupancy store costs, corporateoverhead and advertising costs, increased to $62.8 million during the threemonths ended January 5, 2008 from $58.9 million for the comparable periodof the prior year, an increase of $3.9 million, or 6.6 %. As a percentage ofnet sales, these expenses increased to 30.9% during the three months from 30.0%in the comparable period of the prior year. The increase in selling, general and administrative expenses as apercentage of net sales from the prior year of 0.9% was primarily due to a $2.7million increase in total compensation expense including stock basedcompensation and the recording of a small provision for bonuses in the currentyear verses a reversal of the bonus accrual in the prior year partially offsetby lower advertising.

 

Selling,general and administrative expenses increased to $118.9 million during the sixmonths ended January 5, 2008 from $109.2 million for the comparable periodof the prior year, an increase of $9.7 million, or 8.9 %. As a percentage ofnet sales, these expenses increased to 32.6% during the six months from 30.9%in the comparable period of the prior year. The increase as a percentage of net sales from 

 

18

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the prior year of 1.7%was primarily due to a $5.4 million increase in total compensation expense, includingstock based compensation.

 

*Interest and Other Income, Net.* We generated approximately $4.1 millionof interest and other income (net of other expenses) during the three monthsended January 5, 2008 compared to approximately $2.5 million in thecomparable period of the prior year. The increase was primarily the result ofhigher interest rates on our tax-exempt investments.

 

Forthe six months ended January 5, 2008, we generated approximately $7.8million of interest and other income (net of other expenses), compared to $5.7million in the comparable period of the prior year.  The increase was primarily the result ofhigher interest rates on our tax-exempt investments.

 

*Provisionfor Income Taxes.*Oureffective tax rate decreased to 33.8% for the three months ended January 5,2008 from 35.9% for the comparable period in the prior year primarily due to anincrease in tax-exempt interest income as a percent of total pretax income andan  increase in our allowable domesticmanufacturing deduction.

 

For the six months ended January 5,2008, our effective tax rate decreased to 34.7% from 36.2% for the comparableperiod in the prior year primarily due to an increase in tax-exempt interestincome as a percentage of total pretax income and an increase in our allowabledomestic manufacturing deduction.

 

**Seasonality of Business and QuarterlyResults**

 

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

 

### **LIQUIDITY AND CAPITALRESOURCES**

### ** **

Our workingcapital requirements vary widely throughout the year and generally peak duringthe first and second fiscal quarters. At January 5, 2008, we hadapproximately $365.4 million of cash and equivalents and short-term marketablesecurities on hand. In addition, we had a revolving line of credit, under whichwe could borrow or issue letters of credit up to a combined total of $25million. As of January 5, 2008, there were no cash borrowings outstandingunder the line of credit, and letters of credit outstanding totaled $1.6million.

 

Net cash providedby operating activities for the six months ended January 5, 2008 was $65.3million versus $73.9 million for the six months ended December 30, 2006.Cash provided by operating activities for the period was primarily generated bynet income of $38.7 million adjusted for stock compensation of $6.2 million,depreciation of $10.9 million, deferred rent of $3.3 million and deferredincome taxes of $1.9 million, as well as changes in working capital. Thechanges in working capital were primarily due to an increase in accruedliabilities of $12.2 million and a decrease in prepaid expenses and otherassets of $4.5 million, primarily as a result of the timing of tax payments,partially offset by a decrease in accounts payable of $3.8 million, an increasein inventory of $2.1 million and an increase in accounts receivable of $2.9million.

 

Net cash providedby investing activities for the six months ended January 5, 2008 was $12.5million versus net cash used by investing activities of $44.4 

 

19

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million for the sixmonths ended December 30, 2006. Cash provided by investing activities for the period was primarily dueto the sales of marketable securities of $276.8 million, partially offset bypurchases of marketable securities of $245.8 million and capital expendituresof $18.6 million related to the opening of new stores.  We opened 17 new stores in the six monthsended January 5, 2008 and expect to open approximately 35 stores duringfiscal 2008.  We estimate that totalcapital expenditures will be approximately $45 million in fiscal 2008.

 

Net cash used byfinancing activities was $78.3 million for the six months ended January 5,2008 versus net cash provided by financing activities of $1.3 million for thesix months ended December 30, 2006. Cash used by financing activities for the six months was primarily dueto the purchase of 5 million shares of our outstanding common stock totaling$66.9 million and payments of quarterly dividends for the fourth quarter offiscal 2007 and the first and second quarters of fiscal 2008 totaling $13.8million, partially offset by proceeds received from stock option exercises of$2.0 million and the related tax benefit of $0.6 million.

 

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

 

Webelieve that our cash on hand, together with our cash flows from operations,will be sufficient to meet our capital and operating requirements for at leastthe next twelve months. Our future capital requirements, however, will depend onnumerous factors, including without limitation, the size and number of new andexpanded stores and/or store concepts, investment costs for managementinformation systems, potential acquisitions and/or joint ventures, repurchaseof stock and future results of operations.

 

### **Inflation**

### ** **

Wedo not believe that inflation has had a material effect on the results ofoperations in the recent past. However, we cannot assure you that our businesswill not be affected by inflation in the future.

 

##### **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

##### ** **

Weare exposed to market risks, which include changes in U.S. interest rates and,to a lesser extent, foreign exchange rates. We do not engage in financialtransactions for trading or speculative purposes.

 

*InterestRate Risk*

* *

We currently maintain aportfolio of variable interest rate investments consisting of cash equivalentsand short-term marketable securities. Marketable securities consist of closed-end variable interest rate fundsthat invest primarily in tax-exempt municipal bonds.  Due to the variable nature of theseinvestments, their value is typically not subject to market rate changes.  According to our investment policy, we mayinvest in taxable and tax-exempt instruments. In addition, the policy establishes limits on credit quality, maturity, issuerand type of instrument. Marketable securities are classified as “available forsale”.  We do not use derivativefinancial instruments in our investment portfolio.

 

20

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All highly liquidinvestments with a maturity of three months or less at the date of purchase areconsidered to be cash equivalents. Investments are considered short-term marketable securities if theoriginal maturity is between three months and twelve months, or long-termmarketable securities if the original maturity is greater than twelve months.Auction rate securities have stated maturities beyond one year but are pricedand traded as short-term instruments due to the liquidity provided through theinterest rate reset mechanism and are classified as short-term when theyrepresent investments of cash that are intended for use in current operations.

 

Thefollowing table lists our cash equivalents and short-term marketable securitiesat January 5, 2008:

 
| ** **                          | ** ** | **Book Value**         | ** ** | **Fair Value** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|---------------------|------------|
| ** **                          |       | **(Dollars  in thousands)** |       |
| Cash equivalents                    |       | $                           | 41,760     |                | $          | 41,760 |   |
| Weighted average  interest rate (1) |       | 4.00                        | %          |                |       |
| Short-term  marketable securities   |       | 296,050                     |       | 296,050             |       |
| Weighted average  interest rate (1) |       | 5.59                        | %          |                |       |
| Total                               |       | $                           | 337,810    |                | $          | 337,810 |   |

 

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(1) Represents the weighted average interest rate for tax-exempt municipal bonds,municipal preferreds, corporate preferreds and taxable and tax-exemptinstitutional money market instruments.

 

The interest payable on outstanding cash borrowings under our bank lineof credit is based on variable interest rates and therefore affected by changesin market interest rates. As we have no outstanding cash borrowings, if interest rates rosesignificantly, our results from operations and cash flows would not beaffected.

 

*ForeignCurrency Risks*

* *

We enter into a significant amount of purchaseobligations outside of the United States, substantially all of which arenegotiated and settled in U.S. Dollars and, therefore, have only minimal exposureto foreign currency exchange risks. We also operate a subsidiary for which thefunctional currency is the Canadian Dollar. In accordance with SFAS No. 52,“Foreign Currency Translation”, assets and liabilities of Canada’s operationsare translated into U.S. dollars at quarter-end rates, while income andexpenses are translated at the weighted average exchange rates for the quarter.The related translation adjustments are recorded in accumulated othercomprehensive income as a separate component of shareholders’ equity.Fluctuations in exchange rates therefore impact our financial condition andresults of operations, as reported in U.S. Dollars.   We do not hedgeagainst foreign currency risks and believe that foreign currency exchange riskis immaterial.

 

##### **ITEM 4.  CONTROLSAND PROCEDURES**

##### ** **

Under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, we evaluated the effectiveness of our disclosure controls andprocedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended. Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this quarterly report at the reasonable assurance level.

 

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There has been no change in our internal control overfinancial reporting during the quarter ended January 5, 2008 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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##### ** **

##### **PART II  OTHER INFORMATION**

##### ** **

**ITEM1.**                **LEGAL PROCEEDINGS**

 

See the Legal Matterssection of the Notes to the Condensed Consolidated Financial Statements for adiscussion of legal proceedings.

 

**ITEM1A. RISK FACTORS**

 

Our past performance maynot be a reliable indicator of future performance because actual future resultsand trends may differ materially depending on a variety of factors, including,but not limited to, the risks and uncertainties discussed below. In addition,historical trends should not be used to anticipate results or trends in futureperiods.

 

Factors that might causeour actual results to differ materially from the forward looking statementsdiscussed elsewhere in this report, as well as affect our ability to achieveour financial and other goals, include, but are not limited to, those set forthbelow.  There have been no materialchanges in our risk factors from those disclosed in Part I, Item 1Aof our Annual Report on Form 10-K for the fiscal year ended July 7,2007.

 

RISKS RELATING TO OURBUSINESS:

 

**1. Thesuccess of our business depends in large part on our ability to identifyfashion trends as well as to react to changing customer demand in a timelymanner.**Consequently,we depend in part upon the customer response to the creative efforts of ourmerchandising, design and marketing teams and their ability to anticipatetrends and fashions that will appeal to our consumer base. If we miscalculateour customers’ product preferences or the demand for our products, we may befaced with excess inventory. Historically, this type of occurrence has resultedin excess fabric for some products and markdowns and/or write-offs, which hasimpaired our profitability, and may do so in the future. Similarly, any failureon our part to anticipate, identify and respond effectively to changingconsumer demands and fashion trends will adversely affect our sales.

 

**2. If weare unable to obtain raw materials, or unable to find manufacturing facilitiesor if our manufacturers perform unacceptably, our sales may be negativelyaffected and our financial condition may be harmed**. We do not own any manufacturingfacilities and therefore depend on contractors and third parties to manufactureour products. We place all of our orders for production of merchandise and rawmaterials by purchase order and do not have any long-term contracts with anymanufacturer or supplier. If we fail to maintain favorable relationships withour manufacturers and suppliers or are unable to obtain sufficient quantitiesof quality raw materials on commercially reasonable terms, it could harm ourbusiness and results of operations. We cannot assure you that contractors andthird-party manufacturers (1) will not supply similar products to ourcompetitors, (2) will not stop supplying products to us completely or (3) willsupply products in a timely manner. Untimely receipt of products may result inlower than anticipated sales and markdowns which would have a negative impacton earnings. Furthermore, we have received in the past, and may receive in thefuture, shipments of products from manufacturers that fail to conform to ourquality control standards. In such event, unless we are able to obtainreplacement products in a timely manner, we may lose sales. Certain of ourthird-party manufacturers store our raw materials. In the event our inventoryis damaged or destroyed while in storage and we are unable to obtainreplacement raw materials, our earnings may be negatively impacted.

 

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**3. Oursuccess depends on our ability to attract and retain qualified employees inorder to support our existing business and future expansion.**From time to time we actively recruitqualified candidates to fill key executive positions from within the Company.There is substantial competition for experienced personnel, which we expectwill continue. We compete for experienced personnel with companies who havegreater financial resources than we do. In the past, we have experiencedsignificant turnover of our executive management team and retail storepersonnel. We are also exposed to employment practice litigation due to thelarge number of employees and high turnover of our sales associates. If we failto attract, motivate, and retain qualified personnel, it could harm ourbusiness and limit our ability to expand.

 

In addition, we depend onthe expertise and execution of our key employees, particularly Manny Mashouf,our founder and Chairman of the Board, and Gregory Scott, our Chief ExecutiveOfficer and member of the Board of Directors. If we lose the services of Mr. Mashoufor Mr. Scott, or any key officers or employees, it could harm our businessand results of operations.

 

**4. If weare not able to successfully develop new concepts, including BEBE SPORT and 2bbebe, our revenue base and earnings may be impaired**. From time to time, we may pursue newconcepts.  If the BEBE SPORT and 2b bebeor other new concepts are not successful, our financial condition may beharmed.

 

**5. Wecannot assure you that future store openings will be successful, and new storeopenings may impact existing stores.**We expect to open approximately 35 stores in fiscal2008, of which 19 will be bebe stores, 9 will be BEBE SPORT stores and 7 willbe 2b bebe stores. We cannot assure you that the stores that we plan to open infiscal 2008, or any other stores that we might open in the future, will besuccessful or that our overall operating profit will increase as a result ofopening these stores. During fiscal 2008 we anticipate closing up to 4 stores.For fiscal 2008, we plan to grow our operations primarily through the opening ofnew stores. Most of our new store openings in fiscal 2008 will be in existingmarkets. These openings may affect the existing stores’ net sales andprofitability. Our failure to predict accurately the demographic or retailenvironment at any future store location could have a material adverse effecton our business, financial condition and results of operations.

 

Our ability toeffectively obtain real estate to open new stores depends upon the availabilityof real estate that meets our criteria, including traffic, square footage,co-tenancies, average sales per square foot, lease economics, demographics, andother factors, and our ability to negotiate terms that meet our financialtargets. In addition, we must be able to effectively renew our existing storeleases. Failure to secure real estate locations adequate to meet annual targetsas well as effectively managing the profitability of our existing fleet ofstores could have a material adverse effect on our results of operations.

 

**6. Weare subject to risks associated with our online sales.**We operate an on-line store at www.bebe.comto sell our merchandise. Although our online sales encompass a relatively smallpercentage of our total sales, our on-line operations are subject to numerousrisks, including unanticipated operating problems, reliance on third-partycomputer hardware and software providers. The on-line operations also involveother risks that could have an impact on our results of operations includingbut not limited to diversion of sales from our stores, rapid technologicalchange, liability for online content, security breaches, consumer privacyconcerns, credit card fraud, and risks related to the failure of the computersystems that operate the website and its related support systems. In addition,given our use of a third party platform, we do not have direct control ofcertain aspects of our on-line business. We cannot assure you that our on-linestore will continue to achieve sales and profitability growth or even remain atits current level.

 

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**7. Anyserious disruption at our major facilities could have a harmful effect on ourbusiness.**Wecurrently operate a corporate office in Brisbane, California, a distributionfacility in Benicia, California, and a design studio and production facility inLos Angeles, California. Any serious disruption at these facilities whether dueto construction, relocation, fire, earthquake, terrorist acts or otherwisewould harm our operations and could have a harmful effect on our business andresults of operations. Furthermore, we have little experience operatingessential functions away from our main corporate offices and are uncertain whateffect operating such satellite facilities might have on business, personneland results of operations.

 

**8. Werely on information technology, the disruption of which could adversely impactour business.** Werely on various information systems to manage our operations and regularly makeinvestments to upgrade, enhance or replace such systems. To support our growthwe initiated a three year IS&T strategic plan and we are currently enteringyear three of this plan. If we fail to successfully implement the plan,our business could be adversely affected.

 

**9. Weface significant competition in the retail and apparel industry, which couldharm our sales and profitability.**The retail and apparel industries are highlycompetitive and are characterized by low barriers to entry. We expectcompetition in our markets to increase. The primary competitive factors in ourmarkets are: brand name recognition, sourcing, product styling, quality,presentation and pricing, timeliness of product development and delivery, storeambiance, customer service and convenience. We compete with traditional department stores, specialty storeretailers, business to consumer websites, off-price retailers and directmarketers for, among other things, raw materials, market share, retail space,finished goods, sourcing and personnel. Because many of these competitors arelarger and have substantially greater financial, distribution and marketingresources than we do, we may lack the resources to adequately compete withthem. If we fail to remain competitive in any way, it could harm our business,financial condition and results of operations.

 

**10.Purchases of the merchandise we sell are generally discretionary and aretherefore particularly susceptible to economic conditions.**The outlook for the United States economyis uncertain and is directly affected by global factors that are beyond ourcontrol. Such factors include disposable consumer income, oil prices, recessionand fears of recession, war and fears of war, terrorist attacks, inclementweather, consumer debt, interest rates, sales tax rates, consumer confidence infuture economic conditions and political conditions, and consumer perceptionsof personal well-being and security. Consumers are generally more willing tomake discretionary purchases, including purchases of fashion products, duringperiods in which favorable economic conditions prevail. If economic conditionschange, our business, financial condition and results of operations could beadversely affected. We cannot predict the indirect effects such as rising oiland freight prices, consumer spending or other economic factors that naturaldisasters will have on our results of operations.

 

**11. Ourbusiness could be adversely impacted by unfavorable international politicalconditions.** Dueto our international operations, our sales and operating results are, and willcontinue to be, affected by international social, political, legal and economicconditions. In particular, our business could be adversely impacted byinstability or changes resulting in the disruption of trade with the countriesin which our contractors, suppliers or customers are located, significantfluctuations in the value of the dollar against foreign currencies orrestrictions on the transfer of funds, or additional trade restrictions imposedby the United States and other foreign governments. Trade restrictions,including increased tariffs or quotas, embargoes, and customs restrictionscould increase the cost or reduce the supply of merchandise available to thecompany and adversely affect its financial condition and results of operations.In addition, we purchase a substantial amount of our raw materials from 

 

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China and our businessand operating results may be affected by changes in the political, social oreconomic environment in China.

 

**12. Ifwe are not able to successfully protect our intellectual property our abilityto capitalize on the value of our brand name may be impaired**. Even though we take actions toestablish, register and protect our trademarks and other proprietary rights, wecannot assure you that we will be successful or that others will not imitateour products or infringe upon our intellectual property rights. In addition, wecannot assure that others will not resist or seek to block the sale of ourproducts as infringements of their trademark and proprietary rights.

 

We are seeking toregister our trademarks domestically and internationally. Obstacles may existthat may prevent us from obtaining a trademark for the bebe name or relatednames. We may not be able to register certain trademarks, purchase the right orobtain a license to use the bebe name or related names on commerciallyreasonable terms. If we fail to obtain trademark, ownership or license therequisite rights, it would limit our ability to expand. In some jurisdictions,despite successful registration of our trademarks, third parties may allegeinfringement and bring actions against us. In addition, if our licensees failto use our intellectual property correctly, the reputation and value associatedwith our trademarks may be diluted. Furthermore, if we do not demonstrate use of our trademarks, ourtrademark rights may lapse over time.

 

**13. Ifan independent manufacturer violates labor or other laws, or is accused ofviolating any such laws, or if their labor practices diverge from thosegenerally accepted as ethical, it could harm our business and brand image**. While we maintain a policy to monitorthe operations of our independent manufacturers by having an independent firminspect these manufacturing sites, and all manufacturers are contractuallyrequired to comply with such labor practices, we cannot control the actions orthe public’s perceptions of such manufacturers, nor can we assure that thesemanufacturers will conduct their businesses using ethical or legal laborpractices. Apparel companies can be held jointly liable for the wrongdoings ofthe manufacturers of their products. While we do not control their employees’employment conditions or the manufacturers’ business practices, and themanufacturers act in their own interest, they may act in a manner that resultsin negative public perceptions of us and/or employee allegations or courtdeterminations that we are jointly liable.

 

RISKS RELATING TO OURCOMMON STOCK:

 

**1. Ourstock price may fluctuate because of the relatively low number of shares thatcan be publicly traded.**The vast majority of our outstanding shares of our common stock aresubject to trading restrictions. As of January 5, 2008, of theapproximately  89,000,000 shares of ourcommon stock then outstanding, approximately 27,000,000 shares were availableto be publicly traded, and as a result, our stock price is vulnerable to marketswings due to large purchases, sales and short sales of our common stock.

 

**2.Because Manny Mashouf beneficially owns a substantial portion of theoutstanding shares, other shareholders may not be able to influence thedirection the company takes.**As of January 31, 2008, Manny Mashouf, theChairman of the Board, beneficially owned approximately 56% of the outstandingshares of our common stock. As a result, he can control the election ofdirectors and the outcome of all issues submitted to the shareholders. This maymake it more difficult for a third party to acquire shares, may discourageacquisition bids, and could limit the price that certain investors might bewilling to pay for shares of common stock. This concentration of stockownership may have the effect of delaying, deferring or preventing a change incontrol of our company.

 

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**3. Our significant shareholdershold a substantial portion of our stock which may result in the tradingvolatility or may adversely affect our common stock.**As of January 31, 2008, Ms. Neda Mashouf currently ownedapproximately 13% of the outstanding shares of our common stock. As a result,any change in ownership of a significant portion of these shares, includingsales by Ms. Mashouf, may result in trading volatility in our common stockor may adversely affect our stock price.

 

**4. Oursales, margins and operating results are subject to seasonal and quarterlyfluctuations.** Ourbusiness varies with general seasonal trends that are characteristic of theretail and apparel industries, such as the timing of seasonal wholesaleshipments and other events affecting retail sales. As a result, our storestypically generate a higher percentage of our annual net sales andprofitability in the second quarter of our fiscal year, which includes theholiday selling season, compared to other quarters.

 

In addition, ourcomparable store sales have fluctuated significantly in the past, and we expectthat they will continue to fluctuate in the future. A variety of factors affectcomparable store sales, including fashion trends, competition, current economicconditions, the timing of release of new merchandise and promotional events,changes in our merchandise mix, the success of marketing programs and weatherconditions. Our ability to deliver strong comparable store sales results andmargins depends in large part on accurately forecasting demand and fashiontrends, selecting effective marketing techniques, providing an appropriate mixof merchandise for our customer base, managing inventory effectively, andoptimizing store performance by closing under performing stores. Suchfluctuations may adversely affect the market price of our common stock.

 

**5.Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 couldnegatively impact investor confidence.**In order to meet the requirements of the Sarbanes-OxleyAct of 2002 in future periods, we must continuously document, test, monitor andenhance our internal control over financial reporting.  We cannot assure you that the periodicevaluation of our internal controls required by Section 404 of theSarbanes-Oxley Act will not result in the identification of significant controldeficiencies and/or material weaknesses or that our auditors will be able toattest to the effectiveness of our internal control over financial reporting.Failure to maintain the effectiveness of our internal control over financialreporting or to comply with the requirements of this Act could have a materialadverse effect on our reputation, financial condition and market price of ourcommon stock.

 

##### **ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

##### ** **

         Not applicable.

 

##### **ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

##### ** **

         Not applicable.

 

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##### ** **

##### **ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

##### ** **

We held our annual meeting of shareholders at ourheadquarters in Brisbane, California on November 16, 2007.  Of the93,607,770 shares outstanding as of the record date, 90,608,035 shares wererepresented by proxy at the meeting.

 

At the meeting,our shareholders voted on and approved the following matters:

 

(1)   Proposalto elect six directors to hold office for a one-year term and until theirsuccessors are elected:

 
| ** **       | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
|             |       |       |       |         |       |
| Barbara Bass     |       | 90,237,392 |       | 370,643      |       |
| Cynthia Cohen    |       | 89,959,213 |       | 648,822      |       |
| Corrado Federico |       | 89,760,685 |       | 847,350      |       |
| Manny Mashouf    |       | 90,018,347 |       | 589,688      |       |
| Gregory Scott    |       | 90,025,154 |       | 582,881      |       |
| Caden Wang       |       | 90,238,234 |       | 369,801      |       |

 

(2)  Proposalto ratify the appointment of Deloitte & Touche LLP as our independentauditors for the fiscal year ending July 5, 2008.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
|       |       |        |       |        |       |
| 90,052,186 |       | 431,216     |       | 124,633     |       |

##### ** **

##### **ITEM5.  OTHER INFORMATION**

##### ** **

         Not applicable.

 

##### **ITEM6.  EXHIBITS**

##### ** **

(a) Exhibits.  The following is a list of exhibits filed aspart of this Report on Form 10-Q.

 
| **Exhibit** | ** ** | **Description**                                             |
|-------------|------------|-------------------------------------------------------------|
|        |       |                                                        |
| 31.1        |       | Section 302  Certification of Chief Executive Officer. |
| 31.2        |       | Section 302  Certification of Chief Financial Officer. |
| 32.1        |       | Section 906  Certification of Chief Executive Officer. |
| 32.2        |       | Section 906 Certification  of Chief Financial Officer. |

 

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** **

**SIGNATURE**

** **

         Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | Dated February 14,  2008                                       |
|--------|---------------------------------------------------------------------|
|   |                                                                |
|   | bebe stores, inc.                                                   |
|   |                                                                |
|   | /s/ Walter Parks                                                    |   |
|   | Walter Parks, Chief  Operating Officer and Chief Financial  Officer |

 

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EXHIBIT INDEX

 
| **Exhibit Number** | ** ** | **Description**                                            |
|-------------------------|------------|------------------------------------------------------------|
|                    |       |                                                       |
| 31.1                    |       | Section 302  Certification of Chief Executive Officer |
| 31.2                    |       | Section 302  Certification of Chief Financial Officer |
| 32.1                    |       | Section 906  Certification of Chief Executive Officer |
| 32.2                    |       | Section 906  Certification of Chief Financial Officer |

 

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