**UNITED STATESSECURITIES AND EXCHANGE COMMISSION********Washington, D.C. 20549**

**FORM10-Q**

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

**For the quarterly period ended December 30, 2006**

**OR**

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

**Commission File Number 0-24395**

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

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

 

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

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  x Yes oNo

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2 of the Securities ExchangeAct).  o Large accelerated filer x Accelerated filer oNon-accelerated filer

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act) o Yes x No

The number of shares ofthe registrant’s common stock, par value $0.001 per share, outstanding as ofJanuary 31, 2006 was 93,036,280.

 

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**bebestores, inc.**

#### **TABLE OF CONTENTS**

|                    | ** ** | ** **                                                                                                               | ** ** | **Page No.** |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| **PART I.**        | ** ** | **FINANCIAL INFORMATION**                                                                                                |       |         |
|               |       |                                                                                                                     |       |         |
| ITEM 1.            |       | Condensed Consolidated Financial Statements                                                                              |       | 3            |
|               |       |                                                                                                                     |       |         |
|               |       | Condensed Consolidated Balance Sheets as of December  30, 2006, July 1, 2006 and December 31, 2005                       |       | 3            |
|               |       |                                                                                                                     |       |         |
|               |       | Condensed Consolidated Statements of Income for the  three and six months ended  December 30, 2006 and December 31, 2005 |       | 4            |
|               |       |                                                                                                                     |       |         |
|               |       | Condensed Consolidated Statements of Cash Flows for  the six months ended December 30, 2006 and December 31, 2005        |       | 5            |
|               |       |                                                                                                                     |       |         |
|               |       | Notes to Condensed Consolidated Financial Statements                                                                     |       | 6            |
|               |       |                                                                                                                     |       |         |
| ITEM 2.            |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                              |       | 12           |
|               |       |                                                                                                                     |       |         |
| ITEM 3.            |       | Quantitative and Qualitative Disclosures about Market  Risk                                                              |       | 19           |
|               |       |                                                                                                                     |       |         |
| ITEM 4.            |       | Controls and Procedures                                                                                                  |       | 20           |
|               |       |                                                                                                                     |       |         |
| **PART  II.**      | ** ** | **OTHER  INFORMATION**                                                                                                   |       |         |
|               |       |                                                                                                                     |       |         |
| ITEM  1.           |       | Legal  Proceedings                                                                                                       |       | 21           |
|               |       |                                                                                                                     |       |         |
| ITEM  1A.          |       | Risk  Factors                                                                                                            |       | 22           |
|               |       |                                                                                                                     |       |         |
| 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                                                                      |       | 27           |
|               |       |                                                                                                                     |       |         |
| ITEM  5.           |       | Other  Information                                                                                                       |       | 28           |
|               |       |                                                                                                                     |       |         |
| ITEM 6.            |       | Exhibits                                                                                                                 |       | 28           |
|               |       |                                                                                                                     |       |         |
| **SIGNATURE**      |       |                                                                                                                     |       | 29           |
| ** **         |       |                                                                                                                     |       |         |
| **EXHIBIT  INDEX** |       | 30                                                                                                                       |

 

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**PART I.****                       FINANCIALINFORMATION**

ITEM 1.                        CondensedConsolidated Financial Statements

 

**bebe stores, inc.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

 
| ** **                                                                                                                                      | ** ** | **As of**        | ** ** | **As of**   | ** ** | **As of**        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                                                                                                                      | ** ** | **December 30,** | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                      | ** ** | **2006**              | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                      | ** ** | ** **            | ** ** | ** **       | ** ** | ** **            | ** ** |
| **Assets:**                                                                                                                                     |       |                  |       |             |       |                  |       |
| Current assets:                                                                                                                                 |       |                  |       |             |       |                  |       |
| Cash and  equivalents                                                                                                                           |       | $                     | 67,461     |             | $          | 38,656                |       | $ | 51,324 |   |
| Short term  marketable securities                                                                                                               |       | 314,467               |       | 289,015          |       | 274,136               |       |
| Receivables (net  of allowance of $1,015, $897 and $1,100)                                                                                      |       | 8,376                 |       | 5,682            |       | 5,823                 |       |
| Inventories                                                                                                                                     |       | 46,343                |       | 42,151           |       | 35,492                |       |
| Prepaid and  other                                                                                                                              |       | 14,212                |       | 13,802           |       | 13,239                |       |
| Total current  assets                                                                                                                           |       | 450,859               |       | 389,306          |       | 380,014               |       |
| Property and equipment,  net                                                                                                                    |       | 102,557               |       | 95,022           |       | 80,078                |       |
| Other assets                                                                                                                                    |       | 17,879                |       | 16,581           |       | 9,491                 |       |
| Total assets                                                                                                                                    |       | $                     | 571,295    |             | $          | 500,909               |       | $ | 469,583 |   |
|                                                                                                                                            |       |                  |       |             |       |                  |       |
| **Liabilities and Shareholders’  Equity:**                                                                                                 |       |                  |       |             |       |                  |       |
| Current liabilities:                                                                                                                            |       |                  |       |             |       |                  |       |
| Accounts payable                                                                                                                                |       | $                     | 36,842     |             | $          | 22,947                |       | $ | 34,491 |   |
| Accrued  liabilities                                                                                                                            |       | 34,323                |       | 35,841           |       | 30,603                |       |
| Current portion  of capital leases                                                                                                              |       | 224                   |       | 249              |       | 269                   |       |
| Total current  liabilities                                                                                                                      |       | 71,389                |       | 59,037           |       | 65,363                |       |
| Long term portion of  capital leases                                                                                                            |       | 150                   |       | 260              |       | 384                   |       |
| Deferred rent and other  lease incentives                                                                                                       |       | 36,708                |       | 33,388           |       | 32,433                |       |
| Total liabilities                                                                                                                               |       | 108,247               |       | 92,685           |       | 98,180                |       |
|                                                                                                                                            |       |                  |       |             |       |                  |       |
| 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 93,002,916, 91,744,090 and 91,279,283 shares |       | 93                    |       | 92               |       | 91                    |       |
| Additional  paid-in capital                                                                                                                     |       | 116,056               |       | 95,768           |       | 86,716                |       |
| Accumulated  other comprehensive income                                                                                                         |       | 1,530                 |       | 2,418            |       | 1,623                 |       |
| Retained  earnings                                                                                                                              |       | 345,369               |       | 309,946          |       | 282,973               |       |
| Total shareholders’  equity                                                                                                                |       | 463,048               |       | 408,224          |       | 371,403               |       |
| Total liabilities and shareholders’ equity                                                                                                 |       | $                     | 571,295    |             | $          | 500,909               |       | $ | 469,583 |   |

 

See accompanying notes tocondensed consolidated financial statements.

3

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**bebestores, inc.CONDENSED CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data)(unaudited)**
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **December 30,**            | ** ** | **December 31,**          | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                                         | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Net sales                                          |       | $                                | 196,802    |                           | $          | 167,895 |   | $ | 353,861 |   | $ | 294,050 |   |
| Cost of sales,  including production and occupancy |       | 102,457                          |       | 82,756                         |       | 180,229 |   | 146,708 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Gross margin                                       |       | 94,345                           |       | 85,139                         |       | 173,632 |   | 147,342 |   |
| Selling, general and  administrative expenses      |       | 58,948                           |       | 46,916                         |       | 109,239 |   | 89,165 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Operating income                                   |       | 35,397                           |       | 38,223                         |       | 64,393 |   | 58,177 |   |
| Interest and other  income, net                    |       | 2,497                            |       | 2,245                          |       | 5,670 |   | 4,360 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Income before income  taxes                        |       | 37,894                           |       | 40,468                         |       | 70,063 |   | 62,537 |   |
| Income tax provision                               |       | 13,621                           |       | 15,459                         |       | 25,363 |   | 23,955 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Net income                                         |       | $                                | 24,273     |                           | $          | 25,009 |   | $ | 44,700 |   | $ | 38,582 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Basic earnings per  share                          |       | $                                | 0.26       |                           | $          | 0.27 |   | $ | 0.48 |   | $ | 0.42 |   |
| Diluted earnings per  share                        |       | $                                | 0.26       |                           | $          | 0.27 |   | $ | 0.47 |   | $ | 0.41 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Basic weighted average  shares outstanding         |       | 92,833                           |       | 91,230                         |       | 92,406 |   | 91,188 |   |
| Diluted weighted average shares outstanding        |       | 95,184                           |       | 92,979                         |       | 94,835 |   | 93,637 |   |

 

See accompanying notes tocondensed consolidated financial statements.

4

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**bebe stores, inc.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(unaudited)**
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **December 30,**          | ** ** | **December 31,** | ** ** |
| ** **                                                                         | ** ** | **2006**                       | ** ** | **2005** | ** ** |
|                                                                               |       |                           |       |   |   |
| Cash flows from  operating activities:                                             |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 44,700     |   | $ | 38,582 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Non-cash  compensation expense                                                     |       | 5,034                          |       | 4,777 |   |
| Depreciation and  amortization                                                     |       | 9,412                          |       | 7,815 |   |
| Net loss on  disposal of property                                                  |       | 3                              |       | 137 |   |
| Deferred rent  and other lease incentives                                          |       | 3,364                          |       | 2,215 |   |
| Deferred income  taxes                                                             |       | (1,289                         | )          | (1,097 | ) |
| Changes in  operating assets and liabilities:                                      |       |                           |       |   |   |
| Receivables                                                                        |       | (1,222                         | )          | 960 |   |
| Inventories                                                                        |       | (4,290                         | )          | (3,669 | ) |
| Prepaid expenses  and other assets                                                 |       | (576                           | )          | (933 | ) |
| Accounts payable                                                                   |       | 13,904                         |       | 13,806 |   |
| Accrued  liabilities                                                               |       | 4,888                          |       | 8,093 |   |
| Net cash provided by  operating activities                                         |       | 73,928                         |       | 70,686 |   |
|                                                                               |       |                           |       |   |   |
| Cash flows from  investing activities:                                             |       |                           |       |   |   |
| Purchase of  property and equipment                                                |       | (18,755                        | )          | (10,440 | ) |
| Purchase of  marketable securities                                                 |       | (183,595                       | )          | (171,628 | ) |
| Proceeds from  sales of marketable securities                                      |       | 157,945                        |       | 141,305 |   |
| Net cash used by  investing activities                                             |       | (44,405                        | )          | (40,763 | ) |
|                                                                               |       |                           |       |   |   |
| Cash flows from  financing activities:                                             |       |                           |       |   |   |
| Net proceeds  from issuance of common stock                                        |       | 8,631                          |       | 1,050 |   |
| Excess tax  benefit on options exercised                                           |       | 6,624                          |       | 401 |   |
| Cash dividends  paid                                                               |       | (13,865                        | )          | (7,299 | ) |
| Other                                                                              |       | (136                           | )          | (117 | ) |
| Net cash provided  (used) by financing activities                                  |       | 1,254                          |       | (5,965 | ) |
|                                                                               |       |                           |       |   |   |
| Net increase in cash  and equivalents                                              |       | 30,777                         |       | 23,958 |   |
| Effect of exchange rate  changes on cash                                           |       | (1,972                         | )          | 294 |   |
| Cash and equivalents:                                                              |       |                           |       |   |   |
| Beginning of period                                                                |       | 38,656                         |       | 27,072 |   |
| End of period                                                                      |       | $                              | 67,461     |   | $ | 51,324 |   |

 

See accompanying notes tocondensed consolidated financial statements.

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##### **bebe stores, inc.**

##### **NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

##### **INTERIMFINANCIAL STATEMENTS**

The accompanying condensed consolidated balance sheetsof bebe stores, inc. (the “Company”) as of December 30, 2006, July 1, 2006 andDecember 31, 2005, the condensed consolidated statements of income for thethree and six months ended December 30, 2006 and December 31, 2005 and thecondensed consolidated statements of cash flows for the six months endedDecember 30, 2006 and December 31, 2005 have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X, without audit. Accordingly, they do not includeall of the information required by accounting principles generally accepted inthe United States of America for annual financial statements. Therefore, thesecondensed consolidated financial statements should be read in conjunction withour Annual Report on Form 10-K for the year ended July 1, 2006.

In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary to presentfairly the financial position at the balance sheet dates and the results ofoperations for the periods presented have been included. The condensedconsolidated balance sheet at July 1, 2006, presented herein, was derived fromthe audited balance sheet included in the Form 10-K for the fiscal year endedJuly 1, 2006.

Our business is affected by the pattern of seasonalitycommon to most retail apparel businesses. The results for the periods presentedare not necessarily indicative of future financial results.

##### **FISCAL YEAR**

Our fiscal year isa 52 or 53 week period, each period ending on the first Saturday after June30.  Fiscal 2007 is a 53 week fiscal yearending on July 7, 2007.

The three-monthperiods ended December 30, 2006 and December 31, 2005 both included 91days.  The six-month periods endedDecember 30, 2006 and December 31, 2005 both included 182 days.

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**INVENTORIES**

     TheCompany’s inventories consist of: 
|                                 | ** ** | **As of**          | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **December 30,**   | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
| ** **                      | ** ** | **2006**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(In thousands)** | ** ** |
| Raw materials                   |       | $                       | 9,723      |   | $ | 10,417 |   | $ | 7,242 |   |
| Merchandise  available for sale |       | 36,620                  |       | 31,734 |   | 28,250 |   |
| Inventories                     |       | $                       | 46,343     |   | $ | 42,151 |   | $ | 35,492 |   |

 

##### **EARNINGSPER SHARE**

Basic earnings pershare is computed as net earnings divided by the weighted average number ofcommon shares outstanding for the period. Diluted earnings per share reflectsthe potential 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** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                     | ** ** | **December 30,  2006**      | ** ** | **December 31,  2005**    | ** ** | **December 30,  2006** | ** ** | **December 31,  2005** | ** ** |
| ** **                                                     | ** ** | **(In thousands)**          | ** ** | **(In thousands)**        | ** ** |
| Basic weighted  average number of shares outstanding           |       | 92,833                           |       | 91,230                         |       | 92,406 |   | 91,188 |   |
| Incremental  shares from the assumed issuance of stock options |       | 2,351                            |       | 1,749                          |       | 2,429 |   | 2,449 |   |
|                                                           |       |                             |       |                           |       |   |   |   |   |
| Diluted weighted  average number of shares outstanding         |       | 95,184                           |       | 92,979                         |       | 94,835 |   | 93,637 |   |

 

The number ofincremental shares from the assumed issuance of stock options is calculatedapplying the treasury stock method.

Excluded from thecomputation of the number of diluted weighted average shares outstanding wereantidilutive options of 1,345,000 and 1,373,000 for the three months endedDecember 30, 2006 and December 31, 2005, respectively, and 1,424,000 and1,097,000 for the six months ended December 30, 2006 and December 31, 2005,respectively.

7

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##### **COMPREHENSIVEINCOME**

Comprehensiveincome consists of net income and other comprehensive income (income, expenses,gains and losses that bypass the income statement and are reported directly asa separate 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** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **December 30,  2006**          | ** ** | **December 31,  2005**    | ** ** | **December 30,  2006** | ** ** | **December 31,  2005** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands)** | ** ** |
| Net income                  |       | $                                    | 24,273     |                           | $          | 25,009 |   | $ | 44,700 |   | $ | 38,582 |   |
| Other  comprehensive income |       | (881                                 | )          | (53                            | )          | (887 | ) | 652 |   |
|                        |       |                                 |       |                           |       |   |   |   |   |
| Total comprehensive  income |       | $                                    | 23,392     |                           | $          | 24,956 |   | $ | 43,813 |   | $ | 39,234 |   |

 

##### **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 $25.0 million and expires on March31, 2009. The outstanding balance bears interest at either the bank’s referencerate (which was 8.25% as of December 30, 2006) or the LIBOR rate plus 1.75percentage points. As of December 30, 2006, there were no outstandingborrowings, and there was $8.1 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.**

##### **STOCK BASEDCOMPENSATION**

The 1997 StockPlan as amended (the “Stock Plan”) provides for the grant of incentive stockoptions, non-qualified stock options, stock purchase rights, stock awards andrestricted stock units. Although the Stock Plan allows for stock options andrelated awards to be granted at prices below fair market value, the Company hashistorically granted such options at the fair market value of the stock on thedate of grant.  Stock options and related awards have a maximum term often years.  Options and restricted stock units granted to employees andoptions granted to Directors generally vest over four years with 20% of theaward vested in each of the first and second years, and 30% vested in each ofthe remaining two years.  Restricted stock units awarded to Directorsgenerally vest over a period of one year from the date of grant.  As ofDecember 30, 2006, the Company has reserved 20,113,750 shares of common stockfor issuance under the Stock Plan and there were 1,498,938 shares available forfuture grant.

EffectiveJuly 3, 2005, the Company adopted the fair value recognition provisions ofFASB Statement No. 123(R), “Share-Based Payment”, using the

8

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modified prospectivetransition method.  Under this transition method, compensation cost in2006 includes the portion vesting in the period for (1) all share-basedpayments granted prior to, but not vested as of July 2, 2005, based on thegrant date fair value estimated in accordance with the original provisions ofFASB Statement No. 123 and (2) all share-based payments grantedsubsequent to July 2, 2005, based on the grant date fair value estimated in accordancewith the provisions of FASB Statement No. 123(R).

The Companyrecognized share-based compensation expense of $2.7 million ($0.02 per dilutedshare, after related tax benefit of $1.0 million) in the three months endedDecember 30, 2006 as a component of selling, general and administrativeexpenses.  The Company recognized share-based compensation expense of $5.0million ($0.03 per diluted share, after related tax benefit of $1.8 million) inthe six months ended December 30, 2006 as a component of selling, general andadministrative expenses.  As of December30, 2006, there was $16.3 million (before any related tax benefit) of totalunrecognized compensation cost related to nonvested share-based compensation thatis expected to be recognized over a weighted-average period of 2.5 years.

The fair value ofeach option grant was estimated on the date of the grant using theBlack-Scholes valuation model.  The expected life of the optionsrepresents the period of time the options are expected to be outstanding and isbased on historical trends. The expected stock price volatility is based on anaverage of the historical volatility of the Company’s stock for a periodapproximating the expected life and the implied volatility based on tradedoptions of the Company’s stock. The expected dividend yield is based onthe Company’s most recent annual dividend payout. The risk-free interest rateis based on the U.S. Treasury yield curve in effect at the time of grant andhas a term that approximates the expected life.

The followingtable presents the weighted average assumptions used in the option pricingmodel for the stock options granted in the three and six months ended December30, 2006 and December 31, 2005:
|                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **December 30,**            | ** ** | **December 31,**          | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                     | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected  dividend rate        |       | 1.0                              | %          | 1.1                            | %          | 0.9 | % | 1.0 | % |
| Volatility                     |       | 48.6                             | %          | 53.3                           | %          | 49.3 | % | 54.2 | % |
| Risk-free  interest rate       |       | 4.6                              | %          | 4.4                            | %          | 4.7 | % | 4.1 | % |
| Expected lives  (years)        |       | 4.1                              |       | 4.4                            |       | 4.1 |   | 4.4 |   |
| Fair value per option  granted |       | $                                | 9.56       |                           | $          | 6.44 |   | $ | 9.26 |   | $ | 7.88 |   |
|                                |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

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##### Thefollowing table summarizes stock option activity during the six months endedDecember 30, 2006:

| ** **                      | ** ** | **Options (In  thousands)** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value  (In thousands)** | ** ** |
|---------------------------------|------------|----------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding,  July 1, 2006      |       | 7,350                            |       | $                                                          | 9.59       |                                                |       |                                                     |       |   |
| Granted                         |       | 799                              |       | 21.55                                                      |       |                                                |       |                                                     |       |
| Exercised                       |       | (1,246                           | )          | 6.86                                                       |       |                                                |       |                                                     |       |
| Cancelled                       |       | (260                             | )          | 14.26                                                      |       |                                                |       |                                                     |       |
|                            |       |                             |       |                                                       |       |                                                |       |                                                     |       |
| Outstanding,  December 30, 2006 |       | 6,643                            |       | $                                                          | 11.35      |                                                | 7.30       |                                                     | $          | 58,361 |   |
|                            |       |                             |       |                                                       |       |                                                |       |                                                     |       |
| Exercisable, December  30, 2006 |       | 2,966                            |       | $                                                          | 8.21       |                                                | 6.34       |                                                     | $          | 34,606 |   |

 

**Intrinsic value for stock options is defined as thedifference between the current market value and the grant price. For the sixmonths ended December 30, 2006, the total intrinsic value of stock optionsexercised was $19.4 million. Cash received from stock options exercised duringthe six months ended December 30, 2006 was $8.5 million and the actual taxbenefit realized for tax deductions from stock options exercised totaled $7.1million.**

##### Thefollowing table summarizes RSU activity during the six months ended December30, 2006:

|                               | ** ** | **Shares (In  thousands)** | ** ** | **Weighted  Average Grant  Date Fair Value  Per Share** | ** ** |
|-------------------------------|------------|---------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Nonvested, July  1, 2006      |       | 31                              |       | $                                                                           | 15.24      |   |
| Granted                       |       | 21                              |       | $                                                                           | 21.00      |   |
| Vested                        |       | (8                              | )          | $                                                                           | 14.37      |   |
| Cancelled                     |       | (2                              | )          | $                                                                           | 18.41      |   |
|                          |       |                            |       |                                                                        |       |
| Nonvested, December 30,  2006 |       | 42                              |       | $                                                                           | 18.22      |   |

 

##### **LEGALMATTERS**

**As of the date of this filing, the Company isinvolved in several ongoing legal proceedings as described below.**

A former employeesued the Company in a complaint filed on April 28, 2005 in the UnitedStates District Court for the Northern District of California (caseNo. C050177) alleging violations under the Fair Labor Standards Act,specifically that the Company obligated her to buy and wear its brand clothingas a uniform, without reimbursement or credit, and the net effect of deductingthe value of such required purchases from her wages would often result in hernot being paid minimum wages. The plaintiff purports to bring the action alsoon behalf of a class of hourly, non-managerial employees who are similarlysituated. The lawsuit seeks compensatory, statutory and injunctive relief. TheCompany has negotiated a confidential settlement in this case which remainssubject to court approval.  One objectionto the settlement has been filed by the plaintiff in the lawsuit described inthe next paragraph of this section.  TheCompany has accrued an amount that management believes reasonably estimates thepotential

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liability, which did nothave a material impact on the Company’s financial position or results ofoperations.

A former employeesued the company in a complaint filed July 27, 2006 in the Superior Courtof California, San Mateo County (case No. CIV 456550) alleging a failureto pay all wages, failure to pay overtime wages, failure to pay minimum wages,failure to provide meal periods, violation of Labor Code §450, violation ofLabor Code §2802 and California Code of Regulations §11040(9)(A), statutorywage violations (late payment of wages), unlawful business practices underBusiness and Professions Code §16720 and §17200, conversion of wages andviolation of Civil Code §52.1. The plaintiff purports to bring the action alsoon behalf of current and former California bebe employees who are similarlysituated. The lawsuit seeks compensatory, statutory, punitive, restitution andinjunctive relief. The Company is currently reviewing the allegations at thisearly stage.

**A customer sued the company in a complaint filedDecember 14, 2006 in the Superior Court of Contra Costa County (case no.C06-02630) alleging that the Company utilized a certain type of preprintedcredit card form in a return transaction in violation of California Civil Code§1747.08. The plaintiff purports to bring the action also on behalf of othercustomers who are similarly situated. The lawsuit seeks compensatory, statutory, and injunctive relief.  The Company is currently reviewing theallegations at this early stage.**

**Two customers have filed separate complaintsalleging the Company violated The Fair Credit Reporting Act (the “FCRA”).  The cases were filed January 10 and January16, 2007 in the United States District Court for the Northern District ofCalifornia (case nos. C07-0203 & C07-0255, respectively) and allege thatthe company violated the FCRA by printing on receipts more than the last fivedigits of the credit or debit card numbers and/or the expiration date.  In both cases, the Plaintiffs purport tobring the action also on behalf of other customers who are similarly situationand are seeking statutory and punitive damages, attorney’s fees and injunctiverelief.  The Company is currentlyreviewing the allegations at this early stage.**

The Company isalso involved in various other legal proceedings arising in the normal courseof business. None of these matters nor the matters listed above are expected,individually or in the aggregate, to have a material adverse effect on theCompany’s business, financial condition or results of operations.

The Companyintends to defend itself vigorously against these claims. However, the resultsof any litigation are inherently uncertain. The Company cannot assure you thatit will be able to successfully defend itself in these lawsuits. Whererequired, and/or otherwise appropriate, the Company has recorded an estimate ofpotential liabilities that management believes are reasonable. Any estimatesare revised as further information becomes available.

**RECENT ACCOUNTING PRONOUNCEMENTS**

In June 2006,the FASB ratified the consensuses reached by the Emerging Issues Task Force inIssue No. 06-3, “How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should be Presented in the Income Statement (That is, Gross VersusNet Presentation).” Issue No. 06-3 requires disclosure of an entity’saccounting policy regarding the presentation of taxes assessed by agovernmental authority that are directly imposed on a revenue-producingtransaction between

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a seller and a customer,including sales, use, value added and some excise taxes. We present such taxeson a net basis (excluded from revenues and costs). The adoption of IssueNo. 06-3, which is effective for interim and annual reporting periodsbeginning after December 15, 2006, will have no impact on the Company’sconsolidated financial statements.

In July 2006,the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement No. 109”.FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan enterprise’s financial statements in accordance with FASB StatementNo. 109, *Accounting for Income Taxes.*FIN48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. The Company is in the process ofdetermining the impact that the adoption of FIN 48 will have on its financialposition and results of operations.

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*.  SFAS No. 157 defines fair value, establishesa framework for measuring fair value in accordance with generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 applies underother accounting pronouncements that require or permit fair value measurementsand accordingly does not require any new fair value measurements.  The provisions of SFAS No. 157 are to beapplied prospectively as of the beginning of the fiscal year in which it isinitially applied, with any transition adjustment recognized as acumulative-effect adjustment to the opening balance of retained earnings.  The provisions of SFAS No. 157 are effectivefor 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.

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

The followingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains forward-looking statements, which involve risks anduncertainties. Our actual results may differ materially from those anticipatedin these forward-looking statements.  Statements that are predictive innature, that depend upon or refer to future events or conditions or thatinclude words such as “expects,” “anticipates,” “intends,” “plans,” “believes,”“estimates,” “thinks,” and similar expressions are forward-looking statements.  Forward looking statements include statements about our expectedresults of operations, capital expenditures and store openings.  Althoughwe believe that these statements are based upon reasonable assumptions, wecannot assure you that our goals will be achieved. These forward-lookingstatements are made as of the date of this Form 10-Q, and we assume noobligation to update or revise them or provide reasons why actual results maydiffer. Factors that might cause such a difference include, but are not limitedto, our ability to respond to changing fashion trends, miscalculation of thedemand for our products, effective management of our growth, decline incomparable store sales performance, ongoing competitive pressures in theapparel industry, changes in the level of consumer spending or preferences inapparel, our ability to attract and retain key management personnel and/orother factors discussed in “Risks Factors” and elsewhere in thisForm 10-Q.

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##### **OVERVIEW**

We design, developand produce a distinctive line of contemporary women’s apparel and accessories.While we attract a broad audience, our target customer is a 21 to 35-year-oldwoman who seeks current fashion trends to suit her lifestyle. The “bebe look”appeals to a hip, sexy, sophisticated, body-conscious woman who takes pride inher appearance. The bebe customer expects value in the form of current fashionand high quality at a competitive price.

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

We market ourproducts under the bebe, COLLECTION bebe, Neda by bebe, Neda, BEBE SPORT andbebe O brand names through our 258 retail stores, of which 189 are bebe stores,48 are BEBE SPORT stores, 20 are bebe outlet stores and 1 is a bebe accessoriesstore.  These stores are located in 32states, the District of Columbia, Puerto Rico and Canada. In addition, we havean on-line store at www.bebe.com and our licensees operate 17 internationalstores, including shop in shops.  Duringthe three months ended December 30, 2006, we opened 10 stores including 5 bebestores and 5 BEBE SPORT stores.  Duringthe six months ended December 30, 2006, we opened 16 stores, including 6 bebestores, 9 BEBE SPORT stores and 1 bebe accessories store. We expect to openapproximately 40 to 45 stores, including approximately 24 to 27 bebe stores, 15to 17 BEBE SPORT stores and 1 bebe accessories store during the year. We alsoplan to renovate 12 existing stores, relocate or expand 10 existing stores andclose approximately 4 stores, resulting in square footage growth ofapproximately 16%.

*bebestores.*  The Company was founded by Manny Mashouf,Chairman of the Board. We opened our first store in San Francisco, Californiain 1976, which was also the year we incorporated.

*BEBESPORT.* The Company launched BEBE SPORT during fiscal 2003 toaddress the performance and active lifestyle needs of the bebe customer.

*bebeoutlets.*  The Company utilizes the outlets as aclearance vehicle for merchandise from our retail stores. In addition, theinventory includes a strong presentation of bebe logo merchandise and specialcuts produced under the bebe O label exclusively for the outlet stores.

*On-line.*bebe.com is an extension of the bebe store experience and provides a completeassortment of bebe and BEBE SPORT merchandise. It is also used as anadvertising vehicle to communicate with our customers.

*bebeaccessories*. In September 2006, the Company opened itsfirst accessory concept store featuring shoes and a unique selection of fineleather goods and gift items. Going forward this boutique concept will featureshoes and bags manufactured under the bebe label as well as shoes and bagsimported from Italy and sold under the COLLECTION bebe and Neda by bebelabels.  These products will also becarried in select bebe stores.  InJanuary 2007, we announced that we would change the name of Neda by bebe.

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*COLLECTIONbebe.*In March 2006, bebe introduced COLLECTION bebe,the exclusive runway collection of better priced contemporary women’s apparel.We launched our first assortment of COLLECTION bebe in 20 stores inSeptember 2006 and plan to make the second collection available in 10stores in March 2007.

##### **CRITICALACCOUNTING POLICIES**

Management’sDiscussion and Analysis of Financial Condition and Results of Operations arebased upon our consolidated financial statements, which have been prepared inconformity with accounting principles generally accepted in the United Statesof America.

The preparation ofthese financial statements requires the appropriate application of certainaccounting policies, many of which require us to make estimates and assumptionsabout future events and their impact on amounts reported in our financial statementsand related notes. Since future events and their impact cannot be determinedwith certainty, the actual results will inevitably differ from our estimates.Such differences could be material to the financial statements. We believe ourapplication of accounting policies, and the estimates inherently requiredtherein, are reasonable. These accounting policies and estimates are constantlyreevaluated, and adjustments are made when facts and circumstances dictate achange. Our accounting policies are more fully described in Note 1 to theconsolidated financial statements in our annual report on Form 10-K forthe year ended July 1, 2006.

We have identifiedcertain critical accounting policies, which are described below:

*Revenuerecognition.  *We recognize revenue at the time theproducts are received by the customers in accordance with the provisions ofStaff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition inFinancial Statements” as amended by SAB No. 104, “Revenue Recognition”.Revenue is recognized for store sales at the point at which the customerreceives and pays for the merchandise at the register with either cash orcredit card. For on-line sales, revenue is recognized at the time the customerreceives the product. We estimate and defer revenue and the related productcosts for shipments that are in transit to the customer. Customers typicallyreceive goods within one week of shipment. Amounts related to shipping billedto customers are reflected in net sales and the related costs are reflected incost of goods sold.

We record areserve for estimated product returns based on historical return trends. As ofDecember 30, 2006 and December 31, 2005, the reserve was $1,728,000 and$1,562,000, respectively. If actual returns are greater than those projected,additional sales returns may be recorded in the future.

Discounts offeredto customers consist primarily of point of sale markdowns and are recorded atthe time of the related sale as a reduction of revenue.

The value ofpoints and rewards earned by our loyalty program members is included as aliability and a reduction of revenue at the time the points and rewards areearned based on historical conversion and redemption rates.  The associated revenue is recognized when therewards are redeemed or expire.

Gift certificatessold are carried as a liability and revenue is recognized when the giftcertificate is redeemed. Similarly, customers may receive a store credit inexchange for returned goods. Store credits are carried as a liability until redeemed.

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Royalty revenuefrom product licensees is recorded as earned, which is based on the licensee’ssales.

*StockBased Compensation.*We account for stock options and awardsissued to employees in accordance with the fair value recognition provisions ofFinancial Accounting Standards Board (“FASB”) Statement No. 123(R) (“SFASNo. 123(R)”), “Share-Based Payment,” using the modified prospectivetransition method. Under SFAS No. 123(R), stock-based awards to employeesare required to be recognized as compensation expense, based on the calculatedfair value on the date of grant. We determine the fair value using the BlackScholes option pricing model. This model requires subjective assumptions,including future stock price volatility and expected term, which affect thecalculated values.

*Inventories.*Our inventories are stated at the lower of weighted average cost or market.Market is determined based on the estimated net realizable value, which isgenerally the merchandise selling price. To ensure that our raw material isproperly valued we age the fabric inventory and record a reserve in accordancewith our established policy, which is based on historical experience. To ensureour finished goods inventory is properly valued we review the age and turnoverof our inventory and record a reserve if the selling price is marked down belowcost. These assumptions can have an impact on current and future operatingresults and financial position. We estimate shrinkage for the period betweenthe last physical count and balance sheet date based on historic shrinkagetrends.

*Long-livedassets.* We review long-lived assets for impairment wheneverevents or changes in circumstances, such as store closures or poor performingstores, indicate that the carrying value of an asset may not be recoverable. Ifthe undiscounted cash flows from the long-lived assets are less than thecarrying value we record an impairment charge equal to the difference betweenthe carrying value and the asset’s fair value. In addition, at the time a decisionis made to close a store, we record an impairment charge, if appropriate, oraccelerate depreciation over the revised useful life of the asset.Historically, our impairment charges have been immaterial.  During the sixmonths ended December 30, 2006 and December 31, 2005 we recorded $0 and$73,000, respectively, of impairment charges.  We believe at this timethat the long-lived assets’ carrying values and useful lives continue to beappropriate.

*Accrued Litigation.*  We accrue estimates of probable liabilitiesassociated with lawsuits and claims. The results of any litigation areinherently uncertain. As information becomes available, we assess the potentialliabilities related to pending litigation and may revise our estimates asnecessary. Such revisions of estimates could materially impact the results ofoperations and financial position.

*Self-Insurance*.  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 decreasebeyond what was anticipated, reserves may need to be adjusted in the future.

*IncomeTaxes*. We accrue liabilities for estimates of probablesettlements of domestic and foreign tax audits. At any one time, many tax yearsmay be subject to audit by various taxing jurisdictions. The results of theseaudits and negotiations with taxing

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authorities may affectthe ultimate settlement of these issues. Our effective tax rate in a givenfinancial statement period may be materially impacted by changes in the mix andlevel of earnings. We also record a valuation allowance against our deferredtax assets arising from foreign tax credit carryforwards as the utilization ofthese credits is not assured.

##### **RESULTS OFOPERATIONS**

##### Our fiscal year is a 52 or 53 week period, eachperiod ending on the first Saturday after June 30.  Fiscal 2007 is a 53 week fiscal year endingon July 7, 2007.  The three month periods ended December 30, 2006 andDecember 31, 2005 both included 91 days. The six month periods ended December 30, 2006 and December 31, 2005 bothincluded 182 days.

The followingtable sets forth certain financial data as a percentage of net sales for theperiods indicated:
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **December 30,**  | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                 | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Net sales                                                  |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |
| Cost of sales,  including production and occupancy (1)     |       | 52.1                   |       | 49.3                  |       | 50.9 |   | 49.9 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Gross margin                                               |       | 47.9                   |       | 50.7                  |       | 49.1 |   | 50.1 |   |
| Selling, general  and administrative expenses expenses (2) |       | 30.0                   |       | 27.9                  |       | 30.9 |   | 30.3 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Operating income                                           |       | 17.9                   |       | 22.8                  |       | 18.2 |   | 19.8 |   |
| Interest and  other income, net                            |       | 1.3                    |       | 1.3                   |       | 1.6 |   | 1.5 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Income before  income taxes                                |       | 19.2                   |       | 24.1                  |       | 19.8 |   | 21.3 |   |
| Provision for  income taxes                                |       | 6.9                    |       | 9.2                   |       | 7.2 |   | 8.2 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Net income                                                 |       | 12.3                   | %          | 14.9                  | %          | 12.6 | % | 13.1 | % |

 

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

(2)                                  Selling, general and administrative expensesprimarily consist of non-occupancy store costs, corporate overhead andadvertising costs.

*Net Sales.* Net sales increased to $196.8 millionduring the three months ended December 30, 2006 from $167.9 million for thecomparable period of the prior year, an increase of $28.9 million, or 17.2%.  During the three month period, an increase incomparable store sales of 5.5% versus the prior year contributed $8.4 millionto the increase in sales.  The remaining increase in sales of $20.5million was generated by stores not included in the comparable store sales baseand increases over the same period of the prior year in on-line sales andwholesale sales to international licensees.

 For the six months ended December 30, 2006,net sales increased to $353.9 million from $294.1 million for the comparablesix-month period of the prior year, an increase of $59.8 million, or 20.3%.During the six month period, an increase in comparable store sales of 8.6%versus the prior year contributed $22.9 million to the increase in sales. The increase in comparable store sales performance was largely due to customeracceptance of the product offering.  The remaining increase in sales of$36.9 million was generated by stores not included in the comparable storesales

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base and increases overthe same period of the prior year in on-line sales and wholesale sales tointernational licensees.  Net salesinclude reductions of $1.1 million associated with the customer loyalty programand $1.3 million associated with customer returns for the six months endedDecember 30, 2006, compared to $1.6 million and $1.0 million for the comparableperiod of the prior year.
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
|                                                 | ** ** | **December 30,**  | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                                      | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Net sales (In  thousands)                       |       | $                      | 196,802    |                  | $          | 167,895 |   | $ | 353,861 |   | $ | 294,050 |   |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Total net sales  increase percentage            |       | 17.2                   | %          | 10.0                  | %          | 20.3 | % | 15.0 | % |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Comparable store  sales increase percentage     |       | 5.5                    | %          | 2.2                   | %          | 8.6 | % | 8.1 | % |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Net sales per  average square foot (1)          |       | $                      | 214        |                  | $          | 207 |   | $ | 388 |   | $ | 369 |   |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Square footage  at end of period (In thousands) |       | 937                    |       | 828                   |       | 937 |   | 828 |   |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Number of store  locations:                     |       |                   |       |                  |       |   |   |   |   |
| Beginning of  period                            |       | 248                    |       | 220                   |       | 242 |   | 214 |   |
| New store  locations                            |       | 10                     |       | 9                     |       | 16 |   | 16 |   |
| Closed store  locations                         |       | 0                      |       | 1                     |       | 0 |   | 2 |   |
| Number of stores open  at end of period         |       | 258                    |       | 228                   |       | 258 |   | 228 |   |

 

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(1)   Net sales per average square foot is calculatedusing net store sales and a monthly average store square footage.

* Gross Margin.*Gross margin increased to $94.3 millionduring the three months ended December 30, 2006 from $85.1 million for thecomparable three-month period of the prior year, an increase of $9.2 million,or 10.8%. As a percentage of net sales, gross margin decreased to 47.9% for thethree-month period ended December 30, 2006 from 50.7% in the comparablethree-month period of the prior year. The decrease in gross margin as apercentage of net sales from the prior year of 2.8% resulted primarily fromlower merchandise margins from higher markdowns sold and higher inventoryreserves.

Gross margin increased to$173.6 million during the six months ended December 30, 2006 from $147.3million for the comparable six-month period of the prior year, an increase of$26.3 million, or 17.9%. As a percentage of net sales, gross margin was 49.1%for the six-month period ended December 30, 2006 compared to 50.1% in thecomparable six-month period of the prior year. The decrease in gross margin as a percentage of net sales from the prioryear of 1.0% resulted primarily from higher inventory reserves.

*Selling,General and Administrative Expenses.*Selling, general and administrative expenses, whichprimarily consist of non-occupancy store costs, corporate overhead andadvertising costs, increased to $58.9 million during the three months endedDecember 30, 2006 from $46.9 million for the comparable period of the prioryear, an increase of $12.0 million, or 25.6%. As a percentage of net sales,these expenses increased to 30.0%

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during the three-month period from 27.9% in thecomparable period of the prior year.  Forthe six months ended December 30, 2006, selling, general and administrativeexpenses increased to $109.2 million from $89.2 million for the comparable six-monthperiod of the prior year, an increase of $20.0 million, or 22.4%. As apercentage of net sales, these expenses increased to 30.9% during the six-monthperiod from 30.3% in the comparable period of the prior year.  The increase as a percentage of net sales wasprimarily due to higher compensation, advertising and professional fees.

*Interestand Other Income, Net.* We generated approximately $2.5 million of interest and other income(net of other expenses) during the three months ended December 30, 2006compared to approximately $2.2 million in the comparable three-month period ofthe prior year. For the six months ended December 30, 2006, we generatedapproximately $­­5.7 million of interest and other income (net of otherexpenses) compared to approximately $4.4 million in the comparable six-monthperiod of the prior year. The increases are the result of higher average cashbalances and higher interest rates offset by foreign exchange losses.

*Provisionfor Income Taxes.*The effective tax rate decreased to 35.9%for the three month period ended December 30, 2006 from 38.2% for thecomparable period in the prior period. The effective tax rate decreased to 36.2% for the six month period endedDecember 30, 2006 from 38.3% primarily due to an increase in tax exemptinterest income.

**Seasonalityof Business and Quarterly Results**

Our businessvaries with general seasonal trends that are characteristic of the retail andapparel industries. As a result, our typical store generates a higherpercentage of our annual net sales and profitability in the second quarter ofour fiscal year (which includes the holiday selling season) compared to theother quarters of our fiscal year. If for any reason our sales were belowseasonal norms during the second quarter of our fiscal year, our annualoperating results would be negatively impacted. Because of the seasonality ofour business, results for any quarter are not necessarily indicative of resultsthat may be achieved for a full fiscal year.

### **LIQUIDITY AND CAPITAL RESOURCES**

Our working capitalrequirements vary widely throughout the year and generally peak during thefirst and second fiscal quarters. At December 30, 2006, we had approximately$381.9 million of cash and equivalents and short-term marketable securities onhand. In addition, we had a revolving line of credit, under which we couldborrow or issue letters of credit up to a combined total of $25.0 million. Asof December 30, 2006, there were no cash borrowings outstanding under the lineof credit and letters of credit outstanding totaled $8.1 million.

Net cash provided byoperating activities for the six months ended December 30, 2006 was $73.9million versus $70.7 million for the six months ended December 31, 2005. Cashprovided by operating activities for the period was primarily generated byincome adjusted for stock compensation, depreciation and deferred rent, as wellas changes in working capital. The changes in working capital are primarily anincrease in accounts payable and accrued liabilities, primarily due to thetiming of payments and an increase in inventory in preparation for the holidayselling season.

Net cash used byinvesting activities for the six months ended December 30, 2006 was $44.4million due to the purchase of marketable securities and capital expendituresrelated to the opening of new stores.  Weopened 16 new stores in the six months ended December 30, 2006 and expect toopen 40 to 45 stores during fiscal 2007. We estimate that total capital expenditures will be approximately $50million in fiscal 2007.

Net cash providedby financing activities of $1.3 million for the six months ended December 30,2006 resulting from proceeds received from stock option

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exercises and the relatedtax benefit, partially offset by the payment of quarterly cash dividends forthe fourth quarter of fiscal 2006 and the first and second quarters of fiscal2007 totaling $13.9 million.

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

### **Inflation**

We do not believe that inflation has had a material effect on the resultsof operations in the recent past. However, we cannot assure that our businesswill not be affected by inflation in the future.

##### **ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

*Interest Rate Risk*

We currentlymaintain a portfolio of variable interest rate investments consisting of cashequivalents and short-term marketable securities.  Marketable securities are comprised ofclosed-end variable interest rate funds that invest primarily in tax-exemptmunicipal bonds.  Due to the variablenature of these investments, their value is typically not subject to marketrate changes.  According to ourinvestment policy, we may invest in taxable and tax exempt instruments.  In addition, the policy establishes limits oncredit quality, maturity, issuer and type of instrument.  Marketable securities are classified as “availablefor sale”.    We do not use derivativefinancial instruments in our investment portfolio.

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.

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The following table lists our cash equivalents and short-term marketablesecurities at December 30, 2006:
| ** **                          | ** ** | **Book Value**                  | ** ** | **Fair Value** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| Cash equivalents                    |       | $                                    | 50,437     |                | $          | 50,437 |   |
| Weighted average  interest rate (1) |       | 3.18                                 | %          |                |       |
| Short-term marketable  securities   |       | 314,467                              |       | 314,467             |       |
| Weighted average  interest rate (1) |       | 3.80                                 | %          |                |       |
| Total                               |       | $                                    | 364,904    |                | $          | 364,904 |   |

 

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(1)   Representsthe weighted average interest rate for tax exempt municipal bonds, municipalpreferreds, corporate preferreds and taxable and tax exempt institutional moneymarket instruments.

The interest payable onoutstanding cash borrowings under our bank line of credit is based on variableinterest rates and therefore affected by changes in market interest rates. As we have no outstanding cashborrowings, if interest rates rose significantly, our results from operationsand cash flows would not be affected.

*ForeignCurrency Risks*

We enter into asignificant amount of purchase obligations outside of the United States,substantially all of which are settled in U.S. Dollars and, therefore, haveonly minimal exposure to foreign currency exchange risks. We also operate asubsidiary for which the functional currency is the Canadian Dollar.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.  CONTROLS ANDPROCEDURES**

(a)           Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of our disclosure controls and procedures, as such term isdefined under Rule 13a-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis quarterly report.

(b)           Therehas been no change in our internal control over financial reporting during thequarter ended December 30, 2006 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

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##### **PARTII  OTHER INFORMATION**

**ITEM 1.**                 **LEGAL PROCEEDINGS**

**As of the date of this filing, we are involved inseveral ongoing legal proceedings as described below.**

A former employee sued bebe in a complaint filed onApril 28, 2005 in the United States District Court for the NorthernDistrict of California (case No. C050177) alleging violations under theFair Labor Standards Act, specifically that we obligated her to buy and wearits brand clothing as a uniform, without reimbursement or credit, and the net effectof deducting the value of such required purchases from her wages would oftenresult in her not being paid minimum wages. The plaintiff purports to bring theaction also on behalf of a class of hourly, non-managerial employees who aresimilarly situated. The lawsuit seeks compensatory, statutory and injunctiverelief. We have negotiated a confidential settlement in this case which remainssubject to court approval.  One objectionto the settlement has been filed by the plaintiff in the lawsuit described inthe next paragraph of this section.  Wehave accrued an amount that we believe reasonably estimates the potentialliability, which did not have a material impact on our financial position orresults of operations.

A former employee sued bebe in a complaint filedJuly 27, 2006 in the Superior Court of California, San Mateo County (caseNo. CIV 456550) alleging a failure to pay all wages, failure to payovertime wages, failure to pay minimum wages, failure to provide meal periods,violation of Labor Code §450, violation of Labor Code §2802 and California Codeof Regulations §11040(9)(A), statutory wage violations (late payment of wages),unlawful business practices under Business and Professions Code §16720 and§17200, conversion of wages and violation of Civil Code §52.1. The plaintiffpurports to bring the action also on behalf of current and former Californiabebe employees who are similarly situated. The lawsuit seeks compensatory,statutory, punitive, restitution and injunctive relief. We are currently reviewingthe allegations at this early stage.

**A customer sued the company in a complaint filedDecember 14, 2006 in the Superior Court of Contra Costa County (case no.C06-02630) alleging that the Company utilized a certain type of preprintedcredit card form in a return transaction in violation of California Civil Code§1747.08. The plaintiff purports to bring the action also on behalf of othercustomers who are similarly situated. The lawsuit seeks compensatory, statutory, and injunctive relief.  We are currently reviewing the allegations atthis early stage.**

**Two customers have filed separate complaintsalleging the Company violated The Fair Credit Reporting Act (the “FCRA”).  The cases were filed January 10 and January16, 2007 in the United States District Court for the Northern District ofCalifornia (case nos. C07-0203 & C07-0255, respectively) and allege thatthe company violated the FCRA by printing on receipts more than the last fivedigits of the credit or debit card numbers and/or the expiration date.  In both cases, the Plaintiffs purport tobring the action also on behalf of other customers who are similarly situationand are seeking statutory and punitive damages, attorney’s fees and injunctiverelief.  We are currently reviewing theallegations at this early stage.**

We are alsoinvolved in various other legal proceedings arising in the normal course ofbusiness. None of these matters nor the matters listed above are expected,

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individually or in theaggregate, to have a material adverse effect on our business, financialcondition or results of operations.

    We intend to defend itself vigorously againstthese claims. However, the results of any litigation are inherently uncertain.We cannot assure you that we will be able to successfully defend the Company inthese lawsuits. Where required, and/or otherwise appropriate, we have recordedan estimate of potential liabilities that we believe is reasonable. Anyestimates are revised as further information becomes available.

**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. Other than revisions to risk factors numbered three and four under theheading “Risks Relating to our Business” and to risk factor number one under “RisksRelating to our Common Stock” which were updated to reflect recent events,there have been no material changes in our risk factors from those disclosed inPart I, Item 1A of our Annual Report on Form 10-K for the fiscal yearended July 1, 2006.

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 customerresponse to the creative efforts of our merchandising, design and marketingteams and their ability to anticipate trends and fashions that will appeal toour consumer base. If we miscalculate our customers’ product preferences or thedemand for our products, we may be faced with excess inventory. Historically,this type of occurrence has resulted in excess fabric for some products andmarkdowns and/or write-offs, which has impaired our profitability, and may doso in the future. Similarly, any failure on our part to anticipate, identifyand respond effectively to changing consumer demands and fashion trends willadversely affect our sales.

**2. If weare unable to obtain raw materials, unable to find manufacturing facilities orif our manufacturers perform unacceptably, our sales may be negatively affectedand our financial condition may be harmed**. We do not own anymanufacturing facilities and therefore depend on contractors and third partiesto manufacture our products. We place all of our orders for production ofmerchandise and raw materials by purchase order and do not have any long-termcontracts with any manufacturer or supplier. If we fail to maintain favorablerelationships with our manufacturers and suppliers or are unable to obtainsufficient quantities of quality raw materials on commercially reasonableterms, it could harm our business and results of operations. We cannot assureyou that contractors and third party manufacturers (1) will not supplysimilar products to our competitors, (2) will not stop supplying productsto us completely, or (3) will supply products in a timely manner. Untimelyreceipt of products may result in lower than anticipated sales and markdownswhich would have a negative impact on earnings. Furthermore, we have

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received in the past, andmay receive in the future, shipments of products from manufacturers that failto conform to our quality control standards. In such event, unless we are ableto obtain replacement products in a timely manner, we may lose sales. Certainof our third party manufacturers store our raw materials. In the event ourinventory is damaged or destroyed while in storage and we are unable to obtainreplacement raw materials, our earnings may be negatively impacted.

**3. Oursuccess depends on our ability to attract and retain key employees in order tosupport our existing business and future expansion.**From timeto time we actively recruit qualified candidates to fill key executivepositions from within the Company. There is substantial competition forexperienced personnel, which we expect will continue. We compete forexperienced personnel with companies who have greater financial resources thanwe do. In the past, we have experienced significant turnover of our executivemanagement team and retail store personnel. We are also exposed to employmentpractice litigation due to the large number of employees and high turnover ofour sales associates. If we fail to attract, motivate, and retain qualifiedpersonnel, it could harm our business 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 ofMr. Mashouf or Mr. Scott, or any key officers or employees, it couldharm our business and results of operations. On November 8, 2006, NedaMashouf resigned from the Company and from our Board of Directors. Wepreviously identified Neda Mashouf as a key employee. The loss ofMs. Mashouf could have an adverse effect on our operations and as a result,our business could suffer.

**4. If weare not able to successfully develop new concepts, including BEBE SPORT, ourrevenue base and earnings may be impaired**. We believe thatthere is opportunity to expand the number of BEBE SPORT stores in new andexisting markets while we continue to address the product assortment. Inaddition, from time to time, we may pursue other new concepts. For example, weopened our first boutique accessory concept store in the first quarter offiscal 2007 which we have renamed bebe accessories. If the BEBE SPORT conceptis not successful, our financial condition may be harmed.

**5. Therecan be no assurance that future store openings will be successful and new storeopenings may impact existing stores.**We expect to openapproximately 40 to 45 stores in fiscal 2007, of which 24 to 27 will be bebestores, 15 to 17 will be BEBE SPORT stores and 1 is a bebe accessories store.In the past, we have closed stores as a result of strategic decisions, leaseexpirations, poor performance, and other factors.  There can be no assurance that the storesthat we plan to open in fiscal 2007, or any other stores that we might open inthe future, will be successful or that our overall operating profit willincrease as a result of opening these stores. During fiscal 2006 we closedthree stores and during fiscal 2007, we anticipate closing four stores. Forfiscal 2007, we plan to grow our operations primarily through the opening ofnew stores. Most of our new store openings in fiscal 2007 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

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factors, and our abilityto negotiate terms that meet our financial targets. In addition, we must beable to effectively renew our existing store leases. Failure to secure realestate locations adequate to meet annual targets as well as effectivelymanaging the profitability of our existing fleet of stores could have amaterial adverse effect on our results of operations.

**6. Weare subject to risks associated with our online sales.**Weoperate an on-line store at www.bebe.com to sell our merchandise. Although ouronline sales encompass a relatively small percentage of our total sales, ouron-line operations are subject to numerous risks, including unanticipatedoperating problems, reliance on third-party computer hardware and softwareproviders, system failures and the need to invest in additional computersystems. The on-line operations also involve other risks that could have animpact on our results of operations including but not limited to diversion ofsales from our other stores, rapid technological change, liability for onlinecontent, security breaches, consumer privacy concerns, credit card fraud, risksrelated to the failure of the computer systems that operate the website and itsrelated support systems. In addition, given our use of a third party platform,we do not have direct control of certain aspects of our on-line business. Therecan be no assurance that our on-line store will continue to achieve sales andprofitability growth or even remain at its current level.

**7. Anyserious disruption at our major facilities could have a harmful effect on ourbusiness.**We currently operate a corporate office inBrisbane, California, a distribution facility in Benicia, California, and adesign studio and production facility in Los Angeles, California. Any seriousdisruption at these facilities whether due to construction, relocation, fire,earthquake, terrorist acts or otherwise would harm our operations and couldhave a harmful effect on our business and results of operations. Furthermore,we have little experience operating essential functions away from our maincorporate offices and are uncertain what effect operating such satellitefacilities might have on business, personnel and results of operations.

**8. Werely on information technology, the disruption of which could adversely impactour business.** We rely on various information systems tomanage our operations and regularly make investments to upgrade, enhance orreplace such systems. To support our growth we initiated a three year IS&Tstrategic plan and we are currently in year two of this plan. In year one wecompleted the upgrade of our infrastructure, began the implementation of ournew production management system, implemented Arthur planning, completed theconversion of our web site to a third party platform and the roll out ofclubbebe. We went live with the first phase of our production management systemin October 2006 and plan to be fully operational within 12 months. Inaddition to improving the preproduction and design processes, we shouldsignificantly improve our ability to manage the flow of paper and streamlinethe process. For years two and three, we have begun the process of identifyingpartners to replace our current point of sale system and implement a new humanresources system. After both of these systems have been chosen and theimplementation process has begun we will begin to evaluate our merchandisingsystem needs. Any delays or difficulties in transitioning to new systems, or inintegrating them with our current systems, or any other disruptions affectingany of our information systems, could have a material adverse impact on ourbusiness, financial condition and results of operations.

**9. Weface significant competition in the retail and apparel industry, which couldharm our sales and profitability.**The retail and apparelindustries are highly competitive and are characterized by low barriers toentry. We expect competition in our markets to increase. The primarycompetitive factors in our markets are: brand name recognition, sourcing,product styling, quality, presentation and pricing,

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timeliness of productdevelopment and delivery, store ambiance, customer service andconvenience.  We compete with traditionaldepartment stores, specialty store retailers, business to consumer websites,off-price retailers and direct marketers for, among other things, rawmaterials, market share, retail space, finished goods, sourcing and personnel.Because many of these competitors are larger and have substantially greaterfinancial, distribution and marketing resources than we do, we may lack theresources to adequately compete with them. If we fail to remain competitive inany way, it could harm our business, financial condition, and results ofoperations.

**10.Purchases of the merchandise we sell are generally discretionary and aretherefore particularly susceptible to economic conditions.**Theoutlook for the United States economy is uncertain and is directly affected byglobal factors that are beyond our control. Such factors include disposableconsumer income, oil prices, recession and fears of recession, war and fears ofwar, terrorist attacks, inclement weather, consumer debt, interest rates, salestax rates, consumer confidence in future economic conditions and politicalconditions, and consumer perceptions of personal well-being and security.Consumers are generally more willing to make discretionary purchases, includingpurchases of fashion products, during periods in which favorable economicconditions prevail. If economic conditions change, our business, financialcondition and results of operations could be adversely affected. We cannotpredict the indirect effects such as rising oil and freight prices, consumerspending or other economic factors that natural disasters will have on ourresults of operations.

**11. Ourbusiness could be adversely impacted by unfavorable international politicalconditions.** Due to our international operations, our salesand operating results are, and will continue to be, affected by internationalsocial, political, legal and economic conditions. In particular, our businesscould be adversely impacted by instability or changes resulting in thedisruption of trade with the countries in which our contractors, suppliers orcustomers are located, significant fluctuations in the value of the dollaragainst foreign currencies or restrictions on the transfer of funds, oradditional trade restrictions imposed by the United States and other foreigngovernments. Trade restrictions, including increased tariffs or quotas,embargoes, and customs restrictions could increase the cost or reduce thesupply of merchandise available to the company and adversely affect itsfinancial condition and results of operations. In addition, we purchase asubstantial amount of our raw materials from China and our business andoperating 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 to establish, register and protect our trademarksand other proprietary rights, we cannot assure you that we will be successfulor that others will not imitate our products or infringe upon our intellectualproperty rights. In addition, there is no assurance that others will not resistor seek to block the sale of our products as infringements of their trademarkand 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.

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Furthermore, if we do notdemonstrate use of our trademarks, our trademark 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 monitor the operations of our independentmanufacturers by having an independent firm inspect these manufacturing sites,and all manufacturers are contractually required to comply with such laborpractices, we cannot control the actions or the public’s perceptions of suchmanufacturers, nor can we assure that these manufacturers will conduct theirbusinesses using ethical or legal labor practices. Apparel companies can beheld jointly liable for the wrongdoings of the manufacturers of their products.While we do not control their employees’ employment conditions or themanufacturers’ business practices, and the manufacturers act in their owninterest, they may act in a manner that results in negative public perceptionsof us and/or employee allegations or court determinations that we are jointlyliable.

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 outstandingshares of our common stock are subject to trading restrictions. As of December30, 2006, of the approximately 93,000,000 shares of our common stock thenoutstanding, approximately 26,000,000 shares were available to be publiclytraded, and as a result, our stock price is vulnerable to market swings due tolarge purchases, sales and short sales of our common stock.

Proceedings have beencommenced for dissolution of the marriage of Manny and Neda Mashouf, thebeneficial owners of approximately 72% of our outstanding shares.  In connection with these proceedings it islikely that their shares, which are currently held through a trust, will beallocated between them.  Any change inthe ownership of a significant portion of these shares to ownership by anon-affiliate may result in trading volatility in our common stock.

**2. Oursales, margins and operating results are subject to seasonal and quarterlyfluctuations.** Our business varies with general seasonaltrends that are characteristic of the retail and apparel industries, such asthe timing of seasonal wholesale shipments and other events affecting retailsales. As a result, our stores typically generate 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 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.

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**3.Because Manny Mashouf and Neda Mashouf beneficially own 72% of the outstandingshares, other shareholders may not be able to influence the direction thecompany takes.**As of December 30, 2006, Manny Mashouf, theChairman of the Board, and Neda Mashouf beneficially owned approximately 72% ofthe outstanding shares of our common stock. As a result, they can control theelection of directors and the outcome of all issues submitted to theshareholders. This may make it more difficult for a third party to acquireshares, may discourage acquisition bids, and could limit the price that certaininvestors might be willing to pay for shares of common stock. Thisconcentration of stock ownership may have the effect of delaying, deferring orpreventing a change in control of our company.

**4.Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 couldnegatively impact investor confidence.**In order to meet therequirements of the Sarbanes-Oxley Act of 2002 in future periods, we mustcontinuously document, test, monitor and enhance our internal control overfinancial reporting. There can be no assurance that the periodic evaluation ofour internal controls required by Section 404 of the Sarbanes-Oxley Actwill not result in the identification of significant control deficienciesand/or material weaknesses or that our auditors will be able to attest to theeffectiveness of our internal control over financial reporting. Failure tomaintain the effectiveness of our internal control over financial reporting orto comply with the requirements of this Act could have a material adverse effecton our reputation, financial condition and market price of our common stock.

##### **ITEM2.                  UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

Notapplicable.

##### **ITEM3.                  DEFAULTSUPON SENIOR SECURITIES**

Not applicable.

##### **ITEM4.                  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

We held our annualmeeting of shareholders at our headquarters in Brisbane, California on November17, 2006.  Of the 92,638,252 sharesoutstanding as of the record date, 89,838,167 shares were represented by proxyat the meeting.

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

(1)          Proposal to elect sixdirectors to hold office for a one-year term and until their successors areelected:

|                  | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
| ** **       | ** ** | ** ** | ** ** | ** **   | ** ** |
| Barbara Bass     |       | 87,039,823 |       | 2,797,588    |       |
| Cynthia Cohen    |       | 86,397,991 |       | 3,439,420    |       |
| Corrado Federico |       | 81,022,753 |       | 8,814,658    |       |
| Manny Mashouf    |       | 81,383,379 |       | 8,454,032    |       |
| Gregory Scott    |       | 81,437,516 |       | 8,399,895    |       |
| Caden Wang       |       | 87,045,053 |       | 2,792,358    |       |

 

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(2)          Proposal to amend the1997 Stock Plan to increase the maximum number of shares reserved for issuanceunder the Stock Plan by 500,000 shares from 19,613,750 shares to 20,113,750shares.

| For        | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
|       |       |        |       |        |       |                      |       |
| 71,903,712 |       | 12,705,516  |       | 23,842      |       | 5,205,097                 |       |

 

(3)          Proposal to ratify theappointment of Deloitte & Touche LLP as our independent auditors for thefiscal year ending July 7, 2007.

| For        | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
|       |       |        |       |        |       |                      |       |
| 89,738,829 |       | 92,041      |       | 6,541       |       | 756                       |       |

 

##### **ITEM5.                  OTHERINFORMATION**

Not applicable.

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

(a) Exhibits.  The following is alist of exhibits filed as part of this Report on Form 10-Q.
| Exhibit | ** ** | **Description**                                        |
|---------|------------|--------------------------------------------------------|
|    |       |                                                   |
| 10.1*   |       | bebe stores, inc. 1997 Stock Plan, as amended          |
| 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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* Incorporated by reference from exhibit 99.1to Registrant’s Current Report on Form 8-K filed on November 22, 2006.

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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 8, 2007                                              |
|--------|---------------------------------------------------------------------|
|   |                                                                |
|   | bebe stores,  inc.                                                  |
|   |                                                                |
|   | /s/  Walter  Parks                                        |   |
|   | Walter Parks,  Chief Operating Officer and Chief Financial  Officer |

 

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**EXHIBIT INDEX**
| Exhibit Number | ** ** | **Description**                                      |
|----------------|------------|------------------------------------------------------|
| 10.1*          |       | bebe stores, inc. 1997 Stock Plan, as amended        |
| 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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*Incorporated by reference from exhibit 99.1 to Registrant’s Current Report onForm 8-K filed on November 22, 2006.

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