** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE**

**COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**x****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE**

**SECURITIES**

**EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended October 4, 2008**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE**

**SECURITIES**

**EXCHANGE ACT OF 1934**

 

**CommissionFile Number 0-24395**

 

**bebestores, inc.**

 (Exact nameof registrant as specified in its charter)

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

 

**400Valley Drive**

**Brisbane,California 94005**

(Address ofprincipal executive offices)

 

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.    x   Yes    o   No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large  accelerated filer   o    | ** ** | Accelerated  filer   x         |
|------------------------------------------------|------------|-----------------------------------------------|
|                                           | ** ** |                                          |
| Non-accelerated  filer   o      | ** ** | Smaller  reporting company   o |
| (Do not check if  a smaller reporting company) | ** ** |                                          |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b – 2 of the Exchange Act).

  o Yes  x No

 

The number of shares ofthe registrant’s common stock, par value $0.001 per share, outstanding as of October 31,2008 was 89,005,459.

 

 

 

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**bebestores, inc.**

 

**TABLEOF CONTENTS**

** **
| ** **        | ** ** | ** **                                                                                                                 | **Page No.** |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------------------|-------------------|
|              |       |                                                                                                                       |              |
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                                  | ** **        |
|              |       |                                                                                                                       |              |
|              | ITEM 1.    | Condensed Consolidated Financial Statements                                                                                |              |
|              |       |                                                                                                                       |              |
|              |       | Condensed Consolidated Balance Sheets as of  October 4, 2008, July 5, 2008 and October 6, 2007              | 3                 |
|              |       |                                                                                                                       |              |
|              |       | Condensed Consolidated Statements of Income for the  three months ended October 4, 2008 and October 6, 2007 | 4                 |
|              |       |                                                                                                                       |              |
|              |       | Condensed Consolidated Statements of Cash Flows for  the three months ended October 4, 2008 and October 6, 2007  | 5                 |
|              |       |                                                                                                                       |              |
|              |       | Notes to Condensed Consolidated Financial Statements                                                                       | 6                 |
|              |       |                                                                                                                       |              |
|              | ITEM 2.    | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                | 10                |
|              |       |                                                                                                                       |              |
|              | ITEM 3.    | Quantitative and Qualitative Disclosures about  Market Risk                                                                | 14                |
|              |       |                                                                                                                       |              |
|              | ITEM 4.    | Controls and Procedures                                                                                                    | 15                |
|              |       |                                                                                                                       |              |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                      | ** **        |
|              |       |                                                                                                                       |              |
|              | ITEM 1.    | Legal Proceedings                                                                                                          | 16                |
|              |       |                                                                                                                       |              |
|              | ITEM 1A.   | Risk Factors                                                                                                               | 16                |
|              |       |                                                                                                                       |              |
|              | ITEM 2.    | Unregistered Sales of Equity Securities and Use of  Proceeds                                                               | 19                |
|              |       |                                                                                                                       |              |
|              | ITEM 3.    | Defaults Upon Senior Securities                                                                                            | 19                |
|              |       |                                                                                                                       |              |
|              | ITEM 4.    | Submission of Matters to a Vote of Security Holders                                                                        | 19                |
|              |       |                                                                                                                       |              |
|              | ITEM 5.    | Other Information                                                                                                          | 19                |
|              |       |                                                                                                                       |              |
|              | ITEM 6.    | Exhibits                                                                                                                   | 19                |
|              |       |                                                                                                                       |              |
| **SIGNATURE**     | 20         |
|              |       |
| **EXHIBIT INDEX** | 21         |
|                   |            |                                                                                                                            |                   |  |

 

2

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**PART I.         FINANCIAL INFORMATION**

 

ITEM 1.         Condensed Consolidated FinancialStatements

 

**bebestores, inc.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                      | ** ** | **As of  October 4,****2008** | ** ** | **As of  July 5,****2008** | ** ** | **As of  October 6,****2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                      | ** ** | ** **                              | ** ** | ** **                           | ** ** | ** **                              | ** ** |
| **Assets:**                                                                                                                                     | ** ** | ** **                              | ** ** | ** **                           | ** ** | ** **                              | ** ** |
| Current assets:                                                                                                                                 |       |                                    |       |                                 |       |                                    |       |
| Cash and equivalents                                                                                                                            |       | $                                       | 119,565    |                                 | $          | 123,344                                 |       | $ | 40,590 |   |
| Short term  marketable securities                                                                                                               |       | —                                  |       | —                               |       | 283,925                                 |       |
| Receivables (net  of allowance of $1,215, $1,197 and $1,139)                                                                                    |       | 9,976                                   |       | 7,953                                |       | 10,247                                  |       |
| Inventories                                                                                                                                     |       | 49,312                                  |       | 42,827                               |       | 52,064                                  |       |
| Deferred income  taxes, net                                                                                                                     |       | 9,283                                   |       | 9,290                                |       | 9,071                                   |       |
| Prepaid and  other                                                                                                                              |       | 19,538                                  |       | 16,215                               |       | 19,900                                  |       |
| Total current  assets                                                                                                                           |       | 207,674                                 |       | 199,629                              |       | 415,797                                 |       |
| Long term  investments                                                                                                                          |       | 228,155                                 |       | 235,751                              |       | —                                  |       |
| Property and  equipment, net                                                                                                                    |       | 137,022                                 |       | 133,128                              |       | 121,193                                 |       |
| Deferred income  taxes, net                                                                                                                     |       | 24,846                                  |       | 24,686                               |       | 24,402                                  |       |
| Other assets                                                                                                                                    |       | 4,007                                   |       | 4,569                                |       | 4,218                                   |       |
| Total assets                                                                                                                                    |       | $                                       | 601,704    |                                 | $          | 597,763                                 |       | $ | 565,610 |   |
|                                                                                                                                            |       |                                    |       |                                 |       |                                    |       |
| **Liabilities  and Shareholders’ Equity:**                                                                                                 | ** ** | ** **                              | ** ** | ** **                           | ** ** | ** **                              | ** ** |
| Current  liabilities:                                                                                                                           |       |                                    |       |                                 |       |                                    |       |
| Accounts payable                                                                                                                                |       | $                                       | 33,592     |                                 | $          | 23,252                                  |       | $ | 33,948 |   |
| Accrued  liabilities                                                                                                                            |       | 29,529                                  |       | 38,958                               |       | 28,493                                  |       |
| Current portion  of capital leases                                                                                                              |       | —                                  |       | 38                                   |       | 206                                     |       |
| Total current  liabilities                                                                                                                      |       | 63,121                                  |       | 62,248                               |       | 62,647                                  |       |
| Deferred rent  and other lease incentives                                                                                                       |       | 47,736                                  |       | 46,229                               |       | 43,584                                  |       |
| Uncertain tax  positions                                                                                                                        |       | 3,401                                   |       | 3,401                                |       | 5,278                                   |       |
| Total  liabilities                                                                                                                              |       | 114,258                                 |       | 111,878                              |       | 111,509                                 |       |
|                                                                                                                                            |       |                                    |       |                                 |       |                                    |       |
| 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 89,004,780, 88,939,720 and 88,607,755 shares |       | 89                                      |       | 89                                   |       | 89                                      |       |
| Additional  paid-in capital                                                                                                                     |       | 141,962                                 |       | 139,795                              |       | 130,155                                 |       |
| Accumulated  other comprehensive income (loss)                                                                                                  |       | (7,739                                  | )          | (261                                 | )          | 12,180                                  |       |
| Retained earnings                                                                                                                               |       | 353,134                                 |       | 346,262                              |       | 311,677                                 |       |
| Total  shareholders’ equity                                                                                                                |       | 487,446                                 |       | 485,885                              |       | 454,101                                 |       |
| Total  liabilities and shareholders’ equity                                                                                                |       | $                                       | 601,704    |                                 | $          | 597,763                                 |       | $ | 565,610 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**bebestores, inc.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**(Inthousands, except per share data)**

**(unaudited)**

** **
| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **October  4,  2008**            | ** ** | **October  6,  2007** | ** ** |
|                                               |       |                             |       |   |   |   |   |
| Net sales                                          |       | $                                | 163,260    |   | $ | 161,082 |   |
| Cost of sales,  including production and occupancy |       | 89,958                           |       | 84,567 |   |
|                                               |       |                             |       |   |   |
| Gross margin                                       |       | 73,302                           |       | 76,515 |   |
| Selling, general  and administrative expenses      |       | 59,155                           |       | 56,180 |   |
|                                               |       |                             |       |   |   |
| Operating income                                   |       | 14,147                           |       | 20,335 |   |
| Interest and  other income, net                    |       | 3,030                            |       | 3,695 |   |
|                                               |       |                             |       |   |   |
| Income before  income taxes                        |       | 17,177                           |       | 24,030 |   |
| Income tax  provision                              |       | 5,972                            |       | 8,651 |   |
|                                               |       |                             |       |   |   |
| Net income                                         |       | $                                | 11,205     |   | $ | 15,379 |   |
|                                               |       |                             |       |   |   |
| Basic earnings  per share                          |       | $                                | 0.13       |   | $ | 0.17 |   |
| Diluted earnings  per share                        |       | $                                | 0.12       |   | $ | 0.16 |   |
|                                               |       |                             |       |   |   |
| Basic weighted  average shares outstanding         |       | 88,962                           |       | 92,683 |   |
| Diluted weighted  average shares outstanding       |       | 90,038                           |       | 94,177 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**bebestores, inc.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(unaudited)**

 
| ** **                                                                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **October 4,****2008**                                                   | ** ** | **October 6,****2007**      |
|                                                                          |       |                             |       |   |   |
| Cash flows from  operating income:                                            |       |                             |       |   |   |
| Net income                                                                    |       | $                                | 11,205     |   | $ | 15,379 |   |
| Adjustments to  reconcile net income to cash provided by operating activities |       |                             |       |   |   |
| Non-cash  compensation expense                                                |       | 1,739                            |       | 2,973 |   |
| Depreciation and  amortization                                                |       | 6,201                            |       | 5,392 |   |
| Net loss on  disposal of property                                             |       | 156                              |       | — |   |
| Deferred rent  and other lease incentives                                     |       | 1,591                            |       | 3,352 |   |
| Deferred income  taxes                                                        |       | —                           |       | (873 | ) |
| Changes in  operating assets and liabilities:                                 |       |                             |       |   |   |
| Receivables                                                                   |       | (1,791                           | )          | (1,861 | ) |
| Inventories                                                                   |       | (6,660                           | )          | (7,867 | ) |
| Prepaid expenses  and other                                                   |       | (3,071                           | )          | (3,572 | ) |
| Accounts payable                                                              |       | 10,392                           |       | 5,878 |   |
| Accrued  liabilities                                                          |       | (5,185                           | )          | (1,266 | ) |
| Net cash  provided by operating activities                                    |       | 14,577                           |       | 17,535 |   |
|                                                                          |       |                             |       |   |   |
| Cash flows from  investing activities:                                        |       |                             |       |   |   |
| Purchase of  property and equipment                                           |       | (8,830                           | )          | (9,828 | ) |
| Purchase of  marketable securities                                            |       | —                           |       | (141,300 | ) |
| Proceeds from  sales of marketable securities                                 |       | 2,200                            |       | 184,475 |   |
| Net cash  provided (used) by investing activities                             |       | (6,630                           | )          | 33,347 |   |
|                                                                          |       |                             |       |   |   |
| Cash flows from  financing activities:                                        |       |                             |       |   |   |
| Net proceeds  from issuance of common stock                                   |       | 374                              |       | 388 |   |
| Purchase of  common stock                                                     |       | —                           |       | (66,950 | ) |
| Excess of tax  benefit from options exercised                                 |       | 53                               |       | 212 |   |
| Cash dividends  paid                                                          |       | (8,895                           | )          | (9,354 | ) |
| Other                                                                         |       | (38                              | )          | (55 | ) |
| Net cash used by  financing activities                                        |       | (8,506                           | )          | (75,759 | ) |
|                                                                          |       |                             |       |   |   |
| Net decrease in  cash and cash equivalents                                    |       | (559                             | )          | (24,877 | ) |
| Effect of  exchange rate changes on cash                                      |       | (3,220                           | )          | (136 | ) |
| Cash and  equivalents:                                                        |       |                             |       |   |   |
| Beginning of  period                                                          |       | 123,344                          |       | 65,603 |   |
| End of period                                                                 |       | $                                | 119,565    |   | $ | 40,590 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**bebestores, inc.**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**INTERIMFINANCIAL STATEMENTS**

 

The accompanyingcondensed consolidated balance sheets of bebe stores, inc. (the “Company”) asof October 4, 2008, July 5, 2008 and October 6, 2007, thecondensed consolidated statements of income for the three months ended October 4,2008 and October 6, 2007 and the condensed consolidated statements of cashflows for the three months ended October 4, 2008 and October 6, 2007have been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X, withoutaudit. Accordingly, they do not include all of the information required byaccounting principles generally accepted in the United States of America forannual financial statements. Therefore, these condensed consolidated financialstatements should be read in conjunction with our Annual Report on Form 10-Kfor the year ended July 5, 2008.

 

In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary to present fairly the financial position at the balancesheet dates and the results of operations for the periods presented have beenincluded. The condensed consolidated balance sheet at July 5, 2008,presented herein, was derived from the audited balance sheet included in the Form 10-Kfor the fiscal year ended July 5, 2008.

 

Our business is affectedby the pattern of seasonality common to most retail apparel businesses. Theresults for the periods presented are not necessarily indicative of futurefinancial results.

 

**FISCALYEAR**

 

Our fiscal year is a 52or 53 week period, each period ending on the first Saturday after June 30. Fiscal years 2009 and 2008 each include 52 weeks.

 

The three month periodsended October 4, 2008 and October 6, 2007 each include 13 weeks.

 

**INVENTORIES**

 

The Company’s inventoriesconsist of:

 
| ** **                      | ** **                  | **As of**          | ** **               |
|---------------------------------|-----------------------------|-------------------------|--------------------------|
| ** **                      | **October 4,****2008** | ** **              | **July 5,****2008** | ** ** | **October 6,****2007** | ** ** |
| ** **                      | ** **                  |
| ** **                      | ** **                  | **(In thousands)** | ** **               |
| Raw materials                   |                        | $                       | 4,983                    |   | $ | 5,340 |   | $ | 6,845 |   |
| Merchandise  available for sale |                        | 44,329                  |                     | 37,487 |   | 45,219 |   |
| Inventories                     |                        | $                       | 49,312                   |   | $ | 42,827 |   | $ | 52,064 |   |

 

**EARNINGSPER SHARE**

 

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

 

The following is a reconciliationof the number of shares used in the basic and diluted earnings per sharecomputations:

 
| ** **                                                                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **October 4,  2008**        | ** ** | **October 6,  2007** | ** ** |
| ** **                                                                        | ** ** | **(In thousands)**          | ** ** |
| Basic weighted average number of shares outstanding |       | 88,962                           |       | 92,683 |   |
| Incremental  shares from the assumed issuance of stock options                    |       | 1,076                            |       | 1,494 |   |
| Diluted weighted  average number of shares outstanding                            |       | 90,038                           |       | 94,177 |   |

 

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

 

Excluded from thecomputation of the number of diluted weighted average shares outstanding wereoptions of 3,372,000, and 2,342,000 for the three months ended October 4,2008 and October 6, 2007, respectively, which in each case would have beenanti-dilutive.

 

6

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**COMMONSTOCK PURCHASES**

 

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

 

**COMPREHENSIVEINCOME (LOSS)**

 

Comprehensive income(loss) 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).  The Company’s comprehensive income(loss) consists of net income, unrealized losses on long term investments andforeign currency translation adjustments for all periods presented.

 
| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **October 4,  2008**        | ** ** | **October 6,  2007** | ** ** |
| ** **                                | ** ** | **(In thousands)**          | ** ** |
| Net income                                |       | $                                | 11,205     |   | $ | 15,379 |   |
| Unrealized loss  on long term investments |       | (5,396                           | )          | — |   |
| Accumulated  translation adjustments      |       | 2,082                            |       | 3,041 |   |
| Total  comprehensive income               |       | $                                | 7,891      |   | $ | 18,420 |   |

 

**INVESTMENTS**

 

We hold a variety ofinterest bearing auction rate securities (“ARS”) comprised of federally insuredstudent loan backed securities and insured municipal authority bonds. As of October 4,2008, our ARS portfolio totaled approximately $228 million classified as longterm investments. Our ARS portfolio includes approximately 98% federallyinsured student loan backed securities and 2% municipal authority bonds. OurARS portfolio is comprised of approximately 83% AAA rated investments, 5% AArated investments and 12% A rated investments.  These ARS investments areintended to provide liquidity via an auction process that resets the applicableinterest rate at predetermined calendar intervals, allowing investors to eitherroll over their holdings or gain immediate liquidity by selling such interestsat par. The recent uncertainties in the credit markets have affected ourholdings in ARS investments and auctions for the majority of our investments inthese securities have failed to settle on their respective settlement dates.Consequently, the investments are not currently liquid and we will not be ableto access these funds until a future auction of these investments issuccessful. Maturity dates for these ARS investments range from 2010 to 2044with principal distributions occurring on certain securities prior to maturity.We currently have the ability and intent to hold these ARS investments until arecovery of the auction process or until maturity.

 

Typically the fair valueof ARS investments approximates par value due to the frequent resets throughthe auction process. While we continue to earn interest on our ARS investmentsat the maximum contractual rate, these investments are not currently

trading and therefore donot currently have a readily determinable market value. Accordingly, theestimated fair value of ARS no longer approximates par value.

 

We determined theestimated fair value of our investment in ARS as of October 4, 2008 usinga discounted cash flow model to estimate the fair value of our investments inARS. The assumptions used in preparing the discounted cash flow model includeestimates for interest rates, timing and amount of cash flows and expectedholding periods of the ARS. Based on this assessment of fair value, as of October 4,2008 we determined there was an additional decline in the fair value of our ARSinvestments of $5.4 million since July 5, 2008 bringing our totalimpairment charge to $13.2 million, with no related tax benefit, of which allwas deemed temporary and the impairment charges have been recorded in the othercomprehensive income component of shareholders’ equity.

 

We review our impairmentsin accordance with SFAS No. 115,*Accounting for Certain Investments in Debt and Equity Securities*,and related guidance issued by the FASB and SEC in order to determine theclassification of the impairment as “temporary” or “other-than-temporary”. Atemporary impairment charge results in an unrealized loss being recorded in theother comprehensive income component of shareholders’ equity. Such anunrealized loss does not affect net income for the applicable accountingperiod. An other-than-temporary impairment charge is recorded as a realizedloss in the condensed consolidated statement of income and reduces net incomefor the applicable accounting period. The differentiating factors betweentemporary and other-than-temporary impairment are primarily the length of thetime and the extent to which the market value has been less than cost, thefinancial condition and near-term prospects of the issuer and our currentintent and ability to retain our investment in the issuer for a period of timesufficient to allow for any anticipated recovery in market value.

 

7

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The valuation of ourinvestment portfolio is subject to uncertainties that are difficult to predict.Factors that may impact its valuation include changes to credit ratings of thesecurities as well as to the underlying assets supporting those securities,rates of default of the underlying assets, underlying collateral value,discount rates and ongoing strength and quality of market credit and liquidity.

 

**CREDITFACILITIES**

 

The Company has anunsecured commercial line of credit agreement with a bank, which provides forborrowings and issuance of letters of credit up to a combined total of $25million and expires on March 31, 2009. The outstanding balance bearsinterest at either the bank’s reference rate (which was 5.0% as of October 4,2008) or the LIBOR rate plus 1.75 percentage points. As of October 4,2008, there were no outstanding borrowings, and there was $4.1 million outstandingin letters of credit.

 

This credit facilityrequires the Company to comply with certain financial covenants, includingamounts for minimum tangible net worth, unencumbered liquid assets andprofitability, and certain restrictions on making loans and investments.

 

**STOCKBASED COMPENSATION**

 

The following tablesummarizes the stock based compensation expense recognized under the Company’sstock plan during the three months ended October 4, 2008 and October 6,2007:

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **October 4,  2008**        | ** ** | **October 6,  2007** | ** ** |
| ** **                              | ** ** | **(In thousands)**          | ** ** |
| Stock Options                           |       | $                                | 1,595      |   | $ | 2,955 |   |
| Nonvested stock  awards/units           |       | 144                              |       | 18 |   |
| Total stock  based compensation expense |       | $                                | 1,739      |   | $ | 2,973 |   |

 

Unrecognized compensationcost related to nonvested stock options and nonvested stock awards/unitstotaled approximately $7.5 million and $0.3 million, respectively, as of October 4,2008.  This cost is expected to berecognized over a weighted average period of 3.1 years.  The weighted average fair values of stockoptions at their grant date during the three months ended October 4, 2008and October 6, 2007 were $4.10 and $5.31, respectively.

 

**FAIRVALUE MEASUREMENTS**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements*”*.  SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value in accordance withgenerally accepted accounting principles, and expands disclosures about fairvalue measurements.  In February 2008, the FASB issued FASB StaffPosition No. FAS 157-2, “Effective Date of FASB Statement No. 157,”which delayed the effective date of SFAS 157 for non-financial assets andliabilities, except for certain items that are recognized or disclosed at fairvalue at least annually.  The Companyelected to partially adopt the provisions of SFAS No. 157 as of July 6,2008 for financial instruments, as permitted by FSP 157-2. Although the partialadoption of SFAS No. 157 did not materially impact the Company’s financialcondition, results of operations or cash flow, the Company is now required toprovide additional disclosures as part of its financial statements.  The Company does not expect the adoption ofthe remaining provisions of SFAS 157 (delayed by FSP 157-2) to have a materialimpact on the Company’s consolidated financial position, results of operationsor cash flows.

 

In February 2007,the FASB issued SFAS No. 159,  “The Fair Value Option for FinancialAssets and Financial Liabilities-Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure eligible items at fairvalue at specified election dates and report unrealized gains and losses onitems for which the fair value option has been elected in earnings at eachsubsequent reporting date. The Company adopted SFAS No. 159 as of July 6,2008 but elected not to record additional financial assets and liabilities atfair value.  As a result, the adoption ofSFAS No. 159 did not impact the Company’s consolidated financial position,results of operations or cash flows.

 

SFAS No. 157establishes a three-tier fair value hierarchy, which prioritizes the inputsused in measuring fair value. These tiers include: Level 1, defined asobservable inputs such as quoted prices in active markets; Level 2, defined asinputs other than quoted prices in active markets that are either directly orindirectly observable; and Level 3, defined as observable inputs in whichlittle or no market data exists, therefore requiring an entity to develop itsown assumptions.

 

As of October 4,2008, the Company held financial instruments that are required to be measuredat fair value on a recurring basis. These included cash equivalents and longterm investments. Cash equivalents consist of money market funds. Long terminvestments consist of auction rate securities (“ARS”) comprised of federallyinsured student loan backed securities and insured municipal authority bonds.

 

8

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We determined theestimated fair value of our investment in ARS as of October 4, 2008 usinga discounted cash flow model to estimate the fair value of our investments inARS. The assumptions used in preparing the discounted cash flow model includeestimates for interest rates, timing and amount of cash flows and expectedholding periods of the ARS. Based on this assessment of fair value, as of October 4,2008 we determined there was an additional decline in the fair value of our ARSinvestments of $5.4 million since July 5, 2008 bringing our totalimpairment charge to $13.2 million, with no related tax benefit, of which allwas deemed temporary and the impairment charges have been recorded in the othercomprehensive income component of shareholders’ equity.

 

The following items aremeasured at fair value on a recurring basis subject to the disclosurerequirements of SFAS No. 157 at October 4, 2008:

 
| **Description**       | ** ** | **October 4, 2008**                      | ** ** | **Using Quoted Prices  in Active Markets for  Identical Assets** | ** ** | **Significant   Other  Observable  Inputs** | ** ** | **Significant Unobservable Inputs** | ** ** |
|-----------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | ** **                                    | ** ** | **(Level 1)**                                                    | ** ** | **(Level 2)**                               | ** ** | **(Level 3)**                       | ** ** |
| ** **            | ** ** | **Fair value measurements at reporting date** | ** ** |
| ** **            | ** ** | **(In thousands)**                       | ** ** |
| Cash equivalents      |       | $                                             | 91,693     |                                                             | $          | 91,693                                      |       | $                                   | —     |   | $ | — |   |
| Long term investments |       | 228,155                                       |       | —                                                           |       | —                                      |       | 228,155                             |       |
| Total                 |       | $                                             | 319,848    |                                                             | $          | 91,693                                      |       | $                                   | —     |   | $ | 228,155 |   |

 

The following tablepresents the Company’s activity for assets measured at fair value on arecurring basis using significant unobservable inputs (Level 3) as defined inSFAS No. 157 for the three months ended October 4, 2008:

 

| ** **                                        | ** ** | **Long Term Investments** | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|
| ** **                                        | ** ** | **(In thousands)**   | ** ** |
| Balance at  July 5, 2008                     |       | $                         | 235,751    |   |
| Transfers to  Level 3                             |       | —                    |       |
| Total gains or  (losses) (realized or unrealized) |       |                      |       |
| Included in  earnings                             |       | —                    |       |
| Included in  other comprehensive income           |       | (5,396                    | )          |
| Purchases and  settlements (net)                  |       | (2,200                    | )          |
| Total                                             |       | $                         | 228,155    |   |

 

**SUBSEQUENT EVENTS**

 

In October 2008,  the board of directors authorized a programto repurchase up to $30 million of the Company’s common stock. The Companyintends, from time to time, as business conditions warrant, to purchase stockin the open market or through private transactions. Purchases may be increased,decreased or discontinued at any time without prior notice.

 

The plan does notobligate the Company to repurchase any specific number of shares and may besuspended at any time at management’s discretion. The Company currently hasapproximately 89 million shares outstanding.

 

On October 8, 2008, UBSnotified the Company of a settlement offer whereby UBS would purchase eligibleauction rate securities (“ARS”) it sold to the Company prior toFebruary 13, 2008. Under the terms of the settlement, at the Company’s option,UBS will purchase eligible ARS from the Company at par value during the periodJune 30, 2010 through July 2, 2012. The Company has untilNovember 14, 2008 to notify UBS if it will accept the terms of thesettlement offer. UBS has offered to also provide the Company with access to “nonet cost” loans up to 75% of the par value of eligible ARS until June 30,2010. As of October 4, 2008, the Company held approximately$95.1 million, at par value, of eligible ARS with UBS. As of November 10,2008, we have not entered into any ARS loan program agreements with UBS.

 

 

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 **LEGAL MATTERS**

 

As of the date of thisfiling, the Company is involved in ongoing legal proceedings as describedbelow.

 

A former employee suedthe Company in a complaint filed on April 28, 2005 in the United StatesDistrict Court for the Northern District of California (case No. C050177)alleging violations under the Fair Labor Standards Act, specifically that theCompany obligated her to buy and wear its brand clothing as a uniform, withoutreimbursement or credit, and the net effect of deducting the value of suchrequired purchases from her wages would often result in her not being paidminimum wages. The plaintiff purports to bring the action also on behalf of aclass of hourly, non-managerial employees who are similarly situated. Thelawsuit seeks compensatory, statutory and injunctive relief. The Company hasnegotiated a confidential settlement in this case which remains subject tocourt approval. One objection to the settlement has been filed by the plaintiffin the lawsuit described in the next paragraph of this section. The Company hasaccrued an amount that the Company believes reasonably estimates the potentialliability, which did not have a material impact on the Company’s financialposition or results of operations.

 

A former employee suedthe Company in a complaint filed July 27, 2006 in the Superior Court ofCalifornia, San Mateo County (case No. CIV 456550) alleging a failure topay all wages, failure to pay overtime wages, failure to pay minimum wages,failure to provide meal periods, violation of Labor Code §450, violationof Labor Code §2802 and California Code of Regulations §11040(9)(A),statutory wage violations (late payment of wages), unlawful business practicesunder Business and Professions Code §16720 and §17200, conversion of wagesand violation of Civil Code §52.1. The plaintiff purports to bring theaction also on behalf of current and former California bebe employees who aresimilarly situated. The lawsuit seeks compensatory, statutory, punitive,restitution and injunctive relief. In September 2008, the Company filed anopposition to Plaintiff’s recently filed motion to certify a class relatingonly to Plaintiff’s claim that the Company required employees to purchase andwear our product. The court is currently reviewing this matter.

 

A former employee suedthe Company in a complaint filed September 20, 2007 in the United StatesDistrict Court for the District of New Jersey (case no. 07-cv-4514(D.N.J.)) alleging various state and federal statutory breaches based on afailure to pay all wages, including overtime wages and bonus, failure toprovide and/or pay for meal and rest break periods, failure to credit vacationtime and other benefits and retaliation, wrongful termination, breach ofcontract, breach of covenant of good faith and fair dealing, and unjustenrichment. Plaintiff purports to bring the action on behalf of current andformer store management employees who are or were similarly situated. Thecomplaint seeks compensatory, statutory and punitive damages and equitablerelief. In April 2008, the Company filed both a Motion to Dismiss and anobjection to Plaintiff’s Motion for Conditional Class Certificationregarding Plaintiffs’ claims of violations under the Fair Labor Standard Act (“FLSAclaims”). The Court dismissed a number of Plaintiffs claims, left in tactcertain others (including state wage claims, individual federal wage claims andthe retaliation claim) and separately denied Plaintiff’s certification motionpertaining to purported FLSA class claims. A status conference will be heard in early November.

 

The Company is alsoinvolved in various other legal proceedings arising in the normal course ofbusiness. 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 Company intends todefend ourself vigorously against each of these claims. However, the results ofany litigation are inherently uncertain. The Company cannot assure you that wewill be able to successfully defend ourself in these lawsuits. Where required,and/or otherwise appropriate, the Company has recorded an estimate of potentialliabilities that the Company believes is reasonable. Any estimates are revisedas further information becomes available.

 

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

The following Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontains forward-looking statements, which involve risks and uncertainties. Ouractual results may differ materially from those anticipated in these forward-lookingstatements.  Statements that are predictive in nature, that depend upon orrefer to future events or conditions or that include words such as “expects,” “anticipates,”“intends,” “plans,” “believes,” “estimates,” “thinks,” and similar expressionsare forward-looking statements.   Forward-looking statements includestatements about our expected results of operations, capital expenditures andstore openings.  Although we believe that these statements are based uponreasonable assumptions, we cannot assure you that our goals will be achieved.These forward-looking statements are made as of the date of this Form 10-Q,and we assume no obligation to update or revise them or provide reasons whyactual results may differ. Factors that might cause such a difference include,but are not limited to, our ability to respond to changing fashion trends,miscalculation of the demand for our products, effective management of ourgrowth, decline in comparable store sales performance, ongoing competitivepressures in the apparel industry, changes in the level of consumer spending orpreferences in apparel, our ability to attract and retain key managementpersonnel and/or other factors discussed in “Risk Factors” and elsewhere inthis Form 10-Q.

 

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**OVERVIEW**

 

We design, develop andproduce 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 distinctive productoffering includes a full range of separates, tops, sweaters, dresses, activewear 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 our productsunder the bebe, BEBE SPORT, bbsp, 2b bebe and bebe O brand names through our307 retail stores, of which 213 are bebe stores, 64 are BEBE SPORT stores, 10are 2b bebe stores, 19 are bebe outlet stores and 1 is a bebe accessories storeas of October 4, 2008. These stores are located in 35 states, the Districtof Columbia, Puerto Rico, the U.S. Virgin Islands and Canada. In addition, wehave an on-line store at www.bebe.com and our licensees operate 22international stores. During the three months ended October 4, 2008, weopened 5 stores, including 3 bebe stores, 1 BEBE SPORT store and 1 2b bebestore and closed 1 bebe store.  We expect to open approximately 20 stores,including approximately 10 bebe stores, 1 BEBE SPORT store, 9 2b bebe storesand convert all of our existing bebe outlet stores to 2b bebe stores during ourfiscal 2009. We also plan to renovate 3 existing stores and relocate or expand6 existing stores, resulting in square footage growth of approximately 5%.

 

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

 

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

 

*bebeoutlets.*  We utilize the outlets as a clearance vehiclefor merchandise from our retail stores. In addition, the inventory includes astrong presentation of bebe logo merchandise and special cuts produced underthe bebe O and 2b bebe labels exclusively for the outlet stores.  Infiscal 2009, we plan to convert all our existing bebe outlet stores to 2b bebestores.

 

*2b bebe stores*.  During fiscal 2009, we plan to open 9 new 2bbebe stores in outlet centers which offer a strong presentation of bebe logomerchandise similar to our outlet stores and special cuts produced under the 2bbebe label.  We will also use thesestores as a clearance vehicle for retail but on a much smaller scale.

 

*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.  We are currentlyable to ship to customers in the United States and Canada.

 

**Critical Accounting Policies**

** **

Management’s Discussionand Analysis of Financial Condition and Results of Operations are based uponour consolidated financial statements, which have been prepared in conformitywith accounting principles generally accepted in the United States of America.

 

The preparation of thesefinancial statements requires the appropriate application of certain accountingpolicies, many of which require us to make estimates and assumptions aboutfuture 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. Our most critical accounting policies are thoserelated to revenue recognition, stock based compensation, inventories,marketable securities, impairment of long lived assets, uncertain taxpositions, and liabilities for self-insurance. These accounting policies andestimates are constantly reevaluated, and adjustments are made when facts andcircumstances dictate a change. Our accounting policies are described inNote 1 to the consolidated financial statements in our annual report onForm 10-K for the fiscal year ended July 5, 2008. This discussion andanalysis should be read in conjunction with such discussion and with ourcondensed consolidated financials statements and related notes included inPart 1, Item 1 of this report.

 

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**RESULTSOF OPERATIONS**

 

Our fiscal year is a 52or 53 week period, each period ending on the first Saturday after June 30. Fiscal years 2009 and 2008 each include 52 weeks.  The three months ended October 4,2008 and October 6, 2007 each include 13 weeks.

 

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

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **October 4,  2008**        | ** ** | **October 6,  2007** | ** ** |
|                                                   |       |                             |       |   |   |
| Net sales                                              |       | 100.0                            | %          | 100.0 | % |
| Cost of sales,  including production and occupancy (1) |       | 55.1                             |       | 52.5 |   |
|                                                   |       |                             |       |   |   |
| Gross margin                                           |       | 44.9                             |       | 47.5 |   |
| Selling, general  and administrative expenses (2)      |       | 36.2                             |       | 34.9 |   |
|                                                   |       |                             |       |   |   |
| Operating income                                       |       | 8.7                              |       | 12.6 |   |
| Interest and  other income, net                        |       | 1.9                              |       | 2.3 |   |
|                                                   |       |                             |       |   |   |
| Income before  income taxes                            |       | 10.6                             |       | 14.9 |   |
| Provision for  income taxes                            |       | 3.7                              |       | 5.4 |   |
|                                                   |       |                             |       |   |   |
| Net income                                             |       | 6.9                              | %          | 9.5 | % |

 

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(1)           Costof sales includes the cost of merchandise, occupancy costs, distribution centerand production costs.

 

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

 

*NetSales.* Net sales increased to $163.3 million during the threemonths ended October 4, 2008 from $161.1 million for the comparable periodof the prior year, an increase of $2.2 million, or 1.4%. The increase in salesis primarily due to a $15.2 million increase in stores not included in thecomparable store sales, a $0.9 million increase in on-line sales, a $1.7million increase in wholesale sales to international licensees and otherrevenue increases including royalty revenue and changes in deferred revenuerelated to our loyalty program.  Thesehave been partially offset by a 10.8% decrease in comparable store salestotaling $15.2 million and a decrease of $2 million related to stores closedduring the 12 month period ended October 4, 2008.

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **October 4,  2008**        | ** ** | **October 6,  2007** | ** ** |
|                                            |       |                             |       |   |   |
| Net sales (In  thousands)                       |       | $                                | 163,260    |   | $ | 161,082 |   |
|                                            |       |                             |       |   |   |
| Total net sales  increase percentage            |       | 1.4                              | %          | 2.5 | % |
|                                            |       |                             |       |   |   |
| Comparable store  sales decrease percentage     |       | (10.8                            | )%         | (9.3 | )% |
|                                            |       |                             |       |   |   |
| Net sales per  average square foot (1)          |       | $                                | 138        |   | $ | 158 |   |
|                                            |       |                             |       |   |   |
| Square footage  at end of period (In thousands) |       | 1,143                            |       | 1,013 |   |
|                                            |       |                             |       |   |   |
| Number of store  locations:                     |       |                             |       |   |   |
| Beginning of  period                            |       | 303                              |       | 273 |   |
| New store  locations                            |       | 5                                |       | 6 |   |
| Closed store  locations                         |       | (1                               | )          | 0 |   |
| Number of stores  open at end of period         |       | 307                              |       | 279 |   |

 

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(1)           We calculate net salesper average square foot using net store sales and a monthly average storesquare footage.

 

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*GrossMargin.* Gross margin decreased to $73.3 million during thethree months ended October 4, 2008 from $76.5 million for the comparableperiod of the prior year, a decrease of $3.2 million, or 4.2%. As a percentageof net sales, gross margin decreased to 44.9% for the three months ended October 4,2008 from 47.5% in the comparable period of the prior year.  The decreasein gross margin as a percentage of net sales was primarily due to unfavorableoccupancy leverage and a lower merchandise margin as a result of highermarkdowns.

 

*Selling,General and Administrative Expenses.* Selling, general andadministrative expenses, which primarily consist of non-occupancy store costs,corporate overhead and advertising costs, increased to $59.2 million during thethree months ended October 4, 2008 from $56.2 million for the comparableperiod of the prior year, an increase of $3.0 million, or 5.3 %. As apercentage of net sales, selling, general and administrative expenses increasedto 36.2% during the three months ended October 4, 2008 from 34.9% in thecomparable period of the prior year.  The increase in selling, general andadministrative expenses as a percentage of net sales from the prior year of1.3% was primarily due to higher depreciation expense.

 

*Interestand Other Income, Net.* We generated approximately $3.0million of interest and other income (net of other expenses) during the threemonths ended October 4, 2008 compared to approximately $3.7 million in thecomparable period of the prior year. The decrease was primarily the result oflower investment in higher yielding tax-exempt investments and more investmentsin money market funds.

 

*Provisionfor Income Taxes.* Our effective tax rate decreased to 34.8%for the three months ended October 4, 2008 from 36.0% for the comparableperiod in the prior year primarily due to an increase in tax-exempt interestincome as a percent of total pretax income.

 

**Seasonalityof Business and Quarterly Results**

 

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

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our working capitalrequirements vary widely throughout the year and generally peak during thefirst and second fiscal quarters. At October 4, 2008, we had approximately$347.7 million of cash and equivalents and long term investments on hand ofwhich approximately $228 million, net of an unrealized loss of $13.2 million,were invested in auction rate securities (“ARS”). Due to the recent failures ofthese auctions we have classified $228 million of these investments as longterm investments. We do not anticipate the lack of liquidity in the ARS toimpact our ability to fund our operations in the foreseeable future and believewe have sufficient cash and equivalents to fund ongoing operations. Inaddition, we have a revolving line of credit, under which we may borrow orissue letters of credit up to a combined total of $25 million. As of October 4,2008, there were no cash borrowings outstanding under the line of credit, andletters of credit outstanding totaled $4.1 million.

 

At October 4, 2008, theCompany had cash and cash equivalents of $347.7 million held in accountsmanaged by third party financial institutions consisting of invested cash andcash in our operating accounts.  Theinvested cash is invested in interest bearing funds managed by third partyfinancial institutions.  These fundsinvest in direct obligations of the government of the United States.  To date, except with respect to our ARS(discussed above and elsewhere in this report), we have experienced no loss orlack of access to our invested cash or cash equivalents; however, we canprovide no assurances that access to our invested cash and cash equivalentswill not be impacted by adverse conditions in the financial markets.

 

At any point in time wealso have approximately $90 to $120 million in operating accounts that are withthird party financial institutions.  Thesebalances exceed the Federal Deposit Insurance Corporation (“FDIC”) insurancelimits.  While we monitor daily the cashbalances in our operating accounts and adjust the cash balances as appropriate,these cash balances could be impacted if the underlying financial institutionsfail or could be subject to other adverse conditions in the financialmarkets.  To date, we have experienced noloss or lack of access to cash in our operating accounts.

 

Net cash provided byoperating activities for the three months ended October 4, 2008 was $14.6million versus $17.5 million for the three months ended October 6, 2007.Cash provided by operating activities for the period was primarily generated bynet income of $11.2 million adjusted for stock compensation of $1.7 million,depreciation of $6.2 million, deferred rent of $1.6 million and net loss ondisposal of property of $0.2 million, as well as changes in working capital.The changes in working capital were primarily due to an increase in accountspayable of $10.4 million, offset by an increase in inventory of $6.7 million,an increase in prepaid expenses and other assets of $3.1 million, an increasein receivables of $1.8 million, and a decrease in accrued liabilities of $5.2million.

 

Net cash used byinvesting activities for the three months ended October 4, 2008 was $6.6million versus net cash provided by investing activities of $33.3 million forthe three months ended October 6, 2007.  Cash used by investingactivities for the period was primarily due to capital expenditures of $8.8million related to the opening of new stores, partially offset by proceeds onour auction rate securities of $2.2 million.  We opened 5 new stores inthe three months ended October 4, 2008 and expect to open approximately 24stores during fiscal 2009.  We estimate that total capital expenditureswill be approximately $32 million in fiscal 2009.

 

Net cash used byfinancing activities was $8.5 million for the three months ended October 4,2008 versus net cash used by

 

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financing activities of$75.8 million for the three months ended October 6, 2007.  Cash usedby financing activities for the period was primarily due to payments ofquarterly dividends for the fourth quarter of fiscal 2008 and the first quarterof fiscal 2009 totaling $8.9 million, partially offset by proceeds receivedfrom stock option exercises of $0.3 million and the related tax benefit of $0.1million.

 

As of October 4,2008, we had a balance of approximately $228 million in investments in ARSclassified as long term investments.  Our ARS portfolio includesapproximately 98% federally insured student loan backed securities and 2%municipal authority bonds. Our ARS portfolio is comprised of approximately 83%AAA rated investments, 5% AA rated investments and 12% A ratedinvestments.  These ARS investments are intended to provide liquidity viaan auction process that resets the applicable interest rate at predeterminedcalendar intervals, allowing investors to either roll over their holdings orgain immediate liquidity by selling such interests at par. The recentuncertainties in the credit markets have affected our holdings in ARSinvestments and auctions for the majority of our investments in thesesecurities have failed to settle on their respective settlement dates.Consequently, the investments are not currently liquid and we will not be ableto access these funds until a future auction of these investments issuccessful. Maturity dates for these ARS investments range from 2010 to 2044with principal distributions occurring on certain securities prior to maturity.We currently have the ability and intent to hold these ARS investments until arecovery of the auction process or until maturity.

 

On October 8, 2008, UBSnotified the Company of a settlement offer whereby UBS would purchase eligibleauction rate securities (“ARS”) it sold to the Company prior to February 13,2008. Under the terms of the settlement, at the Company’s option, UBS willpurchase eligible ARS from the Company at par value during the period June 30,2010 through July 2, 2012. The Company has until November 14, 2008 to notifyUBS if it will accept the terms of the settlement offer. UBS has offered toalso provide the Company with access to “no net cost” loans up to 75% of thepar value of eligible ARS until June 30, 2010. As of October 4, 2008, theCompany held approximately $95.1 million, at par value, of eligible ARS withUBS.  As of November 10, 2008, we have notentered into any ARS loan or program agreements with UBS.

 

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

 

We believe that our cashon hand, together with our cash flows from operations, will be sufficient tomeet our capital and operating requirements for at least the next twelvemonths. Our future capital requirements, however, will depend on numerousfactors, including without limitation, liquidity of our auction ratesecurities, the size and number of new and expanded stores and/or storeconcepts, investment costs for management information systems, potentialacquisitions and/or joint ventures, repurchase of stock and future results ofoperations.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to marketrisks, which include changes in U.S. interest rates and, to a lesser extent,foreign exchange rates. We do not engage in financial transactions for tradingor speculative purposes.

 

*InterestRate Risk*

 

We currently maintain aportfolio of variable interest rate investments consisting of cash equivalentsand long term investments comprised of auction rate securities (“ARS”). Our ARSportfolio includes approximately 98% federally insured student loan backedsecurities and 2% municipal authority bonds. Our ARS portfolio includesapproximately 83% AAA rated investments, 5% AA rated investments and 12% Arated investments.  According to our investment policy, we may invest intaxable and tax-exempt instruments.  In addition, the policy establisheslimits on credit quality, maturity, issuer and type of instrument. Marketablesecurities are classified as “available for sale”.  We do not usederivative financial 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 termmarketable securities if the original maturity is between three months andtwelve months, or long term investments if the original maturity is greaterthan twelve months. Typically the fair value of ARS investments approximatespar value due to the frequent resets through the auction process. While wecontinue to earn interest on our ARS investments at the maximum contractualrate, these investments are not currently trading and therefore do notcurrently have a readily determinable market value. Accordingly, the estimatedfair value of ARS no longer approximates par value. We determined the estimatedfair value of our investment in ARS as of October 4, 2008 using adiscounted cash flow model to estimate the fair value of our investments inARS. The assumptions used in preparing the discounted cash flow model includeestimates for interest rates, timing and amount of cash flows and expectedholding periods of the ARS. Based on this assessment of fair value, as of October 4,2008 we determined there was an additional decline in the fair value of our ARSinvestments of $5.4 million bringing our total impairment

 

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charge to $13.2 million,with no related tax benefit, of which all was deemed temporary and theimpairment charges have been recorded in the other comprehensive incomecomponent of shareholders’ equity. As of October 4, 2008, we classified allof our ARS investments as long term investments on our condensed consolidatedbalance sheet because of our inability to determine when our investments in ARSwill settle.  We have modified our investment strategy and increased ourinvestments in more liquid money market investments.  An immediate anduniform increase in market interest rate of 100 basis points from levels at October 4,2008 would cause an additional decline of approximately 2%, or $6.0 million, inthe fair market value of our investments in ARS.

 

On October 8, 2008, UBSnotified the Company of a settlement offer whereby UBS would purchase eligibleauction rate securities (“ARS”) it sold to the Company prior to February 13,2008. Under the terms of the settlement, at the Company’s option, UBS willpurchase eligible ARS from the Company at par value during the period June 30,2010 through July 2, 2012. The Company has until November 14, 2008 to notifyUBS if it will accept the terms of the settlement offer. UBS has offered toalso provide the Company with access to “no net cost” loans up to 75% of thepar value of eligible ARS until June 30, 2010. As of October 4, 2008, theCompany held approximately $95.1 million, at par value, of eligible ARS withUBS. As of November 10, 2008, we have not entered into any ARS loan or programagreements with UBS.

 

The following table listsour cash equivalents and investments at October 4, 2008:

 
| ** **                          | ** ** | **Book Value**                  | ** ** | **Fair Value** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| Cash equivalents                    |       | $                                    | 91,693     |                | 91,693     |   |
| Weighted average  interest rate (1) |       | 1.70                                 | %          |                |       |
| Long term  investments              |       | $                                    | 228,155    |                | 228,155    |   |
| Weighted average  interest rate (1) |       | 6.15                                 | %          |                |       |
| Total                               |       | $                                    | 319,848    |                | 319,848    |   |

 

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(1)   Represents the weighted averageinterest rate for tax-exempt student loan and municipal bonds, and taxable andtax-exempt institutional money market 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. Aswe have no outstanding cash borrowings, if interest rates rose significantly,our results from operations and 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 negotiated and settled in U.S. Dollars and,therefore, have only minimal exposure to foreign currency exchange risks. Wealso operate a subsidiary for which the functional currency is the CanadianDollar. In accordance with SFAS No. 52, “Foreign Currency Translation”,assets and liabilities of Canada’s operations are translated into U.S. dollarsat quarter-end rates, while income and expenses are translated at the weightedaverage exchange rates for the quarter. The related translation adjustments arerecorded in accumulated other comprehensive income as a separate component ofshareholders’ equity. Fluctuations in exchange rates therefore impact ourfinancial condition and results of operations, as reported in U.S.Dollars.   We do not hedge against foreign currency risks and believethat foreign currency exchange risk is immaterial.

 

**ITEM 4.****                  CONTROLS ANDPROCEDURES**

 

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

 

There has been no changein our internal control over financial reporting during the quarter ended October 4,2008 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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

 

**ITEM 1.****                  LEGALPROCEEDINGS**

 

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

 

**ITEM 1A.****               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.  Except for changes to the general economic conditions risk factor,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 fiscalyear ended July 5, 2008.

 

RISKS RELATING TO OURBUSINESS:

 

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

 

**2. If weare unable to obtain raw materials, or unable to find manufacturing facilitiesor if our manufacturers perform unacceptably, our sales may be negativelyaffected and our financial condition may be harmed**. We do notown any manufacturing facilities and therefore depend on contractors and thirdparties to manufacture our products. We place all of our orders for productionof merchandise and raw materials by purchase order and do not have anylong-term contracts with any manufacturer or supplier. If we fail to maintainfavorable relationships with our manufacturers and suppliers or are unable toobtain sufficient quantities of quality raw materials on commerciallyreasonable terms, it could harm our business and results of operations. Wecannot assure you that contractors and third-party manufacturers (1) willnot supply similar products to our competitors, (2) will not stopsupplying products to us completely or (3) will supply products in atimely manner. Untimely receipt of products may result in lower thananticipated sales and markdowns which would have a negative impact on earnings.Furthermore, we have received in the past, and may receive in the future,shipments of products from manufacturers that fail to conform to our qualitycontrol standards. In such event, unless we are able to obtain replacementproducts in a timely manner, we may lose sales. Certain of our third-partymanufacturers store our raw materials. In the event our inventory is damaged ordestroyed while in storage and we are unable to obtain replacement rawmaterials, our earnings may be negatively impacted.

 

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

 

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

 

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

 

**5. General economic conditions,including increases in energy and commodity prices, that are largely out of ourcontrol may adversely affect our financial condition and results ofoperations.  **We aresensitive to changes in general economic conditions, both nationally andlocally.  Recessionary economic cycles,higher interest rates, higher fuel and other energy costs, inflation, deflation,increases in commodity prices, higher levels of unemployment, higher consumerdebt levels, higher tax rates and other changes in tax laws or other economicfactors that may affect consumer spending or buying habits could adverselyaffect the demand for products we sell in our stores. In addition, the recentturmoil in the financial markets may have an adverse effect on the U.S. andworld economy, which could negatively impact consumer spending patterns. Therecan be no assurances that government responses to the disruptions in thefinancial markets will restore consumer confidence.

 

Furthermore, we couldexperience reduced traffic in our stores or limitations on the prices we cancharge for our products, either of which could reduce our sales and profitmargins and have a material adverse affect on our financial condition andresults of operations. Also, economic factors such as those listed above andincreased transportation costs, inflation, higher costs of labor, insurance andhealthcare, and changes in other laws and regulations may increase our cost ofsales and our operating, selling, general and administrative expenses, andotherwise adversely affect our financial condition and results of operations.

 

**6. Wecannot assure you that future store openings will be successful, and new storeopenings may impact existing stores.** We expect to openapproximately 20 stores in fiscal 2009, of which 10 will be bebe stores, 1 willbe a BEBE SPORT store and 9 will be 2b bebe stores. We cannot assure you thatthe stores that we plan to open in fiscal 2009, or any other stores that wemight open in the future, will be successful or that our overall operatingprofit will increase as a result of opening these stores. During fiscal 2009 weclosed 2 bebe stores and do not anticipate closing any additional stores forthe remainder of the fiscal year. For fiscal 2009, we plan to grow ouroperations primarily through the opening of new stores. Most of our new storeopenings in fiscal 2009 will be in existing markets. These openings may affectthe existing stores’ net sales and profitability. Our failure to predictaccurately the demographic or retail environment at any future store locationcould have a material adverse effect on our business, financial condition andresults of operations.

 

Our ability toeffectively obtain real estate to open new stores depends upon the availabilityof real estate that meets our criteria, including traffic, square footage,co-tenancies, average sales per square foot, lease economics, demographics, andother factors, and our ability to negotiate terms that meet our financialtargets. In addition, we must be able to effectively renew our existing storeleases.

Failure to secure 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.

 

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**7. Weare subject to risks associated with our on-line sales.** Weoperate an on-line store at www.bebe.com to sell our merchandise.

Although our on-linesales encompass a relatively small percentage of our total sales, our on-lineoperations are subject to numerous risks, including unanticipated operatingproblems, reliance on third-party computer hardware and software providers. Theon-line operations also involve other risks that could have an impact on ourresults of operations including but not limited to diversion of sales from ourstores, rapid technological change, liability for on-line content, securitybreaches, consumer privacy concerns, credit card fraud, and risks related tothe failure of the computer systems that operate the website and its related supportsystems. In addition, given our use of a third party platform, we do not havedirect control of certain aspects of our on-line business. We cannot assure youthat our on-line store will continue to achieve sales and profitability growthor even remain at its current level.

 

**8. 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.

 

**9. 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 entering year three of this plan. Ifwe fail to successfully implement the plan, our business could be adverselyaffected.

 

**10. 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, timeliness of productdevelopment and delivery, store ambiance, customer service andconvenience.  We compete with traditional department stores, specialty storeretailers, business to consumer websites, off-price retailers and directmarketers for, among other things, raw materials, market share, retail space,finished goods, sourcing and personnel. Because many of these competitors arelarger and have substantially greater financial, distribution and marketingresources than we do, we may lack the resources to adequately compete withthem. If we fail to remain competitive in any way, it could harm our business,financial condition and results of operations.

 

**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, we cannot assure that others will not resist orseek to block the sale of our products as infringements of their trademark andproprietary rights.

 

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

 

**13. Wemay be required to record unrealized losses in future quarters as a result ofthe decline in value of our investments in auction rate securities or as aresult of a change in our ability and intent to hold our investment in auctionrate securities.** We hold a variety of interest bearingauction rate securities (“ARS”) comprised of federally insured student loanbacked securities and insured municipal authority bonds. These ARS investmentsare intended to provide liquidity via an auction process that resets theapplicable interest rate at predetermined calendar intervals, allowinginvestors to either roll over their holdings or gain immediate liquidity byselling such interests at par. The recent uncertainties in the credit marketshave affected our holdings in ARS investments and the majority of auctions forour investments in these securities have failed to settle on their respectivesettlement dates. Consequently, $228 million of our ARS are not currently liquidand we will not be able to access these funds until a future auction of theseinvestments is successful or a buyer is found outside of the auction process.Maturity dates for these ARS investments range from 2010 to 2044 with principaldistributions occurring on certain securities prior to maturity.

 

On October 8, 2008, UBSnotified the Company of a settlement offer whereby UBS would purchase eligibleauction rate securities (“ARS”) it sold to the Company prior to February 13,2008. Under the terms of the settlement, at the Company’s option, UBS willpurchase eligible ARS from the Company at par value during the period June 30,2010 through July 2, 2012. The Company has until November 14, 2008 to notifyUBS if it will accept the terms of the settlement offer. UBS has offered toalso provide the Company with access to “no net cost” loans up to 75% of thepar value of eligible ARS until June 30, 2010. As of October 4, 2008, theCompany held approximately $95.1 million, at par value, of eligible ARS with UBS.As of November 10, 2008, we have not entered into any ARS loan or programagreements with UBS.

 

The valuation of ourinvestment portfolio is subject to uncertainties that are difficult to predict.Factors that may impact its valuation include changes to credit ratings of thesecurities as well as to the underlying assets supporting those securities,rates of default of the underlying assets, underlying collateral value,discount rates and ongoing strength and quality of market credit and liquidity.

 

Although we currentlyhave the ability and intent to hold these ARS investments until a recovery ofthe auction process or until maturity, if the current market conditionsdeteriorate further, or the anticipated recovery in market values does notoccur, we may be required to record additional unrealized losses in othercomprehensive income or impairment charges in future quarters.

 

**14. 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 result in negative public perceptionsof us and/or employee allegations or court determinations that we are jointlyliable.

 

 RISKS RELATING TOOUR COMMON 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 October 4,2008, of the approximately 89,000,000 shares of our common stock then outstanding,approximately 27,600,000 shares were available to be publicly traded, and as aresult, our stock price is vulnerable to market swings due to large purchases,sales and short sales of our common stock.

 

**2.Because Manny Mashouf beneficially owns a substantial portion of theoutstanding shares, other shareholders may not be able to influence thedirection the company takes.** As of October 31, 2008, Manny Mashouf, the Chairman of the Board,beneficially owned approximately 56% of the outstanding shares of our commonstock. As a result, he can control the election of directors and the outcome ofall issues submitted to the shareholders. This may make it more difficult for athird party to acquire shares, may discourage acquisition bids, and could limitthe price that certain investors might be willing to pay for shares of commonstock. This concentration of stock ownership may have the effect of delaying,deferring or preventing a change in control of our company.

 

**3. Oursignificant shareholders hold a substantial portion of our stock which mayresult in the trading volatility or may**

**adverselyaffect our common stock.** As of October 31, 2008, Ms. Neda Mashouf currently ownedapproximately 13% of the outstanding shares of our common stock. As a result,any change in ownership of a significant portion of these shares, includingsales by Ms. Mashouf, may result in trading volatility in our common stockor may adversely affect our stock price.

 

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**4. Our sales,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 underperforming stores. Suchfluctuations may adversely affect the market price of our common stock.

 

**5.Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 couldnegatively impact investor confidence.** In order to meet therequirements of the Sarbanes-Oxley Act of 2002 in future periods, we mustcontinuously document, test, monitor and enhance our internal control overfinancial reporting.  We cannot assure you 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 to maintain theeffectiveness of our internal control over financial reporting or to complywith the requirements of this Act could have a material adverse effect on ourreputation, financial condition and market price of our common stock.

 

**ITEM2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

Not applicable.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Not applicable.

 

**ITEM5.  OTHER INFORMATION**

 

Not applicable.

 

**ITEM6.  EXHIBITS**

 

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

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

 

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**SIGNATURE**

 

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

 

 
|   | Dated November 10,  2008                                       |
|--------|---------------------------------------------------------------------|
|   |                                                                |
|   | bebe stores, inc.                                                   |
|   |                                                                |
|   | /s/ Walter Parks                                                    |
|   | Walter Parks, Chief  Operating Officer and Chief Financial  Officer |

 

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EXHIBIT INDEX

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

 

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