The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," "thinks," and similar expressions are forward-looking statements.
Forward-looking statements include statements about our expected results of operations, capital expenditures and store openings. Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that our goals will be achieved. These forward-looking statements are made as of the date of this Form 10-Q, and we assume no obligation to update or revise them or provide reasons why actual results may differ. Factors that might cause such a difference include, but are not limited to, our ability to respond to changing fashion trends, obtain raw materials and find manufacturing facilities, attract and retain key management personnel, develop new concepts, successfully open future stores, successfully manage our online business, maintain and protect information technology, respond effectively to competitive pressures in the apparel industry and adverse economic conditionsand protect our intellectual property as well as declines in comparable store sales performance, changes in the level of consumer spending or preferences in apparel and/or other factors discussed in "Risk Factors" and elsewhere in this Form 10-Q.

OVERVIEW

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

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

We market our products under the bebe, BEBE SPORT, bbsp, 2b bebe and PH8 brand names through our 307 retail stores, of which 212 are bebe stores, 61 are BEBE SPORT stores, 33 are 2b bebe stores and 1 is a bebe accessories store as of October 3, 2009. These stores are located in 35 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Canada. In addition, we have an on-line store at www.bebe.com, and our licensees operate 37 international stores as of October 3, 2009. During the three months ended October 3, 2009, we opened 2 bebe stores and closed a bebe store, a BEBE SPORT store and a 2b bebe store. We expect to open approximately 5 bebe stores during fiscal 2010. We also plan to expand an existing store. We intend to convert our BEBE SPORT stores to PH8 stores in the second quarter of fiscal 2010.

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

BEBE SPORT. We launched BEBE SPORT during fiscal 2003 to address the performance and active lifestyle needs of the bebe customer. We offer a selection of sportswear and footwear under the BEBE SPORT and bbsp brand names. In September 2009, we began introducing product under our new PH8 label in our existing BEBE SPORT stores and we intend to convert the BEBE SPORT stores to PH8 stores in November 2009, and begin to offer BEBE SPORT product in bebe and 2b bebe stores starting Holiday 2009. In our PH8 stores, we will offer a selection of casual weekend apparel, work-out attire and accessories such as bags, shoes and various seasonal items. In addition, we will launch a separate PH8 on-line store in June 2010 that will provide a complete assortment of PH8 product and will also be used as a vehicle to communicate with our new customers. Due to the change in store fronts and product offering we will exclude the new PH8 stores from comparable store sales as of November 2009.

2b bebe stores. We currently operate 15 2b bebe stores and 18 stores operating in the outlet store design under the 2b bebe name. The stores operating in the 2b bebe design sell bebe logo, 2b bebe merchandise and a small percentage of bebe retail markdowns. The stores operating in the outlet design with the same name change sell bebe logo, 2b bebe merchandise and a large percentage of bebe retail markdowns.

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

CRITICAL ACCOUNTING POLICIES

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

The preparation of these financial statements requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements. We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. Our most critical accounting policies are those related to revenue recognition, stock based compensation, inventories, marketable securities, impairment of long lived assets, uncertain tax positions and liabilities for self-insurance. We continually evaluate these accounting policies and estimates, and we make adjustments when facts and circumstances dictate a change. Our accounting policies are described in Note 1 to the consolidated financial statements in our annual report on Form 10-K for the fiscal year ended July 4, 2009. This discussion and analysis should be read in conjunction with such discussion and with our condensed consolidated financials statements and related notes included in Part 1, Item 1 of this quarterly report.

RESULTS OF OPERATIONS

Our fiscal year is a 52 or 53 week period, each period ending on the first Saturday after June 30. Fiscal years 2010 and 2009 each include 52 weeks. The three months ended October 3, 2009 and October 4, 2008 each include 13 weeks.

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

                                                           Three Months Ended
                                                        October 3,    October 4,
                                                           2009          2008

Net sales                                                    100.0 %       100.0 %
Cost of sales, including production and occupancy (1)         63.3          55.1

Gross margin                                                  36.7          44.9
Selling, general and administrative expenses (2)              42.2          36.2

Operating income (loss)                                       (5.5 )         8.7
Interest and other income, net                                 0.9           1.9

Income (loss) before income taxes                             (4.6 )        10.6
Provision (benefit) for income taxes                          (1.3 )         3.7

Net income (loss)                                             (3.3 )%        6.9 %

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

Net Sales. Net sales decreased to $125.7 million during the three months ended October 3, 2009 from $163.3 million for the comparable period of the prior year, a decrease of $37.6 million, or 23.0%. The decrease in sales was primarily due to a 25.7% decrease in comparable store sales resulting primarily from the overall macroeconomic environment, in which we saw lower traffic and conversion in stores, a reduced customer acceptance of the merchandise offering and a 16.6% decrease in our on-line sales. These decreases were partially offset by stores not included in the comparable store sales, an increase in wholesale sales to international licensees and an increase in royalty revenue.

                                                      Three Months Ended
                                                  October 3,      October 4,
                                                     2009            2008

Net sales (In thousands)                         $    125,659    $    163,260

Total net sales increase (decrease) percentage          (23.0 )%          1.4 %

Comparable store sales decrease percentage              (25.7 )%        (10.8 )%

Net sales per average square foot (1)            $        104    $        138

Square footage at end of period (In thousands)          1,155           1,143

Number of store locations:
Beginning of period                                       308             303
New store locations                                         2               5
Closed store locations                                      3               1
Number of stores open at end of period                    307             307

Gross Margin. Gross margin decreased to $46.2 million during the three months ended October 3, 2009 from $73.3 million for the comparable period of the prior year, a decrease of $27.1 million, or 37.0%. As a percentage of net sales, gross margin decreased to 36.7% for the three months ended October 3, 2009 from 44.9% in the comparable period of the prior year. The decrease in gross margin as a percentage of net sales was primarily due to higher markdowns and unfavorable occupancy leverage partially offset by lower other costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, which primarily consist of non-occupancy store costs, corporate overhead and advertising costs, decreased to $53.0 million during the three months ended October 3, 2009 from $59.2 million for the comparable period of the prior year, a decrease of $6.2 million, or 10.5 %. As a percentage of net sales, selling, general and administrative expenses increased to 42.2% during the three months ended October 3, 2009 from 36.2% in the comparable period of the prior year. The decrease in dollars over the prior year was primarily due to an increase in depreciation expense and a $1.7 million impairment charge related to under-performing stores offset by lower compensation and advertising expense. The increase as a percentage of net sales is a result of lower revenues.

Interest and Other Income, Net. We generated approximately $1.0 million of interest and other income, net of other expenses during the three months ended October 3, 2009 compared to approximately $3.0 million in the comparable period of the prior year. The decrease in interest and other income resulted from investments in lower-yielding tax-exempt investments and money market funds.

Provision for Income Taxes.Our effective tax rate was a 28.1% benefit for the three months ended October 3, 2009 compared to a 34.8% provision for the comparable period in the prior year. The lower effective tax rate was primarily due to discrete adjustments booked during the quarter offset by an increase in tax-exempt interest income as a percent of total pre-tax loss and a change in tax treatment related to our stock option exchange in which incentive stock options that were exchanged were converted to non-qualified stock options.

SEASONALITY OF BUSINESS AND QUARTERLY RESULTS

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

LIQUIDITY AND CAPITAL RESOURCES

Our working capital requirements vary widely throughout the year and generally peak during the first and second fiscal quarters. As of October 3, 2009, we had approximately $309.1 million of cash and equivalents and investments on hand of which approximately $40.0 million were invested in government treasury bills (of these, $10.0 million are classified as cash equivalents), approximately $8.5 million were invested in guaranteed investment certificates, and approximately $189.9 million, net of impairment charges of $27.3 million, were invested in auction rate securities ("ARS"). We do not anticipate the lack of liquidity in the ARS to impact our ability to fund our operations in the foreseeable future and believe we have sufficient cash and equivalents to fund ongoing operations. In addition, we have a revolving line of credit, under which we may borrow or issue letters of credit up to a combined total of $25 million. As of October 3, 2009, there were no cash borrowings outstanding under the line of credit, and letters of credit outstanding totaled $2.7 million. This credit facility requires us to maintain a $2.5 million compensating balance and to comply with certain financial covenants, including amounts for minimum tangible net worth, unencumbered liquid assets and profitability, and certain restrictions on making loans and investments. As of October 3, 2009, we were not in compliance with one covenant of the agreement requiring specified quarterly income levels. We obtained a waiver as of October 3, 2009, with respect to this covenant for the quarter ended October 3, 2009.

As of October 3, 2009, we had cash and equivalents of $80.7 million held in accounts managed by third-party financial institutions consisting of invested cash and cash in our operating accounts. The invested cash is invested in interest bearing funds managed by third party financial institutions. These funds invest in direct obligations of the government of the United States. To date, we have experienced no loss or lack of access to our invested cash or equivalents; however, we can provide no assurances that access to our invested cash and equivalents will not be impacted by adverse conditions in the financial markets.

At any point in time we also have approximately $75 to $100 million of invested cash and cash in operating accounts that are with third party financial institutions. These balances exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to invested cash or cash in our operating accounts.

Net cash used by operating activities for the three months ended October 3, 2009 was $9.9 million versus cash provided by operating activities of $14.6 million for the three months ended October 4, 2008. The decrease of $24.5 million from the comparable period was primarily due to a decrease in net earnings of $15.4 million and decreased changes in working capital of $8.5 million primarily related to lower accounts payable resulting from decreases in finished goods inventory at stores and reduced costs related to new store openings.

Net cash used by investing activities for the three months ended October 3, 2009 was $0.9 million versus $6.6 million for the three months ended October 4, 2008. The decrease of $5.7 million versus the prior year comparable period was primarily due to lower capital expenditures. We expect that total capital expenditures will be below $20 million in fiscal 2010.

Net cash used by financing activities was $6.4 million for the three months ended October 3, 2009 versus $8.5 million for the three months ended October 4, 2008. The decrease of $2.1 million from the prior year comparable period was primarily due to lower dividends paid related to a lower rate declared for the first quarter of fiscal 2010 ($0.025 per share versus $0.05 per share in the prior year).

We hold a variety of interest bearing ARS consisting of federally insured student loan backed securities and insured municipal authority bonds. As of October 3, 2009, our ARS portfolio totaled approximately $189.9 million, $69.5 million (net of an impairment charge of $12.7 million) classified as trading securities and $120.4 million (net of temporary impairment charge of $14.6 million) classified as long-term available for sale securities. Our ARS portfolio includes approximately 98% federally insured student loan backed securities and 2% municipal authority bonds. Our ARS portfolio consists of approximately 46% AAA rated investments, 10% AA rated investments, 33% A rated investments and 11% BBB rated investments. This is a change from our fiscal 2009 portfolio, which consisted of 46% AAA rates investments, 14% AA rated investments, 30% A rated investments and 10% BBB related investments. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The uncertainties in the credit markets that began in February 2008 have affected our holdings in ARS investments and auctions for our investments in these securities have failed to settle on their respective settlement dates. Historically the fair value of ARS investments had approximated par value due to the frequent resets through the auction process. While we continue to earn interest on our ARS investments at the maximum contractual rate, these investments are not currently trading and

therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of ARS no longer approximates par value. Consequently, the investments are not currently liquid, and we will not be able to access these funds until a future auction of these investments is successful, the issuer redeems the securities, or at maturity. Maturity dates for these ARS investments range from 2010 to 2044 with principal distributions occurring on certain securities prior to maturity.

In November 2008, we entered into a settlement agreement related to our ARS held with UBS Financial Services, Inc. ("UBS") that grants us certain rights related to these ARS (the "Right"). Beginning June 30, 2010, at our request, UBS has agreed to purchase all of our ARS currently held with them at par value. Conversely, UBS has the right, in its discretion, to purchase or sell our ARS at any time until July 2, 2012, so long as we receive payment at par value upon any sale or disposition. The enforceability of the Right results in a put option which should be recognized as a free standing asset separate from the ARS. Upon acceptance of the offer from UBS, we recorded the put option at fair value of $11.6 million, with a corresponding credit to interest income. Although it is a financial instrument, the put option does not meet the FASB's definition of a derivative instrument, therefore we have elected to measure the put option at fair value. As a result, unrealized gains and losses are included in earnings. At October 3, 2009, the fair value of the put option is $12.1 million, net of a reserve of $0.6 million, of which a gain of $0.02 million has been recognized in the current year.

Prior to accepting the UBS offer, we recorded our ARS held with UBS as investments available for sale, with an associated unrealized loss included in other comprehensive income. In connection with our acceptance of the UBS offer in November 2008, we transferred approximately $84.4 million in ARS subject to the UBS settlement from investments available for sale to trading securities and recorded a loss on investments of approximately $12.1 million. As a result, changes in fair value of the ARS are recorded as a component of net income. We intend to exercise the Right when it becomes available, and as such the associated investments have been classified as short-term on the balance sheet.

In October 2008, our board of directors authorized a program to repurchase up to $30 million of our common stock. We may, from time to time, as business conditions warrant, purchase stock in the open market or through private transactions. Purchases may be increased, decreased or discontinued at any time without prior notice. The plan does not obligate us to repurchase any specific number of shares and may be suspended at any time at management's discretion. We did not repurchase any shares during the first quarter of fiscal 2010 and $16.7 million remains available under the program.

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