During weeks one, two and three of December both traffic and sales were challenging. In weeks four and five, the company saw an improvement in both, but not enough to offset the shortfalls in the first three weeks.

- Sportswear and suiting business were particularly challenged, as the company saw clients focused on dresses including sweater dresses as opposed to suiting and separates.
- The bebe accessory business was positive with a lower markdown rate, higher average unit retail and faster weeks of supply than the prior year.
- Shoe business continues to perform with a strong double-digit comparable store sales. The company ended the quarter with new sunglass fixture in 106 stores, and it is pleased with the category performance. Comparable store sales increased double-digits.
- Handbag business showed strong performance driven by signature logo handbags. The company saw double-digit comparable store sales in handbags
- The jewelry business also performed well, driven by signature bracelets and necklaces.
- Hosiery was also successful with strong triple digit comparable store sales performance. While the company saw sequential improvement in belts, it did not see the improvement anticipated and it is still running below last year in this category.

In BEBE SPORT, the company saw improvement in comparable store sales and while SPORT continued to run negative, it was pleased with the improved margin performance.

The company saw improvements in both IMU and markdown rate, while turning the product faster than prior year. The business was driven by bbsp in sweaters, offset by the street side of the business, which continues to under-perform. The company mailed 122,000 direct mail pieces focusing on the bbsp side of the business versus 245,000 last year. The company mailed to the top 50% of SPORT clients and delivered positive incremental revenue and coupon conversion.

The outlet business achieved a flat comparable store sales performance that was below incoming expectations driven in part by a reduction in transfers of markdown inventory from full price locations. The company continues to be pleased with the bebe logo and bebe O business in the outlet stores, and remain on track to open first ""to be bebe"" stores this spring.

The company opened six bebe stores and five BEBE SPORT stores, and expanded one bebe store.

The company continues to believe that new store growth as well as the expansion of strong performing existing stores with high sales per square foot will be part of the growth story as the company goes forward.

The company believes that this growth will consist of expansion in the ""to be bebe"" business. In fiscal 2008, the company remains on track to grow square footage 14%. This growth will include 19 new bebe stores, 9 new BEBE SPORT stores, 7 ""to be bebe"" stores, and expansion of 7 existing bebe stores. Six, for the quarter the company spend 4.3% of sales on total advertising versus 4.7 in the prior year.

This reduction is the result of decision to not anniversar TV in the prior year, offset by BEBE SPORT national advertising including the cast of Eva Longoria. In the November-December period, the company mailed 2 bebe catalogs and 1 BEBE SPORT catalog with a total circulation of 2.1 million versus last year''s 1.4 million, a 50% increase.

While the direct mail marginally exceeded last year’s direct mail sales, the company did not get the lift anticipated from the increased circulation.

It is attributable to a lower average dollar sale across all customer segments, and less than expected conversion from expanded circulation. While sales were disappointing, the company changed the format of November book, and managed other cost components of production which enabled to mail 50% more catalogs at a lower cost than last year.

- The company leveraged increasing BEBE SPORT client base to improve the profitability of the BEBE SPORT catalog, which was mailed during the first week of December.
- Bebe.com sales increased 23% over last year, driven by a 21% increase in traffic and improved conversion. The company implemented several new launches during the first half of the year including shipping to Canada, several user experience enhancements such as multiple product views, and simplified navigation in addition to exclusive product launches of lingerie and swim. bebe.com continues to prove to be an important channel to test new products, engage with clients, and enhance the communication of brand, merchandise and marketing strategies.

Year-to-Date Financial Highlights

- Net sales were $364 million compared to $354 million in the prior year, an increase of 3%.
- Comparable store sales decreased 8.5% compared to an increase of 8.6% in the prior year.
- Gross margin decreased to 46.8% compared to 49.1% in the prior year. This decrease is primarily the result of higher markdowns and unfavorable occupancy leverage offset by lower raw material reserves.

- SG&A expenses increased to 32.6% of sales compared to 30.9% of sales in the prior year, primarily as a result of higher compensation including stock-based.
- Net earnings were $39 million compared to $45 million in the prior year.
- Earnings per share are 42 cents per share on 92 million weighted average shares outstanding compared to 47 cents per share on 95 million weighted average sales outstanding for the prior year.

- Capital expenditures were approximately $18 million and depreciation expense was approximately $10.8 million.
- International business continues to exceed expectations. Comparable store sales increased 43% and total international sales grew 163%.
- The company opened three new stores bringing total store count to 17 excluding shop and shop. These three new stores are located in Indonesia, Israel and Malaysia. The company signed new agreements for the territories in Mexico and Egypt, and are close to finalizing plans for Eastern Europe.
- The company has freestanding stores in the UAE, Israel, Thailand, Singapore, Malaysia and Indonesia. The company continues to make the growth of international business priority for the company.

Third Quarter 2008 Outlook

- Based on the current business trends and the larger macroeconomic conditions, the company believes that a return to a regular price business needs to be number one priority. To accomplish this, the company will reduce the depth of buy of non-proven fashion items, and invest in items that it believes will drive sales based on previous sell-throughs with limited markdown risk. Inventory management and creating urgency with client is number one focus.
Based on the non-historical nature of the weekly sales builds in the business, and the current negative macroeconomic conditions, the company is making a conservative yet realistic outlook on the upcoming quarter. The company believes comparable store sales will be in the negative mid-single digit range versus flat comparable store sales in the prior year.

- The company is currently not anticipating a benefit from the shift of Easter, which falls on week four versus week one of April last year. The company is not anticipating a benefit in March this year when compared to the prior year, because both years include the build historically associated with the Easter holiday. The company anticipates this historical build will be offset by Easter Sunday taking place in March versus April in the prior year.
- This year third quarter will have 13 weeks versus 14 weeks in the prior year, due to the calendar shift.
- The company will be reducing depth in fashion buys in core bebe brand to help offset the current economic uncertainty, and will continue to support proven key items to drive the business.

- In bebe retail, the apparel division will continue to invest in dresses, denims and sweaters, including sweater dresses. The company believes that it will struggle with anniversarying successful sportswear and suiting business as this business continues to perform below expectations.
- The company has re-organized bebe merchandising department to be focused on lifestyle. The company has separated wear to work and going out business from underdeveloped causal business including denim and logo. The company believes this move will help in merchandising merchandise by lifestyle.
- The company has launched the bebe design lab which is under the direction of Manny Mashouf, Chairman. This design initiative will replace COLLECTION bebe runway effort which the company discontinued last spring. To clarify, Manny’s role has not changed as was incorrectly reported in an analyst report. Currently he will be focusing on the design lab rather than the COLLECTION bebe effort, and he continues to be involved in the business on a daily basis.