BEBE STORES INC - 10-K Annual Report

400 Valley Drive
Brisbane, California 94005
(Address of principal executive offices)
Telephone: (415) 715-3900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $65,485,571 as of August 30, 2002, based upon the closing sale price per share of $13.50 of the registrant's Common Stock as reported on the Nasdaq National Market on such date. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes. As of August 30, 2002, 25,621,981 shares of Common Stock, $0.001 per share par value, of the registrant were outstanding.

Part III incorporates information by reference from the definitive Proxy Statement for the 2002 Annual Meeting of Shareholders, to be filed with the Commission no later than 120 days after the end of the registrant's fiscal year covered by this Form 10-K.

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. This Form 10-K includes forward-looking statements that could differ from actual future results. 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. These statements involve known and unknown risks, uncertainties and other factors, including the factors described below, that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. 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-K, 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, miscalculation of the demand for our products, effective management of our growth, decline in comparable store sales performance, ongoing competitive pressures in the apparel industry, 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-K.

We design, develop and produce a distinctive line of contemporary women's apparel and accessories. We market our products under the bebe, bebe moda and bbsp (future bebe sport) brand names through our 165 specialty retail stores located in 30 states, the District of Columbia, Canada, 11 licensed stores in Greece, Israel, United Arab Emirates and Singapore, and an on-line store at www.bebe.com. While we attract a broad audience, our target customers are 18-to 35-year-old women who seek current fashion trends interpreted to suit their lifestyle needs. The "bebe look," with an unmistakable hint of sensuality, appeals to a hip, sophisticated, body-conscious woman who takes pride in her appearance. The bebe customer is a discriminating consumer who demands value in the form of quality at a competitive price. Our broad product offering includes tops, pants, skirts, dresses, suits, logo, casual sportswear, activewear, outerwear, handbags and other accessories. We design and develop the majority of our merchandise in-house. The merchandise is then manufactured to our specifications. The remainder of our merchandise is selected directly from third party manufacturers' lines.

Founded by Manny Mashouf, our current Chairman of the Board and Chief Executive Officer, we opened our first store in San Francisco, California in 1976. In the last five years, we significantly strengthened our employee base and have implemented several strategic initiatives that have contributed to our overall growth. These strategic initiatives address all aspects of our operations and in particular the merchandising, planning, production, design and distribution functions. Our merchandising initiatives focus primarily on expanding our product line to include lifestyle dressing at a competitive price that easily adapts from day to evening. In addition, to offering day to eveningwear, we offer a casual assortment of denim, logo and bebe sport. The logo product line highlights the bebe logo on a variety of casual silhouettes, enhancing brand awareness and providing younger, "aspirational" customers an entry to the bebe product line at lower price points. The bebe sport product line is active inspired sportswear featuring cotton knits, fleece, casual active bottoms, sweaters, outerwear and accessories that are easy, sexy and modern. The strategic initiatives that relate to the planning, production, design and distribution functions focus primarily on implementing more sophisticated processes. Also, these initiatives involve a more disciplined approach to our business operations.

We reinforce our brand with a distinctive lifestyle image advertising campaign, using prominent fashion photographers. We believe that our emphasis on non-product specific lifestyle advertising promotes brand awareness and attracts customers who are intrigued by the playfully sensual and evocative imagery. We communicate the images to consumers through a variety of advertising vehicles including fashion magazines, bus shelters, in-store displays and customer mailings. We further enhance the bebe brand image by designing our on-line and retail stores to create an upscale, inviting boutique environment.

While the market for women's apparel is extremely large, we believe that our distinctive, contemporary point of view that offers quality merchandise to an underserved market segment, presents us with opportunities for future growth. Our objective is to satisfy the fashion needs of the modern, sexy and sophisticated woman. The principal elements of our operating strategy to achieve this objective are as follows:

1. Provide distinctive fashion throughout a broad product line. Fashion from throughout the world inspires our designers and merchandisers. They interpret contemporary ideas for silhouettes, fabrications and colors into products and styles to meet the everyday lifestyle needs of the bebe customer. Our in-house design team provides us with fast access to the latest fashions. While many of our styles and products are represented season after season with variations in color, fabric or trim, our merchandisers are committed to bringing newness into the merchandise mix in response to emerging trends. Our merchandisers carefully plan our product lines to represent a broad selection of sleek, fashionable goods, including day wear, evening wear and weekend wear, with a continued focus on day-into-evening styles. Our product line is further supported by a broad selection of accessories that help our customers create a distinctive ensemble, while logo-embellished items provide an entry point for younger, aspirational customers.

2. Vertically integrate design, production, merchandising and retail functions. We believe that our vertical integration of processes from design to market coupled with our financial discipline enable us to produce distinctive quality merchandise of exceptional value. We maintain flexibility in our sourcing by subcontracting production of our own designs, developing products in conjunction with third-party apparel manufacturers, or selecting merchandise directly from manufacturers' lines. This approach also enables us to respond quickly to changing fashion trends, while reducing our risk of excess inventory.

3. Manage merchandise mix. We believe that a disciplined approach to merchandising and a proactive inventory management program is critical to our success. By actively monitoring sell-through rates and managing the mix of categories and products in our stores, we believe that we are able to respond to emerging trends in a timely manner, minimize our dependence on any particular category, style or fabrication, and preserve a balanced, coordinated presentation of merchandise within each store.

4. Control distribution of merchandise. We believe that distributing our core apparel line through bebe stores, our on-line web-site, licensed stores and selected retail stores greatly enhances our brand image. This controlled distribution strategy enables us to display the full assortment of our products, control the pricing, visual presentation and flow of goods, test new products and reinforce the brand's identity in the eyes of our customers.

5. Enhance brand image. Through an edgy, high-impact, visual advertising campaign using print, outdoor, in-store, electronic, and direct mail communication vehicles, we attract customers who are intrigued by the playfully sensual and evocative imagery of the bebe lifestyle. We also offer a line of merchandise branded with the distinctive bebe logo to increase brand awareness. Within our stores and through our on-line store, we seek to create an upscale, inviting environment that further enhances the

bebe brand and builds customer loyalty and demand for bebe merchandise. Furthermore, we train our sales associates to be responsive and knowledgeable and encourage them to reflect the bebe image.

6. Enhance customer relations management. We believe a private label credit card with GE Capital will enhance customer loyalty, improve customer communications and enable us to respond to the needs of the customer.

We plan to grow our operations in a controlled manner, primarily through the opening of new stores. We opened 20 stores in fiscal 2002, we currently plan to open approximately 25 to 30 stores in fiscal 2003, the majority of which will be in existing markets. We continually review our store base for under-performing stores.

We also plan to grow by introducing new product categories, such as a fragrance line. These can either be internally developed or developed in conjunction with licensees. From time to time, we will consider licensing the bebe name for other select product categories on a limited basis. We currently license rights for footwear, eyewear and swimwear. Under the terms of these agreements, the licensees will manufacture and distribute products branded with the bebe logo to be sold at bebe stores and selected retailers.

To support the introduction of new product categories in recent years and to handle higher sales volumes, we have developed a store prototype larger than the average of roughly 3,500 square feet for our existing stores. Our new store prototype is approximately 3,000 to 5,000 square feet. However, in selected markets, we have and may in the future open larger flagship stores. As opportunities arise, we also may expand certain existing stores.

We have tested a new concept store format, bbsp, soon to be renamed bebe sport. The bebe sport product line is active inspired sportswear featuring cotton knits, fleece, casual active bottoms, sweaters, outerwear and accessories that are easy, sexy and modern. The average bebe sport store will be 2,500 square feet, which will allow us to display the full bebe sport assortment. As of June 30, 2002, we operate three bbsp concept stores. We will convert the bbsp concept stores to bebe sport stores and open eight to ten new bebe sport stores in fiscal 2003.

Additionally, we are upgrading our on-line store to simplify and enhance our customers' on-line shopping experience and may continue to invest in such upgrades to further capitalize on the encouraging performance of our on-line sales.

In addition to our domestic expansion, we are expanding internationally primarily through licensing agreements. Our licensees currently operate stores in Greece, Israel, United Arab Emirates and Singapore. Under the terms of these agreements, licensees will open bebe stores that will be stocked with inventory purchased from us.

Our merchandising strategy is to provide current, timely fashions in a broad selection of categories to suit the lifestyle needs of our customers. We market all of our merchandise under the bebe, bebe moda and bbsp (future bebe sport) brand names. We design and develop most of our merchandise in-house and contract to have the merchandise manufactured to our specifications. In some cases, we select merchandise directly from third-party apparel manufacturers' lines and market it under our "bebe," "bebe moda" or "bbsp (future bebe sport)" labels. We do not have long-term contracts with any third party apparel manufacturers and purchase all of the merchandise from such manufacturers by purchase order.

Product Categories. After building a strong suiting business in the early 1990s, we diversified our product line in fiscal 1996. We significantly increased the breadth of our product offerings by expanding categories such as knits, tops, related separates, leather, dresses, lingerie, shoes, swimwear, sunglasses, logo and accessories. While each category's contribution as a percentage of total net sales varies seasonally, each of the product classifications is represented throughout the year.

We regularly evaluate new categories that may be appropriate for introduction. For example, in fall 1999, we introduced a denim product line.

Product Development. We take a disciplined approach to the product development process. This allows our merchants to gain as much information as possible concerning current fashion trends before making fabric or product purchase commitments. We control the process by focusing on key color selection, fabric order, pattern development and production order deadlines. We establish the deadlines to ensure an adequate flow of inventory into the stores. While product development is seasonal, we make commitments monthly based on current sales and fashion trends. This enhances our ability to react promptly to customer demand. Merchandising teams and designers work together to continuously develop new styles to be presented at monthly product review and selection meetings. These new styles incorporate variations on existing styles in an effort to capitalize further on the more popular silhouettes or entirely new styles and fabrications that respond to emerging trends or customer preferences.

In addition, a detailed merchandising plan supports the product development process. This merchandising plan includes sales, inventory and profitability targets for each product classification. The plan is reconciled with our store sales plan, a compilation of individual store sales projections. We update the merchandising plan on a semi-monthly basis to reflect current sales and inventory trends. The plan is then distributed throughout the merchandising department. We use the updated merchandising plan to adjust production orders as needed to meet inventory and sales targets. If we miscalculate consumer demand for our products, we may be faced with significant excess inventory and fabric for some products and missed opportunities for others. Weak sales and resulting markdowns could cause our profitability to be impaired.

In recent years, we have initiated an extensive image advertising program, which addresses the lifestyles and aspirations of our target customers. Through an edgy, high-impact, visual advertising campaign, we attract customers who are intrigued by the playfully sensual and evocative imagery. We believe that our emphasis on non-product specific lifestyle advertising promotes brand awareness and supports numerous product line expansion opportunities. An outside advertising agency works with our internal Marketing Department to create a lifestyle advertising campaign. This campaign, which emphasizes a forward-looking view of fashion, is communicated to consumers through a variety of means including fashion magazines, bus shelters, in-store displays and customer mailings. In addition, our Public Relations Department communicates directly with fashion editors and supplies them with a continuous flow of product information. On occasion, we have co-sponsored promotional events with fashion magazines, such as Elle, Glamour, Marie Claire, Vogue, InStyle and Vanity Fair.

Our business varies with general seasonal trends that are characteristic of the retail and apparel industries. As a result, our typical store generates a disproportionate amount of our annual net sales in the first half of our fiscal year (which includes the fall and holiday selling seasons) compared to the second half of our fiscal year. If for any reason our sales were below seasonal norms during the first half 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.

Store Locations and Environment. As of June 30, 2002, we operated 165 stores in 30 states, the District of Columbia, and Canada. Our stores average approximately 3,600 square feet and are primarily located in regional shopping malls and freestanding street locations. While we may update our stores' environment from time to time, all of our stores are designed to create a clean, upscale boutique environment, featuring contemporary finishings and sophisticated details. Glass exteriors allow passersby to see easily into the store. The open floor design allows customers to readily view the majority of the merchandise on display while store fixtures allow for the efficient display of garments, outfits and accessories.

We provide the stores with specific merchandise display directions on a weekly or bi-weekly basis from the corporate office based on currently available merchandise receipts. Our in-store product presentation utilizes a variety of different fixtures to highlight the product line's breadth and versatility. Complete outfits are displayed throughout the store using garments from a variety of product categories. By emphasizing outfits in this manner, we allow the customer to see how different pieces can be combined to create multiple ensembles.

Expansion Opportunities. We believe that there is a significant opportunity to expand the number of stores in many markets within geographic areas in which bebe stores are currently located. We, together with our real estate consultant, also have identified specific mall and street locations within many markets to be considered for new bebe store locations. In selecting a specific site, we look for high traffic locations primarily in regional shopping centers and in freestanding street locations. We evaluate proposed sites based on the traffic pattern, co-tenancies, average sales per square foot achieved by neighboring stores, lease economics, demographic characteristics and other factors considered important within the specific location.

We opened 20 new stores in fiscal 2002 and plan to open approximately 25 to 30 stores in fiscal 2003, the majority of which will be in existing markets. Our new store prototype is approximately 3,000 to 5,000 square feet, although in selected markets we may open larger stores that will be designed to further enhance the bebe image.

During fiscal 2002, the average new store size was approximately 4,200 square feet. New store construction costs (before tenant allowances) averaged roughly $578,000. The average gross inventory investment is approximately $105,000. Our stores typically have achieved profitability at the store operating level within the first full quarter of operation; however, we cannot assure that our stores will do so in the future. Actual store growth and future store profitability and rates of return will depend on a number of factors that include, but are not limited to, individual store economics and suitability of available sites. Because of their higher cost structure, larger stores are not expected to achieve operating margins comparable to our other stores.

In addition to opening new stores, we expanded or relocated three existing stores to larger spaces during fiscal 2002. We believe that as awareness of bebe's brand name increases, our product offering expands and our stores mature, additional expansions may be appropriate.

Our ability to expand will depend on a number of factors, including the availability of desirable locations, the negotiation of acceptable leases and our ability to manage expansion and to source adequate inventory. We cannot assure you that we will be able to achieve our planned expansion on a timely and profitable basis. Furthermore, we cannot assure you that store openings in existing markets will not result in reduced net sales volumes and profitability of existing stores in those markets.

Outlet Stores. As of June 30, 2002, 20 of our 165 stores were located in outlet malls throughout the United States. In order to promote a better merchandise presentation within the full price specialty stores, the products offered in outlet stores are primarily slower moving inventory. Additionally, we round out the inventory of our outlet stores with casual logo styles sold at full price and, to a lesser extent, garments specifically produced for the outlet stores often using excess fabric inventories.

The average new outlet store size was approximately 3,800 square feet. New store construction costs (before tenant allowances) averaged approximately $439,000, and the average inventory investment was approximately $151,000. Of the 20 stores opened in fiscal 2002, two were outlet stores. Of the 25 to 30 stores planned to be opened in fiscal 2003, eight to ten are expected to be bebe sport stores and none are expected to be outlet stores.

bbsp (future bebe sport) Concept Stores. We have tested a new concept store format, bbsp, soon to be renamed bebe sport. The bebe sport product line is active inspired sportswear featuring cotton knits, fleece, casual active bottoms, sweaters, outerwear and accessories that are easy, sexy and modern. The average bebe sport store will be 2,500 square feet, which will allow us to display the full bebe sport assortment. As of June 30, 2002, we operate three bbsp concept stores. We expect to convert the bbsp concept stores to bebe sport stores and open eight to ten new bebe sport stores in fiscal 2003.

Store Closures. We monitor the financial performance of our stores and, from time to time, have closed in the past and will close in the future, stores that we do not consider to be viable. Many of the store leases contain early termination options that allow us to close the stores in certain specified years of the leases if certain minimum sales levels are not achieved. We closed our one remaining store in the United Kingdom during fiscal 2002.

Store operations are organized into four regions and nineteen districts. Each region is managed by a regional manager, and each district is managed by a district manager. Each regional manager is typically responsible for four to six districts, and each district manager is typically responsible for seven to ten stores. Each store is typically staffed with two to four managers in addition to sales associates and store support employees.

We seek to instill enthusiasm and dedication in our store management personnel and sales associates through incentive programs and regular communication with the stores. Sales associates, excluding associates in outlet stores, receive commissions on sales with a guaranteed minimum hourly compensation. Store managers receive base compensation plus incentive compensation based on sales and inventory control. Regional and district managers receive base compensation plus incentive compensation based on meeting profitability benchmarks.

We have well-established store operating policies and procedures and use an in-store training regimen for all new store employees. The Visual Merchandising staff provides the stores with merchandise presentation instructions, which include photographs of fixture presentations on a regular basis. In addition, we provide product descriptions to sales associates to enable them to gain familiarity with our product offerings. We offer our sales associates a discount on bebe merchandise to encourage them to wear our apparel and reflect the bebe image while on the selling floor.

We also maintain a Loss Prevention Department to develop and implement programs for controlling losses. These programs include installing electronic surveillance systems in all stores, monitoring returns, voids, employee sales and deposits, and educating store personnel on loss prevention.

All of our merchandise is marketed under the bebe, bebe moda and bbsp (future bebe sport) brand names. Much of this merchandise is designed and developed in-house and manufactured to our specifications. The balance is developed primarily in conjunction with third-party apparel manufacturers. In some cases, we select merchandise directly from these manufacturers' lines. When we contract for merchandise production, we use facilities in the United States and foreign manufacturers. These facilities produce garments based on designs, patterns and detailed specifications produced by us.

We use computer aided design systems to develop patterns and production markers as part of our product development process. We fit test sample garments before production to make sure patterns are accurate. We maintain a formalized quality control program. Additionally, a percentage of merchandise receipts are inspected and fit tested a second time prior to being shipped to our stores. Garments that do not pass inspection are returned to the manufacturer for rework or accepted at reduced prices for sale in our outlet stores.

All of the merchandise for our domestic stores and licensed stores are received, inspected, processed, warehoused and distributed through our distribution center. Details about each receipt are supplied to merchandise planners who determine how the product should be distributed among the stores based on current inventory levels, sales trends and specific product characteristics. Advance shipping notices are electronically communicated to the stores and any goods not shipped are stored for replenishment purposes. Merchandise typically is shipped to the stores on a daily basis using common carriers.

We do not have any long-term contracts with any manufacturer or supplier and place all of our orders by purchase order. If we fail to obtain sufficient quantities of manufacturing capacity or raw materials, it would have a harmful effect on our business, financial condition and results of operations. We have received in the past, and may receive in the future, shipments of products from manufacturers that fail to conform to our quality control standards. In such event, unless we are able to obtain replacement products in a timely manner, we may lose sales which could harm our operating results.

The retail and apparel industries are highly competitive and are characterized by low barriers to entry. We expect competition in our markets to increase. The primary competitive factors in our markets are:

We compete with traditional department stores, specialty store retailers, business to consumer websites, off-price retailers and direct marketers for, among other things, raw materials, market share, retail space, finished goods, sourcing and personnel. Because many of these competitors are larger and have substantially greater financial, distribution and marketing resources than we do, we may lack the

resources to adequately compete with them. If we fail to compete in any way, it may have a harmful effect on our business, financial condition and results of operations.

Trademarks and Service Marks. We believe that our trademarks and other proprietary rights are important to our success. We have registered "bebe" and "bebe moda" in the United States and certain foreign jurisdictions and have applied for "bbsp" and "bebe sport" in the United States and certain foreign jurisdictions. Even though we take actions to establish and protect our trademarks and other proprietary rights, we cannot assure that others will not imitate our products or infringe on our intellectual property rights. In addition, we cannot assure that others will not resist or seek to block the sale of our products as infringements of their trademark and proprietary rights. In certain jurisdictions, other entities may have rights to names that contain the word "bebe," which could limit our ability to expand in such jurisdictions.

We are seeking to register our trademarks in targeted international markets that we believe represent large potential markets for our products. In some of these markets, local companies currently have registered competing marks, and/or regulatory obstacles exist that may prevent us from obtaining a trademark for the bebe name or related names. In such countries, we may be unable to use the bebe name unless we purchase the right or obtain a license to use the bebe name. In other countries, if we do not show use of our trademark rights, our trademark rights may lapse over time. We may not be able to register trademarks in these international markets, purchase the right, obtain a license to use the bebe name or show use of our trademarks on commercially reasonable terms. Furthermore in some jurisdictions, despite successful registration of our trademarks, third parties may allege infringement and bring actions against us. If we fail to obtain or perfect trademark, ownership or license rights, it would limit our ability to expand into certain international markets or enter such markets with the bebe name, and to capitalize on the value of our brand.

Licensing. We strive to provide our customers with high quality products and to maintain a consistent image in all of our advertising and marketing programs. We regularly evaluate opportunities to expand our product offering. Accordingly, we may from time to time selectively enter into licensing or joint venture agreements with third parties. In entering into such licensing and joint venture agreements, we seek to preserve the integrity of our brand by closely monitoring the design and quality of the products sold by licensees or joint venture partners and by controlling the manner in which our products are advertised, marketed and distributed. In addition to distributing such new products through bebe stores, we may elect to distribute these licensed products with the bebe logo through other channels. We currently license rights that allow licensees to manufacture and distribute footwear, eyewear and swimwear branded with the bebe logo to be sold at bebe stores and other retailers.

We have signed licensing agreements to license the bebe brand name internationally to licensees who will open bebe stores. We have signed licensing agreements with companies who currently operate bebe retail stores in Greece, Israel, United Arab Emirates and Singapore. Under these agreements, we provide the use of our name, store design and advertising images, and the licensees purchase inventory from us.

We are committed to utilizing technology to enhance our competitive position. Our information systems provide integration of the store, merchandising, distribution and financial systems. The core business systems, which consist of both purchased and internally developed software, are accessed over a Company-wide network providing corporate employees with access to all key business applications. Daily sales and cash deposit information are electronically collected from the stores' point-of-sale terminals nightly. During this process, we also obtain information concerning inventory receipts and

transfers and send to the stores pricing, markdown and shipment notification data. In addition, we collect customer names and addresses to update our customer database. The merchandising staff evaluates the sales and inventory information collected from the stores to make key merchandise planning decisions, including replenishment and markdowns. These decisions enhance our ability to optimize sales while limiting markdowns and minimizing inventory risk by properly marking down slow selling styles, reordering existing styles and effectively distributing new inventory receipts to the stores.

In the past, our investments in information systems have focused on our core store, merchandise and financial accounting systems. Currently, our focus is on integrating our production, planning and point of sales system. We made investments to improve existing management information systems and implemented new systems during fiscal 2002 and plan to make additional investments in fiscal 2003. We cannot assure you that we will be successful with the implementation of these new systems or plans. Failure to implement and integrate such systems or plans could have a harmful effect on our business, financial condition and results of operations.

As of August 31, 2002, we had approximately 2,400 employees, of whom approximately 300 were employed at the corporate offices and distribution center. The remaining 2,100 employees were employed in store operations. Approximately 920 were full-time employees and 1,480 were employed on a part-time basis. None of our employees is represented by a labor union, and we believe our relationship with our employees is good.

The following table sets forth certain information with respect to the executive officers, directors and other officers and key personnel as of September 1, 2002:

Name	Age	Position
Manny Mashouf(1)	64	Chairman of the Board and Chief Executive Officer
Barbara Bass(2)	51	Director
Corrado Federico(2)	61	Director
Neda Mashouf(1)	39	Vice Chairman of the Board and General Merchandising Manager of Design
Philip Schlein(2)	68	Director
John Kyees(1)	55	Chief Financial Officer and Chief Administrative Officer
Kathy Lee(1)	52	General Merchandising Manager
Patrick McGahan(1)	50	Vice President of Stores
Tim Millen(1)	42	Vice President of Information Services and Technology
Ferrell Ostrow(1)	43	Vice President of Loss Prevention
Michelle Perna(1)	49	Vice President of Human Resources
Tom Curtis	39	General Merchandising Manager of bebe sport

Manny Mashouf founded bebe stores, inc. and has served as Chairman of the Board and Chief Executive Officer since our incorporation in 1976. Mr. Mashouf is the husband of Neda Mashouf, Vice Chairman of the Board and General Merchandising Manager of Design.

Barbara Bass has served as a Director since February 1997. Since 1993, Ms. Bass has served as the President of the Gerson Bakar Foundation. From 1989 to 1992, Ms. Bass served as President and Chief Executive Officer of the Emporium Weinstock Division of Carter Hawley Hale Stores, Inc., a department store chain. Ms. Bass also serves on the Board of Directors of Starbucks Corporation and DFS Group Limited.

Corrado Federico has served as a Director since November 1996. Mr. Federico is President of Solaris Properties and has served as the President of Corado, Inc., a land development firm, since 1991. From 1986 to 1991, Mr. Federico held the position of President and Chief Executive Officer of Esprit de Corp, Inc., a wholesaler and retailer of junior and children's apparel, footwear and accessories ("Esprit"). Mr. Federico also serves on the Board of Directors of Hot Topic, Inc.

Neda Mashouf has served as Vice Chairman of the Board since November 2001 and has been employed by us since 1984, most recently as General Merchandising Manager of Design. Ms. Mashouf is the wife of Manny Mashouf, Chairman of the Board and Chief Executive Officer.

Philip Schlein has served as a Director since December 1996. Since April 1985, Mr. Schlein has been a general partner of U.S. Venture Partners, a venture capital firm specializing in retail and consumer products companies. From January 1974 to January 1985, Mr. Schlein served as President and Chief Executive Officer of Macy's California, a division of R. H. Macy & Co, Inc., a department store chain. Mr. Schlein also serves on the Board of Directors of Quick Response Services and several private companies.

John Kyees has served as Chief Financial Officer and Chief Administrative Officer since March 2002. Prior to joining bebe stores, inc., Mr. Kyees held various executive positions at both specialty and national retailers including Skinmarket, Inc., Chas. A Stevens, a division of Hartmax; J.L. Hudsons Co and HC Holdings. Mr. Kyees was also the Chief Financial Officer of Express, a division of the Limited, Inc. for over twelve years.

Kathy Lee has served as General Merchandising Manager since October 2000. From 1996 to 2000, Ms. Lee served as a Senior Merchandising Manager. Prior to joining bebe stores, inc., Ms. Lee was at Esprit de Corp, Inc. ("Esprit"), for 10 years where she held various positions. Prior to Esprit, Ms. Lee was a merchandise buyer for I. Magnin & Co. for 10 years.

Patrick McGahan has served as Vice President of Stores since February 2002. From 1991 to 2001, Mr. McGahan directed all sales and business operations for up to 550 stores nationwide for Structure, a division of the Limited, Inc. Prior to that, Mr. McGahan was the Regional Sales Manager with Express, a division of the Limited, Inc. for 10 years where he managed operations at up to 125 specialty retail stores in the western United States.

Tim Millen has served as Vice President of Information Services and Technology since November 1997. From July 1996 to November 1997, Mr. Millen served as Vice President of Information Systems for AZ3 Inc. (d.b.a. BCBG), a women's apparel retail and wholesale company. From August 1994 to July 1996, Mr. Millen served as Vice President of Management Information Systems for Francine Browner Inc., an apparel wholesale company. From 1991 to 1994, Mr. Millen was an independent information technology consultant, focusing on the retail and wholesale apparel market.

Ferrell Ostrow has served as Vice President of Loss Prevention since March 1999. From February 1998 to February 1999, Mr. Ostrow served as the Director of Loss Prevention for The Wet Seal Inc. From February 1988 to February 1998, Mr. Ostrow served as Director of Loss Prevention with Pacific Sunwear of California Inc.

Michelle Perna has served as Vice President of Human Resources since November 2000. From May 1997 to October 2000, Ms. Perna was President of HR1, an HR consulting company. From November 1989 to May 1997, Ms. Perna was Vice President of Human Resources at Merv Griffin's Resorts Casino.

Tom Curtis has served as General Merchandising Manager of bebe sport since June 2002. From 1998 to 2002, Mr. Curtis served as a Senior Merchandising Manager. Prior to joining bebe stores, inc., Mr. Curtis was at The Walt Disney Co., Rampage Clothing Co. and R.H. Macy & Co., Inc. where he held various positions.

As of June 30, 2002, our 165 stores, all of which are leased, encompassed approximately 601,000 total square feet. The typical store lease is for a 10-year term and requires us to pay a base rent and a percentage rent if certain minimum sales levels are achieved. Many of the leases provide a lease termination option in certain specified years of the lease if certain minimum sales levels are not achieved. In addition, leases for locations typically require us to pay property taxes, utilities and repairs and maintenance. Also, leases for mall locations may include common area maintenance fees.

Our main corporate headquarters are currently located in a facility in Brisbane, California. The facility located at 400 Valley Drive is approximately 35,000 square feet and houses administrative offices, store support services, and our on-line store. The lease for 400 Valley Drive expires in April 2014. During fiscal 2002, we consolidated the administrative offices located at 380 Valley Drive into the 400 Valley Drive facility. We also lease a 144,000 square foot distribution center in Benicia, California, a technology support center in a leased facility in Sacramento, California and a design studio in a leased facility in Los Angeles, California.

From time to time, we may be involved in litigation relating to claims arising out of its operations. As of the date of this filing, we are not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or results of operations.

The common stock trades on the Nasdaq National Market under the symbol "BEBE". The following table sets forth the high and low sales of our common stock for the two years ended June 30, 2002, as reported by Nasdaq:

	High		Low
Fiscal 2001
First Quarter	$	20.25	$	7.25
Second Quarter		25.00		8.00
Third Quarter		31.00		19.31
Fourth Quarter		33.10		14.73
Fiscal 2002
First Quarter	$	35.50	$	14.50
Second Quarter		21.91		12.87
Third Quarter		26.20		18.27
Fourth Quarter		24.78		17.26

As of August 30, 2002, the number of holders of record of our common stock was 55 and the number of beneficial holders of our common stock was approximately 2,700.

We have never declared or paid any dividends on our common stock and do not intend to pay any dividends on our common stock in the foreseeable future. In addition, our current line of credit arrangements prohibit the payment of cash dividends on our capital stock.

Information with respect to equity plan compensation is incorporated by reference from our definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of our fiscal year.

The following selected financial data is qualified by reference to, and should be read in conjunction with, the Financial Statements and Notes thereto and the other financial information

appearing elsewhere in this filing. These historical results are not necessarily indicative of results to be expected in the future.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this Form 10-K. 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 could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risks That May Affect Results" in this section. Our fiscal year ends on June 30 of each calendar year.

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. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 to the financial statements.

We have identified certain critical accounting policies, which are described below.

Inventories. Our inventories are stated at the lower of FIFO (first-in, first-out) cost or market. In order to assess that inventory is recorded properly at the lower of cost or market, we make certain assumptions based on historical experience and current information. These assumptions can have a significant impact on current and future operating results and financial position.

Long-lived assets. We review long-lived assets for impairment whenever events or changes in circumstances, such as store closures, indicate that the carrying value of an asset may not be recoverable. At the time a decision is made to close a store, we record an impairment charge, if appropriate, or accelerate depreciation over the revised useful life. We believe at this time that the long-lived assets' carrying values and useful lives continue to be appropriate.

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. We will adopt SFAS No. 142 at the beginning of fiscal 2003 and we do not expect the adoption to have a significant impact on our financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 will become effective for us at the beginning of fiscal 2003. SFAS

No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principals Board No. 30. We do not expect that the adoption of SFAS No. 144 will have a significant impact on our financial statements.

In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. We will adopt the provisions of SFAS 146 for any restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the company's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may effect the timing of recognizing any future restructuring costs as well as the amounts recognized.

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

Net Sales. Net sales increased to $316.4 million during the year ended June 30, 2002 from $290.8 million in fiscal 2001, an increase of $25.6 million, or 8.8%. Of this increase, new, expanded or remodeled stores not included in the comparable store sales base added $41.0 million to sales, while a decrease in comparable store sales of 5.7% reduced sales by $15.4 million. Comparable store sales for the first half of fiscal 2002 decreased 3.7%. Comparable store sales for the second half of fiscal 2002 decreased 8.1%. Comparable store sales were positive from July 1, 2001 through September 10, 2001. Following the September 11^th terrorist attack, the decrease in comparable store sales was attributed to the following: marketplace conditions, missed opportunities in key product categories, a product assortment heavily skewed toward the casual lifestyle, and the move of the production operation from Brisbane, California to Los Angeles, California.

Gross Profit. Gross profit, which includes the cost of merchandise, buying and occupancy, increased to $142.4 million for the year ended June 30, 2002 from $139.6 million in fiscal 2001, an increase of $2.8 million, or 2.0%. As a percentage of net sales, gross profit decreased to 45.0% for the year from 48.0% during fiscal 2001. The decrease in gross profit as a percentage of net sales resulted from negative occupancy expense leverage and reduced merchandise margins. Negative occupancy expense leverage was attributed to the lower sales productivity. Reduced merchandise margins were due to increased production costs related to the move of the production facility to Los Angeles, California, production delays and charges associated with the write-off of fabric of approximately $1.5 million. Merchandise margins were also reduced by a weaker product sell-through, primarily in the first six months of the fiscal year, resulting in an increased level of markdowns and a change in the mix of sales between full price and outlet stores.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, which primarily consist of non-occupancy store costs, corporate overhead and advertising costs, increased to $101.8 million during the year ended June 30, 2002 from $97.8 million in fiscal 2001, an increase of $4.0 million, or 4.1%. As a percentage of net sales, these expenses decreased to 32.2% during the year ended June 30, 2002 from 33.6% in fiscal 2001. This decrease as a percentage of net sales was primarily due to lower compensation resulting from a change in our incentive plan, and a favorable settlement on a lawsuit. In fiscal 2001, we recorded $890,000 of expenses related to the tentative resolution of a lawsuit. The decrease in expenses was offset by negative leverage associated with the decrease in comparable store sales and $1.2 million of charges related to abandoned information technology projects.

Interest and Other Expense (Income), Net. We generated $2.1 million of interest and other income (net of other expenses) during the year ended June 30, 2002 as compared to $3.4 million in fiscal 2001. Average cash balances continued to increase, however lower interest rates during fiscal 2002 resulted in a reduction in interest income.

Provision for Income Taxes. The effective tax rate for the year ended June 30, 2002 was 37.9% as compared to 38.5% in fiscal 2001. The lower effective tax rate for fiscal 2002 was primarily attributable to the benefits of converting the United Kingdom operations into a disregarded entity for U.S. federal income tax purposes.

Net Sales. Net sales increased to $290.8 million during the year ended June 30, 2001 from $241.8 million in fiscal 2000, an increase of $49.0 million, or 20.3%. Of this increase, new, expanded or remodeled stores not included in the comparable store sales base added $54.0 million to sales, while a decrease in comparable store sales of 2.3% reduced sales by $5.0 million. Comparable store sales for the first half of fiscal 2001 decreased 5.9%. Comparable store sales for the second half of fiscal 2001 increased 2.3%. The decrease in comparable store sales in the first half of fiscal 2001 was attributable to missed opportunities in key product categories, our failure to provide a balanced product assortment that addressed our customer needs and increased competition. The increase in comparable store sales for the second half of fiscal 2001 was attributable to broader and more balanced product assortment.

Gross Profit. Gross profit, which includes the cost of merchandise, buying and occupancy, increased to $139.6 million for the year ended June 30, 2001 from $122.0 million in fiscal 2000, an increase of $17.6 million, or 14.4%. As a percentage of net sales, gross profit decreased to 48.0% for the year from 50.4% during fiscal 2000. The decrease in gross profit as a percentage of net sales resulted from negative occupancy expense leverage and reduced merchandise margins. Negative occupancy expense leverage was attributed to the lower sales productivity. Reduced merchandise margins was due to weaker product sell-through, which resulted in an increased level of markdowns necessary to sell off excess inventories.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, which primarily consist of non-occupancy store costs, corporate overhead and advertising costs, increased to $97.8 million during the year ended June 30, 2001 from $76.3 million in fiscal 2000, an increase of $21.5 million, or 28.2%. As a percentage of net sales, these expenses increased to 33.6% during the year ended June 30, 2001 from 31.6% in fiscal 2000. This increase as a percentage of net sales was primarily due to a decrease in comparable store sales, expenses related to an increase in compensation at the corporate office, increase in depreciation expense and $890,000 of expense related to a legal settlement.

Interest and Other Expense (Income), Net. We generated $3.4 million of interest and other income (net of other expenses) during the year ended June 30, 2001 as compared to $3.2 million in fiscal 2000 due to increases in average cash balances arising from operating results offset by lower interest rates.

Provision for Income Taxes. The effective tax rate for the year ended June 30, 2001 was 38.5% as compared to 39.8% in fiscal 2000. The lower effective tax rate for fiscal 2001 was primarily attributable to interest on tax free and tax-advantaged investments.

Our working capital requirements vary widely throughout the year and generally peak in the first and second fiscal quarters. At June 30, 2002, we had approximately $123.4 million of cash and cash equivalents on hand. In addition, we had a revolving line of credit, under which we could borrow or issue letters of credit up to a combined total of $10.0 million. As of June 30, 2002, there were no borrowings under the line of credit and letters of credit outstanding totaled $2.3 million.

Net cash provided by operating activities in fiscal 2002, 2001 and 2000 was $49.9 million, $33.7 million and $30.2 million, respectively. The increase in cash provided by operating activities in fiscal 2002 compared to 2001 and 2000 was primarily the result of net income and changes in working capital.

Net cash used by investing activities was $21.9 million, $18.0 million and $18.0 million in fiscal 2002, 2001 and 2000, respectively. The primary use of these funds was for the opening of new stores, investments in management information systems, the relocation of our distribution center to Benicia, California, and the expansion of our corporate offices. We opened 20 new stores in fiscal 2002, 26 new stores in fiscal 2001 and 24 new stores in fiscal 2000. We expect to open approximately 25 to 30 stores in fiscal 2003.

During fiscal 2002, new store construction costs (before tenant allowances) averaged $578,000. The average gross inventory investment was $105,000.

Net cash provided by financing activities was $4.2 million, $2.9 million and $1.1 million in fiscal 2002, fiscal 2001 and fiscal 2000, respectively, and was derived from proceeds from the issuance of common stock arising from stock option exercises.

We believe that our cash on hand, together with our cash flow from operations, will be sufficient to meet our capital and operating requirements through fiscal 2003. Our future capital requirements,

however, will depend on numerous factors, including without limitation, the size and number of new and expanded stores, investment costs for management information systems, potential acquisitions and/or joint ventures, repurchase of stock and future results of operations.

Summary Disclosures about Contractual Obligations and Commercial Commitments:

The following table summarizes significant contractual obligations as of June 30, 2002:

As of June 30, 2002, there were no borrowings outstanding under the line of credit.

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

Factors that might cause our actual results to differ materially from the forward looking statements discussed elsewhere in this report, as well as affect our ability to achieve our financial and other goals, include, but are not limited to, the following:

1. If we misjudge our customers' acceptance of, or demand for, our products, our sales and profitability may be negatively impacted. Our success depends on our ability to develop or select the right products, present a balanced product assortment and manage our inventory with the demand for such merchandise. Our ability to accurately predict the demand for our products is further affected by uncertainties created by the slowed economy, recent international affairs and consumer spending fluctuations. If we miscalculate our customers' product preferences or the demand for our products, we may be faced with significant excess inventory or lack of inventory. This could result in excess fabric for some products and missed opportunities for others. This may result in weak sales and markdowns and/or write-offs, which would impair our profitability.

2. If we cannot successfully transition our production responsibilities with our new personnel in Los Angeles, California, we could lose sales and increase our cost of goods. In March 2002, We shifted the production responsibilities from existing personnel in Brisbane, California, to new personnel

in Los Angeles, California. We have and may continue to experience difficulty in implementing our production processes with these new personnel. Any disruption related to this transition whether due to the hiring and training of new personnel, differences in the techniques and processes used, system integration and implementation or other factors, may affect the timeliness of product deliveries, control of inventory including raw materials, work-in-process and finished goods and the quality of our merchandise, and could ultimately harm our sales, adversely affect our reputation and result in additional costs.

3. If we are not able to consistently show increases in net sales and net earnings or are not able to operate on a profitable basis, our stock price may be negatively affected. We cannot guarantee that we will generate net earnings increases period to period or that we will remain profitable in the future. In the past five years, profitability rates have varied widely from quarter-to-quarter and from year-to-year. In particular, in fiscal 2000, we experienced a significantly lower rate of growth in earnings than experienced in the prior three fiscal years. Although we were profitable, in fiscal 2001 and fiscal 2002, we experienced a decrease in earnings versus the prior year.

Our future results of operations will depend on a number of factors including, but not limited to, our ability to manage and execute:

In addition, future results of operations will depend on factors outside of our control, such as general economic conditions (including the effects of the events of September 11, 2001 and uncertainties related to the ongoing conflicts), availability of third party sourcing and raw materials, and actions of competitors.

4. If we are unable to obtain raw materials or find manufacturing facilities, our financial condition may be harmed. We do not own any manufacturing facilities and therefore depend on a limited number of third parties to manufacture our products. Independent manufacturers make merchandise designed by the bebe in-house design team with raw materials purchased from independent mills and other suppliers. We place all of our orders for production of merchandise and raw materials by purchase order and do not have any long-term contracts with any manufacturer or supplier. We compete with many other companies for production facilities and raw materials. If we fail to obtain sufficient quantities of raw materials, it would have a harmful effect on our financial condition. Furthermore, we have received in the past, and may receive in the future, shipments of products from manufacturers that fail to conform to our quality control standards. In such event, unless we are able to obtain replacement products in a timely manner, we may lose sales. If we fail to maintain favorable relationships with these production facilities and to obtain an adequate supply of quality raw materials on commercially reasonable terms, it could harm our business and results of operations. Furthermore, we cannot assure that these production facilities will not supply similar raw materials to or manufacture similar products for our competitors.

5. If we are not able to effectively manage our growth, our profitability may be negatively impacted. Our continued growth depends, to a significant degree, on our ability to identify sites and open and operate new stores on a profitable basis. We expect to open approximately 25 to 30 stores in fiscal 2003. Our plan to expand successfully depends on a number of factors, including but not limited to, the following:

In selected markets, we have opened and plan to open flagship stores that will be larger and more expensive to operate than existing stores. If these flagship stores do not generate sufficient revenues to cover their higher costs, our financial results could be negatively affected.

We cannot assure that we will achieve our planned expansion on a timely and profitable basis. In addition, most of our new store openings in fiscal 2003 will be in existing markets. These openings may affect the existing stores' net sales volumes and profitability. Furthermore, we will need to hire experienced executive personnel to support the planned improvements and expansions of our business. We cannot assure that we will be successful in hiring such personnel in a time frame necessary to manage and support our expansion plans.

6. Our success depends on our key employees, the loss of whom could disrupt our business. We depend upon the expertise and execution of our key employees, particularly Manny Mashouf, the founder, Chairman of the Board, Chief Executive Officer and majority shareholder. Except for Mr. Mashouf, we do not carry "key person" life insurance policies on any of our employees. If we lose the services of Mr. Mashouf or any key officers or employees, it could harm our business and results of operations.

Also, our success depends on our ability to attract and retain experienced employees and utilize all employees' strengths. There is substantial competition for experienced personnel, which we expect to continue. We compete for experienced personnel with companies who have greater financial resources than we do. In the past, we have experienced significant turnover of our executive management team and retail store personnel. If we fail to attract, motivate and retain qualified personnel, or capitalize on such persons' expertise, it could harm our business and results of operations.

7. If we are not able to effectively upgrade and expand our management information systems, our operations may be harmed. We have in the past and will continue in the future to make significant investments to improve existing management information systems and implement new systems in the areas of production, merchandise allocation, financial and distribution functions. We cannot assure that these enhancements will be successfully implemented. If we fail to implement and integrate such systems, it can have a harmful effect on our results of operations.

8. If an independent manufacturer violates labor or other laws, or is accused of violating any such laws, or if their labor practices diverge from those generally accepted as ethical, it could harm our business and brand image. While we maintain a policy to monitor the operations of our independent manufacturers by having an independent firm inspect these manufacturing sites, and all manufacturers are contractually required to comply with such labor practices, we cannot control the actions or the public's perceptions of such manufacturers, nor can we assure that these manufacturers will conduct their businesses using ethical or legal labor practices. Apparel companies can be held jointly liable for the wrongdoings of the manufacturers of their products. While we do not control their employees' employment conditions or the manufacturer's business practices, and the manufacturers act in their own interest, they may act in a manner that results in negative public perceptions of us and/or employee allegations or court determinations that we are jointly liable. Currently, there are two litigation matters pending that involve labor disputes. Although the amount of liability with respect to these actions cannot be accurately predicted, in the opinion of Management, any such liability will not individually or in the aggregate have a material adverse effect on our business, financial condition or results of operations.

9. We depend on third party apparel manufacturers, and our sales may be negatively affected if the manufacturers do not perform acceptably. We develop a significant portion of our merchandise in conjunction with third party apparel manufacturers. In some cases, we select merchandise directly from these manufacturers' lines. We do not have long-term contracts with any third party apparel manufacturers and purchase all of the merchandise from such manufacturers by purchase order. Furthermore, we have received in the past, and may receive in the future, shipments of products from manufacturers that fail to conform to our quality control standards. In such event, unless we are able to obtain replacement products in a timely manner, we may lose sales. We cannot assure you that third party manufacturers (1) will not supply similar products to our competitors, (2) will not stop supplying products to us completely or (3) will supply products that satisfy our quality control standards.

10. Our business is seasonal and as a result our sales volumes and levels of profitability fluctuate on a quarterly basis. We tend to generate larger sales and, to an even greater extent, profitability levels in the first and second quarters, which include the fall and holiday selling seasons, of our fiscal year. If for any reason sales are below seasonal norms during the first and second quarters of our fiscal year our quarterly and annual results of operations would be harmed. Our quarterly financial performance may also fluctuate widely as a result of a number of other factors such as:

Due to these factors, we believe that quarter to quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance.

11. Any serious disruption at our major facilities could have a harmful effect on our business. We currently operate our corporate office in Brisbane, California, and a distribution facility in Benicia, California. We also operate a technology support center in Sacramento, California, and a design studio and production facility in Los Angeles, California. Any serious disruption at these facilities whether due to the construction, relocation, employment needs of these facilities, fire, earthquake, terrorist acts or otherwise would harm our operations and could have a harmful effect on our business and results of operations. Furthermore, we have little experience operating essential functions away from our main corporate offices and are uncertain what effect operating such satellite facilities might have on business, personnel and results of operations.

Furthermore, merchandise is typically shipped as soon as possible after receipt in our distribution center using third-party carriers. If these third-party carriers are unable to deliver shipments to some or all of our stores in a timely or cost efficient manner or if shipments are slowed due to actual or threats of terrorist attacks, our business and results of operations may be harmed.

12. If we are not able to successfully develop product lines or new store concepts or acquire businesses that extend our product lines, our ability to expand our revenue base may be impaired. From time to time, we may introduce new categories of products or new store concepts or acquire businesses. For example, we have tested a new concept store format, bbsp, soon to be renamed bebe sport, in which our product offering is limited to active inspired sportswear branded with the "bebe" and "bbsp (future bebe sport)" logo. If this limited product offering is not successful or if the bbsp (future bebe sport) brand name does not achieve the same recognition as the bebe and bebe moda brand names, our ability to expand into additional markets with this concept store may be impaired.

13. If we are not able to successfully protect our existing copyrights and trademarks, our ability to capitalize on the value of our brand name may be impaired. We have to ensure our licensees are using the intellectual property correctly or the goodwill associated with these trademarks will be diluted which will have an impact on our business. Currently, we are protecting our trademarks in litigation, which may result in us posting a material bond.

We are seeking to register our trademarks in targeted international markets, which we believe represents large potential markets for our products. In some of these markets, local companies currently have registered competing marks, and/or regulatory obstacles exist that may prevent us from obtaining a trademark for the bebe name or related names. In such countries, we may be unable to use the bebe name unless we purchase the right or obtain a license to use the bebe name. We may not be able to register trademarks in these international markets, purchase the right or obtain a license to use the bebe name on commercially reasonable terms. If we fail to obtain trademark, ownership or license rights, it would limit our ability to expand into certain international markets or enter such markets with the bebe name, and to capitalize on the value of our brand.

Furthermore in some jurisdictions, despite successful registration of our trademarks, third parties may allege infringement and bring actions against us.

14. Legislative actions and potential new accounting pronouncements are likely to cause our general and administrative expenses to increase and impact our future financial position and results of operations. In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as proposed changes to listing standards by Nasdaq, and proposed accounting changes by the Securities and Exchange Commission, we may be required to increase our internal controls, hire additional personnel and additional outside legal, accounting and advisory services, all of which could cause our general and administrative costs to increase. Proposed changes in the accounting rules, including legislative and other proposals to account for employees stock options as compensation expense among others, could increase the expenses we report under GAAP and adversely affect our operating results.

1. If economic conditions deteriorate, then it could have a negative impact on our business, sales and profitability. The retail and apparel industries are subject to substantial cyclical variation. A recession in the general economy or a decline in consumer spending in the apparel industry could harm our financial performance. Consumers generally purchase less apparel and related merchandise during recessionary periods and consumer spending may decline at other times. Any economic slowdown or downturn could harm our financial condition. We cannot assure that our customers would continue to make purchases during such times.

2. We face significant competition in the retail and apparel industry, which could harm our sales and profitability. The retail and apparel industries are highly competitive and are characterized by low

barriers to entry. We expect competition in our markets to increase. The primary competitive factors in our markets are:

3. If we fail to deal with the risks inherent in the fashion and apparel industry, our profitability and brand image may be impaired. The apparel industry is subject to rapidly evolving fashion trends, shifting consumer demands and intense competition. If we misinterpret the current fashion trends or if we fail to respond to shifts in consumer tastes, demand for bebe products, profitability and brand image could be impaired. Also, we cannot assure that our competitors will not carry similar designs, which would undermine bebe's distinctive image and may harm our brand image. Our future success partly depends on our ability to anticipate, identify and capitalize upon emerging fashion trends, including products, styles, fabrics and colors. In addition, our success depends on our ability to distinguish ourselves within the women's apparel market.

1. Our stock price may fluctuate because of the small number of shares that can be publicly traded and the low average daily trading volumes. The vast majority of our outstanding shares of our common stock are not registered and are subject to trading restrictions. As of June 30, 2002, only 4,840,858 shares of our common stock were available to be publicly traded, and as a result, our average daily trading volumes are relatively low, and our stock price is vulnerable to market swings due to large purchases, sales and short sales of our common stock.

2. Because a principal shareholder controls the company, other shareholders may not be able to influence the direction the company takes. As of June 30, 2002, Manny Mashouf, the Chairman of the Board and Chief Executive Officer, beneficially owned approximately 81.1% of the outstanding shares of our common stock. As a result, he alone can control the election of directors and the outcome of all issues submitted to the shareholders. This may make it more difficult for a third party to acquire shares, may discourage acquisition bids, and could limit the price that certain investors might be willing to pay for shares of common stock. This concentration of stock ownership may have the effect of delaying, deferring or preventing a change in control of our company.

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

We have fixed and variable income investments consisting of cash equivalents and short-term investments, which are affected by changes in market interest rates. We do not use derivative financial instruments in its investment portfolio.

The interest payable on our bank line of credit is based on variable interest rates and therefore affected by changes in market interest rates. If interest rates rose .475 basis points (a 10% change from the bank's reference rate as of June 30, 2002), our results from operations and cash flows would not be significantly affected.

We enter into a significant amount of purchase obligations outside of the U.S. which are settled in U.S. Dollars and, therefore, have only minimal exposure to foreign currency exchange risks. We also operate a subsidiary with a base currency other than the U.S. Dollar. This subsidiary represented less than two percent of total revenues for fiscal year 2002 and, therefore, presents only minimal exposure to foreign currency exchange risks. We do not hedge against foreign currency risks and believe that foreign currency exchange risk is immaterial.

Information with respect to this item is set forth in "Index to Financial Statements."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Information with respect to this item is incorporated by reference from the Registrant's definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the registrant's fiscal year.

There were no reports on Form 8-K filed during the last quarter of the fiscal year covered by this report.

Pursuant to the requirements of the Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Brisbane, State of California, on the 27th day of September 2002.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Manny Mashouf and John Kyees, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Exchange Act, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated:

Name	Title	Date
/s/ MANNY MASHOUF Manny Mashouf	Chief Executive Officer and Chairman of the Board (Principal Executive Officer)	September 27, 2002
/s/ JOHN KYEES John Kyees	Chief Financial Officer and Chief Administrative Officer (Principal Financial Officer and Principal Accounting Officer)	September 27, 2002
/s/ NEDA MASHOUF Neda Mashouf	Vice Chairman of the Board	September 27, 2002
/s/ BARBARA BASS Barbara Bass	Director	September 27, 2002
/s/ CORRADO FEDERICO Corrado Federico	Director	September 27, 2002
/s/ PHILIP SCHLEIN Philip Schlein	Director	September 27, 2002

I, Manny Mashouf, Chief Executive Officer of bebe stores, inc. (the "Registrant"), do hereby certify, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that:


Dated: September 27, 2002		/s/ MANNY MASHOUF Manny Mashouf, Chief Executive Officer

I, John Kyees, Chief Financial Officer of bebe stores, inc. (the "Registrant"), do hereby certify, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that:


Dated: September 27, 2002		/s/ JOHN KYEES John Kyees, Chief Financial Officer

bebe stores, inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2002, JUNE 30, 2001 AND JUNE 30, 2000:

We have audited the accompanying consolidated balance sheets of bebe stores, inc. as of June 30, 2002 and 2001 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three fiscal years in the period ended June 30, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of bebe stores, inc. as of June 30, 2002 and 2001 and the results of its operations and its cash flows for each of the three fiscal years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America.

bebe stores, inc.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

bebe stores, inc.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

bebe stores, inc.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Amounts in thousands)

bebe stores, inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

Nature of the business—bebe stores, inc., the "Company," designs, develops and produces a distinctive line of contemporary women's apparel and accessories, which it markets under the bebe, bbsp (future bebe sport) and bebe moda brand names primarily through its 165 specialty retail stores located in 30 states, the District of Columbia, Canada, 11 licensed stores in Greece, Israel, United Arab Emirates and Singapore and an on-line store at www.bebe.com.

The Company has one reportable segment and has one brand with product lines of a similar nature. Revenues of the Company's international retail operations represent less than two percent of total revenues for fiscal year 2002.

Basis of financial statement presentation—The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP).

Consolidation—The consolidated financial statements include the accounts of the Company and its subsidiary. All material intercompany transactions and balances have been eliminated.

Use of estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications—Certain amounts for prior years have been reclassified to conform with current year presentation.

Foreign currency adjustments—Translation adjustments result from the translation of foreign subsidiaries financial statements into US Dollars. The results of operations of foreign subsidiaries are translated using the average exchange rate during the period. Balance sheet amounts are translated at the exchange rate in effect at the balance sheet date. The resulting translation adjustment is included in shareholders' equity.

Cash and cash equivalents represent cash and short-term, highly liquid investments with original maturities of less than 90 days.

Inventories are stated at the lower of FIFO (first-in, first-out) cost or market. Cost includes certain indirect purchasing, merchandise handling and storage costs.

Equipment and leasehold improvements, net are stated at cost. Depreciation on equipment and leasehold improvements is computed using the straight-line method over the following estimated useful lives.

Description		Years
Leasehold improvements		10
Furniture, fixtures, equipment and vehicles		5
Computer hardware and software		3
Assets under capital lease		3

Leasing commissions associated with negotiating new store leases are capitalized in other assets and amortized over the lease term.

Deferred rent—Many of the Company's operating leases contain predetermined fixed increases of the minimum rental rate during the initial lease term. For these leases, the Company recognizes the related rental expense on a straight-line basis and records the difference between the amount charged to expense and the rent paid as deferred rent.

Construction allowance—The Company receives construction allowances from landlords, which are deferred and amortized on a straight-line basis over the life of the lease as a reduction of rent expense. Construction allowances are recorded under deferred rent on the balance sheet.

Store preopening costs associated with the opening or remodeling of stores, such as preopening rent and payroll, are expensed as incurred.

Advertising costs are charged to expense when the advertising first takes place. Advertising costs were $10.7 million, $10.4 million and $9.8 million respectively, during fiscal 2002, 2001 and 2000.

Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events then known to management are considered other than changes in the tax law or rates.

Fair value of financial instruments—The carrying values of cash and cash equivalents, investments, receivables and accounts payable approximates the estimated fair values.

Concentration of credit risk—Financial instruments, which principally subject the Company to concentration of credit risk, consist principally of cash and cash equivalents. The Company places its cash with financial institutions. At times, such amounts may be in excess of FDIC insurance limits.

Impairment of long-lived assets—The Company regularly reviews the carrying value of its long-lived assets. Whenever events or changes in circumstances indicate that the carrying amount of its assets might not be recoverable, the Company, using its best estimates based on reasonable and supportable assumptions and projections, has reviewed for impairment the carrying value of long-lived assets. During fiscal 2002 the Company recorded $1.2 million of charges related to abandoned information technology projects.

Stock based compensation—The Company accounts for stock based awards to employees using the intrinsic value-based method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations.

Earnings per share—Basic earnings per share (EPS) is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through the exercise of outstanding dilutive stock options.

Revenue recognition—Net sales consist of all product sales, net of estimated returns. Gift certificates sold are carried as a liability and revenue is recognized when the gift certificate is redeemed. Similarly, customers may receive a store credit in exchange for returned goods. Store credits are carried as a liability until redeemed. License revenue is recorded as earned.

Comprehensive income consists of net income and other comprehensive income (income, expenses, gains and losses that bypass the income statement and are reported directly as a separate component of equity). The Company's comprehensive income equals net income plus foreign currency translation adjustments for all periods presented. Such components of comprehensive income are shown in the Consolidated Statements of Shareholders' Equity.

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and

Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The Company will adopt SFAS No. 142 at the beginning of fiscal 2003 and does not expect the adoption to have a significant impact on its financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 will become effective for the Company at the beginning of fiscal 2003. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principals Board No. 30. The Company does not expect that the adoption of SFAS No. 144 will have a significant impact on its financial statements.

In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt the provisions of SFAS 146 for any restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the company's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may effect the timing of recognizing any future restructuring costs as well as the amounts recognized.

	As of June 30,
	2002		2001
	(Dollars in thousands)
Raw materials	$	3,758	$	6,469
Merchandise available for sale		19,599		21,304

Inventories	$	23,357	$	27,773

The Company has an unsecured commercial line of credit agreement with a bank, which provides for borrowings and issuance of letters of credit of up to $10.0 million and expires on December 1, 2003. The outstanding balance bears interest at either the bank's reference rate (which was 4.75% and 6.75%, as of June 30, 2002 and 2001, respectively) or the LIBOR rate plus 1.75 percentage points. As of June 30, 2002 and 2001, there was $2.3 million and $5.3 million, respectively, outstanding in letters of credit.

This credit facility requires the Company to comply with certain financial covenants, including a minimum tangible net worth and certain restrictions on making loans and investments. In addition,

under the line of credit, cash dividends can not be paid without the prior consent of the lending institution.

The Company has operating leases for its retail store locations, corporate headquarters, distribution center and certain office equipment. Store leases typically provide for payment by the Company of certain operating expenses, real estate taxes and additional rent based on a percentage of net sales if a specified net sales target is exceeded. In addition, certain leases have escalation clauses and provide for terms of renewal and/or early termination based on the net sales volumes achieved.

Rent expense for the fiscal years ended June 30, 2002, 2001 and 2000 was $40.2 million, $34.5 million and $26.1 million, respectively. Rent expense includes percentage rent and other lease-required expenses for the years ended 2002, 2001 and 2000 of $12.7 million, $11.3 million, and $9.1 million, respectively.

Future minimum lease payments under operating leases at June 30, 2002 are as follows:

Fiscal year ending June 30 (Dollars in thousands),
		2003	$	28,178
		2004		27,874
		2005		26,606
		2006		24,580
		2007		23,299
	Thereafter			80,349

Total minimum lease payments			$	210,886

		Fiscal Year Ended June 30,
		2002			2001			2000
		(Dollars in thousands)
Current:
	Federal	$	13,639		$	13,538		$	16,398
	State		3,869			3,894			4,449
	Foreign		208			198			108

			17,716			17,630			20,955

Deferred
	Federal		(1,278	)		(92	)		(1,233	)
	State		(328	)		(80	)		(267	)
	Foreign		28			(43	)		(1	)

			(1,578	)		(215	)		(1,501	)

	Provision	$	16,138		$	17,415		$	19,454

A reconciliation of the federal statutory tax rate with the Company's effective income tax rate is as follows:

	Fiscal Year Ended June 30,
	2002		2001		2000
Federal statutory rate	35.0	%	35.0	%	35.0	%
State rate, net of federal benefit	5.4		5.5		5.6
Tax-exempt interest	(1.5	)	(2.2	)	(1.6	)
Other	(1.0	)	0.2		0.8

Effective tax rate	37.9	%	38.5	%	39.8	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes.

Significant components of the Company's deferred tax assets (liabilities) are as follows:

			As of June 30,
			2002			2001
			(Dollars in thousands)
Current:
	Gift certificates/store credits		$	892		$	714
	Inventory reserve			745			1,068
	Accrued vacation			273			228
	Uniform capitalization			(135	)		(182	)
	Other			614			666

		Total current		2,389			2,494

Noncurrent:
	Basis difference in fixed assets			2,575			1,364
	Deferred rent			1,674			1,147
	Net operating loss			0			288
	Other			314			264

		Total noncurrent		4,563			3,063
	Valuation allowance			0			(183	)

Net deferred tax assets			$	6,952		$	5,374

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The Company had established a valuation allowance for 100% of the net deferred tax asset related to the United Kingdom operations at June 30, 2001 due to the uncertainty of realizing future tax benefits from its foreign net operating loss carryforward (NOL) and other deferred tax assets.

During the year ended June 30, 2002, the Company ceased doing business in the United Kingdom and does not anticipate filing income tax returns in the United Kingdom for periods beyond June 30, 2002.

		As of June 30,
		2002			2001
		(Dollars in thousands)
Leasehold improvements		$	44,006		$	27,936
Furniture, fixtures, equipment and vehicles			15,538			11,808
Computer hardware and software			16,454			13,995
Assets under capital lease			329			329
Construction in progress			4,611			6,189

	Total		80,938			60,257
Less: accumulated depreciation and amortization			(30,365	)		(21,058	)

Equipment and leasehold improvements, net		$	50,573		$	39,199

Employees are eligible to participate in the Company's 401(k) plan if they have been employed by the Company for one year, have reached age 21, and work at least 1,000 hours annually. Generally, employees can defer up to 15% of their gross wages up to the maximum limit allowable under the Internal Revenue Code. The employer can make a discretionary matching contribution for the employee. Employer contributions to the plan for the years ended June 30, 2002, 2001 and 2000 were $131,543, $126,339, and $68,120, respectively.

Our shareholders have granted the Board of Directors the authority to issue up to 1,000,000 shares of $0.001 par value preferred stock and to fix the rights, preferences, privileges and restrictions including voting rights, of these shares without any further vote or approval by the shareholders. No preferred stock has been issued to date.

Options granted under the 1997 Stock Plan (the "Stock Plan") have a ten-year term and may be incentive stock options, non-qualified stock options, stock purchase rights or stock awards. As of June 30, 2002, the Company has reserved 4,330,000 shares of common stock for issuance under the Stock Plan.

The options granted are immediately exercisable, but are subject to repurchase at the original exercise price in the event that the optionee's employment with the Company ceases for any reason. The Company's right of repurchase generally lapses over a four-year period as follows: 20% in each of the first two years after the grant date and 30% in the third and fourth years after the grant date, with full lapse of the repurchase option occurring on the fourth anniversary date.

The 1998 Employee Stock Purchase Plan (the "Plan") has a total of 750,000 shares of common stock reserved for issuance under the Plan. The Plan allows eligible employees to purchase our common stock in an amount, which may not exceed 10% of the employee's compensation. The Plan is

implemented in sequential 24-month offerings. Each offering is generally comprised of eight, three-month purchase periods, with shares purchased on the last day of each purchase period (a "Purchase Date"). The price at which stock may be purchased is equal to 85% of the lower of fair market value of our common stock on the first and last day of the offering period or the Purchase Date. Under the Purchase plan in the years ended June 30, 2002, 2001 and 2000 there were 16,908, 29,109 and 36,965 shares issued, respectively.

The following table summarizes information about stock options outstanding at June 30, 2002:

Had compensation expense for the Stock Plan been determined based on the fair value at the grant dates for awards under the Stock Plan, consistent with the method of SFAS No. 123, the

Company's net earnings, basic EPS and diluted EPS would have been reduced to the pro forma amounts indicated below:

		Fiscal Year Ended June 30,
		2002		2001		2000
		(Dollars in thousands, except per share amounts)
Net income	As reported	$	26,484	$	27,807	$	29,405
	Proforma	$	23,699	$	25,530	$	27,798
Basic EPS	As reported	$	1.04	$	1.12	$	1.20
	Proforma	$	0.93	$	1.03	$	1.14
Diluted EPS	As reported	$	1.02	$	1.08	$	1.17
	Proforma	$	0.91	$	0.99	$	1.10

The weighted average fair value of options granted during the fiscal year ended June 30, 2002, 2001, and 2000 was $11.80, $6.26 and $12.38, respectively. The fair value of each option grant was estimated on the date of the grant using the minimum value method with the following weighted-average assumptions:

	Fiscal Year Ended June 30,
	2002		2001		2000
Expected dividend rate	0.00	%	0.00	%	0.00	%
Volatility	63.50	%	97.74	%	82.63	%
Risk-free interest rate	5.52	%	5.75	%	5.90	%
Expected lives (years)	5.32		5.67		5.94

From time to time, the Company may be involved in litigation relating to claims arising out of its operations. As of the date of this filing, the Company is not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company's business, financial condition or results of operations.

The Company's granting of stock options may result in dilution of basic EPS. The following table summarizes the difference between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute diluted EPS. The number of incremental shares from the assumed issuance of stock options is calculated applying the treasury stock method.

Excluded from the computation of the number of diluted weighted average shares outstanding were antidilutive options of 1,183,930, 289,218 and 935,626 for fiscal 2002, 2001 and 2000, respectively.

The quarterly financial information presented below reflects all adjustments which, in the opinion of the Company's management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented.

During the fourth quarter ended June 30, 2002, the Company recorded $1.2 million of charges related to abandoned information technology projects.

		Fiscal Year Ended June 30,
Statements of Operations Data:		Fiscal Year Ended June 30,
Statements of Operations Data:		2002			2001			2000			1999			1998
		(Dollars in thousands, except per share data)
Net sales		$	316,424		$	290,836		$	241,802		$	201,341		$	146,756
Cost of sales, including buying and occupancy			174,048			151,204			119,850			95,440			71,713

Gross profit			142,376			139,632			121,952			105,901			75,043
Selling, general and administrative expenses			101,828			97,817			76,294			61,069			46,359

Income from operations			40,548			41,815			45,658			44,832			28,684
Interest and other expenses (income), net			(2,074	)		(3,407	)		(3,201	)		(2,242	)		(838	)

Earnings before income taxes			42,622			45,222			48,859			47,074			29,522
Provision for income taxes			16,138			17,415			19,454			19,065			12,103

Net earnings		$	26,484		$	27,807		$	29,405		$	28,009		$	17,419

Basic earnings per share		$	1.04		$	1.12		$	1.20		$	1.16		$	0.77
Diluted earnings per share		$	1.02		$	1.08		$	1.17		$	1.11		$	0.73
Basic weighted average shares outstanding			25,404			24,792			24,481			24,055			22,688
Diluted weighted average shares outstanding			25,964			25,697			25,226			25,327			23,862
Selected Operating Data:
Number of stores:
	Opened during period		20			26			24			17			7
	Closed during the period		1			4			1			2			4
	Open at end of period		165			146			124			101			86
Net sales per average store(1)		$	1,957		$	2,030		$	2,164		$	2,181		$	1,719
Comparable store sales increase (decrease)(2)			(5.7	)%		(2.3	)%		0.4	%		25.1	%		41.3	%
		As of June 30,
		2002			2001			2000			1999			1998
Balance Sheet Data:
Working capital		$	133,738		$	107,323		$	80,711		$	62,144		$	35,904
Total assets			213,165			174,730			137,662			107,366			64,209
Long-term debt, including current portion			2			82			173			260			187
Shareholders' equity			180,541			147,296			111,800			80,094			45,263

	Fiscal Year Ended June 30,
Statements of Operations Data:	Fiscal Year Ended June 30,
Statements of Operations Data:	2002		2001		2000
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales, including buying and occupancy(1)	55.0		52.0		49.6

Gross profit	45.0		48.0		50.4
Selling, general and administrative expenses(2)	32.2		33.6		31.6

Income from operations	12.8		14.4		18.8
Interest and other expenses (income), net	(0.7	)	(1.2	)	(1.3	)

Earnings before income taxes	13.5		15.6		20.1
Provision for income taxes	5.1		6.0		8.1

Net earnings	8.4	%	9.6	%	12.0	%

	Amount of Commitment Expiration Period (Dollars in thousands)
	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
CONTRACTUAL OBLIGATIONS
Operating leases	$	211	$	28	$	79	$	46	$	58

	Amount of Commitment Expiration Period (Dollars in thousands)
	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
OTHER COMMERCIAL COMMITMENTS
Revolving line of credit, net of outstanding letters of credit	$	7,667	$	—	$	7,667	$	—	$	—
Standby letters of credit		384		384		—		—		—
Trade letters of credit		1,949		1,949		—		—		—

Total Commercial Commitments	$	10,000	$	2,333	$	7,667	$	—	$	—

Independent auditors' report		F-2
Consolidated balance sheets as of June 30, 2002 and 2001		F-3
Consolidated statements of income for the fiscal years ended June 30, 2002, 2001 and 2000		F-4
Consolidated statements of shareholders' equity for the fiscal years ended June 30, 2002, 2001 and 2000		F-5
Consolidated statements of cash flows for the fiscal years ended June 30, 2002, 2001 and 2000		F-6
Notes to consolidated financial statements		F-7


		bebe stores, inc.
		By:		MANNY MASHOUF Chief Executive Officer (Principal Executive Officer)

			As of June 30,
			2002			2001
Assets:
Current assets:
	Cash and cash equivalents		$	123,431		$	91,000
	Receivables (net of allowance of $190 and $416)			2,249			2,342
	Inventories			23,357			27,773
	Deferred income taxes, net			2,389			2,494
	Prepaid and other			4,849			7,189

		Total current assets		156,275			130,798
Equipment and leasehold improvements, net				50,573			39,199
Deferred income taxes, net				4,563			2,880
Other assets				1,754			1,853

Total assets			$	213,165		$	174,730

Liabilities and Shareholders' Equity:
Current liabilities:
	Accounts payable		$	12,138		$	10,878
	Accrued liabilities			10,337			12,429
	Income taxes payable			62			168

		Total current liabilities		22,537			23,475
Long-term debt				—			7
Deferred rent				10,087			3,952

Total liabilities				32,624			27,434

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 40,000,000 shares at $0.001 par value per share; issued and outstanding 25,612,056 and 25,187,695 shares		26			25
	Additional paid-in capital			38,624			32,017
	Accumulated other comprehensive loss			(37	)		(190	)
	Retained earnings			141,928			115,444

		Total shareholders' equity		180,541			147,296

Total liabilities and shareholders' equity			$	213,165		$	174,730

	Common Stock
	Number of Shares	Amount		Additional Paid-in Capital			Deferred Compensation			Retained Earnings		Accumulated Other Comprehensive Loss			Total			Comprehensive Income
Balance as of June 30, 1999	24,388	$	24	$	23,148		$	(1,282	)	$	58,232	$	(28	)	$	80,094
Net earnings											29,405					29,405		$	29,405
Foreign currency translation adjustment													(62	)		(62	)		(62	)

Total comprehensive income																		$	29,343

Deferred compensation					(176	)		849								673
Common stock issued under stock plans including tax benefit	202		0		1,689											1,689

Balance as of June 30, 2000	24,590	$	24	$	24,661		$	(433	)	$	87,637	$	(90	)	$	111,799
Net earnings											27,807					27,807		$	27,807
Foreign currency translation adjustment													(100	)		(100	)		(100	)

Total comprehensive income																		$	27,707

Deferred compensation					(20	)		433								413
Common stock issued under stock plans including tax benefit	598		1		7,376											7,377

Balance as of June 30, 2001	25,188	$	25	$	32,017		$	—		$	115,444	$	(190	)	$	147,296
Net earnings											26,484					26,484		$	26,484
Foreign currency translation adjustment													153			153			153

Total comprehensive income																		$	26,637

Common stock issued under stock plans including tax benefit	424		1		6,607											6,608

Balance as of June 30, 2002	25,612	$	26	$	38,624		$	—		$	141,928	$	(37	)	$	180,541

		Shares Outstanding		Weighted Average Exercise Price Per Share
		(Amounts in thousands)
Balance June 30, 1999		1,685		$	7.92
	Granted	749			20.04
	Exercised	(165	)		3.67
	Canceled	(589	)		18.23

Balance June 30, 2000		1,680			10.24
	Granted	1,230			13.90
	Exercised	(568	)		4.71
	Canceled	(352	)		15.52

Balance June 30, 2001		1,990			12.75
	Granted	779			25.16
	Exercised	(407	)		9.92
	Canceled	(760	)		18.19

Balance June 30, 2002		1,602		$	17.02

	Options Outstanding				Options Vested
Exercise Prices	Number	Weighted Average Remaining Life	Weighted Average Exercise Price		Number	Weighted Average Exercise Price
	(In thousands)	(in years)			(In thousands)
$1.77	321	4.99	$	1.77	321	$	1.77
$5.65 to $13.25	286	7.80		9.85	73		10.06
$13.63 to $22.04	357	9.04		18.20	39		15.26
$22.25 to $26.20	269	9.54		23.36	10		24.14
$27.45 to $30.64	349	8.33		29.97	129		29.94
$31.29 to $35.05	20	7.30		33.11	11		32.50

	1,602	7.91	$	17.02	583	$	10.92

	2002 Quarter Ended
	Sept. 30		Dec. 31		March 31		June 30
	(in thousands, except per share amounts)
Net sales	$	73,645	$	98,707	$	70,611	$	73,461
Gross profit		34,270		47,018		28,981		32,107
Selling, general and administrative expenses		24,618		27,697		23,408		26,105
Income from operations		9,652		19,321		5,573		6,002
Earnings before income taxes		10,306		19,838		6,041		6,437
Net earnings		6,487		12,259		3,774		3,964
Basic earnings per share	$	0.26	$	0.48	$	0.15	$	0.16
Diluted earnings per share	$	0.25	$	0.47	$	0.15	$	0.15

Column A	Column B		Column C		Column D			Column E
Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Deduction			Balance at end of Period
Year Ended June 30, 2000
Allowance for doubtful accounts receivable	$	108	$	186	$	(130	)	$	164
Reserve for store closures		566		624		(488	)		702

	$	674	$	810	$	(618	)	$	866

Year Ended June 30, 2001
Allowance for doubtful accounts receivable	$	164	$	349	$	(97	)	$	416
Reserve for store closures		702		245		(724	)		223

	$	866	$	594	$	(821	)	$	639

Year Ended June 30, 2002
Allowance for doubtful accounts receivable	$	416	$	235	$	(461	)	$	190
Reserve for store closures		223		—		(223	)		—

	$	639	$	235	$	(684	)	$	190

EXHIBIT NUMBER		DESCRIPTION OF DOCUMENT
3.1*		Amended and Restated Articles of Incorporation of Registrant.
3.2*		Bylaws of Registrant.
4.1*		Specimen certificate representing the Common Stock (in standard printer form, not provided).
10.1*		1997 Stock Plan.
10.2*		1998 Stock Purchase Plan.
10.3*		Form of Indemnification Agreement.
10.6**		Standard Industrial/Commercial-Tenant Lease-Net dated November 30, 1998 between Registrant and Far Western Land and Investment Company, Inc., (lease for additional building to house administrative departments in Brisbane, California).
10.7**		Retail Store License Agreement between Registrant and Sakal Duty Free LTD., a duly registered Israeli private company, and Sakal Sports LTD., a duly registered Israeli private company, effective as of November 1, 1998.
10.8***		Form of Retail Store License Agreement between Registrant and [company].
10.9****		Amendment No. 1 to Lease Agreement (amendment to Standard Industrial/Commercial-Tenant Lease-Net dated November 30, 1998 between Registrant and Far Western Land and Investment Company, Inc.)
21.1		Subsidiaries of Registrant.
23.1		Independent Auditors' Consent and Report on Schedules.
24.1		Power of Attorney (see signature page).
99.1		Certification of Chief Executive Officer.
99.2		Certification of Chief Financial Officer.