**UnitedStatesSecurities and Exchange Commission**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                      | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                 |
| **For the  quarterly period ended December 31, 2007** |
| ** **                                                 |
| **Or**                                                     |
| ** **                                                 |
| **o******                                                  | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For the transition period from           to**

 

**Commission file number 0-21196**

 

**MOTHERS WORK, INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **13-3045573**                     |
|------------------------------------------------------------------|------------|------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |       | (IRS  Employer Identification No.) |
|                                                             |       |                               |
| **456 North 5th Street, Philadelphia, Pennsylvania**             | ** ** | **19123**                          |
| (Address  of principal executive offices)                        |       | (Zip  code)                        |

 

Registrant’stelephone number, including area code **(215) 873-2200**

 

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

 

Indicate by check mark whether the Registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.
|                           |                     |                         |
|--------------------------------|--------------------------|------------------------------|
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|                           |                     |                         |

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theAct).Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

CommonStock, $.01 par value 6,066,598 shares outstanding as of January 31, 2008

 

 

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** **

**MOTHERS WORK, INC. AND SUBSIDIARIES**

**INDEX**

 
| PART I.   FINANCIAL INFORMATION |                                                                                        |
|-------------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                                   | Financial Statements (unaudited)                                                            |   |
|                                      | Consolidated  Balance Sheets                                                                | 3 |
|                                      | Consolidated  Statements of Operations                                                      | 4 |
|                                      | Consolidated Statements of  Stockholders’ Equity and Comprehensive Income (Loss)       | 5 |
|                                      | Consolidated Statements of  Cash Flows                                                      | 6 |
|                                      | Notes to  Consolidated Financial Statements                                                 | 7 |
| Item 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| Item 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                 | 19 |
| Item 4.                                   | Controls and Procedures                                                                     | 20 |
|                                      |                                                                                        |   |
| PART II.  OTHER  INFORMATION    |                                                                                        |   |
| Item 1.                                   | Legal Proceedings                                                                           | 21 |
| Item 1A.                                  | Risk Factors                                                                                | 21 |
| Item 2.                                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 21 |
| Item 6.                                   | Exhibits                                                                                    | 21 |
|                                      |                                                                                        |
| Signatures                                | 22                                                                                          |
|                                      |                                                                                        |
|                                           |                                                                                             |  |  |  |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**MOTHERS WORK, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(inthousands, except share and per share amounts)

(unaudited)

 
| ** **                                                                                                                        | ** ** | **December 31, 2007** | ** ** | **September 30, 2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| **ASSETS**                                                                                                                        |       |                            |       |                             |       |
| Current assets:                                                                                                                   |       |                            |       |                             |       |
| Cash and cash equivalents                                                                                                         |       | $                               | 10,787     |                             | $          | 10,130 |   |
| Trade receivables, net                                                                                                            |       | 6,775                           |       | 12,094                           |       |
| Inventories                                                                                                                       |       | 96,789                          |       | 100,485                          |       |
| Deferred income taxes                                                                                                             |       | 7,123                           |       | 7,123                            |       |
| Prepaid expenses and other current assets                                                                                         |       | 6,204                           |       | 6,603                            |       |
| Total current assets                                                                                                              |       | 127,678                         |       | 136,435                          |       |
| Property, plant and equipment, net                                                                                                |       | 68,186                          |       | 68,651                           |       |
| Assets held for sale                                                                                                              |       | 207                             |       | 207                              |       |
| Other assets:                                                                                                                     |       |                            |       |                             |       |
| Goodwill                                                                                                                          |       | 50,389                          |       | 50,389                           |       |
| Deferred financing costs, net of  accumulated amortization of $204 and $133                                                       |       | 1,180                           |       | 1,251                            |       |
| Other intangible assets, net of accumulated  amortization of $2,311 and $2,478                                                    |       | 538                             |       | 576                              |       |
| Deferred income taxes                                                                                                             |       | 15,684                          |       | 15,189                           |       |
| Other non-current assets                                                                                                          |       | 4,167                           |       | 3,227                            |       |
| Total other assets                                                                                                                |       | 71,958                          |       | 70,632                           |       |
| Total assets                                                                                                                      |       | $                               | 268,029    |                             | $          | 275,925 |   |
|                                                                                                                              |       |                            |       |                             |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                    |       |                            |       |                             |       |
| Current liabilities:                                                                                                              |       |                            |       |                             |       |
| Line of credit borrowings                                                                                                         |       | $                               | —     |                             | $          | — |   |
| Current portion of long-term debt                                                                                                 |       | 1,224                           |       | 1,534                            |       |
| Accounts payable                                                                                                                  |       | 23,048                          |       | 28,345                           |       |
| Accrued expenses and other current  liabilities                                                                                   |       | 37,863                          |       | 41,633                           |       |
| Total current liabilities                                                                                                         |       | 62,135                          |       | 71,512                           |       |
| Long-term debt                                                                                                                    |       | 91,377                          |       | 91,646                           |       |
| Deferred rent and other non-current  liabilities                                                                                  |       | 27,002                          |       | 24,244                           |       |
| Total liabilities                                                                                                                 |       | 180,514                         |       | 187,402                          |       |
|                                                                                                                              |       |                            |       |                             |       |
| Commitments and contingencies (Note 9)                                                                                            |       |                            |       |                             |       |
|                                                                                                                              |       |                            |       |                             |       |
| Stockholders’ equity:                                                                                                        |       |                            |       |                             |       |
| Preferred stock, 2,000,000 shares  authorized                                                                                     |       |                            |       |                             |       |
| Series A cumulative convertible  preferred stock, $.01 par value; 41,000 shares authorized, none outstanding                 |       | —                          |       | —                           |       |
| Series B junior participating  preferred stock, $.01 par value; 300,000 shares authorized, none outstanding                  |       | —                          |       | —                           |       |
| Common stock, $.01 par value; 20,000,000  shares authorized, 5,968,542 and 5,963,434 shares issued and outstanding,  respectively |       | 60                              |       | 60                               |       |
| Additional paid-in capital                                                                                                        |       | 80,947                          |       | 81,047                           |       |
| Retained earnings                                                                                                                 |       | 8,542                           |       | 8,820                            |       |
| Accumulated other comprehensive loss                                                                                              |       | (2,034                          | )          | (1,404                           | )          |
| Total stockholders’ equity                                                                                                   |       | 87,515                          |       | 88,523                           |       |
| Total liabilities and stockholders’ equity                                                                                   |       | $                               | 268,029    |                             | $          | 275,925 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

3

----

 

**MOTHERS WORK, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(inthousands, except per share amounts)

(unaudited)

 
| ** **                                    | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
|                                          |       |                                                |       |   |   |
| Net sales                                     |       | $                                                   | 142,876    |   | $ | 148,484 |   |
| Cost of goods sold                            |       | 70,914                                              |       | 71,434 |   |
| Gross profit                                  |       | 71,962                                              |       | 77,050 |   |
| Selling, general and administrative  expenses |       | 70,578                                              |       | 69,548 |   |
| Operating income                              |       | 1,384                                               |       | 7,502 |   |
| Interest expense, net                         |       | 1,866                                               |       | 3,132 |   |
| Loss on extinguishment of debt                |       | —                                              |       | 2,093 |   |
| Income (loss) before income taxes             |       | (482                                                | )          | 2,277 |   |
| Income tax provision (benefit)                |       | (130                                                | )          | 888 |   |
| Net income (loss)                             |       | $                                                   | (352       | ) | $ | 1,389 |   |
|                                          |       |                                                |       |   |   |
| Net income (loss) per share – Basic      |       | $                                                   | (0.06      | ) | $ | 0.24 |   |
| Average shares outstanding – Basic       |       | 5,852                                               |       | 5,705 |   |
| Net income (loss) per share – Diluted    |       | $                                                   | (0.06      | ) | $ | 0.23 |   |
| Average shares outstanding – Diluted     |       | 5,852                                               |       | 6,138 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

4

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**MOTHERSWORK, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)**(in thousands)

(unaudited)

** **
| ** **                                                              | ** ** | **Common Stock**  | ** ** | ** ** | ** ** | ** **                       | ** ** | **Accumulated**        | ** ** | ** **                     | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|------------|------------|----------------------------------|------------|------------------------|------------|--------------------------------|------------|------------|------------|
| ** **                                                              | ** ** | **Number  of  Shares** | ** ** | **Amount** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Other  Comprehensive  Loss** | ** ** | **Total**  | ** ** | **Comprehensive  Income  (Loss)** | ** ** |
| Balance as of September 30, 2007                                   |       | 5,963                  |       | $          | 60         |                             | $          | 81,047                 |       | $                              | 8,820      |       | $          | (1,404 | ) | $ | 88,523 |   |   |   |
| Net loss                                                                |       | —                 |       | —     |       | —                           |       | (352                   | )          | —                         |       | (352       | )          | $ | (352 | ) |
| Amortization of prior service cost for  retirement plans, net of tax    |       | —                 |       | —     |       | —                           |       | —                 |       | 25                             |       | 25         |       | 25 |   |
| Change in fair value of interest rate swap,  net of tax                 |       | —                 |       | —     |       | —                           |       | —                 |       | (621                           | )          | (621       | )          | (621 | ) |
| Unrealized loss on investments, net of tax                              |       | —                 |       | —     |       | —                           |       | —                 |       | (34                            | )          | (34        | )          | (34 | ) |
| Comprehensive loss                                                      |       |                   |       |       |       |                             |       |                   |       |                           |       |       |       | $ | (982 | ) |
| Cumulative effect of adoption of FIN  No. 48, Note 6               |       | —                 |       | —     |       | —                           |       | 74                     |       | —                         |       | 74         |       |   |   |
| Stock-based compensation                                                |       | 9                      |       | —     |       | 558                              |       | —                 |       | —                         |       | 558        |       |   |   |
| Exercise of stock options                                               |       | 3                      |       | —     |       | 32                               |       | —                 |       | —                         |       | 32         |       |   |   |
| Tax shortfall from stock option exercises  and restricted stock vesting |       | —                 |       | —     |       | (583                             | )          | —                 |       | —                         |       | (583       | )          |   |   |
| Repurchase and retirement of common shares                              |       | (6                     | )          | —     |       | (107                             | )          | —                 |       | —                         |       | (107       | )          |   |   |
| Balance as of December 31, 2007                                    |       | 5,969                  |       | $          | 60         |                             | $          | 80,947                 |       | $                              | 8,542      |       | $          | (2,034 | ) | $ | 87,515 |   |   |   |
|                                                                    |       |                   |       |       |       |                             |       |                   |       |                           |       |       |       |   |   |
| Balance as of September 30, 2006                                   |       | 5,624                  |       | $          | 56         |                             | $          | 71,431                 |       | $                              | 9,213      |       | $          | — |   | $ | 80,700 |   |   |   |
| Net income                                                              |       | —                 |       | —     |       | —                           |       | 1,389                  |       | —                         |       | 1,389      |       | $ | 1,389 |   |
| Comprehensive income                                                    |       |                   |       |       |       |                             |       |                   |       |                           |       |       |       | $ | 1,389 |   |
| Stock-based compensation                                                |       | 81                     |       | 1          |       | 470                              |       | —                 |       | —                         |       | 471        |       |   |   |
| Exercise of stock options                                               |       | 188                    |       | 2          |       | 3,355                            |       | —                 |       | —                         |       | 3,357      |       |   |   |
| Excess tax benefit from stock option  exercises                         |       | —                 |       | —     |       | 2,263                            |       | —                 |       | —                         |       | 2,263      |       |   |   |
| Reclassification of equity award from  liabilities                      |       | —                 |       | —     |       | 1,423                            |       | —                 |       | —                         |       | 1,423      |       |   |   |
| Balance as of December 31, 2006                                    |       | 5,893                  |       | $          | 59         |                             | $          | 78,942                 |       | $                              | 10,602     |       | $          | — |   | $ | 89,603 |   |   |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

5

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(inthousands)

(unaudited)

 
| ** **                                                                                      | ** ** | **Three Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Cash Flows from Operating Activities**                                                        |       |                                                |       |   |   |
| Net income (loss)                                                                               |       | $                                                   | (352       | ) | $ | 1,389 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities:       |       |                                                |       |   |   |
| Depreciation and amortization                                                                   |       | 4,002                                               |       | 3,877 |   |
| Stock-based compensation expense                                                                |       | 558                                                 |       | 471 |   |
| Loss on impairment of long-lived assets                                                         |       | 533                                                 |       | 250 |   |
| Loss (gain) on disposal of assets                                                               |       | 46                                                  |       | (63 | ) |
| Loss on extinguishment of debt                                                                  |       | —                                              |       | 2,093 |   |
| Accretion of discount on senior notes                                                           |       | —                                              |       | 44 |   |
| Deferred income tax benefit                                                                     |       | (343                                                | )          | (176 | ) |
| Amortization of deferred financing costs                                                        |       | 71                                                  |       | 154 |   |
| Changes in assets and liabilities:                                                              |       |                                                |       |   |   |
| Decrease (increase) in —                                                                   |       |                                                |       |   |   |
| Trade receivables                                                                               |       | 5,319                                               |       | (607 | ) |
| Inventories                                                                                     |       | 3,696                                               |       | 4,773 |   |
| Prepaid expenses and other current assets                                                       |       | (71                                                 | )          | 282 |   |
| Other non-current assets                                                                        |       | 220                                                 |       | 13 |   |
| Increase (decrease) in —                                                                   |       |                                                |       |   |   |
| Accounts payable, accrued expenses and  other current liabilities                               |       | (10,924                                             | )          | 201 |   |
| Deferred rent and other non-current  liabilities                                                |       | 1,880                                               |       | (936 | ) |
| Net cash provided by operating activities                                                       |       | 4,635                                               |       | 11,765 |   |
|                                                                                            |       |                                                |       |   |   |
| **Cash Flows from Investing Activities**                                                        |       |                                                |       |   |   |
| Purchase of short-term investments                                                              |       | —                                              |       | (19,550 | ) |
| Proceeds from sale of short-term  investments                                                   |       | —                                              |       | 28,975 |   |
| Contribution to grantor trust                                                                   |       | (1,160                                              | )          | — |   |
| Capital expenditures                                                                            |       | (3,730                                              | )          | (3,004 | ) |
| Purchase of intangible assets                                                                   |       | —                                              |       | (9 | ) |
| Net cash (used in) provided by investing  activities                                            |       | (4,890                                              | )          | 6,412 |   |
|                                                                                            |       |                                                |       |   |   |
| **Cash Flows from Financing Activities**                                                        |       |                                                |       |   |   |
| Increase (decrease) in cash overdraft                                                           |       | 2,149                                               |       | (67 | ) |
| Repayment of long-term debt                                                                     |       | (579                                                | )          | (25,165 | ) |
| Premium on repurchase of long-term debt                                                         |       | —                                              |       | (1,406 | ) |
| Repurchase of common stock                                                                      |       | (107                                                | )          | — |   |
| Proceeds from exercise of stock options                                                         |       | 32                                                  |       | 3,357 |   |
| Excess tax benefit (tax shortfall) from  exercise of stock options and restricted stock vesting |       | (583                                                | )          | 2,263 |   |
| Net cash provided by (used in) financing  activities                                            |       | 912                                                 |       | (21,018 | ) |
| **Net Increase (Decrease) in Cash and Cash  Equivalents**                                       |       | 657                                                 |       | (2,841 | ) |
| **Cash and Cash Equivalents, Beginning of  Period**                                             |       | 10,130                                              |       | 18,904 |   |
| **Cash and Cash Equivalents, End of Period**                                                    |       | $                                                   | 10,787     |   | $ | 16,063 |   |
|                                                                                            |       |                                                |       |   |   |
| Supplemental Disclosures of Cash Flow  Information:                                             |       |                                                |       |   |   |
| Cash paid for interest                                                                          |       | $                                                   | 2,225      |   | $ | 1,106 |   |
| Cash paid for income taxes                                                                      |       | $                                                   | 495        |   | $ | 378 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

6

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** **

**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

(unaudited)

 

**1.      BASIS OF FINANCIAL STATEMENT PRESENTATION**

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with the requirements for Form 10-Q and Article 10 ofRegulation S-X and, accordingly, certain information and footnotedisclosures have been condensed or omitted. Reference is made to the Annual Report on Form 10-K as of and forthe year ended September 30, 2007 for Mothers Work, Inc. andsubsidiaries (the “Company” or “Mothers Work”), as filed with the Securitiesand Exchange Commission (“SEC”), for additional disclosures including a summaryof the Company’s accounting policies.

 

In the opinion of management, theconsolidated financial statements contain all adjustments, consisting of normalrecurring adjustments, necessary to present fairly the consolidated financialposition, results of operations and cash flows of the Company for the periodspresented.  Since the Company’soperations are seasonal, the interim operating results of the Company may notbe indicative of operating results for the full year.

 

The Company operates on a fiscal year ending September 30of each year.  All references to fiscalyears of the Company refer to fiscal years, or periods within such fiscalyears, ended on September 30 in those years.  For example, the Company’s “fiscal 2008” willend on September 30, 2008.  Certainreclassifications have been made to the prior year consolidated financialstatements to conform to the current year presentation.

 

**2.      EARNINGS PER SHARE (EPS)**

 

Basic earnings per share (“Basic EPS”) is computed by dividing netincome (loss) by the weighted average number of common shares outstanding,excluding restricted stock awards for which the restrictions have notlapsed.  Diluted earnings per share (“Diluted EPS”) is computed bydividing net income (loss) by the weighted average number of common sharesoutstanding, after giving effect to the potential dilution, if applicable, fromthe assumed lapse of restrictions on restricted stock awards and from theexercise of securities, such as stock options and warrants, into shares ofcommon stock as if those securities were exercised.

 

The following tables summarizethe Basic EPS and Diluted EPS calculations (in thousands, except per shareamounts):

 
| ** **                                                                              | ** ** | **Three Months Ended  December 31, 2007** | ** ** | **Three Months Ended  December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **Net  Loss**                                                 | ** ** | **Shares**                                                    | ** ** | **EPS** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic EPS                                                                               |       | $                                                             | (352       | )                                                             | 5,852      |   | $ | (0.06 | ) | $ | 1,389 |   | 5,705 |   | $ | 0.24 |   |
| Incremental shares from the  assumed lapse of restrictions on restricted stock awards   |       | —                                                        |       | —                                                        |       | — |   | — |   | 33 |   | — |   |
| Incremental shares from the  assumed exercise of outstanding stock options and warrants |       | —                                                        |       | —                                                        |       | — |   | — |   | 400 |   | (0.01 | ) |
|                                                                                    |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                                                             |       | $                                                             | (352       | )                                                             | 5,852      |   | $ | (0.06 | ) | $ | 1,389 |   | 6,138 |   | $ | 0.23 |   |

 

For the three months ended December 31,2006, options for 8,000 shares were excluded from the calculation of DilutedEPS as their effect would have been antidilutive.  Options and unvested restricted stocktotaling 930,475 shares of the Company’s common stock were outstanding as of December 31,2007, but were not included in the computation of Diluted EPS for the threemonths ended December 31, 2007, due to the Company’s net loss. Had theCompany reported a profit for the three months ended December 31, 2007,the weighted average number of dilutive shares outstanding for computation ofDiluted EPS would have been approximately 5,979,000.

 

7

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**3.      INVENTORIES**

 

Inventories were comprised ofthe following (in thousands):

 
| ** **       | ** ** | **December 31, 2007** | ** **   | **September 30, 2007** | ** ** |
|------------------|------------|---------------------------------|--------------|----------------------------------|------------|
| Finished goods   |       | $                               |  87,396 |                             | $          |  91,860 |   |
| Work-in-progress |       | 3,324                           |         | 2,947                            |       |
| Raw materials    |       | 6,069                           |         | 5,678                            |       |
|             |       | $                               |  96,789 |                             | $          |  100,485 |   |

 

**4.      ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES**

 

Accrued expenses and othercurrent liabilities were comprised of the following (in thousands):

 
| ** **                                                        | ** ** | **December 31, 2007** | ** ** | **September 30, 2007** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| Salaries, wages and employee  benefits                            |       | $                               | 9,809      |                             | $          | 11,106 |   |
| Income taxes payable                                              |       | —                          |       | 1,768                            |       |
| Interest                                                          |       | 1,218                           |       | 1,562                            |       |
| Deferred rent                                                     |       | 3,953                           |       | 4,014                            |       |
| Sales taxes                                                       |       | 3,675                           |       | 3,561                            |       |
| Insurance                                                         |       | 1,736                           |       | 1,664                            |       |
| Audit and legal                                                   |       | 2,161                           |       | 4,814                            |       |
| Remaining payout for redemption  of Series A Preferred Stock |       | 679                             |       | 679                              |       |
| Accrued store construction  costs                                 |       | 335                             |       | 442                              |       |
| Gift certificates and store  credits                              |       | 7,478                           |       | 4,591                            |       |
| Other                                                             |       | 6,819                           |       | 7,432                            |       |
|                                                              |       | $                               | 37,863     |                             | $          | 41,633 |   |

 

**5.      LONG-TERM DEBT AND LINE OF CREDIT**

 

In November 2006, the Company’s Board of Directors authorized therepurchase of $25,000,000 principal amount of the Company’s 111/4% senior notes (the “Senior Notes”).  On December 8, 2006, the Companycompleted the repurchase of the authorized amount at 105.625% of the$25,000,000 principal amount, plus accrued and unpaid interest.  In connection with the December 2006repurchase, the Company recorded a pre-tax charge totaling $2,093,000,representing the premium paid of $1,406,000 plus the write-off of unamortizeddebt issuance discount and deferred financing costs of $687,000.  On April 18, 2007, the Company completedthe redemption of the remaining outstanding amount of its Senior Notes at105.625% of the $90,000,000 principal amount, plus accrued and unpaidinterest.  In connection with the April 2007redemption, the Company recorded a pre-tax charge totaling $7,330,000,representing the premium paid of $5,063,000 plus the write-off of unamortizeddebt issuance discount and deferred financing costs of $2,267,000.

 

On March 13, 2007, the Company entered into a Term Loan andSecurity Agreement (the “Term Loan Agreement”) for a $90,000,000 senior securedTerm Loan B due March 13, 2013 (the “Term Loan”), the proceeds of whichwere received on April 18, 2007 and were used to redeem the remaining$90,000,000 principal amount of the Senior Notes.  The interest rate on the Term Loan is equalto, at the Company’s election, either (i) the prime rate plus 1.00%, or (ii) theLIBOR rate plus the applicable margin. The applicable margin was initially fixed at 2.50% through and includingthe fiscal quarter ended September 30, 2007.  Thereafter, the applicable margin for LIBORrate borrowings is either 2.25% or 2.50%, depending on the Company’sConsolidated Leverage Ratio (as defined). Based upon the Company’s Consolidated Leverage Ratio as of September 30,2007, the applicable margin for LIBOR rate borrowings remained at 2.50% for thefirst quarter of fiscal 2008.  TheCompany is required to make minimum repayments of the principal amount of theTerm Loan in quarterly installments of $225,000 each.  Additionally, the Term Loan can be prepaid atthe Company’s option, in part or in whole, at any time without any prepaymentpremium or penalty.  The Term Loan is secured by a security interest in the Company’s accounts receivable,inventory, real estate interests, letter of credit rights, cash, intangiblesand certain other assets. The security interest granted to the Term Lenders is,in certain respects, subordinate to the security interest granted to the CreditFacility Lender.  The Term LoanAgreement imposes certain restrictions on the Company’s ability to, among otherthings, incur additional indebtedness, pay dividends, repurchase stock, andenter into other various types of transactions. The Term Loan Agreement also contains quarterly financial covenants thatrequire the Company to maintain a specified maximum permitted ConsolidatedLeverage Ratio and a specified minimum permitted Consolidated Interest CoverageRatio (as defined).  Since the inceptionof the Term Loan Agreement, including the three month period ended December 31,2007, the Company was in compliance with the financial covenants of its TermLoan Agreement.

 

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In order to mitigate the Company’s floating rate interest risk on thevariable rate Term Loan, the Company entered into an interest rate swapagreement with the Agent bank for the Term Loan that commenced on April 18,2007, the date the $90,000,000 Term Loan proceeds were received, and expires onApril 18, 2012.  The interest rateswap agreement enables the Company to effectively convert an amount of the TermLoan equal to the notional amount of the interest rate swap from a floatinginterest rate of LIBOR plus 2.50% (subject to reduction to LIBOR plus 2.25% ifthe Company achieves a specified leverage ratio), to a fixed interest rate of7.50% (subject to reduction to 7.25% if the Company achieves a specifiedleverage ratio) for the significant majority of the Term Loan.  The notional amount of the interest rate swapwas $75,000,000 at the inception of the swap agreement and decreases over timeto a notional amount of $5,000,000 at the expiration date.  The notional amount of the swap was$65,000,000 as of December 31, 2007 and over the next eighteen months decreasesas follows:  to $57,500,000 starting April 18,2008; to $50,000,000 starting October 20, 2008; and to $42,500,000starting April 20, 2009.

 

In connection with the Term Loan transaction, the Company amended itsexisting $60,000,000 revolving credit facility (the “Credit Facility”) in orderto permit the new Term Loan financing. This amendment of the Credit Facility also extended its maturity from October 15,2009 to March 13, 2012, increased its size to $65,000,000, and reduced theLIBOR-based interest rate option under the facility by 0.25%.  There are no financial covenant requirementsunder the Credit Facility provided that Excess Availability (as defined) doesnot fall below 10% of the Borrowing Base (as defined).  If Excess Availability were to fall below 10%of the Borrowing Base, the Company would be required to meet a specifiedminimum Fixed Charge Coverage Ratio (as defined).  During the first quarters of fiscal 2008 and2007, the Company exceeded the minimum requirements for Excess Availability.

 

**6.      INCOME TAXES**

 

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”)No. 48, “Accounting for Uncertainty in Income Taxes.”  FIN No. 48clarifies the accounting for income taxes by prescribing the minimumrecognition threshold a tax position is required to meet before beingrecognized in the financial statements.  FIN No. 48 applies toall tax positions related to income taxes subject to Statement of FinancialAccounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.”  UnderFIN No. 48, recognition of a tax benefit occurs when a tax position ismore-likely-than-not to be sustained upon examination, based solely on itstechnical merits.  Derecognition of a previously recognized taxposition would occur if it is subsequently determined that the tax position nolonger meets the more-likely-than-not threshold of being sustained.

 

The Company adopted theprovisions of FIN No. 48 effective as of October 1,2007.  In accordance with FIN No. 48, the Company recorded acumulative effect adjustment of $74,000, decreasing the liability forunrecognized tax benefits and increasing the September 30, 2007 balance ofretained earnings.

 

As of October 1, 2007, theCompany had $2,315,000 of unrecognized tax benefits, including accrued interestand penalties of $946,000.  The Company records interest andpenalties related to unrecognized tax benefits in income tax provision(benefit).  If recognized, the portion of the liabilities forunrecognized tax benefits that would impact the Company’s effective tax ratewas $1,623,000.

 

During the twelve monthssubsequent to October 1, 2007, it is reasonably possible that the grossunrecognized tax benefits could potentially decrease by approximately $382,000(of which approximately $114,000 would affect the effective tax rate) forfederal and state tax positions related to the effect of expiring statutes oflimitations and expected settlements.

 

The Company’s U.S. Federalincome tax returns for the years ended September 30, 2004 and beyondremain subject to examination by the U.S. Internal RevenueService.  The Company also files returns in numerous statejurisdictions, which have varying statutes of limitations.  Generally,state tax returns for the years ended September 30, 2003 and beyond,depending upon the jurisdiction, remain subject to examination.  However,the statutes of limitations on certain of the Company’s state returns remainopen for years prior to fiscal 2003.

 

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**7.      RETIREMENT PLANS**

 

On March 2, 2007, theCompany entered into Supplemental Executive Retirement Agreements withits Chairman of the Board and Chief Executive Officer and its President andChief Creative Officer (the “SERPAgreements”).

 

The components of net periodicpension cost on a pre-tax basis were as follows (in thousands):

 
| ** **                          | ** ** | **Three Months Ended  December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Service cost                        |       | $                                                   | 243        |   | $ | — |   |
| Interest cost                       |       | 45                                                  |       | — |   |
| Amortization of prior service  cost |       | 88                                                  |       | — |   |
| Total net periodic benefit cost     |       | $                                                   | 376        |   | $ | — |   |

 

The SERP Agreements also provide that theCompany will establish a grantor trust, the assets of which will be used to paybenefits under the SERP Agreements (or to satisfy the claims of the Company’sgeneral creditors in the event of the Company’s bankruptcy or insolvency).  As required by the SERP Agreements, thegrantor trust will be funded periodically, on an actuarial basis, such that thetotal assets of the trust from time to time will reasonably approximate theCompany’s then current obligation under the SERP Agreements (provided that,upon a change in control, the Company has agreed to fully fund the grantortrust, regardless of the extent to which the SERP benefits are thenvested).   On April 30, 2007, theCompany made an initial required contribution to the grantor trust of$2,662,000.  On November 27,2007, the Company made an additional required contribution to the grantor trustof $1,160,000.  No further contributions are expected to be made during fiscal 2008.  As of December 31, 2007, investments inthe grantor trust, included in other non-current assets in the consolidatedbalance sheet, amounted to $3,896,000. The grantor trust investments were classified as available-for-sale andconsisted primarily of fixed income mutual funds with cost that approximatedthe fair value.

 

**8.     NEW ACCOUNTINGPRONOUNCEMENTS**

 

SFASNo. 157

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in U.S. generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years, for financial assets andliabilities that are measured at fair value on a recurring basis.  The FASB issued a one-year deferral of SFAS No. 157’sfair value measurement requirements for non-financial assets and liabilitiesthat are not required or permitted to be measured at fair value on a recurringbasis.  The impact from adoptionof SFAS No. 157, if any, on the Company’s consolidated financial positionor results of operations has not yet been determined.

 

SFAS No. 159

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities.”  SFAS No. 159 provides companies with anoption to report selected financial assets and liabilities at fair value andrequires entities to display the fair value of those assets and liabilities forwhich the company has chosen to use fair value on the face of the balancesheet.  SFAS No. 159 is effectivefor financial statements issued for fiscal years beginning after November 15,2007.  The impact from adoption ofSFAS No. 159, if any, on the Company’s consolidated financial position orresults of operations has not yet been determined.

 

**9.      COMMITMENTS AND CONTINGENCIES**

 

From time to time, the Companyis named as a defendant in legal actions arising from normal businessactivities. Litigation is inherently unpredictable and although the amount ofany liability that could arise with respect to currently pending actions cannotbe accurately predicted, the Company does not believe that the resolution ofany pending action will have a material adverse effect on its financialposition, results of operations or liquidity.

 

**10.   SEGMENTAND ENTERPRISE WIDE DISCLOSURES**

 

***Operating Segment***.  Under SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” a company may berequired to report segmented information about separately identifiable parts ofits business, which both (i) meet the definition of an “operating segment”under SFAS No. 131, and (ii) exceed certain quantitative thresholdsestablished in SFAS No. 131.  TheCompany has determined that its business is comprised of one operating segment:the design, manufacture and sale of maternity apparel and relatedaccessories.  While the Company offers awide 

 

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**range of products for sale, the substantialportion of its products are initially distributed through the same distributionfacilities, many of the Company’s products are manufactured at common contractmanufacturer production facilities, the Company’s products are marketed througha common marketing department, and these products are sold to a similarcustomer base, consisting of expectant mothers.**

 

***Geographic Information***.  Information concerning theCompany’s operations by geographic area was as follows (in thousands):

 
| ** **                              | ** ** | **Three Months Ended  December  31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                                  | ** ** | **2006** | ** ** |
| **Net Sales to Unaffiliated Customers** |       |                                                      |       |   |   |
| United States                           |       | $                                                         | 137,821    |   | $ | 144,217 |   |
| Canada                                  |       | $                                                         | 5,055      |   | $ | 4,267 |   |

 
| ** **            | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** |
|-----------------------|------------|-----------------------------|------------|------------------------------|------------|
| **Long-Lived Assets** |       |                        |       |                         |       |
| United States         |       | $                           | 66,650     |                         | $          | 67,125 |   |
| Canada                |       | $                           | 2,074      |                         | $          | 2,102 |   |
| Costa Rica            |       | $                           | 207        |                         | $          | 207 |   |

 

***Major Customers*****. **For theperiods presented, the Company didnot have any one customer who represented more than 10% of its net sales.

 

**11.   INTERESTEXPENSE, NET**

 

Interest expense, net was comprised of the following (in thousands):

 
| ** **            | ** ** | **Three Months Ended  December 31,** | ** **  |
|-----------------------|------------|-----------------------------------------------------|-------------|
| ** **            | ** ** | **2007**                                            | ** **  | **2006** | ** ** |
| Interest expense      |       | $                                                   |  1,956 |   | $ |  3,370 |   |
| Interest income       |       | (90                                                 | )           | (238 | ) |
| Interest expense, net |       | $                                                   |  1,866 |   | $ |  3,132 |   |

 

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**Results of Operations**

 

The following tables set forth certain operating data as a percentageof net sales and as a percentage change for the three months ended December 31:

 
| ** **                                        | ** ** | **% of Net Sales (1)** | ** ** | **% Increase** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|---------------------|------------|
| ** **                                        | ** ** | **2007**                                   | ** ** | **2006**            | ** ** | **2007 vs. 2006** | ** ** |
|                                              |       |                                       |       |                |       |   |   |
| Net sales                                         |       | 100.0                                      | %          | 100.0               | %          | (3.8 | )% |
| Cost of goods sold (2)                            |       | 49.6                                       |       | 48.1                |       | (0.7 | ) |
| Gross profit                                      |       | 50.4                                       |       | 51.9                |       | (6.6 | ) |
| Selling, general and  administrative expenses (3) |       | 49.4                                       |       | 46.8                |       | 1.5 |   |
| Operating income                                  |       | 1.0                                        |       | 5.1                 |       | (81.6 | ) |
| Interest expense, net                             |       | 1.3                                        |       | 2.1                 |       | (40.4 | ) |
| Loss on extinguishment of debt                    |       | 0.0                                        |       | 1.4                 |       | (100.0 | ) |
| Income (loss) before income  taxes                |       | (0.3                                       | )          | 1.5                 |       | (121.2 | ) |
| Income tax provision (benefit)                    |       | (0.1                                       | )          | 0.6                 |       | (114.6 | ) |
| Net income (loss)                                 |       | (0.2                                       | )%         | 0.9                 | %          | (125.3 | )% |

 

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(1)   Components may not add to total due torounding.

 

(2)   The “Cost of goods sold” line item includes: merchandise costs(including customs duty expenses), expenses related to inventory shrinkage,product related corporate expenses (including expenses related to our payroll,benefit costs and operating expenses of our buying departments), inventoryreserves (including lower of cost or market reserves), inbound freight charges,purchasing and receiving costs, inspection costs, warehousing costs, internaltransfer costs, and the other costs of our distribution network.

 

(3)   The “Selling, general and administrative expenses” line itemincludes:**advertising and marketing expenses,corporate administrative expenses, store expenses (including store payroll andstore occupancy expenses), store opening and store closing expenses, and storeasset impairment charges.

 

Thefollowing table sets forth certain information concerning the number of ourstores and leased departments for the periods indicated:

 
| ** **                | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **December 31, 2007**  | ** ** | **December 31, 2006** | ** ** |
| **Retail Locations** | ** ** | **Stores**                       | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** |
| Beginning of period       |       | 781                              |       | 795 |   | 1,576 |   | 810 |   | 731 |   | 1,541 |   |
| Opened                    |       | 7                                |       | 2 |   | 9 |   | 3 |   | 60 |   | 63 |   |
| Closed                    |       | (16                              | )          | (25 | ) | (41 | ) | (6 | ) | (4 | ) | (10 | ) |
| End of period             |       | 772                              |       | 772 |   | 1,544 |   | 807 |   | 787 |   | 1,594 |   |

 

Our fiscal year ends on September 30.  All references in this discussion to ourfiscal years refer to the fiscal year, or periods within the fiscal year, endedon September 30 in the year mentioned. For example, our “fiscal 2008” will end on September 30, 2008.

 

**Three Months Ended December 31, 2007 and2006**

 

***Net Sales.***  Our netsales for the first quarter of fiscal 2008 decreased by 3.8%, or $5.6 million,to $142.9 million from $148.5 million for the first quarter of fiscal2007.  The decrease in net sales versuslast year resulted primarily from a decrease in comparable store sales.  Comparable store sales decreased by4.1% for the first quarter of fiscal 2008, based on 1,352 retail locations,versus a comparable store sales decrease of 2.1% for the first quarter offiscal 2007, based on 1,454 retail locations. We attribute the decrease in comparable store sales for the quarterprimarily to the more pregnancy-friendly fit of certain current non-maternityfashion trends, unseasonably warm weather early in the quarter, and a weak overalleconomic and retail environment.

 

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As of December 31, 2007, we operated a total of 772 stores and1,544 total retail locations, compared to 807 stores and 1,594 total retaillocations as of December 31, 2006. In addition, our Oh Baby by MotherhoodTM collection is available at Kohl’s®stores throughout the United States. During the first quarter of fiscal 2008, we opened seven stores,including two multi-brand store openings, and closed 16 stores, with eight ofthe store closings related to multi-brand store openings.  In addition, during the first quarter offiscal 2008, the Company closed 23 leased department locations within Sears®stores, pursuant to mutual agreement with Sears.  As of December 31, 2007, the Companyoperates 478 leased departments within Sears stores and, as we disclosed in September 2007,our relationship with Sears will end on June 20, 2008, resulting in theclosure of our remaining leased departments within Sears stores.

 

***Gross Profit.***  Our grossprofit for the first quarter of fiscal 2008 decreased by 6.6%, or $5.1 million,to $72.0 million from $77.1 million for the first quarter of fiscal 2007,primarily reflecting the effect of our lower sales volume.  Gross profitas a percentage of net sales (gross margin) for the first quarter of fiscal2008 was 50.4% compared to 51.9% for the first quarter of fiscal 2007.  Thedecrease in gross margin of 1.5 percentage points compared to the prior yearresulted primarily from spreading fixed product overhead costs over a lowersales volume and, to a lesser extent, more price promotional activity comparedto last year, partially offset by increased marketing partnership revenues.

 

***Selling, General andAdministrative Expenses.***  Our selling, general andadministrative expenses for the first quarter of fiscal 2008 increased by 1.5%,or approximately $1.1 million, to $70.6 million from $69.5 million for thefirst quarter of fiscal 2007.  Thisincrease in expense for the quarter resulted primarily from increases inadvertising costs, retirement plan expense, store closing costs and impairmentcharges for write-downs of store long-lived assets, partially offset bydecreased legal expense and lower variable incentive compensation costs.  As a percentage of net sales, selling,general and administrative expenses increased to 49.4% for the first quarter offiscal 2008 compared to 46.8% for first quarter of fiscal 2007.  This increase in the expense percentage forthe quarter resulted primarily from negative expense leverage from the decreasein comparable store sales, as well as the $1.1 million increase in selling,general and administrative expense.  Werecorded charges of $0.3 million related to store closings for the firstquarter of fiscal 2008, as compared to $27,000 of income from store closings inthe first quarter of fiscal 2007.  Weincurred impairment charges for write-downs of store long-lived assets of $0.5million for the first quarter of fiscal 2008, as compared to $0.3 million forthe first quarter of fiscal 2007.

 

***Operating Income.***  Our operating income for the first quarterof fiscal 2008 decreased by 81.6%, or $6.1 million, to $1.4 million from$7.5 million for the first quarter of fiscal 2007, due to the lower salesvolume and associated gross profit reduction and, to a much lesser extent,higher selling, general and administrative expenses.  Operating income as a percentage of net sales(operating income margin) for thefirst quarter of fiscal 2008 decreased to 1.0% from 5.1% for the first quarterof fiscal 2007.  The decrease inoperating income margin was due to our higher operating expense ratio and ourlower gross margin compared to the first quarter of fiscal 2007.

 

***Interest Expense, Net.***  Our netinterest expense for the first quarter of fiscal 2008 decreased by 40.4%, orapproximately $1.2 million, to $1.9 million from $3.1 million for thefirst quarter of fiscal 2007.  Thisdecrease was primarily due to the lower interest rate on our new $90.0 millionTerm Loan, which was used to redeem the remaining outstanding balance of ourSenior Notes and, to a lesser extent, our lower debt level, as a result of therepurchase of $25.0 million of our Senior Notes on December 8, 2006,partially offset by higher average borrowings under our credit facility.  During the first quarter of fiscal 2008, ouraverage level of direct borrowings under our credit facility was $4.3 million,but we did not have any direct borrowings under our credit facility as of December 31,2007.  During the first quarter of fiscal2007, we had no direct borrowings under our credit facility.

 

***Loss on Extinguishment of Debt*. **In December 2006, we repurchased $25.0million principal amount of our outstanding Senior Notes. The $25.0 millionSenior Note repurchase resulted in a first quarter fiscal 2007 pre-tax chargeof $2.1 million, representing the premium paid plus the write-off ofunamortized debt issuance discount and deferred financing costs.

 

***Income Tax Provision.***  Oureffective tax rate was a benefit of 27.0% for the first quarter of fiscal 2008and a provision of 39.0% for the first quarter of fiscal 2007.  Our benefit rate for the first quarter offiscal 2008, reflects the effect of additional income tax expense recognizedduring the quarter in connection with the implementation of FIN No. 48.  We expect our effective tax rate for the fullyear fiscal 2008 to be approximately 39.5%.

 

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***Net Income (Loss).***  Net lossfor the first quarter of fiscal 2008 was $0.4 million, or $(0.06) per share(diluted), compared to net income of $1.4 million, or $0.23 per share(diluted), for the first quarter of fiscal 2007.   Net income for the first quarter of fiscal2007 includes an after-tax debt extinguishment charge of $1.3 million, or $0.21per share (diluted).  We had no debtextinguishment charges in the first quarter of fiscal 2008.

 

Our average diluted shares outstanding of5,852,000 for the first quarter of fiscal 2008 was 4.7% lower than the6,138,000 average diluted shares outstanding for the first quarter of fiscal2007.  The decrease in average diluted shares outstandingreflects the elimination of the dilutive impact of outstanding stock optionsand restricted stock in the first quarter of fiscal 2008 due to the net loss,compared to the dilutive impact of outstanding stock options and restrictedstock awards in the first quarter of fiscal 2007, when we generated net income,partially offset by higher shares outstanding in the first quarter of fiscal2008 compared to the first quarter of fiscal 2007, as a result of stock optionexercises and restricted stock awards.

 

**Seasonality**

 

Our business, like that of many otherretailers, is seasonal.  Our quarterly net sales have historically beenhighest in our third fiscal quarter, corresponding to the Spring sellingseason, followed by the first fiscal quarter, corresponding to the Fall/holidayselling season.  Given the typicallyhigher gross margin we experience in the third fiscal quarter compared to otherquarters, the relatively fixed nature of most of our operating expenses andinterest expense, and the historically higher sales level in the third quarter,we have typically generated a very significant percentage of our full yearoperating income and net income during the third quarter.  Results for any quarter are notnecessarily indicative of the results that may be achieved for a full fiscalyear.  Quarterly results may fluctuate materially depending upon, amongother things, the timing of new store openings and new leased departmentopenings, net sales and profitability contributed by new stores and leaseddepartments, increases or decreases in comparable store sales, the timing ofthe fulfillment of purchase orders under our product and license arrangements,adverse weather conditions, shifts in the timing of certain holidays andpromotions, changes in inventory and production levels and the timing ofdeliveries of inventory, and changes in our merchandise mix.

 

**Liquidity and Capital Resources**

 

Our cash needs have primarily been for: (i) debt service, (ii) capitalexpenditures, including leasehold improvements, fixtures and equipment for newstores, store relocations and expansions of our existing stores, as well asimprovements and new equipment for our distribution and corporate facilitiesand information systems, and (iii) working capital, including inventory tosupport our business.  We havehistorically financed these capital requirements from cash flows fromoperations, borrowings under our credit facility or available cash balances.

 

In November 2006, our Board of Directors authorized the repurchaseof $25.0 million principal amount of our Senior Notes.  This was in addition to the repurchase of$10.0 million principal amount of our Senior Notes completed during August andSeptember 2006.  On December 8,2006, we completed the repurchase of the authorized amount at 105.625% of the$25.0 million principal amount, plus accrued and unpaid interest.  On April 18, 2007, we completed theredemption of the remaining $90.0 million principal amount of our outstandingSenior Notes through a new Term Loan financing, which we expect will result ina decrease in annualized pre-tax interest expense of approximately $3.6million.  We began to recognize thisdecrease in annualized interest expense from the new Term Loan financing in ourthird fiscal quarter of fiscal 2007.  Thenew Term Loan extends the maturity for $90.0 million principal amount of ourdebt from August 1, 2010 (the maturity date of the redeemed Senior Notes)to March 13, 2013 (the maturity date of the new Term Loan), with quarterlyrequired principal payments of $225,000. The December 2006 redemption of the Senior Notes, which was at aprice of 105.625% of principal amount, plus accrued interest, resulted in “Losson extinguishment of debt” of $2.1 million on a pre-tax basis for the firstquarter of fiscal 2007, consisting of the $1.4 million cash redemption premiumand $0.7 million of non-cash expense from the write-off of unamortized deferredfinancing costs and debt issuance costs.

 

In March 2007, we entered intoSupplemental Executive Retirement Agreements with our Chairman ofthe Board and Chief Executive Officer and our President and Chief CreativeOfficer (the “SERP Agreements”).  The SERP Agreements provided that we establisha grantor trust, the assets of which will be used to pay benefits under theSERP Agreements (or to satisfy the claims of our general creditors in the eventof the Company’s bankruptcy or insolvency). As required by the SERP Agreements, the grantor trust will be fundedperiodically, on an actuarial basis, such that the total assets of the trustfrom time to time will reasonably approximate our then current obligation underthe SERP Agreements (provided that, upon a change in control, we have agreed tofully fund the grantor trust, regardless of the extent to which the SERPbenefits are then vested).   In April 2007,we made an initial required contribution to the grantor trust of$2,662,000.  In November 2007,we made an additional required contribution to the grantor trust of$1,160,000.  No further contributions are expected to be made during fiscal 2008.

 

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Cash and cash equivalents increased by $0.7million during the first quarter of fiscal 2008 compared to a decrease of $2.8million for the first quarter of fiscal 2007.  Cash provided by operationsof $4.6 million for the first quarter of fiscal 2008 decreased by approximately$7.2 million from the $11.8 million cash provided by operations for the firstquarter of fiscal 2007.  This decrease in cash provided byoperations was primarily the result of: (i) a decrease in accountspayable, accrued expenses and other current liabilities in the first quarter offiscal 2008 compared to an increase in the first quarter of fiscal 2007, (ii) thenet loss in the first quarter of fiscal 2008 compared to net income for thefirst quarter of fiscal 2007, and (iii) a lower decrease in inventories inthe first quarter of fiscal 2008 compared to the first quarter of fiscal2007.  These decreases in cash providedby operations were partially offset by increased cash provided by a decrease inaccounts receivable in the first quarter of fiscal 2008 compared to an increasein the first quarter of fiscal 2007. During the first quarter of fiscal 2008, we used our cash provided byoperations to pay for capital expenditures and to fund the grantor trustrelated to our retirement plans.  During the first quarter of fiscal2007, we used a portion of our cash provided by operations to pay for capitalexpenditures.  The remaining cash provided by operations, aswell as cash generated by net proceeds from the sales (net of purchases) of short-terminvestments and from stock option exercises, was used to complete the$25.0 million principal repurchase of our Senior Notes on December 8,2006.

 

For the first quarter of fiscal 2008, we spent $3.7 million oncapital expenditures, including $2.5 million for leasehold improvements,fixtures and equipment principally for new store facilities, as well asimprovements to existing stores, and $1.2 million for our informationsystems and distribution and corporate facilities.  This compares to $3.0 million in capitalexpenditures for the first quarter of fiscal 2007, of which $1.4 millionwas spent for new store facilities and improvements to existing stores andretail locations, and $1.6 million for our information systems anddistribution and corporate facilities.  The increase in capital expenditures wasprimarily due to increased expenditures for new store facilities.

 

On March 13, 2007, we entered into a Term Loan Agreement for a$90,000,000 senior secured Term Loan B due March 13, 2013, the proceeds ofwhich were received on April 18, 2007 and were used to redeem theremaining $90,000,000 principal amount of our Senior Notes.  The interest rate on the Term Loan is equalto, at our election, either (i) the prime rate plus 1.00%, or (ii) theLIBOR rate plus the applicable margin. The applicable margin was initially fixed at 2.50% through and includingthe fiscal quarter ended September 30, 2007.  Thereafter, the applicable margin for LIBORrate borrowings is either 2.25% or 2.50%, depending on our ConsolidatedLeverage Ratio (as defined).  Based uponour Consolidated Leverage Ratio as of September 30, 2007, the applicablemargin for LIBOR rate borrowings remained at 2.50% for the first quarter offiscal 2008.  We are required to makeminimum repayments of the principal amount of the Term Loan in quarterlyinstallments of $225,000 each. Additionally, the Term Loan can be prepaid at our option, in part or inwhole, at any time without any prepayment premium or penalty.  The TermLoan is secured by a security interest inour accounts receivable, inventory, real estate interests, letter of creditrights, cash, intangibles and certain other assets. The security interestgranted to the Term Lenders is, in certain respects, subordinate to thesecurity interest granted to the Credit Facility Lender.  The Term Loan Agreement imposescertain restrictions on our ability to, among other things, incur additionalindebtedness, pay dividends, repurchase stock, and enter into other varioustypes of transactions.  The Term LoanAgreement also contains quarterly financial covenants that require us tomaintain a specified maximum permitted Consolidated Leverage Ratio and aspecified minimum permitted Consolidated Interest Coverage Ratio (as defined).  During all of the three months ended December 31,2007, we were in compliance with the financial covenants of our Term LoanAgreement.

 

In order to mitigate our floating rate interest risk on the variablerate Term Loan, we entered into an interest rate swap agreement with the Agentbank for the Term Loan that commenced on April 18, 2007, the date the$90,000,000 Term Loan proceeds were received, and expires on April 18,2012.  The interest rate swap agreementenables us to effectively convert an amount of the Term Loan equal to thenotional amount of the interest rate swap from a floating interest rate ofLIBOR plus 2.50% (subject to reduction to LIBOR plus 2.25% if we achieve aspecified leverage ratio), to a fixed interest rate of 7.50% (subject toreduction to 7.25% if we achieve a specified leverage ratio) for thesignificant majority of the Term Loan. The notional amount of the interest rate swap was $75,000,000 at theinception of the swap agreement and decreases over time to a notional amount of$5,000,000 at the expiration date.  Thenotional amount of the swap was $65,000,000 as of December 31, 2007 andover the next eighteen months decreases as follows:  to $57,500,000 starting April 18, 2008;to $50,000,000 starting October 20, 2008; and to $42,500,000 starting April 20,2009.

 

In connection with the Term Loan transaction, we amended our existing$60,000,000 Credit Facility in order to permit the new Term Loanfinancing.  This amendment of the CreditFacility also extended its maturity from October 15, 2009 to March 13,2012, increased its size to $65,000,000, and reduced the LIBOR-based interestrate option under the facility by 0.25%. There are no financial covenant requirements under the Credit Facilityprovided that Excess Availability (as defined) does not fall below 10% of theBorrowing Base (as defined).  If ExcessAvailability were to fall below 10% of the Borrowing Base, we would be requiredto meet a specified minimum Fixed Charge Coverage Ratio (as defined).  During the first quarters of fiscal 2008 and2007, we exceeded the minimum requirements for Excess Availability.

 

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As of December 31, 2007,we had no outstanding borrowings under the Credit Facility and $7.0 million inletters of credit, with $55.0 million of availability under our credit linebased on our Borrowing Base limitations. We had average direct borrowings of $4.3 million under ourcredit facility for the first quarter of fiscal 2008, compared to nodirect borrowings during the first quarter of fiscal 2007.

 

Our management believes thatour current cash and working capital positions, expected operating cash flowsand available borrowing capacity under our Credit Facility, will be sufficientto fund our working capital, capital expenditures and debt repaymentrequirements and to fund stock and/or debt repurchases, if any, for at leastthe next twelve months.

 

###### **CriticalAccounting Policies and Estimates**

###### ** **

Our consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States. These generally accepted accounting principles requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilities atthe date of our consolidated financial statements and the reported amounts ofnet sales and expenses during the reporting period.

 

Our significant accounting policies aredescribed in Note 2 of “Notes to Consolidated Financial Statements” in ourAnnual Report on Form 10-K for the year ended September 30,2007.  We believe that the followingdiscussion addresses our critical accounting policies, which are those that aremost important to the portrayal of our financial condition and results ofoperations and require management’s most difficult, subjective and complexjudgments, often as a result of the need to make estimates about the effect ofmatters that are inherently uncertain. If actual results were to differ significantly from estimates made,future reported results could be materially affected.  However, we are not currently aware of anyreasonably likely events or circumstances that would result in materiallydifferent results.  Except as disclosedbelow and in the financial statements and accompanying notes included in Item1of this report, there were no material changes in, or additions to, ourcritical accounting policies or in the assumptions or estimates we used toprepare the financial information appearing in this report.

 

Our senior management has reviewed these critical accounting policiesand estimates and the related Management’s Discussion and Analysis of FinancialCondition and Results of Operations with the Audit Committee of our Board ofDirectors.

 

***Inventories.***  Wevalue our inventories, which consist primarily of maternity apparel, at thelower of cost or market. Cost is determined on the first-in, first-out method(FIFO) and includes the cost of merchandise, freight, duty and brokerfees.  A periodic review of inventoryquantities on hand is performed in order to determine if inventory is properlyvalued at the lower of cost or market. Factors related to current inventories such as future consumer demandand fashion trends, current aging, current analysis of merchandise based onreceipt date, current and anticipated retail markdowns or wholesale discounts,and class or type of inventory are analyzed to determine estimated netrealizable values.  Criteria utilized byus to quantify aging trends include factors such as the amount of merchandisereceived within the past twelve months, merchandise received more than one yearbefore with quantities on-hand in excess of 12 months of sales, andmerchandise currently selling below cost. A provision is recorded to reduce the cost of inventories to itsestimated net realizable value, if required. Inventories as of December 31, 2007 and September 30, 2007totaled $96.8 million and $100.5 million, respectively, representing36.1% and 36.4% of total assets, respectively. Given the significance of inventories to our consolidated financialstatements, the determination of net realizable values is considered to be acritical accounting estimate.  Anysignificant unanticipated changes in the factors noted above could have asignificant impact on the value of our inventories and our reported operatingresults.

 

***Long-Lived Assets.***  Ourlong-lived assets consist principally of store leasehold improvements (includedin the “Property, plant and equipment, net” line item in our consolidatedbalance sheets) and, to a much lesser extent, lease acquisition costs (includedin the “Other intangible assets, net” line item in our consolidated balancesheets).  These long-lived assets arerecorded at cost and are amortized using the straight-line method over theshorter of the lease term or their useful life. Net long-lived assets as of December 31, 2007 and September 30,2007 totaled $68.7 million and $69.2 million, respectively,representing 25.6% and 25.1% of total assets, respectively.

 

In assessing potential impairment of these assets, we periodicallyevaluate the historical and forecasted operating results and cash flows on astore-by-store basis.  Newly openedstores may take time to generate positive operating and cash flow results.  Factors such as: (i) store type, thatis, company store or leased department, (ii) store concept, that is,Motherhood Maternity®, Mimi Maternity®, A Pea in the Pod® or DestinationMaternity®, (iii) store location, for example, 

 

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urban area versus suburb, (iv) current marketplace awareness ofour brands, (v) local customer demographic data, (vi) anchor storeswithin the mall in which our store is located and (vii) current fashiontrends are all considered in determining the time frame required for a store toachieve positive financial results, which is assumed to be within two yearsfrom the date a store location is opened. If economic conditions are substantially different from our expectations,the carrying value of certain of our long-lived assets may becomeimpaired.  As a result of our impairmentassessment, we recorded write-downs of long-lived assets of $0.5 million forthe first quarter of fiscal 2008, and $0.3 million for the first quarter offiscal 2007, respectively.

 

***Goodwill*.** The purchase method of accounting for business combinations requires theuse of estimates and judgments to allocate the purchase price paid foracquisitions to the fair value of the net tangible and identifiable intangibleassets.  Goodwill represents the excessof the aggregate purchase price over the fair value of net assets acquired inbusiness combinations and is separately disclosed in our consolidated balancesheets.  As of both December 31,2007 and September 30, 2007, goodwill totaled $50.4 million,representing 18.8% and 18.3% of total assets, respectively.  In June 2001, the FASB issued SFAS No. 142,“Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill no longer be amortized,but instead be tested for impairment at least annually or as impairmentindicators arise.

 

The impairment test requires us to compare the fair value of businessreporting units to their carrying value, including assigned goodwill.  In assessing potential impairment ofgoodwill, we have determined that we have one reporting unit for purposes ofapplying SFAS No. 142 based on our reporting structure.  The fair value of our single reporting unitis determined based on the fair market value of our outstanding common stock ona control basis and, if necessary, an outside independent valuation is obtainedto determine the fair value.  Thecarrying value of our single reporting unit, expressed on a per share basis, isrepresented by the book value per share of our outstanding common stock.  The results of the annual impairment testperformed as of September 30, 2007, indicated the fair value of thereporting unit exceeded its carrying value. If the per share fair value of our single reporting unit were less thanthe book value per share on September 30, 2007, our goodwill couldpotentially have been impaired.

 

***Accounting for Income Taxes.***  Weadopted the provisions of FIN No. 48 effective as of October 1, 2007(see “Notes to Consolidated Financial Statements; Note 6. Income Taxes”).

 

As part of the process of preparing our consolidated financialstatements, we are required to estimate our income taxes in each of thejurisdictions in which we operate.  Thisprocess requires us to estimate our actual current tax exposure (includinginterest and penalties) together with assessing temporary differences resultingfrom differing treatment of items, such as depreciation of property andequipment and valuation of inventories, for tax and accounting purposes.  We establish reserves for certain taxpositions that we believe are supportable, but such tax positions arepotentially subject to successful challenge by the applicable taxingauthority.  We determine our provisionfor income taxes based on federal and state tax laws and regulations currentlyin effect, some of which have been recently revised.  Legislation changes currently proposed bycertain of the states in which we operate, if enacted, could increase ourtransactions or activities subject to tax. Any such legislation that becomes law could result in an increase in ourstate income tax expense and our state income taxes paid, which could have amaterial and adverse effect on our net income or cash flow.

 

The temporary differences between the book and tax treatment of incomeand expenses result in deferred tax assets and liabilities, which are includedwithin our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will berecovered from future taxable income. Actual results could differ from our assessments if adequate taxableincome is not generated in future periods. Net deferred tax assets as of December 31, 2007 and September 30,2007 totaled $22.8 million and $22.3 million, respectively,representing 8.5% and 8.1% of total assets, respectively.  To the extent we believe that recovery is notmore likely than not, we must establish a valuation allowance.  To the extent we establish a valuationallowance or change the allowance in a future period, income tax expense willbe impacted.

 

***Accounting for Contingencies*.** From time to time, we are named as a defendant in legal actionsarising from our normal business activities. We account for contingencies such as these in accordance with SFAS No. 5,“Accounting for Contingencies,” including the provisions of Emerging IssuesTask Force Issue D-77, “Accounting for Legal Costs Expected to be Incurred inConnection with a Loss Contingency.” SFAS No. 5 requires us to record an estimated loss contingency wheninformation available prior to issuance of our financial statements indicatesthat it is probable that an asset has been impaired or a liability has beenincurred at the date of the financial statements and the amount of the loss canbe reasonably estimated.  Aninterpretation of SFAS No. 5 further states that when there is a range ofloss and no amount within that range is a better estimate than any other, thenthe minimum amount of the range shall be accrued.  Accounting for contingencies arising fromcontractual or legal proceedings requires management, after consultation withoutside legal counsel, to use its best judgment when estimating an accrualrelated to such contingencies.  Asadditional information becomes known, our 

 

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accrual for a loss contingency could fluctuate, thereby creatingvariability in our results of operations from period to period.  Likewise, an actual loss arising from a losscontingency which significantly exceeds the amount accrued for in our financialstatements could have a material adverse impact on our operating results forthe period in which such actual loss becomes known.

 

**Recent Accounting Pronouncements**

 

SFASNo. 157

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in U.S. generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years, for financial assets andliabilities that are measured at fair value on a recurring basis.  The FASB issued a one-year deferral of SFAS No. 157’sfair value measurement requirements for non-financial assets and liabilitiesthat are not required or permitted to be measured at fair value on a recurringbasis.  The impact from adoptionof SFAS No. 157, if any, on our consolidated financial position or resultsof operations has not yet been determined.

 

SFAS No. 159

 

*In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities.”  SFAS No. 159provides companies with an option to report selected financial assets andliabilities at fair value and requires entities to display the fair value ofthose assets and liabilities for which the company has chosen to use fair valueon the face of the balance sheet.  SFAS No. 159is effective for financial statements issued for fiscal years beginning after November 15,2007.  The impact from adoption of SFAS No. 159,if any, on our consolidated financial position or results of operations has notyet been determined.*

 

**Forward-Looking Statements**

 

Some of the information in thisreport, including the information incorporated by reference (as well asinformation included in oral statements or other written statements made or tobe made by us), contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). Theforward-looking statements involve a number of risks and uncertainties. Anumber of factors could cause our actual results, performance, achievements orindustry results to be materially different from any future results,performance or achievements expressed or implied by these forward-lookingstatements. These factors include, but are not limited to: our ability tosuccessfully manage various business initiatives, our ability to successfully manageand retain our leased department and licensed relationships and marketingpartnerships, future sales trends in our existing retail locations, weather,changes in consumer spending patterns, raw material price increases, consumerpreferences and overall economic conditions, our ability to anticipate andrespond to fashion trends and consumer preferences, unanticipated fluctuationsin our operating results, impact of competition and pricing, availability ofsuitable store locations, continued availability of capital and financing, ourability to hire and develop senior management and sales associates, our abilityto develop and source merchandise, our ability to receive production fromforeign sources on a timely basis, potential stock repurchases, potential debtprepayments, changes in market interest rates, war or acts of terrorism, andother factors referenced in our Annual Report on Form 10-K, includingthose set forth under the caption “Risk Factors.”

 

In addition, these forward-looking statements necessarily depend uponassumptions, estimates and dates that may be incorrect or imprecise and involveknown and unknown risks, uncertainties and other factors. Accordingly, anyforward-looking statements included in this report do not purport to be predictionsof future events or circumstances and may not be realized. Forward-lookingstatements can be identified by, among other things, the use of forward-lookingterms such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “proforma,” “anticipates,” “intends,” “continues,” “could,” “estimates,” “plans,” “potential,”“predicts,” “goal,” “objective,” or the negative of any of these terms, orcomparable terminology, or by discussions of our outlook, plans, goals,strategy or intentions. Forward-looking statements speak only as of the datemade. Except as required by applicable law, including the securities laws ofthe United States and the rules and regulations of the Securities andExchange Commission, we assume no obligation to update any of these forward-lookingstatements to reflect actual results, changes in assumptions or changes inother factors affecting these forward-looking statements.

 

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**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Mothers Work is exposed to market risk fromchanges in interest rates.  We have not entered into any market sensitiveinstruments for trading purposes.  The analysis below presents thesensitivity of the market value of our financial instruments to selectedchanges in market interest rates.  The range of changes presented reflectsour view of changes that are reasonably possible over a one-year period.

 

As of December 31, 2007, we had cash and cash equivalents of $10.8million and an additional $3.9 million in a grantor trust.  Our cash equivalents consist of money marketaccounts that bear interest at variable rates. Our investments in the grantor trust consist primarily of fixed incomemutual funds with cost that approximates fair value.  A changein market interest rates earned on our investments  impacts the interest income and cash flows, butdoes not materially impact the fair market value of the financialinstruments.  Due to the average maturityand conservative nature of our investment portfolio, we believe a sudden changein interest rates would not have a material effect on the value of ourinvestment portfolio.

 

As of December 31, 2007, the principalcomponents of our debt portfolio were the $89.3 million Term Loan and the$65.0 million Credit Facility, both of which are denominated in U.S.dollars.  The fair market value of the debt portfolio is referred to asthe “Debt Value.”

 

Our Credit Facility carries a variableinterest rate that is tied to market indices.  As of December 31,2007, we had no direct borrowings and $7.0 million of letters of creditoutstanding under our Credit Facility.  Borrowings under the CreditFacility would have resulted in interest at a rate between approximately 5.60%and 7.25% per annum as of December 31, 2007.  Interest on any futureborrowings under the Credit Facility would, to the extent of outstandingborrowings, be affected by changes in market interest rates.  A change in market interest rates on thevariable rate portion of the debt portfolio impacts the interest expenseincurred and cash flows, but does not impact the Debt Value of the financialinstrument.

 

The Term Loan carries a variable interestrate that is tied to market indices.  Thesensitivity analysis as it relates to this portion of our debt portfolioassumes an instantaneous 100 basis point move in interest rates from theirlevels as of December 31, 2007, with all other variables heldconstant.  The Debt Value of the Term Loan is approximately$89.3 million, its principal amount.  A 100 basis point increase in market interestrates would result in additional annual interest expense on the TermLoan of approximately $0.9 million.  A100 basis point decline in market interest rates would correspondinglylower our annual interest expense on the Term Loan by approximately $0.9million.

 

In order to mitigate our floating rate interest risk on the variablerate Term Loan, we entered into an interest rate swap agreement with the Agentbank for the Term Loan that commenced on April 18, 2007.  The interest rate swap agreement enables usto effectively convert an amount of the Term Loan equal to the notional amountof the interest rate swap from a floating interest rate (LIBOR plus 2.50% atinception), to a fixed interest rate (7.50% at inception).  The notional amount of the interest rate swapwas $75.0 million at inception of the swap agreement and decreases over time toa notional amount of $5.0 million at the expiration date.  The notional amount of the swap was$65,000,000 as of December 31, 2007 and over the next twelve monthsdecreases as follows:  to $57,500,000starting April 18, 2008; and to $50,000,000 starting October 20,2008.  Based on the scheduled swapnotional amount during the next 12 months of the swap agreement, a 100 basis point increase in market interestrates would result in interest expense savings for the year ofapproximately $0.6 million.  A 100basis point decline in market interest rates would correspondinglyincrease our interest expense for the year by approximately $0.6 million.  Thus, a100 basis point increase in market interest rates during the next 12 months ofthe swap agreement would result in additional interest expense for theyear of approximately $0.3 million on the Term Loan and swap agreement combined.  A 100 basis point decline in marketinterest rates during the next 12 months of the swap agreement would correspondinglylower our interest expense for the year by approximately $0.3 million on theTerm Loan and swap agreement combined.

 

Based on the limited other variable rate debt included in our debtportfolio as of December 31, 2007, a 100 basis point increase in interestrates would result in additional interest incurred for the year of less than$0.1 million.  A 100 basis point decreasein interest rates would correspondingly lower our interest expense for the yearby less than $0.1 million.

 

Other than as described above, we do notbelieve that the market risk exposure on other financial instruments ismaterial.

 

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**Item 4.  Controls and Procedures**

 

***Disclosure Controls and Procedures***

 

Our disclosure controls and procedures aredesigned to ensure that information required to be disclosed by us in thereports that are filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.  These disclosure controls and proceduresinclude controls and procedures designed to ensure that information required tobe disclosed under the Exchange Act is accumulated and communicated to ourmanagement on a timely basis to allow decisions regarding requireddisclosure.  We evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures as of December 31, 2007. Based on this evaluation, the Company’s Chief Executive Officer andChief Financial Officer have concluded that as of December 31, 2007, thesecontrols and procedures were effective.

 

***Internal Control over Financial Reporting***

 

There have been no changes ininternal control over financial reporting identified in connection with theforegoing evaluation that occurred during the fiscal quarter ended December 31,2007, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

From time to time, the Company is named as a defendant in legal actionsarising from its normal business activities. Although the amount of any liability that could arise with respect tocurrently pending actions cannot be accurately predicted, the Company does notbelieve that the resolution of any pending action will have a material adverseeffect on its financial position, results of operations or liquidity.

 

**Item 1A.  Risk Factors**

 

In addition to the other information set forth inthis Form 10-Q, you should carefully consider the factors discussed in Part I,Item 1A “Risk Factors” of our Form 10-K for the yearended September 30, 2007.  The risks described in our Form 10-Kare not the only risks that we face. Additional risks not presently known to us or that we donot currently consider significant may also have anadverse effect on us. If any of the risks actuallyoccur, our business, results of operations, cash flows or financialcondition could suffer.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

 

The following table providesinformation about purchases by us during the quarter ended December 31,2007 of equity securities that are registered by us pursuant to Section 12of the Securities Exchange Act of 1934:

 
| **Period**                                 | ** ** | **Total  Number of  Shares  Purchased (1)** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased as  Part of a Publicly  Announced Program (2)** | ** ** | **Maximum  Approximate Dollar  Value of Shares that  May Yet Be Purchased  Under the Program (2)** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October 1 to  October 31, 2007   |       | —                                                |       | —                                           |       | —                                                                                                                      |       | —                                                                                                                                          |       |
| November 1 to  November 30, 2007 |       | 6,292                                                 |       | $16.33                                           |       | —                                                                                                                      |       | —                                                                                                                                          |       |
| December 1 to  December 31, 2007 |       | 275                                                   |       | $17.62                                           |       | —                                                                                                                      |       | —                                                                                                                                          |       |
| Total                                      |       | 6,567                                                 |       | $16.38                                           |       | —                                                                                                                      |       | —                                                                                                                                          |       |

 

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(1) Representsshares repurchased directly from certain employees to satisfy income taxwithholding obligations for such employees in connection with restricted stockawards that vested during the period and, to a much lesser extent, fractionalshares repurchased in connection with the Company’s Employee Stock PurchasePlan.

 

(2) Duringthe quarter ended December 31, 2007, the Company did not have a publiclyannounced program for repurchase of shares of its common stock and did notrepurchase any of its common stock in open-market transactions outside of sucha program.

 

**Item 6.  Exhibits**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                       |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1             |       | Certification of the Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                         |
| 31.2             |       | Certification of the Chief Operating Officer & Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     |
| 32.1             |       | Certification of the Chief Executive Officer Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                    |
| 32.2             |       | Certification of the Chief Operating Officer & Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**Signatures**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|                        |     | MOTHERS WORK, INC.                                                          |
|-----------------------------|----------|-----------------------------------------------------------------------------|
|                        |     |
| Date: February 8, 2008 | By:      | **/s/ DAN W. MATTHIAS**                                                     | ** ** |
|                        | * * | Dan W. Matthias                                                             | * * |
| * *                    |     | *Chairman of the Board and    Chief Executive Officer*            |   |
| * *                    | * * | * *                                                                    |
|                        |     |                                                                        |
| Date: February 8, 2008 | By:      | **/s/ EDWARD M. KRELL**                                                     | ** ** |
|                        |     | Edward M. Krell                                                             |   |
| * *                    | * * | *Chief Operating  Officer &*   *Chief Financial Officer* |   |
|                             |          |                                                                             |  |  |

 

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**INDEX OF EXHIBITS FILED WITH**

**FORM 10-Q OF MOTHERS WORK, INC.**

**FOR THE QUARTER ENDED DECEMBER 31, 2007**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                       |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                  |
| 31.1             |       | Certification of the Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                         |
| 31.2             |       | Certification of the Chief Operating Officer & Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     |
| 32.1             |       | Certification of the Chief Executive Officer Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                    |
| 32.2             |       | Certification of the Chief Operating Officer & Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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