**United States**

**Securities and ExchangeCommission**

**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 June 30, 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.**

(Exact name of registrant as specified in itscharter)

| **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’s telephone number, including areacode **(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

Indicateby check mark whether the Registrant is a large accelerated filer, an acceleratedfiler or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o                                 Acceleratedfiler x                         Non-acceleratedfiler o

Indicateby check mark whether the Registrant is a shell company (as defined inRule 12b-2 of the Act).  Yes o No x

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

Common Stock, $.01 par value5,962,939 shares outstanding as of August 2, 2007

 

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**INDEX**
| PART I.  FINANCIAL  INFORMATION |   |
|--------------------------------------|--------|
| Item 1.                              |   | Financial Statements  (unaudited) |   |
|                                 |   | Consolidated  Balance Sheets |   |
|                                 |   | Consolidated  Statements of Operations |   |
|                                 |   | Consolidated  Statements of Stockholders’ Equity and Comprehensive Income |   |
|                                 |   | Consolidated  Statements of Cash Flows |   |
|                                 |   | Notes to  Consolidated Financial Statements |   |
| Item 2.                              |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 3.                              |   | Quantitative  and Qualitative Disclosures About Market Risk |   |
| Item 4.                              |   | Controls and Procedures |   |
|                                 |   |   |   |
| PART II.  OTHER INFORMATION     |   |
| Item 1.                              |   | Legal Proceedings |   |
| Item 1A.                             |   | Risk Factors |   |
| Item 6.                              |   | Exhibits |   |
|                                 |   |   |   |
| Signatures                           |   |   |   |

 

2

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**PART I.  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(in thousands, except share and per share amounts)

(unaudited)
| ** **                                                                                                                       | ** ** | **June 30, 2007** | ** ** | **September 30, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| **ASSETS**                                                                                                                       |       |                        |       |                             |       |
| Current  assets:                                                                                                                 |       |                        |       |                             |       |
| Cash and cash equivalents                                                                                                        |       | $                           | 7,393      |                             | $          | 18,904 |   |
| Short-term investments                                                                                                           |       | —                      |       | 9,425                            |       |
| Trade receivables, net                                                                                                           |       | 10,931                      |       | 11,631                           |       |
| Inventories                                                                                                                      |       | 97,998                      |       | 94,259                           |       |
| Deferred income taxes                                                                                                            |       | 6,018                       |       | 6,018                            |       |
| Prepaid expenses and other current assets                                                                                        |       | 4,578                       |       | 8,395                            |       |
| Total current assets                                                                                                             |       | 126,918                     |       | 148,632                          |       |
| Property,  plant and equipment, net                                                                                              |       | 71,237                      |       | 71,430                           |       |
| Assets  held for sale                                                                                                            |       | 700                         |       | 700                              |       |
| Other  assets:                                                                                                                   |       |                        |       |                             |       |
| Goodwill                                                                                                                         |       | 50,389                      |       | 50,389                           |       |
| Deferred financing costs, net of accumulated amortization of $72 and  $1,927                                                     |       | 1,265                       |       | 2,795                            |       |
| Other intangible assets, net of accumulated amortization of $2,463 and  $2,413                                                   |       | 613                         |       | 726                              |       |
| Deferred income taxes                                                                                                            |       | 13,838                      |       | 12,543                           |       |
| Other non-current assets                                                                                                         |       | 3,756                       |       | 521                              |       |
| Total other assets                                                                                                               |       | 69,861                      |       | 66,974                           |       |
| Total assets                                                                                                                     |       | $                           | 268,716    |                             | $          | 287,736 |   |
| ** **                                                                                                                       |       |                        |       |                             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                    |       |                        |       |                             |       |
| Current  liabilities:                                                                                                            |       |                        |       |                             |       |
| Line of credit borrowings                                                                                                        |       | $                           | —     |                             | $          | — |   |
| Current portion of long-term debt                                                                                                |       | 1,656                       |       | 814                              |       |
| Accounts payable                                                                                                                 |       | 20,710                      |       | 19,593                           |       |
| Accrued expenses and other current liabilities                                                                                   |       | 36,753                      |       | 44,453                           |       |
| Total current liabilities                                                                                                        |       | 59,119                      |       | 64,860                           |       |
| Long-term  debt                                                                                                                  |       | 92,064                      |       | 117,535                          |       |
| Deferred  rent and other non-current liabilities                                                                                 |       | 23,436                      |       | 24,641                           |       |
| Total liabilities                                                                                                                |       | 174,619                     |       | 207,036                          |       |
|                                                                                                                             |       |                        |       |                             |       |
| Commitments  and contingencies (Note 8)                                                                                          |       |                        |       |                             |       |
|                                                                                                                             |       |                        |       |                             |       |
| 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, 5,962,769  and 5,624,374 shares issued and outstanding, respectively |       | 60                          |       | 56                               |       |
| Additional paid-in capital                                                                                                       |       | 80,657                      |       | 71,431                           |       |
| Retained earnings                                                                                                                |       | 14,200                      |       | 9,213                            |       |
| Accumulated other comprehensive loss                                                                                             |       | (820                        | )          | —                           |       |
| Total stockholders’ equity                                                                                                  |       | 94,097                      |       | 80,700                           |       |
| Total  liabilities and stockholders’ equity                                                                                 |       | $                           | 268,716    |                             | $          | 287,736 |   |

 

The accompanying notes are an integral part ofthese Consolidated Financial Statements.

3

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(in thousands, except per share amounts)

(unaudited)
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                        | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                    |       | $                                               | 153,227    |                                           | $          | 163,883 |   | $ | 445,568 |   | $ | 459,919 |   |
| Cost of goods sold                           |       | 72,105                                          |       | 74,023                                         |       | 211,336 |   | 217,853 |   |
| Gross profit                                 |       | 81,122                                          |       | 89,860                                         |       | 234,232 |   | 242,066 |   |
| Selling, general and administrative expenses |       | 70,055                                          |       | 71,933                                         |       | 208,668 |   | 215,035 |   |
| Operating income                             |       | 11,067                                          |       | 17,927                                         |       | 25,564 |   | 27,031 |   |
| Interest expense, net                        |       | 2,043                                           |       | 3,541                                          |       | 7,965 |   | 11,120 |   |
| Loss on extinguishment of debt               |       | 7,330                                           |       | —                                         |       | 9,423 |   | — |   |
| Income before income taxes                   |       | 1,694                                           |       | 14,386                                         |       | 8,176 |   | 15,911 |   |
| Income tax provision                         |       | 661                                             |       | 5,612                                          |       | 3,189 |   | 6,207 |   |
| Net income                                   |       | $                                               | 1,033      |                                           | $          | 8,774 |   | $ | 4,987 |   | $ | 9,704 |   |
|                                         |       |                                            |       |                                           |       |   |   |   |   |
| Net income per share—Basic              |       | $                                               | 0.18       |                                           | $          | 1.64 |   | $ | 0.86 |   | $ | 1.83 |   |
| Average shares outstanding—Basic        |       | 5,838                                           |       | 5,334                                          |       | 5,789 |   | 5,298 |   |
| Net income per share—Diluted            |       | $                                               | 0.17       |                                           | $          | 1.54 |   | $ | 0.81 |   | $ | 1.77 |   |
| Average  shares outstanding—Diluted     |       | 6,140                                           |       | 5,684                                          |       | 6,168 |   | 5,496 |   |

 

The accompanying notes are an integral part ofthese Consolidated Financial Statements.

4

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYAND COMPREHENSIVE INCOME**

**(in thousands)**

**(unaudited)**
| ** **                                                           | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **     | ** ** | **Accumulated** | ** ** | ** **        | ** ** | ** ** | ** ** | ** **                    | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|----------------|------------|-----------------|------------|-------------------|------------|------------|------------|-------------------------------|------------|
| ** **                                                           | ** ** | **Number**            | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**         | ** ** | ** ** | ** ** | ** **                    | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **of**                | ** ** | ** ** | ** ** | **Paid-in**    | ** ** | **Retained**    | ** ** | **Comprehensive** | ** ** | ** ** | ** ** | **Comprehensive Income** | ** ** |
| ** **                                                           | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Capital**    | ** ** | **Earnings**    | ** ** | **Loss**          | ** ** | **Total**  | ** ** | **Quarter**                   | ** ** | **Year to Date** | ** ** |
| Balance as of  September 30, 2006                               |       | 5,624                 |       | $          | 56         |           | $          | 71,431          |       | $                 | 9,213      |       | $          | —                        |       | $ | 80,700 |   |   |   |   |   |
| Net income                                                           |       |                  |       |       |       |           |       | 4,987           |       | —            |       | 4,987      |       | $                             | 1,033      |   | $ | 4,987 |   |
| Initial prior service cost for retirement plans, net  of tax         |       | —                |       | —     |       | —         |       | —          |       | (1,202            | )          | (1,202     | )          |                          |       |   |   |
| Amortization of prior service cost for retirement  plans, net of tax |       | —                |       | —     |       | —         |       | —          |       | 71                |       | 71         |       | 54                            |       | 71 |   |
| Gain on interest rate hedge, net of tax                              |       | —                |       | —     |       | —         |       | —          |       | 311               |       | 311        |       | 311                           |       | 311 |   |
| Comprehensive income                                                 |       |                  |       |       |       |           |       |            |       |              |       |       |       | $                             | 1,398      |   | $ | 5,369 |   |
| Stock-based compensation                                             |       | 121                   |       | 1          |       | 1,533          |       | —          |       | —            |       | 1,534      |       |                          |       |   |   |
| Exercise of stock options                                            |       | 218                   |       | 3          |       | 3,731          |       | —          |       | —            |       | 3,734      |       |                          |       |   |   |
| Tax benefit from stock option exercises                              |       | —                |       | —     |       | 2,540          |       | —          |       | —            |       | 2,540      |       |                          |       |   |   |
| Reclassification of equity award from liabilities                    |       | —                |       | —     |       | 1,422          |       | —          |       | —            |       | 1,422      |       |                          |       |   |   |
| Balance as of June 30,  2007                                    |       | 5,963                 |       | $          | 60         |           | $          | 80,657          |       | $                 | 14,200     |       | $          | (820                          | )          | $ | 94,097 |   |   |   |   |   |
|                                                                 |       |                  |       |       |       |           |       |            |       |              |       |       |       |                          |       |   |   |
| Balance as of  September 30, 2005                               |       | 5,269                 |       | $          | 53         |           | $          | 63,164          |       | $                 | 111        |       | $          | —                        |       | $ | 63,328 |   |   |   |   |   |
| Net income                                                           |       | —                |       | —     |       | —         |       | 9,704           |       | —            |       | 9,704      |       | $                             | 8,774      |   | $ | 9,704 |   |
| Comprehensive income                                                 |       |                  |       |       |       |           |       |            |       |              |       |       |       | $                             | 8,774      |   | $ | 9,704 |   |
| Stock-based compensation                                             |       | —                |       | —     |       | 915            |       | —          |       | —            |       | 915        |       |                          |       |   |   |
| Exercise of stock options                                            |       | 117                   |       | 1          |       | 1,597          |       | —          |       | —            |       | 1,598      |       |                          |       |   |   |
| Tax benefit from stock option exercises                              |       | —                |       | —     |       | 610            |       | —          |       | —            |       | 610        |       |                          |       |   |   |
| Balance as of June 30,  2006                                         |       | 5,386                 |       | $          | 54         |           | $          | 66,286          |       | $                 | 9,815      |       | $          | —                        |       | $ | 76,155 |   |   |   |   |   |

 

The accompanying notes are an integral part ofthese Consolidated Financial Statements.

5

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(in thousands)

(unaudited)
| ** **                                                                         | ** ** | **Nine Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                       | ** ** | **2006** | ** ** |
| **Cash Flows from Operating Activities**                                           |       |                                           |       |   |   |
| Net income                                                                         |       | $                                              | 4,987      |   | $ | 9,704 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                           |       |   |   |
| Depreciation and amortization                                                      |       | 11,868                                         |       | 11,879 |   |
| Stock-based compensation  expense                                                  |       | 1,534                                          |       | 1,706 |   |
| Loss on impairment of  long-lived assets                                           |       | 949                                            |       | 2,345 |   |
| Gain on disposal of assets                                                         |       | (292                                           | )          | (45 | ) |
| Loss on extinguishment of debt                                                     |       | 9,423                                          |       | — |   |
| Accretion of discount on  senior notes                                             |       | 89                                             |       | 139 |   |
| Deferred income tax benefit                                                        |       | (781                                           | )          | (636 | ) |
| Amortization of deferred  financing costs                                          |       | 376                                            |       | 476 |   |
| Changes in assets and liabilities:                                                 |       |                                           |       |   |   |
| Decrease (increase) in —                                                      |       |                                           |       |   |   |
| Trade receivables                                                                  |       | 700                                            |       | (2,519 | ) |
| Inventories                                                                        |       | (3,739                                         | )          | 8,835 |   |
| Prepaid expenses and other  assets                                                 |       | 3,809                                          |       | 1,467 |   |
| Increase (decrease) in —                                                      |       |                                           |       |   |   |
| Accounts payable, accrued  expenses and other current liabilities                  |       | (5,726                                         | )          | 13,909 |   |
| Deferred rent and other  non-current liabilities                                   |       | (1,544                                         | )          | (1,311 | ) |
| Net cash provided by operating  activities                                         |       | 21,653                                         |       | 45,949 |   |
|                                                                               |       |                                           |       |   |   |
| **Cash Flows from Investing Activities**                                           |       |                                           |       |   |   |
| Purchase of short-term investments                                                 |       | (19,550                                        | )          | (69,655 | ) |
| Proceeds from sale of short-term investments                                       |       | 28,975                                         |       | 44,005 |   |
| Contribution to grantor trust                                                      |       | (2,662                                         | )          | — |   |
| Capital expenditures                                                               |       | (12,896                                        | )          | (10,811 | ) |
| Proceeds from sale of property, plant and equipment                                |       | 85                                             |       | — |   |
| Proceeds from sale of assets held for sale                                         |       | —                                         |       | 225 |   |
| Purchase of intangible assets                                                      |       | (9                                             | )          | (11 | ) |
| Net cash used in investing  activities                                             |       | (6,057                                         | )          | (36,247 | ) |
|                                                                               |       |                                           |       |   |   |
| **Cash Flows from Financing Activities**                                           |       |                                           |       |   |   |
| (Decrease) increase in cash overdraft                                              |       | (395                                           | )          | 1,167 |   |
| Proceeds from issuance of long-term debt                                           |       | 90,000                                         |       | — |   |
| Repayment of long-term debt                                                        |       | (115,498                                       | )          | (473 | ) |
| Premium on repurchase of long-term debt                                            |       | (6,469                                         | )          | — |   |
| Deferred financing costs                                                           |       | (1,019                                         | )          | — |   |
| Proceeds from exercise of stock options                                            |       | 3,734                                          |       | 1,598 |   |
| Excess tax benefit from exercise of stock options                                  |       | 2,540                                          |       | 610 |   |
| Net cash (used in) provided by  financing activities                               |       | (27,107                                        | )          | 2,902 |   |
| **Net (Decrease) Increase in Cash and Cash Equivalents**                           |       | (11,511                                        | )          | 12,604 |   |
| **Cash and Cash Equivalents, Beginning of Period**                                 |       | 18,904                                         |       | 3,037 |   |
| **Cash and Cash Equivalents, End of Period**                                       |       | $                                              | 7,393      |   | $ | 15,641 |   |
|                                                                               |       |                                           |       |   |   |
| Supplemental Disclosures of Cash Flow Information:                                 |       |                                           |       |   |   |
| Cash paid for interest                                                             |       | $                                              | 8,573      |   | $ | 7,435 |   |
| Cash (received) paid for income taxes                                              |       | $                                              | (1,006     | ) | $ | 1,110 |   |

 

The accompanying notes are an integral part ofthese Consolidated Financial Statements.

6

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**June 30, 2007**

(unaudited)

**1.****                 BASIS OF FINANCIAL STATEMENT PRESENTATION**

The accompanying unaudited consolidated financial statements have beenprepared in accordance with the requirements for Form 10-Q andArticle 10 of Regulation S-X and, accordingly, certain informationand footnote disclosures have been condensed or omitted.  Reference is made to the Annual Report onForm 10-K as of and for the year ended September 30, 2006 for MothersWork, Inc. and subsidiaries (the “Company” or “Mothers Work”), as filedwith the Securities and Exchange Commission (“SEC”), for additional disclosuresincluding a summary of the Company’s accounting policies.

Inthe opinion of management, the consolidated financial statements contain alladjustments, consisting of normal recurring adjustments, necessary to presentfairly the consolidated financial position, results of operations and cashflows of the Company for the periods presented. Since the Company’s operations are seasonal, the interim operatingresults of the Company may not be indicative of operating results for the fullyear.

The Company operates on a fiscal year ending September30 of each year.  All references tofiscal years of the Company refer to fiscal years, or periods within suchfiscal years, ended on September 30 in those years.  For example, the Company’s “fiscal 2007” willend on September 30, 2007.  Certainreclassifications have been made to the prior year consolidated financialstatements to conform to the current year presentation.

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

Basicearnings per share (“Basic EPS”) is computed by dividing net income by theweighted average number of common shares outstanding, excluding restrictedstock awards for which the restrictions have not lapsed.  Diluted earningsper share (“Diluted EPS”) is computed by dividing net income by the weightedaverage number of common shares outstanding, after giving effect to thepotential dilution, if applicable, from the assumed lapse of restrictions onrestricted stock awards and from the exercise of securities, such as stockoptions and warrants, into shares of common stock as if those securities wereexercised.

The followingtables summarize the Basic EPS and Diluted EPS calculations (in thousands,except per share amounts):
| ** **                                                                              | ** ** | **Three Months Ended  June 30, 2007** | ** ** | **Three Months Ended  June 30, 2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **Net  Income**                                           | ** ** | **Shares**                                                | ** ** | **EPS** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic EPS                                                                               |       | $                                                         | 1,033      |                                                      | 5,838      |   | $ | 0.18 |   | $ | 8,774 |   | 5,334 |   | $ | 1.64 |   |
| Incremental shares from the assumed lapse of restrictions on restricted  stock awards   |       | —                                                    |       | 5                                                         |       | — |   | — |   | — |   | — |   |
| Incremental shares from the assumed exercise of outstanding stock  options and warrants |       | —                                                    |       | 297                                                       |       | (0.01 | ) | — |   | 350 |   | (0.10 | ) |
|                                                                                    |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                                                             |       | $                                                         | 1,033      |                                                      | 6,140      |   | $ | 0.17 |   | $ | 8,774 |   | 5,684 |   | $ | 1.54 |   |

 

7

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| ** **                                                                              | ** ** | **Nine Months Ended  June 30, 2007** | ** ** | **Nine Months Ended  June 30, 2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **Net  Income**                                          | ** ** | **Shares**                                               | ** ** | **EPS** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic EPS                                                                               |       | $                                                        | 4,987      |                                                     | 5,789      |   | $ | 0.86 |   | $ | 9,704 |   | 5,298 |   | $ | 1.83 |   |
| Incremental shares from the assumed lapse of restrictions on restricted  stock awards   |       | —                                                   |       | 46                                                       |       | (0.01 | ) | — |   | — |   | — |   |
| Incremental shares from the assumed exercise of outstanding stock  options and warrants |       | —                                                   |       | 333                                                      |       | (0.04 | ) | — |   | 198 |   | (0.06 | ) |
|                                                                                    |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                                                             |       | $                                                        | 4,987      |                                                     | 6,168      |   | $ | 0.81 |   | $ | 9,704 |   | 5,496 |   | $ | 1.77 |   |

 

For the threemonths ended June 30, 2007 and 2006, options, warrants and restricted stock for160,545 and 149,900 shares, respectively, were excluded from the calculation ofDiluted EPS as their effect would have been antidilutive.  For the nine months ended June 30, 2007 and2006, options, warrants and restricted stock for 70,515 and 555,710 shares,respectively, were excluded from the calculation of Diluted EPS as their effectwould have been antidilutive.  These options, warrants and restricted stockcould potentially dilute EPS in the future.

**3.**                 INVENTORIES

Inventories werecomprised of the following (in thousands):
|                  | ** ** | **June 30, 2007** | ** ** | **September 30, 2006** | ** ** |
|------------------|------------|-----------------------------|------------|----------------------------------|------------|
| Finished goods   |       | $                           | 89,207     |                             | $          | 86,937 |   |
| Work-in-progress |       | 3,237                       |       | 2,736                            |       |
| Raw materials    |       | 5,554                       |       | 4,586                            |       |
|             |       | $                           | 97,998     |                             | $          | 94,259 |   |

 

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

Accrued expensesand other current liabilities were comprised of the following (in thousands):
|                                                             | ** ** | **June 30, 2007** | ** ** | **September 30, 2006** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| Salaries, wages and employee benefits                       |       | $                           | 8,405      |                             | $          | 14,657 |   |
| Income taxes payable                                        |       | 1,127                       |       | 1,565                            |       |
| Interest                                                    |       | 1,580                       |       | 2,273                            |       |
| Deferred rent                                               |       | 4,016                       |       | 4,192                            |       |
| Sales taxes                                                 |       | 3,013                       |       | 3,170                            |       |
| Insurance                                                   |       | 2,139                       |       | 1,892                            |       |
| Audit and legal                                             |       | 3,981                       |       | 4,137                            |       |
| Remaining payout for redemption of Series A Preferred Stock |       | 679                         |       | 679                              |       |
| Accrued store construction costs                            |       | 691                         |       | 681                              |       |
| Gift certificates and store credits                         |       | 4,286                       |       | 3,895                            |       |
| Other                                                       |       | 6,836                       |       | 7,312                            |       |
|                                                        |       | $                           | 36,753     |                             | $          | 44,453 |   |

 

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

In November 2006,the Company’s Board of Directors authorized the repurchase of $25,000,000principal 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 repurchase, theCompany recorded a pre-tax charge totaling $2,093,000, representing the premiumpaid of $1,406,000 plus the write-off of unamortized debt issuance discount anddeferred financing costs of $687,000.  On April 18, 2007, the Company completed the redemption of the remainingoutstanding amount of its Senior Notes at 105.625% of the $90,000,000 principalamount, plus accrued and unpaid interest. In connection with the redemption, the Company recorded a pre-tax chargetotaling $7,330,000, representing the premium paid of $5,063,000 plus thewrite-off of unamortized debt 

8

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issuance discount anddeferred financing costs of $2,267,000.

On March 13, 2007,the Company entered into a Term Loan and Security Agreement (the “Term LoanAgreement”) for a $90,000,000 senior secured Term Loan B due March 13, 2013(the “Term Loan”), the proceeds of which were received on April 18, 2007 andwere used to redeem the remaining $90,000,000 principal amount of the SeniorNotes.  The interest rate on the TermLoan is equal to, at the Company’s election, either (i) the prime rate plus1.00%, or (ii) the LIBOR rate plus the applicable margin.  The applicable margin is initially fixed at2.50% through and including the fiscal quarter ending 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). 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 rate swapagreement enables the Company to effectively convert an amount of the Term Loanequal to the notional amount of the interest rate swap from a floating interestrate of LIBOR plus 2.50% (subject to reduction to LIBOR plus 2.25% if theCompany achieves a specified leverage ratio), to a fixed interest rate of 7.50%(subject to reduction to 7.25% if the Company achieves a specified leverageratio).  The notional amount of theinterest rate swap was $75,000,000 at the inception of the swap agreement anddecreases over time to a notional amount of $5,000,000 at the expirationdate.  The notional amount of the swapwas $75,000,000 as of June 30, 2007 and over the next twelve months decreasesas follows:  to $70,000,000 starting July18, 2007; to $65,000,000 starting October 18, 2007; and to $57,500,000 startingApril 18, 2008.  Commencing with thethird quarter of fiscal 2007, the Company is required to make minimumrepayments of the principal amount of the Term Loan in quarterly installmentsof $225,000 each.  Additionally, the TermLoan can be prepaid at the Company’s option, in part or in whole, at any timewithout any prepayment premium or penalty. The Term Loan Agreement imposes certain restrictions on the Company’sability to, among other things, incur additional indebtedness, pay dividends,repurchase stock, and enter into other various types of transactions.  The Term Loan Agreement also containsquarterly financial covenants that require the Company to maintain a specifiedmaximum permitted Consolidated Leverage Ratio and a specified minimum permittedConsolidated Interest Coverage Ratio (as defined).  As of June 30, 2007, the Company was incompliance with the financial covenants of its Term Loan Agreement.

In connection withthe Term Loan transaction, the Company amended its existing $60,000,000revolving credit facility (the “Credit Facility”) in order to permit the newTerm Loan financing.  This amendment ofthe Credit Facility also extended its maturity from October 15, 2009 to March13, 2012, increased its size to $65,000,000, and reduced the LIBOR-basedinterest 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 nine months of fiscal 2007and the first nine months of fiscal 2006, the Company exceeded the minimumrequirements for Excess Availability.

**6.****                 RETIREMENT PLANS**

On March 2, 2007, the Company entered into Supplemental ExecutiveRetirement Agreements with its Chairman of the Board and Chief ExecutiveOfficer and its President and Chief Creative Officer (the “SERP Agreements”).  Thepurpose of the SERP Agreements is to provide the executives with supplementalpension benefits following their cessation of employment.

The amount of the benefit payable under each SERP Agreement is theactuarial present value of a single life annuity equal to 60% of the executive’s“deemed final pay,” commencing upon cessation of employment.  For this purpose, “deemed final pay” meansthe executive’s current base salary, increased by 3% for each new fiscal yearthat begins before the executive’s cessation of employment.  This benefit vested 331/3% onMarch 2, 2007.  Starting on September 30,2007 and on each September 30 thereafter until fully vested, the benefit willvest either (i) 15%, if during that entire fiscal year the executive providedcontinuous full-time service to the Company, or (ii) 7.5%, if during thatentire fiscal year the executive provided at least continuous 50% part-timeservice to the Company.  Notwithstandingthe foregoing, the benefit is subject to full acceleration if, following achange in control, the executive’s employment ceases due to a terminationwithout cause or a resignation with good reason.  In connection with the initiation of the SERPAgreements, the Company adopted the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans,” and recorded after-tax prior service cost of$1,202,000 (net of income tax benefit of $769,000) as Accumulated OtherComprehensive Loss.

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The components of net periodic pension cost on a pre-tax basis were asfollows (in thousands):
|                                    | ** ** | **Three Months Ended,  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                         | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                       |       | $                                                | 393        |                                           | $          | — |   | $ | 524 |   | $ | — |   |
| Interest cost                      |       | 29                                               |       | —                                         |       | 39 |   | — |   |
| Amortization of prior service cost |       | 89                                               |       | —                                         |       | 118 |   | — |   |
| Total  net periodic benefit cost   |       | $                                                | 511        |                                           | $          | — |   | $ | 681 |   | $ | — |   |

 

The SERP Agreements also provide that the Company will establish agrantor trust, the assets of which will be used to pay benefits under the SERPAgreements (or to satisfy the claims of the Company’s general creditors in theevent of the Company’s bankruptcy or insolvency).  The grantor trust will be fundedperiodically, on an actuarial basis, such that the total assets of the trustfrom time to time will reasonably approximate the Company’s then currentobligation under the SERP Agreements (provided that, upon a change in control,the Company has agreed to fully fund the grantor trust, regardless of theextent to which the SERP benefits are then vested).   On April 30, 2007, the Company made aninitial contribution to the grantor trust of $2,662,000 and no furthercontributions are expected to be made during fiscal 2007.  As of June 30, 2007, investments in thegrantor trust, included in other non-current assets in the consolidated balancesheet, amounted to $2,672,000.  Thegrantor trust investments were classified as available-for-sale and consistedprimarily of fixed income mutual funds with cost that approximated the fairvalue.

**7.****                 NEW ACCOUNTING PRONOUNCEMENTS**

FASBInterpretation No. 48

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes.”  FASB Interpretation No. 48 providesguidance for the recognition and measurement of uncertain tax positions in anenterprise’s financial statements. Recognition involves a determination of whether it is more likely thannot that a tax position will be sustained upon examination with the presumptionthat the tax position will be examined by the appropriate taxing authority thatwould have full knowledge of all relevant information.  This interpretation is effective for fiscalyears beginning after December 15, 2006. Early adoption is permitted if the enterprise has not issued financialstatements, including interim financial statements, in the period ofadoption.  The impact from adoption ofFASB Interpretation No. 48, if any, on the Company’s consolidatedfinancial position or results of operations has not yet been determined.  The Company plans to adopt FASBInterpretation No. 48 effective as of October 1, 2007.

SAB No. 108

InSeptember 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.”  SABNo. 108 states that SEC registrants should use both a balance sheet approachand an income statement approach when quantifying and evaluating themateriality of a misstatement, contains guidance on correcting errors under thedual approach and provides transition guidance for correcting errors existingin prior years.   SAB No. 108 iseffective for annual financial statements covering the first fiscal year endingafter November 15, 2006.  The Companydoes not expect the adoption of SAB No. 108 to have a material impact on theCompany’s consolidated financial statements.

SFAS No. 157

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157 definesfair value, establishes a framework for measuring fair value in U.S. generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  The impact from adoption of SFAS No. 157, ifany, on the Company’s consolidated financial position or results of operationshas not yet been determined.

SFAS No. 159

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities.” SFAS No. 159 provides companies with an option to report selectedfinancial assets and liabilities at fair value and requires entities to displaythe fair value of those assets and liabilities for which the company has chosento use fair value on the face of the balance sheet.  SFAS No. 159 is effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The impact from adoption of SFAS No. 159, ifany, on the Company’s consolidated financial position or results of operationshas not yet been determined.

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**8.****                 COMMITMENTSAND CONTINGENCIES**

From time to time,the Company is named as a defendant in legal actions arising from normalbusiness activities. Litigation is inherently unpredictable and although theamount of any liability that could arise with respect to currently pendingactions cannot be accurately predicted, the Company does not believe that theresolution of any pending action will have a material adverse effect on itsfinancial position, results of operations or liquidity.

**9.**                 SEGMENT ANDENTERPRISE 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 thresholds establishedin SFAS No. 131.  The Company hasdetermined that its business is comprised of one operating segment: the design,manufacture and sale of maternity apparel and related accessories.  While the Company offers a wide range ofproducts for sale, the substantial portion of its products are initiallydistributed through the same distribution facilities, many of the Company’sproducts are manufactured at common contract manufacturer productionfacilities, the Company’s products are marketed through a common marketingdepartment, and these products are sold to a similar customer base, consistingof expectant mothers.

***Geographic Information***.  Information concerning theCompany’s operations by geographic area was as follows (in thousands):
|                                          | ** ** | **Three Months Ended,  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                         | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net  Sales to Unaffiliated Customers** |       |                                             |       |                                           |       |   |   |   |   |
| United States                            |       | $                                                | 147,530    |                                           | $          | 158,293 |   | $ | 431,826 |   | $ | 446,771 |   |
| Canada                                   |       | $                                                | 5,697      |                                           | $          | 5,590 |   | $ | 13,742 |   | $ | 13,148 |   |

 
|                        | ** ** | **June 30,  2007** | ** ** | **September 30,  2006** | ** ** |
|------------------------|------------|-------------------------|------------|-------------------------|------------|
| **Long-Lived  Assets** | ** ** | ** **              | ** ** | ** **              | ** ** |
| United States          |       | $                       | 69,630     |                    | $          | 69,621 |   |
| Canada                 |       | $                       | 2,220      |                    | $          | 2,535 |   |
| Costa Rica             |       | $                       | 700        |                    | $          | 700 |   |

 

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

**10.**          INTERESTEXPENSE, NET

Interest expense,net was comprised of the following (in thousands):
|                        | ** ** | **Three Months Ended,  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **             | ** ** | **2007**                                         | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest expense       |       | $                                                | 2,066      |                                           | $          | 3,841 |   | $ | 8,283 |   | $ | 11,580 |   |
| Interest income        |       | (23                                              | )          | (300                                           | )          | (318 | ) | (460 | ) |
| Interest  expense, net |       | $                                                | 2,043      |                                           | $          | 3,541 |   | $ | 7,965 |   | $ | 11,120 |   |

 

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

**Results of Operations**

Thefollowing tables set forth certain operating data as a percentage of net salesand as a percentage change for the three and nine months ended June 30:
| ** **                                        | ** ** | ** **                                 | ** ** | ** **            | ** ** | ** **        | ** ** | ** **        | ** ** | **% Period to Period** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | ** **                                 | ** ** | ** **            | ** ** | ** **        | ** ** | ** **        | ** ** | **Increase (Decrease)**          | ** ** |
| ** **                                        | ** ** | ** **                                 | ** ** | ** **            | ** ** | ** **        | ** ** | ** **        | ** ** | **Three**                             | ** ** | **Nine** | ** ** |
| ** **                                        | ** ** | **% of Net Sales (1)** | ** ** | **Months**            | ** ** | **Months**        | ** ** |
| ** **                                        | ** ** | **Three**                                  | ** ** | **Nine**              | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** **                                        | ** ** | **Months Ended**                      | ** ** | **Months Ended** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                        | ** ** | **June 30,**                          | ** ** | **June 30,**     | ** ** | **2007 vs.** | ** ** | **2007 vs.** | ** ** |
| ** **                                        | ** ** | **2007**                                   | ** ** | **2006**              | ** ** | **2007**          | ** ** | **2006**          | ** ** | **2006**                              | ** ** | **2006** | ** ** |
| Net  sales                                        |       | 100.0                                      | %          | 100.0                 | %          | 100.0             | %          | 100.0             | %          | (6.5                                  | )%         | (3.1 | )% |
| Cost  of goods sold (2)                           |       | 47.1                                       |       | 45.2                  |       | 47.4              |       | 47.4              |       | (2.6                                  | )          | (3.0 | ) |
| Gross profit                                      |       | 52.9                                       |       | 54.8                  |       | 52.6              |       | 52.6              |       | (9.7                                  | )          | (3.2 | ) |
| Selling,  general and administrative expenses (3) |       | 45.7                                       |       | 43.9                  |       | 46.8              |       | 46.8              |       | (2.6                                  | )          | (3.0 | ) |
| Operating  income                                 |       | 7.2                                        |       | 10.9                  |       | 5.7               |       | 5.9               |       | (38.3                                 | )          | (5.4 | ) |
| Interest  expense, net                            |       | 1.3                                        |       | 2.2                   |       | 1.8               |       | 2.4               |       | (42.3                                 | )          | (28.4 | ) |
| Loss  on extinguishment of debt                   |       | 4.8                                        |       | —                |       | 2.1               |       | —            |       | N.M.                                  |       | N.M. |   |
| Income before income taxes                        |       | 1.1                                        |       | 8.8                   |       | 1.8               |       | 3.5               |       | (88.2                                 | )          | (48.6 | ) |
| Income  tax provision                             |       | 0.4                                        |       | 3.4                   |       | 0.7               |       | 1.3               |       | (88.2                                 | )          | (48.6 | ) |
| Net income                                        |       | 0.7                                        | %          | 5.4                   | %          | 1.1               | %          | 2.1               | %          | (88.2                                 | )          | (48.6 | ) |

 

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N.M.—Not meaningful

(1)          Components may not addto total due to rounding.

(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 operatingexpenses of our buying departments), inventory reserves (including lower ofcost or market reserves), inbound freight charges, purchasing and receivingcosts, inspection costs, warehousing costs, internal transfer costs, and theother costs of our distribution network.

(3)     The “Selling, general andadministrative expenses” line item includes:**advertisingand marketing expenses, corporate administrative expenses, store expenses(including store payroll and store occupancy expenses), store opening and storeclosing expenses, and store asset impairment charges.

The following table sets forth certain information concerning the numberof our stores and leased departments for the periods indicated:
|                           | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006** | ** ** |
| **Retail Locations** | ** ** | **Stores**                       | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** |
| Beginning of period       |       | 795                              |       | 821 |   | 1,616 |   | 831 |   | 728 |   | 1,559 |   |
| Opened                    |       | 5                                |       | 2 |   | 7 |   | 1 |   | 3 |   | 4 |   |
| Closed                    |       | (13                              | )          | (11 | ) | (24 | ) | (17 | ) | (6 | ) | (23 | ) |
| End of period             |       | 787                              |       | 812 |   | 1,599 |   | 815 |   | 725 |   | 1,540 |   |

 
|                           | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **June 30, 2007**     | ** ** | **June 30, 2006** | ** ** |
| **Retail Locations** | ** ** | **Stores**                      | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** |
| Beginning of period       |       | 810                             |       | 731 |   | 1,541 |   | 852 |   | 739 |   | 1,591 |   |
| Opened                    |       | 16                              |       | 121 |   | 137 |   | 12 |   | 15 |   | 27 |   |
| Closed                    |       | (39                             | )          | (40 | ) | (79 | ) | (49 | ) | (29 | ) | (78 | ) |
| End  of period            |       | 787                             |       | 812 |   | 1,599 |   | 815 |   | 725 |   | 1,540 |   |

 

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Our fiscal yearends on September 30.  All references inthis discussion to our fiscal years refer to the fiscal year, or periods withinthe fiscal year, ended on September 30 in the year mentioned.  For example, our “fiscal 2007” will end onSeptember 30, 2007.

**Three Months Ended June 30, 2007 and 2006**

***Net Sales.***  Our netsales for the third quarter of fiscal 2007 decreased by 6.5%, or $10.7 million,to $153.2 million from $163.9 million for the third quarter of fiscal2006.  The decrease in net sales versuslast year resulted primarily from a decrease in comparable store sales,partially offset by increased sales from our leased department and licensedrelationships and marketing partnerships. Comparable store sales decreased by 8.2% for the third quarter offiscal 2007, based on 1,393 retail locations, versus a comparable store salesincrease of 6.4% for the third quarter of fiscal 2006, based on 1,472 retaillocations.  We attribute the decrease incomparable store sales for the quarter primarily to a weak overall economic andretail environment, unseasonably cool weather early in the quarter, and themore pregnancy-friendly fit of certain current non-maternity fashion trends.

As ofJune 30, 2007, we operated a total of 787 stores and 1,599 total retaillocations, compared to 815 stores and 1,540 total retail locations as of June30, 2006.  In addition, our Oh Baby! byMotherhoodTM collection is available at Kohl’s® stores throughout the UnitedStates.  During the third quarter offiscal 2007, we opened five stores, including four multi-brand store openings,and closed 13 stores, with eight of the store closings related to multi-brandstore openings.

***Gross Profit.***  Our grossprofit for the third quarter of fiscal 2007 decreased by approximately $8.8million, to $81.1 million from $89.9 million for the third quarter of fiscal2006, primarily reflecting the effect of our lower sales volume.  Grossprofit as a percentage of net sales (gross margin) for the third quarter offiscal 2007 was 52.9% compared to 54.8% for the third quarter of fiscal2006.  The decrease in gross margin of 1.9 percentage pointscompared to the prior year resulted primarily from spreading fixed productoverhead costs over a lower sales volume and, to a lesser extent, more pricepromotional activity compared to last year, partially offset by increasedmarketing partnership revenues.

***Selling, General and AdministrativeExpenses.***  Our selling, general and administrativeexpenses for the third quarter of fiscal 2007 decreased by 2.6%, orapproximately $1.8 million, to $70.1 million from $71.9 million for thethird quarter of fiscal 2006.  Thisdecrease in expense for the quarter resulted primarily from significantly lowervariable incentive compensation costs and lower stock compensation expense,partially offset by increased payroll and employee benefits costs and increasedlegal expenses.  As a percentage of netsales, selling, general and administrative expenses increased to 45.7% forfiscal 2007 compared to 43.9% for fiscal 2006. This increase in the expense percentage for the quarter resultedprimarily from negative expense leverage from the decrease in comparable storesales, increased payroll and employee benefits costs, and increased legalexpenses, partially offset by significantly lower variable incentivecompensation costs and lower stock compensation expense.  We incurred impairment charges for write-downsof store long-lived assets of $0.6 million for fiscal 2007, as comparedto $0.5 million for fiscal 2006.  Werecorded charges of $15,000 related to store closings for the third quarter offiscal 2007, as compared to $0.3 million of charges incurred for store closingsin the third quarter of fiscal 2006.

***Operating Income.***  Our operating income for the third quarterof fiscal 2007 decreased by 38.3%, or approximately $6.8 million, to $11.1million from $17.9 million for the third quarter of fiscal 2006, due tothe lower sales volume and associated gross profit reduction partially offsetby lower selling, general and administrative expenses.  Operating income as a percentage of net sales(operating income margin) for thethird quarter of fiscal 2007 decreased to 7.2% from 10.9% for the third quarterof fiscal 2006.  The decrease inoperating income margin was due to our lower gross margin and our higheroperating expense ratio compared to fiscal 2006.

***Interest Expense, Net.***  Our netinterest expense for the third quarter of fiscal 2007 decreased by 42.3%, or$1.5 million, to $2.0 million from $3.5 million for the third quarter offiscal 2006.  This decrease was primarilydue to the repurchase of $35.0 million of our Senior Notes from August 2006through December 2006 and, to a lesser extent, the lower interest rate on ournew $90.0 million Term Loan, which was used to redeem the remaining outstandingbalance of our Senior Notes.  During thethird quarter of fiscal 2007, our average level of direct borrowings under ourcredit facility was $1.1 million, but we did not have any direct borrowingsunder our credit facility as of June 30, 2007. During the third quarter of fiscal 2006, we had no direct borrowingsunder our credit facility.

***Loss on Extinguishment of Debt*. **In April 2007, we repurchased the remaining $90.0million principal amount of our outstanding Senior Notes with the proceeds froma new Term Loan.  The $90.0 millionSenior Note repurchase resulted in a third quarter pre-tax charge of $7.3million, representing the premium paid plus the write-off of unamortizeddebt issuance discount and deferred financing costs.

13

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***Income Tax Provision.***  Oureffective tax rate was a provision of 39.0% for the third quarters of fiscal2007 and fiscal 2006.  We expect our effective tax rate for the full year fiscal2007 to be approximately 39%.

***Net Income.***  Netincome for the third quarter of fiscal 2007 was $1.0 million, or $0.17 pershare (diluted), compared to net income of $8.8 million, or $1.54 per share(diluted), for the third quarter of fiscal 2006, representing decreases versuslast year of 88% in net income and 89% in diluted earnings per share.

Our average diluted shares outstanding of 6,140,000 forthe third quarter of fiscal 2007 was 8.0% higher than the 5,684,000 averagediluted shares outstanding for the third quarter of fiscal 2006.  Theincrease in average diluted shares outstanding reflects higher sharesoutstanding in fiscal 2007 compared to fiscal 2006, as a result of stock optionexercises and restricted stock awards, partially offset by the lower dilutiveimpact of outstanding stock options in fiscal 2007 compared to fiscal 2006.

**Nine Months Ended June 30, 2007 and 2006**

***Net Sales.***  Our netsales for the first nine months of fiscal 2007 decreased by 3.1%, orapproximately $14.3 million, to $445.6 million from $459.9 million for thefirst nine months of fiscal 2006.  Thedecrease in net sales versus last year resulted primarily from a decrease incomparable store sales, partially offset by increased sales from our leaseddepartment and licensed relationships and marketing partnerships.  Comparable store sales decreased by4.1% for the first nine months of fiscal 2007, based on 1,365 retail locations,versus a comparable store sales increase of 3.7% for the first nine months offiscal 2006, based on 959 retail locations.

***Gross Profit.***  Our grossprofit for the first nine months of fiscal 2007 decreased by 3.2%, to $234.2million from $242.1 million for the first nine months of fiscal 2006,reflecting the effect of our lower sales volume.  Gross profit as apercentage of net sales (gross margin) for the first nine months of fiscal 2007was 52.6%, the same as for the first nine months of fiscal 2006.  Thegross margin for fiscal 2007 as compared to fiscal 2006 reflects the negativeeffect of spreading fixed product overhead costs over a smaller sales base,offset by higher pre-overhead merchandise gross margins and, to a lesserextent, increased marketing partnership revenues.  The increase in our pre-overhead merchandisegross margins for the nine-month period primarily reflects decreased markdownlevels compared to last year for the first six months of the fiscal year.

***Selling, General and AdministrativeExpenses.***  Our selling, general and administrative expensesfor the first nine months of fiscal 2007 decreased by 3.0%, or approximately$6.3 million, to $208.7 million from $215.0 million for the first ninemonths of fiscal 2006.  This decrease inexpense for the nine-month period resulted primarily from significantly lowervariable incentive compensation costs, lower store occupancy expenses, as aresult of our reduced number of stores, decreased store closing costs and adecrease in impairment charges for write-downs of store long-livedassets, partially offset by increased employee benefits costs’ increased legalexpenses and, to a lesser extent, increased payroll expenses.  As a percentage of net sales, selling,general and administrative expenses were 46.8% for the first nine months ofboth fiscal 2007 and fiscal 2006.  Theselling, general and administrative expense percentage for fiscal 2007 ascompared to fiscal 2006 reflects the impact of significantly lower variableincentive compensation costs, decreased store closing costs and lowerimpairment charges, offset by the negative expense leverage from the decreasein comparable store sales, increased employee benefits costs, increased legalexpenses and, to a lesser extent, increased payroll expenses.  We recorded a gain of $0.1 million related tostore closings for the first nine months of fiscal 2007, as compared to $1.8million of charges incurred for store closings in the first nine months offiscal 2006 (primarily lease termination expenses).  The significant majority of the store closingcosts in fiscal 2006 related to stores closed in conjunction with the openingof our Destination Maternity®superstore in New York City.  Inaddition, we incurred impairment charges for write-downs of store long-livedassets of $0.9 million for fiscal 2007, as compared to $2.3 million for fiscal2006.

***Operating Income.***  Our operating income for the first ninemonths of fiscal 2007 decreased by 5.4%, or approximately $1.4 million, to$25.6 million from $27.0 million for the first nine months of fiscal 2006,due to the lower sales volume and associated gross profit reduction partiallyoffset by lower selling, general and administrative expenses.  Operating income as a percentage of net sales(operating income margin) for thefirst nine months of fiscal 2007 decreased to 5.7% from 5.9% for the first ninemonths of fiscal 2006.

***Interest Expense, Net.***  Our netinterest expense for the first nine months of fiscal 2007 decreased by 28.4%,or approximately $3.1 million, to $8.0 million from $11.1 million for thefirst nine months of fiscal 2006.  Thisdecrease was primarily due to the repurchase of $35.0 million of our SeniorNotes from August 2006 through December 2006 and, to a lesser extent, the lowerinterest rate on our new $90.0 million Term Loan.  During the first nine months of fiscal 2007,our average level of direct borrowings under our credit facility was $0.7million, but we did not have any direct borrowings 

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under our credit facility as of June 30, 2007.  During the first nine months of fiscal 2006,our average level of direct borrowings under our credit facility was $0.4million.

***Loss on Extinguishment of Debt*. **In December 2006, we repurchased $25.0million principal amount of our outstanding Senior Notes.  In April 2007, we repurchased the remaining$90.0 million principal amount of our outstanding Senior Notes with theproceeds from a new Term Loan.  The$115.0 of million Senior Note repurchases resulted in pre-tax charges totaling$9.4 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 provision of 39.0% for the first nine months of fiscal2007 and fiscal 2006.  We expect our effective tax rate for the full year fiscal2007 to be approximately 39%.

***Net Income.***  Netincome for the first nine months of fiscal 2007 was $5.0 million, or $0.81 pershare (diluted), compared to net income of $9.7 million, or $1.77 per share(diluted), for the first nine months of fiscal 2006, representing decreases versuslast year of 49% in net income and 54% in diluted earnings per share.

Our average diluted shares outstanding of 6,168,000 forthe first nine months of fiscal 2007 was 12.2% higher than the 5,496,000average diluted shares outstanding for the first nine months of fiscal2006.  The increase in average diluted shares outstanding reflectshigher shares outstanding in fiscal 2007 compared to fiscal 2006, as a resultof stock option exercises and restricted stock awards, as well as the higherdilutive impact of outstanding stock options in fiscal 2007 compared to fiscal2006.

**Seasonality**

Our business, like that of many other retailers, isseasonal.  Our quarterly net saleshave historically been highest in our third fiscal quarter, corresponding tothe Spring selling season, followed by the first fiscal quarter, correspondingto the Fall/holiday selling season. Given the typically higher gross margin we experience in the thirdfiscal quarter compared to other quarters, the relatively fixed nature of mostof our operating expenses and interest expense, and the historically highersales level in the third quarter, we have typically generated a verysignificant percentage of our full year operating income and net income duringthe third quarter.  Results for any quarter are not necessarilyindicative of the results that may be achieved for a full fiscal year. Quarterly results may fluctuate materially depending upon, among other things,the timing of new store openings and new leased department openings, net salesand profitability contributed by new stores and leased departments, increasesor decreases in comparable store sales, the timing of the fulfillment ofpurchase orders under our product and license arrangements, adverse weatherconditions, shifts in the timing of certain holidays and promotions, changes ininventory and production levels and the timing of deliveries of inventory, andchanges in our merchandise mix.

**Liquidity and Capital Resources**

Ourcash 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 new business initiatives and our new and existing retaillocations.  We have historically financedthese capital requirements from cash flows from operations, borrowings underour credit facility or available cash balances.

InNovember 2006, our Board of Directors authorized the repurchase of $25.0million principal amount of our Senior Notes. This was in addition to the repurchase of $10.0 million principal amountof our Senior Notes completed during August and September 2006.  On December 8, 2006, we completed therepurchase of the authorized amount at 105.625% of the $25.0 million principalamount, plus accrued and unpaid interest. On April 18, 2007, we completed the redemption of the remaining $90.0million principal amount of our outstanding Senior Notes through a new TermLoan financing, which we expect will result in a decrease in annualized pre-taxinterest expense of approximately $3.6 million. This decrease in annualized interest expense from the new Term Loanfinancing began to be recognized in our third fiscal quarter.  The new Term Loan extends the maturity for$90.0 million principal amount of our debt from August 1, 2010 (the maturitydate of the redeemed Senior Notes) to March 13, 2013 (the maturity date of thenew Term Loan), with quarterly required principal payments of $225,000.  The December 2006 and April 2007 redemptionsof the Senior Notes, which were both at a price of 105.625% of principalamount, plus accrued interest, resulted in “Loss on extinguishment of debt” of$9.4 million on a pre-tax basis, consisting of the $6.5 million cash redemptionpremium and $2.9 million of non-cash expense from the write-off of unamortizeddeferred financing costs and debt issuance costs.

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In March 2007, we entered into Supplemental ExecutiveRetirement Agreements with our Chairman of the Board and Chief ExecutiveOfficer and our President and Chief Creative Officer (the “SERP Agreements”).  Thepurpose of the SERP Agreements is to provide the executives with supplementalpension benefits following their cessation of employment.  The SERP Agreements provided that weestablish a grantor trust, the assets of which will be used to pay benefitsunder the SERP Agreements (or to satisfy the claims of our general creditors inthe event of the Company’s bankruptcy or insolvency).  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 April2007, we made an initial contribution to the grantor trust of $2,662,000 and nofurther contributions are expected to be made during fiscal 2007.

Cash and cash equivalents decreased by $11.5 millionduring the first nine months of fiscal 2007 compared to an increase of $12.6million for the first nine months of fiscal 2006.  Cash provided byoperations of $21.7 million for the first nine months of fiscal 2007 decreasedby approximately $24.2 million from the $45.9 million cash provided byoperations for the first nine months of fiscal 2006.  This decreasein cash provided by operations was primarily the result of: (i) a decrease inaccounts payable, accrued expenses and other current liabilities in the firstnine months of fiscal 2007 compared to an increase in the first nine months offiscal 2006 and (ii) an increase in inventories in the first nine months offiscal 2007 compared to a decrease in the first nine months of fiscal2006.  During the first nine months offiscal 2007, we used a significant amount of our cash provided by operations topay for capital expenditures.  We funded the $25.0 million repurchase of ourSenior Notes in December 2006 by utilizing available cash, cash generated bynet proceeds from the sales (net of purchases) of short-term investments,cash generated from stock option exercises, as well as the remaining cashprovided by operations.  During the firstnine months of fiscal 2006, we used our cash provided by operations primarilyto increase our cash balance and short-terminvestments and, to a much lesser extent, to pay for capitalexpenditures.

Forthe first nine months of fiscal 2007, we spent $12.9 million on capitalexpenditures, including $8.9 million for leasehold improvements, fixturesand equipment principally for new store facilities, as well as improvements toexisting stores, and $4.0 million for our information systems anddistribution and corporate facilities. This compares to $10.8 million in capital expenditures for thefirst nine months of fiscal 2006, of which $9.0 million was spent for newstore facilities and improvements to existing stores and retail locations, and$1.8 million for our information systems and distribution and corporatefacilities. The increase in capital expenditures was primarily due to increasedexpenditures for information systems enhancements.

OnMarch 13, 2007, we entered into a Term Loan and Security Agreement for a $90.0million senior secured Term Loan B due March 13, 2013, the proceeds of whichwere received on April 18, 2007 and were used to redeem the remaining $90.0 millionprincipal amount of our Senior Notes. The interest rate on the Term Loan is equal to, at our election, either(i) the prime rate plus 1.00%, or (ii) the LIBOR rate plus the applicablemargin.  The applicable margin isinitially fixed at 2.50% through and including the fiscal quarter endingSeptember 30, 2007.  Thereafter, theapplicable margin for LIBOR rate borrowings is either 2.25% or 2.50%, dependingon our Consolidated Leverage Ratio (as defined).  In order to mitigate our floating rateinterest risk on the variable rate Term Loan, we entered into an interest rateswap agreement with the Agent bank for the Term Loan that commenced on April18, 2007, the date the $90.0 million Term Loan proceeds were received, andexpires on April 18, 2012.  The interestrate swap agreement enables us 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% ifwe achieve a specified leverage ratio), to a fixed interest rate of 7.50%(subject to reduction to 7.25% if we achieve a specified leverage ratio).  The notional amount of the interest rate swapwas $75.0 million at the inception of the swap agreement and decreases over timeto a notional amount of $5.0 million at the expiration date.  The notional amount of the swap was $75.0million as of June 30, 2007 and over the next twelve months decreases asfollows:  to $70.0 million starting July18, 2007; to $65.0 million starting October 18, 2007; and to $57.5 millionstarting April 18, 2008.  Commencing withthe third quarter of fiscal 2007, we are required to make minimum repayments ofthe principal amount of the Term Loan in quarterly installments of $225,000each.  Additionally, the Term Loan can beprepaid at our option, in part or in whole, at any time without any prepaymentpremium or penalty.  The Term LoanAgreement imposes certain restrictions on our ability to, among other things,incur additional indebtedness, pay dividends, repurchase stock, and enter intoother various types of transactions.  TheTerm Loan Agreement also contains quarterly financial covenants that require usto maintain a specified maximum permitted Consolidated Leverage Ratio and aspecified minimum permitted Consolidated Interest Coverage Ratio (asdefined).  As of June 30, 2007, we werein compliance with the financial covenants of our Term Loan Agreement.

Inconnection with the Term Loan transaction, we amended our existing $60.0million revolving Credit Facility in order to permit the new Term Loanfinancing.  This amendment of the CreditFacility also extends its maturity from October 15, 2009 to March 13, 2012,modestly increases its size to $65.0 million, and reduces the LIBOR-basedinterest rate option 

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under the facilityby 0.25%.  There are no financialcovenant requirements under the Credit Facility provided that ExcessAvailability (as defined) does not fall below 10% of the Borrowing Base (asdefined).  If Excess Availability were tofall below 10% of the Borrowing Base, we would be required to meet a specifiedminimum Fixed Charge Coverage Ratio (as defined).  During the first nine months of fiscal 2007and the first nine months of fiscal 2006, we exceeded the minimum requirementsfor Excess Availability.

As of June 30, 2007, we had no outstandingborrowings under the Credit Facility and $8.4 million in letters of credit,with $56.6 million of availability under our credit line.  We had average direct borrowings of $0.7 million under our creditfacility for the first nine months of fiscal 2007, compared to averagedirect borrowings of $0.4 million during the first nine months of fiscal 2006.

Our managementbelieves that our current cash and working capital positions, expectedoperating cash flows and available borrowing capacity under our CreditFacility, will be sufficient to fund our working capital, capital expendituresand debt repayment requirements and to fund stock and/or debt repurchases, ifany, for at least the next twelve months.

###### **Critical Accounting Policies and Estimates**

Our consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States. These generally acceptedaccounting principles require management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of our consolidated financialstatements and the reported amounts of net sales and expenses during the reportingperiod.

Our significantaccounting policies are described in Note 2 of “Notes to ConsolidatedFinancial Statements” in our Annual Report on Form 10-K for the year endedSeptember 30, 2006.  We believe that thefollowing discussion addresses our critical accounting policies, which arethose that are most important to the portrayal of our financial condition andresults of operations and require management’s most difficult, subjective andcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.  If actual results were to differsignificantly from estimates made, future reported results could be materiallyaffected.  However, we are not currentlyaware of any reasonably likely events or circumstances that would result inmaterially different results.

Oursenior management has reviewed these critical accounting policies and estimatesand the related Management’s Discussion and Analysis of Financial Condition andResults of Operations with the Audit Committee of our Board of Directors.

***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 June 30, 2007 and September 30, 2006 totaled$98.0 million and $94.3 million, respectively, representing 36.5% and32.8% 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 are recordedat cost and are amortized using the straight-line method over the shorter ofthe lease term or their useful life.  Netlong-lived assets as of June 30, 2007 and September 30, 2006 totaled$71.9 million and $72.2 million, respectively, representing 26.7% and25.1% of total assets, respectively.

Inassessing potential impairment of these assets, we periodically evaluate thehistorical and forecasted operating 

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results and cashflows on a store-by-store basis.  Newlyopened stores may take time to generate positive operating and cash flowresults.  Factors such as: (i) storetype, that is, company store or leased department, (ii) store concept,that is, Motherhood Maternity®, Mimi Maternity®, A Pea in the Pod® orDestination Maternity®, (iii) store location, for example, urban areaversus suburb, (iv) current marketplace awareness of our brands,(v) local customer demographic data, (vi) anchor stores within themall in which our store is located and (vii) current fashion trends are allconsidered in determining the time frame required for a store to achievepositive financial results, which is assumed to be within two years from thedate a store location is opened.  Ifeconomic conditions are substantially different from our expectations, thecarrying value of certain of our long-lived assets may become impaired.  As a result of our impairment assessment, werecorded write-downs of long-lived assets of $0.9 million for the first nine months of fiscal 2007, and $2.3 millionfor the first nine months of fiscal 2006, 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 intangible assets.  Goodwill represents the excess of theaggregate purchase price over the fair value of net assets acquired in businesscombinations and is separately disclosed in our consolidated balance sheets.  As of both June 30, 2007 andSeptember 30, 2006, goodwill totaled $50.4 million, representing18.8% and 17.5% of total assets, respectively. In June 2001, the FASB issued SFAS No. 142, “Goodwill andOther 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.

Theimpairment test requires us to compare the fair value of business reportingunits to their carrying value, including assigned goodwill.  In assessing potential impairment of goodwill,we have determined that we have one reporting unit for purposes of applyingSFAS 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, 2006, indicated the fair value of thereporting unit exceeded its carrying value. If the per share fair value of our single reporting unit was less thanthe book value per share on September 30, 2006, our goodwill would likelyhave been impaired.  As of June 30, 2007,our book value was $15.78 per share of outstanding common stock and the closingtrading price of our common stock was $31.27 per share.

***Accounting for Income Taxes.***  Aspart of the process of preparing our consolidated financial statements, we arerequired to estimate our income taxes in each of the jurisdictions in which weoperate.  This process requires us toestimate our actual current tax exposure together with assessing temporarydifferences resulting from differing treatment of items, such as depreciationof property and equipment and valuation of inventories, for tax and accountingpurposes.  We determine our provision forincome taxes based on federal and state tax laws and regulations currently ineffect, 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.

Thetemporary differences between the book and tax treatment of income and expensesresult in deferred tax assets and liabilities, which are included within ourconsolidated balance sheets.  We mustthen assess the likelihood that our deferred tax assets will be recovered fromfuture taxable income.  Actual resultscould differ from our assessments if adequate taxable income is not generatedin future periods.  Net deferred taxassets as of June 30, 2007 and September 30, 2006 totaled$19.9 million and $18.6 million, respectively, representing 7.4% and6.5% of total assets, respectively.  Tothe extent we believe that recovery is not more likely than not, we mustestablish a valuation allowance.  To theextent we establish a valuation allowance or change the allowance in a futureperiod, income tax expense will be 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 SFASNo. 5, “Accounting for Contingencies.” 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 accrual for a loss contingency couldfluctuate, thereby creating variability in our results of operations fromperiod to period.  Likewise, an actualloss arising from a loss contingency which significantly exceeds the amountaccrued for in our financial statements could have a material adverse impact onour operating results for the period in which such actual loss becomes known.

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**Recent Accounting Pronouncements**

*FASBInterpretation No. 48*

In June 2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes.”  FASB Interpretation No. 48 provides guidancefor the recognition and measurement of uncertain tax positions in an enterprise’sfinancial statements.  Recognitioninvolves a determination of whether it is more likely than not that a taxposition will be sustained upon examination with the presumption that the taxposition will be examined by the appropriate taxing authority that would havefull knowledge of all relevant information. This interpretation is effective for fiscal years beginning afterDecember 15, 2006.  Early adoption ispermitted if the enterprise has not issued financial statements, includinginterim financial statements, in the period of adoption.  The impact from adoption of FASBInterpretation No. 48, if any, on our consolidated financial position orresults of operations has not yet been determined.  We plan to adopt FASB Interpretation No. 48effective as of October 1, 2007.

SAB No. 108

InSeptember 2006, the SEC issued SAB No. 108, “Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements.”  SAB No. 108 states that SECregistrants should use both a balance sheet approach and an income statementapproach when quantifying and evaluating the materiality of a misstatement,contains guidance on correcting errors under the dual approach and providestransition guidance for correcting errors existing in prior years.   SAB No. 108 is effective for annualfinancial statements covering the first fiscal year ending after November 15,2006.  We do not expect the adoption ofSAB No. 108 to have a material impact on our consolidated financial statements.

SFAS No. 157

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157 definesfair 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 afterNovember 15, 2007, and interim periods within those fiscal years.  The impact from adoption of SFAS No. 157, ifany, on our consolidated financial position or results of operations has notyet been determined.

SFAS No. 159

*InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities.” SFAS No. 159 provides companies with an option to report selectedfinancial assets and liabilities at fair value and requires entities to displaythe fair value of those assets and liabilities for which the company has chosento use fair value on the face of the balance sheet.  SFAS No. 159 is effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The impact from adoption of SFAS No. 159, ifany, on our consolidated financial position or results of operations has notyet been determined.*

**Forward-Looking Statements**

Someof the information in this report, including information incorporated byreference, if applicable, (as well as information included in oral statementsor other written statements made or to be made by us), contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”).  Theforward-looking statements involve a number of risks anduncertainties.  A number of factors couldcause our actual results, performance, achievements or industry results to bematerially different from any future results, performance or achievements expressedor implied by these forward-looking statements.  These factors include, but are not limitedto: the success of our new business initiatives, future sales trends in ourexisting store base, weather, changes in consumer spending patterns, raw materialprice increases, consumer preferences and overall economic conditions, theimpact of competition and pricing, availability of suitable store locations,continued availability of capital and financing, ability to hire and developsenior management and sales associates, ability to develop and sourcemerchandise, ability to receive production from foreign sources on a timelybasis, potential stock repurchases, potential debt prepayments, war or acts ofterrorism and other factors referenced in our Annual Report on Form 10-K,including those set forth under the caption “Risk Factors.”

Inaddition, 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, any forward-lookingstatements included in this report do not purport to be predictions of futureevents or circumstances and may not be realized. Forward-lookingstatements can be identified by, among other things, the use of forward-lookingterms such 

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as “believes,” “expects,”“may,” “will,” “should,” “seeks,” “pro forma,” “anticipates,” “intends,” “continues,”“could,” “estimates,” “plans,” “potential,” “predicts,” “goal,” “objective,” orthe negative of any of these terms, or comparable terminology, or bydiscussions of our outlook, plans, goals, strategy or intentions.  Forward-looking statements speak onlyas of the date made.  We assume noobligation to update any of these forward-looking statements to reflectactual results, changes in assumptions or changes in other factors affectingthese forward-looking statements.

**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

Mothers Work is exposed to market risk from changes ininterest rates.  We have not entered into any market sensitive instrumentsfor trading purposes.  The analysis below presents the sensitivity of themarket value of our financial instruments to selected changes in marketinterest rates.  The range of changes presented reflects our view ofchanges that are reasonably possible over a one-year period.

As ofJune 30, 2007, we had cash and cash equivalents of $7.4 million and anadditional $2.7 million in a grantor trust. Our cash equivalents consist of money market accounts that bear interestat variable rates.  Our investments inthe grantor trust consist primarily of fixed income mutual funds with cost thatapproximates fair value.  A change in market interest rates earned on ourinvestments  impacts the interestincome and cash flows, but does not materially impact the fair market value ofthe financial instruments.  Due to theaverage maturity and conservative nature of our investment portfolio, webelieve a sudden change in interest rates would not have a material effect onthe value of our investment portfolio.

As of June 30, 2007, the principal components of ourdebt portfolio were the $90.0 million Term Loan and the $65.0 millionCredit Facility, both of which are denominated in U.S. dollars.  The fairmarket value of the debt portfolio is referred to as the “Debt Value.”

Our Credit Facility carries a variable interest ratethat is tied to market indices.  As of June 30, 2007, we had no directborrowings and $8.4 million of letters of credit outstanding under our CreditFacility.  Borrowings under the Credit Facility would have resulted ininterest at a rate between approximately 6.32% and 8.25% per annum as of June30, 2007.  Any future borrowings under the Credit Facility would, to theextent of outstanding borrowings, be affected by changes in market interestrates.  A change in market interest rateson the variable 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 interest rate that istied to market indices.  The sensitivityanalysis as it relates to this portion of our debt portfolio assumes aninstantaneous 100 basis point move in interest rates from their levels as ofJune 30, 2007, with all other variables held constant.  The DebtValue of the Term Loan is approximately $90.0 million, its principalamount.  A 100 basis point increase in market interest rates would result in additionalannual interest expense on the Term Loan of approximately $0.9 million.  A 100 basis point decline in marketinterest rates would correspondingly lower our annual interest expenseon the Term Loan by approximately $0.9 million.

Inorder to mitigate our floating rate interest risk on the variable rate TermLoan, we entered into an interest rate swap agreement with the Agent bank forthe Term Loan that commenced on April 18, 2007. The interest rate swap agreement enables us to effectively convert anamount of the Term Loan equal to the notional amount of the interest rate swapfrom a floating interest rate (LIBOR plus 2.50% at inception), to a fixedinterest rate (7.50% at inception).  Thenotional amount of the interest rate swap was $75.0 million at inception of theswap agreement and decreases over time to a notional amount of $5.0 million atthe expiration date.  Based on thescheduled swap notional amount during the next 12 month of the swap agreement,a 100 basis point increase in marketinterest rates would result in interest expense savings for the year ofapproximately $0.7 million.  A 100basis point decline in market interest rates would correspondinglyincrease our interest expense for the year by approximately $0.7 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 $0.2 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 $0.2 million on theTerm Loan and swap agreement combined.

Basedon the limited other variable rate debt included in our debt portfolio as ofJune 30, 2007, a 100 basis point increase in interest rates would result inadditional interest incurred for the year of less than $0.1 million.  A 100 basis point decrease in interest rateswould correspondingly lower our interest expense for the year by less than $0.1million.

Other than as described above, we do not believe thatthe market risk exposure on other financial instruments is material.

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**Item 4.  Controls and Procedures**

***DisclosureControls and Procedures***

Our disclosure controlsand procedures are designed to ensure that information required to be disclosedby us in the reports that are filed or submitted under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities 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 required disclosure.  We evaluated the effectiveness of the designand operation of our disclosure controls and procedures as of June 30,2007.  Based on this evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthat as of June 30, 2007, these controls and procedures were effective.

***InternalControl over Financial Reporting***

There have been nochanges in internal control over financial reporting identified in connectionwith the foregoing evaluation that occurred during the fiscal quarter endedJune 30, 2007, that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II. OTHER INFORMATION**

**Item1.  Legal Proceedings**

Fromtime to time, the Company is named as a defendant in legal actions arising fromits normal business activities.  Althoughthe amount of any liability that could arise with respect to currently pendingactions cannot be accurately predicted, the Company does not believe that theresolution of any pending action will have a material adverse effect on itsfinancial position, results of operations or liquidity.

**Item 1A.  Risk Factors**

In addition to the other information set forth in thisForm 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, 2006.  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 actually occur, ourbusiness, results of operations, cash flows or financial condition couldsuffer.

**Item 6.  Exhibits**
| Exhibit  No. | ** ** | **Description** |
|--------------|------------|-----------------|
|         |       |            |   |
| 10.37        | *†    |            | Second Amended and Restated Employment Agreement  dated as of May 15, 2007, between Mothers Work, Inc. and Edward M. Krell  (Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 15,  2007). |
| 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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*                    Incorporatedby reference.

†                     Managementcontract or compensatory plan or arrangement.

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**Signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                      |     | MOTHERS WORK, INC.                                           |
|----------------------|----------|--------------------------------------------------------------|
|                 |     |                                                         |
| Date: August 7, 2007 | By:      | ** /s/ DAN W. MATTHIAS**                                | ** ** |
|                 |     | Dan W. Matthias                                              | * * |
|                 | * * | *Chairman of the Board and   Chief Executive Officer*        | * * |
|                 | * * | * *                                                     |
|                 |     |                                                         |
| Date: August 7, 2007 | 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 THEQUARTER ENDED JUNE 30, 2007**
| Exhibit  No. | ** ** | **Description** |
|--------------|------------|-----------------|
|         |       |            |   |
| 10.37        | *†    |            | Second Amended and Restated Employment Agreement  dated as of May 15, 2007, between Mothers Work, Inc. and Edward M. Krell  (Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 15,  2007). |
| 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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*                    Incorporatedby reference.

†                     Managementcontract or compensatory plan or arrangement.

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