**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 December 31, 2006** |
| ** **                                            |                                                                                               | ** ** |
| **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 |   | Accelerated filer x |   | Non-accelerated filer 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 value5,924,369 shares outstanding as of February 1, 2007

 

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**INDEX**
| PART I.  FINANCIAL  INFORMATION |   |
|--------------------------------------|--------|
| Item 1.                              |   | Financial Statements  (unaudited) |   |
|                                 |   | Consolidated Balance  Sheets | 3 |
|                                 |   | Consolidated  Statements of Operations | 4 |
|                                 |   | Consolidated  Statements of Cash Flows | 5 |
|                                 |   | Notes to  Consolidated Financial Statements | 6 |
| Item 2.                              |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item 3.                              |   | Quantitative  and Qualitative Disclosures About Market Risk | 22 |
| Item 4.                              |   | Controls and  Procedures | 23 |
|                                 |   |   |   |
| PART II.  OTHER  INFORMATION    |   |
| Item 1.                              |   | Legal Proceedings | 24 |
| Item 1A.                             |   | Risk Factors | 24 |
| Item 6.                              |   | Exhibits | 24 |
|                                 |   |   |   |
| Signatures                           |   |   | 25 |

 

2

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**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**MOTHERS WORK, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(in thousands, except share and per share amounts)

(unaudited)
| ** **                                                                                                                       | ** ** | **December 31, 2006** | ** ** | **September 30, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| **ASSETS**                                                                                                                       | ** ** | ** **                      | ** ** | ** **                       | ** ** |
| Current  assets:                                                                                                                 |       |                            |       |                             |       |
| Cash and cash equivalents                                                                                                        |       | $                               | 16,063     |                             | $          | 18,904 |   |
| Short-term investments                                                                                                           |       | —                          |       | 9,425                            |       |
| Trade receivables, net                                                                                                           |       | 12,238                          |       | 11,631                           |       |
| Inventories                                                                                                                      |       | 89,486                          |       | 94,259                           |       |
| Deferred income taxes                                                                                                            |       | 6,018                           |       | 6,018                            |       |
| Prepaid expenses and other current assets                                                                                        |       | 8,113                           |       | 8,395                            |       |
| Total current assets                                                                                                             |       | 131,918                         |       | 148,632                          |       |
| Property,  plant and equipment, net                                                                                              |       | 71,344                          |       | 71,430                           |       |
| Assets  held for sale                                                                                                            |       | 700                             |       | 700                              |       |
| Other  assets:                                                                                                                   |       |                            |       |                             |       |
| Goodwill                                                                                                                         |       | 50,389                          |       | 50,389                           |       |
| Deferred financing costs, net of accumulated amortization of $1,695 and  $1,927                                                  |       | 2,136                           |       | 2,795                            |       |
| Other intangible assets, net of accumulated amortization of $2,448 and  $2,413                                                   |       | 695                             |       | 726                              |       |
| Deferred income taxes                                                                                                            |       | 12,719                          |       | 12,543                           |       |
| Other non-current assets                                                                                                         |       | 508                             |       | 521                              |       |
| Total other assets                                                                                                               |       | 66,447                          |       | 66,974                           |       |
| Total assets                                                                                                                     |       | $                               | 270,409    |                             | $          | 287,736 |   |
| ** **                                                                                                                       | ** ** | ** **                      | ** ** | ** **                       | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                    | ** ** | ** **                      | ** ** | ** **                       | ** ** |
| Current  liabilities:                                                                                                            |       |                            |       |                             |       |
| Line of credit borrowings                                                                                                        |       | $                               | —     |                             | $          | — |   |
| Current portion of long-term debt                                                                                                |       | 778                             |       | 814                              |       |
| Accounts payable                                                                                                                 |       | 21,866                          |       | 19,593                           |       |
| Accrued expenses and other current liabilities                                                                                   |       | 43,139                          |       | 44,453                           |       |
| Total current liabilities                                                                                                        |       | 65,783                          |       | 64,860                           |       |
| Long-term  debt                                                                                                                  |       | 92,632                          |       | 117,535                          |       |
| Deferred  rent and other non-current liabilities                                                                                 |       | 22,391                          |       | 24,641                           |       |
| Total liabilities                                                                                                                |       | 180,806                         |       | 207,036                          |       |
|                                                                                                                             |       |                            |       |                             |       |
| Commitments  and contingencies (Note 9)                                                                                          |       |                            |       |                             |       |
|                                                                                                                             |       |                            |       |                             |       |
| Stockholders’  equity:                                                                                                      |       |                            |       |                             |       |
| Preferred stock, 2,000,000 shares authorized                                                                                     |       |                            |       |                             |       |
| Series A cumulative convertible preferred stock, $.01 par value; 41,000  shares  authorized, none  outstanding                   |       | —                          |       | —                           |       |
| Series B junior participating preferred stock, $.01 par value; 300,000  shares authorized,  none  outstanding                    |       | —                          |       | —                           |       |
| Common stock, $.01 par value; 20,000,000 shares authorized, 5,893,164  and 5,624,374 shares issued and outstanding, respectively |       | 59                              |       | 56                               |       |
| Additional paid-in capital                                                                                                       |       | 78,942                          |       | 71,431                           |       |
| Retained earnings                                                                                                                |       | 10,602                          |       | 9,213                            |       |
| Total stockholders’ equity                                                                                                  |       | 89,603                          |       | 80,700                           |       |
| Total  liabilities and stockholders’ equity                                                                                 |       | $                               | 270,409    |                             | $          | 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  December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                                         |       |                                                |       |   |   |
| Net sales                                    |       | $                                                   | 148,484    |   | $ | 151,393 |   |
| Cost of goods sold                           |       | 71,434                                              |       | 75,210 |   |
| Gross profit                                 |       | 77,050                                              |       | 76,183 |   |
| Selling, general and administrative expenses |       | 69,548                                              |       | 71,688 |   |
| Operating income                             |       | 7,502                                               |       | 4,495 |   |
| Interest expense, net                        |       | 3,132                                               |       | 3,794 |   |
| Loss on extinguishment of debt               |       | 2,093                                               |       | — |   |
| Income before income taxes                   |       | 2,277                                               |       | 701 |   |
| Income tax provision                         |       | 888                                                 |       | 273 |   |
| Net income                                   |       | $                                                   | 1,389      |   | $ | 428 |   |
|                                         |       |                                                |       |   |   |
| Net income per share – Basic            |       | $                                                   | 0.24       |   | $ | 0.08 |   |
| Average shares outstanding – Basic      |       | 5,705                                               |       | 5,269 |   |
| Net income per share – Diluted          |       | $                                                   | 0.23       |   | $ | 0.08 |   |
| Average  shares outstanding – Diluted   |       | 6,138                                               |       | 5,303 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

4

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(in thousands)

(unaudited)
| ** **                                                                         | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **Cash Flows from Operating Activities**                                           |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 1,389      |   | $ | 428 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                      |       | 3,877                                               |       | 4,017 |   |
| Stock-based compensation  expense                                                  |       | 471                                                 |       | 410 |   |
| Loss on impairment of  long-lived assets                                           |       | 250                                                 |       | 1,566 |   |
| (Gain) loss on disposal of  assets                                                 |       | (63                                                 | )          | 97 |   |
| Loss on extinguishment of debt                                                     |       | 2,093                                               |       | — |   |
| Accretion of discount on  senior notes                                             |       | 44                                                  |       | 45 |   |
| Deferred income tax benefit                                                        |       | (176                                                | )          | (153 | ) |
| Amortization of deferred  financing costs                                          |       | 154                                                 |       | 155 |   |
| Changes in assets and liabilities:                                                 |       |                                                |       |   |   |
| Decrease (increase) in —                                                      |       |                                                |       |   |   |
| Trade receivables                                                                  |       | (607                                                | )          | (2,039 | ) |
| Inventories                                                                        |       | 4,773                                               |       | 11,448 |   |
| Prepaid expenses and other  assets                                                 |       | 295                                                 |       | 637 |   |
| Increase (decrease) in —                                                      |       |                                                |       |   |   |
| Accounts payable, accrued  expenses and other current liabilities                  |       | 201                                                 |       | 6,980 |   |
| Deferred rent and other  non-current liabilities                                   |       | (936                                                | )          | (501 | ) |
| Net cash provided by operating  activities                                         |       | 11,765                                              |       | 23,090 |   |
|                                                                               |       |                                                |       |   |   |
| **Cash Flows from Investing Activities**                                           |       |                                                |       |   |   |
| Purchase of short-term investments                                                 |       | (19,550                                             | )          | (14,500 | ) |
| Proceeds from sale of short-term investments                                       |       | 28,975                                              |       | 3,000 |   |
| Capital expenditures                                                               |       | (3,004                                              | )          | (3,388 | ) |
| Purchase of intangible assets                                                      |       | (9                                                  | )          | (11 | ) |
| Net cash provided by (used in)  investing activities                               |       | 6,412                                               |       | (14,899 | ) |
|                                                                               |       |                                                |       |   |   |
| **Cash Flows from Financing Activities**                                           |       |                                                |       |   |   |
| (Decrease) increase in cash overdraft                                              |       | (67                                                 | )          | 2,739 |   |
| Repayment of long-term debt                                                        |       | (25,165                                             | )          | (156 | ) |
| Premium on repurchase of long-term debt                                            |       | (1,406                                              | )          | — |   |
| Proceeds from exercise of stock options                                            |       | 3,357                                               |       | 9 |   |
| Excess tax benefit from exercise of stock options                                  |       | 2,263                                               |       | 1 |   |
| Net cash (used in) provided by  financing activities                               |       | (21,018                                             | )          | 2,593 |   |
| **Net (Decrease) Increase in Cash and Cash Equivalents**                           |       | (2,841                                              | )          | 10,784 |   |
| **Cash and Cash Equivalents, Beginning of Period**                                 |       | 18,904                                              |       | 3,037 |   |
| **Cash and Cash Equivalents, End of Period**                                       |       | $                                                   | 16,063     |   | $ | 13,821 |   |
|                                                                               |       |                                                |       |   |   |
| Supplemental Disclosures of Cash Flow Information:                                 |       |                                                |       |   |   |
| Cash paid for interest                                                             |       | $                                                   | 1,106      |   | $ | 188 |   |
| Cash paid for income taxes                                                         |       | $                                                   | 378        |   | $ | 78 |   |

 

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

5

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**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2006**

(unaudited)

**1.****              BASIS OF FINANCIALSTATEMENT PRESENTATION**

The accompanying unaudited consolidated financialstatements have been prepared in accordance with the requirements forForm 10-Q and Article 10 of Regulation S-X and, accordingly,certain information and footnote disclosures have been condensed oromitted.  Reference is made to the AnnualReport on Form 10-K as of and for the year ended September 30, 2006for Mothers Work, Inc. and subsidiaries (the “Company” or “Mothers Work”)as filed with the Securities and Exchange Commission, for additionaldisclosures including a summary of the Company’s accounting policies.

In the opinion of management, the consolidatedfinancial statements contain all adjustments, consisting of normal recurringadjustments, necessary to present fairly the consolidated financial position,results of operations and cash flows of the Company for the periods presented.  Since the Company’s operations are seasonal,the interim operating results of the Company may not be indicative of operatingresults for the full year.

The Company operates on a fiscal year ending September30 of each year.  All references tofiscal years of the Company refer to fiscal years ended on September 30 inthose years.  For example, the Company’s “fiscal2007” will end on September 30, 2007. Certain reclassifications have been made to the prior year consolidatedfinancial statements to conform to the current year presentation.

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

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

The following table summarizes the Basic EPS andDiluted EPS calculation (in thousands, except per share amounts):
| ** **                                                                            | ** ** | **Three Months Ended  December 31, 2006** | ** ** | **Three Months Ended  December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **Net  Income**                                               | ** ** | **Shares**                                                    | ** ** | **EPS** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic EPS                                                                             |       | $                                                             | 1,389      |                                                          | 5,705      |   | $ | 0.24 |   | $ | 428 |   | 5,269 |   | $ | 0.08 |   |
| Incremental shares from  the assumed lapse of restrictions on restricted stock awards |       | —                                                        |       | 33                                                            |       | — |   | — |   | — |   | — |   |
| Incremental shares from  the assumed exercise of outstanding stock options            |       | —                                                        |       | 400                                                           |       | (0.01 | ) | — |   | 34 |   | — |   |
|                                                                                  |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                                                           |       | $                                                             | 1,389      |                                                          | 6,138      |   | $ | 0.23 |   | $ | 428 |   | 5,303 |   | $ | 0.08 |   |

 

For the three months ended December 31, 2006 and 2005,options and warrants to purchase 8,000 and 1,066,470 shares, respectively, wereexcluded from the calculation of Diluted EPS as their effect would have beenantidilutive.  These options and warrantscould potentially dilute EPS in the future.

**3.****              STOCK-BASEDCOMPENSATION**

The Company has three equity award plans: the DirectorStock Option Plan (the “Director Plan”), the Amended and Restated 1987 StockOption Plan (the “1987 Plan”) and the 2005 Equity Incentive Plan (the “2005Plan”).  The Director Plan expired onDecember 31, 2004 and no further awards may be granted under thatplan.  Options issued under the DirectorPlan will remain outstanding until they have expired, been exercised or haveotherwise terminated.  Under the 1987 Plan,as amended and restated, officers and certain employees, including outsidedirectors, may be granted options to purchase the 

6

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Company’s common stockwith exercise prices as determined by the Compensation Committee of the Boardof Directors that are no lower than the fair market value of the stock at thedate of grant.  The 1987 plan will expire on December 9, 2007,at which time options issued under the 1987 planwill remain outstanding until they have expired, been exercised or haveotherwise terminated.  No further awardsmay be granted under the 1987 Plan after December 9, 2007.   InFebruary 2003, the stockholders of the Company approved an amendment toincrease the number of shares of common stock available for issuance upon theexercise of options granted under the 1987 Plan and the Director Plan by500,000, up to a total of 2,175,000 options which may be issued under the twoplans (including up to a total of 200,000 options which were issuable under theDirector Plan).  In January 2006, thestockholders of the Company approved the adoption of the 2005 Plan.  Under the 2005 Plan, employees, directors,consultants and other individuals who provide services to the Company, may begranted awards in the form of options, stock appreciation rights, restrictedstock or restricted stock units.  Up to500,000 shares of the Company’s common stock may be issued in respect of awardsunder the 2005 Plan, with no more than 250,000 of those shares permitted to beissued in respect of restricted stock or restricted stock units granted underthe 2005 Plan, and awards of options to purchase the Company’s common stockwill have exercise prices as determined by the Compensation Committee of theBoard of Directors that are no lower than the fair market value of the stock onthe date of grant.

No options have been granted by the Company with anexercise price less than the fair market value of the Company’s common stock onthe date of grant for any of the periods presented.  The majority of the options issued under theplans vest ratably over a five-year period, although some options vestimmediately, and options issued under the plans generally expire ten years fromthe date of grant.  Restricted stockawards issued under the 2005 Plan have restrictions that lapse ratably over twoor five-year periods.  On December 13,2006, the Board of Directors modified the compensation structure for itsnon-employee directors and effective January 19, 2007, each outside directorwill be granted 2,000 shares of restricted stock on an annual basis that willvest one year from the date of grant. The Company issues new shares upon exercise of vested options.  As of December 31, 2006, there were 484,287shares of the Company’s common stock available for grant under the plans, ofwhich 90,287 shares were available under the 1987 Plan (which expires December9, 2007), with no more than 169,000 of those shares permitted to be issued inrespect of restricted stock or restricted stock units granted under the 2005Plan.

For the three months ended December 31, 2006 and 2005,the Company recognized stock-based employee compensation expense of $471,000and $410,000, less related income tax benefits of $184,000 and $160,000.  As of December 31, 2006, $6,000,000 of totalunrecognized compensation cost related to non-vested awards is expected to berecognized over a weighted-average period of 1.9 years.

Stock option activity for all plans was as follows: 
|                                       | ** ** | **Outstanding  Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining Life** | ** ** | **Aggregate   Intrinsic Value** | ** ** |
|---------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **(in thousands)**  | ** ** | ** **                                 | ** ** | **(years)**                                | ** ** | **(in thousands)**                   | ** ** |
| Balance—September 30,  2006 |       | 1,088                    |       | $                                          | 13.99      |                                       |       |                                      |       |   |
| Granted                               |       | 0                        |       | —                                     |       |                                       |       |                                      |       |
| Exercised                             |       | (188                     | )          | 18.06                                      |       |                                       |       |                                      |       |
| Forfeited                             |       | (1                       | )          | 11.44                                      |       |                                       |       |                                      |       |
| Balance—December  31, 2006       |       | 899                      |       | 13.15                                      |       | 6.5                                        |       | $                                         | 23,599     |   |
| Exercisable—December  31, 2006   |       | 530                      |       | $                                          | 12.15      |                                       | 5.1        |                                      | $          | 14,431 |   |

 

During the three months ended December 31, 2006 and2005, the total intrinsic value of options exercised was $5,805,000 and $3,000,respectively.  The total cash receivedfrom these option exercises was $3,357,000 and $9,000, respectively, and theactual tax benefit realized for the tax deductions from these option exerciseswas $2,263,000 and $1,000, respectively.

No options were granted during the three months endedDecember 31, 2006.  The weighted averagefair value of the options granted during the three months ended December 31,2005 was estimated at $6.10 per share. The weighted average fair value was calculated on the date of grantusing the Black-Scholes option-pricing model with the following weightedaverage assumptions:
|                            | ** ** | **Three Months Ended  December 31,** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Dividend yield             |       | —                                              |       | None |   |
| Expected price  volatility |       | —                                              |       | 59.0 | % |
| Risk-free  interest rates  |       | —                                              |       | 4.4 | % |
| Expected lives             |       | —                                              |       | 6.5 years |   |

 

7

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Expected volatility wasdetermined using a weighted average of the historic volatility of the Company’scommon stock as of the option grant date measured over a period equal to theexpected life of the grant.  Risk freeinterest rates were based on the U. S. Treasury yield curve in effect at thedate of the grant.  Expected lives weredetermined using the simplified method, which measures the average of theoption vesting term and the option contractual term.

Restricted stock activity for the 2005 Plan was asfollows: 
|                                         | ** ** | **Outstanding  Shares** | ** ** | **Weighted  Average  Grant Date   Fair Value** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|---------------------------------------------------------------|------------|
| ** **                              | ** ** | **(in thousands)** | ** ** | ** **                                                    | ** ** |
| Nonvested—September 30,  2006 |       | —                  |       | $                                                             | —     |   |
| Granted                                 |       | 81                      |       | 50.39                                                         |       |
| Nonvested—December 31,  2006       |       | 81                      |       | $                                                             | 50.39      |   |

 

**4.****                 INVENTORIES**

Inventories were comprised of the following (inthousands):
|                  | ** ** | **December 31, 2006** | ** ** | **September 30, 2006** | ** ** |
|------------------|------------|---------------------------------|------------|----------------------------------|------------|
| Finished goods   |       | $                               | 82,464     |                             | $          | 86,937 |   |
| Work-in-progress |       | 2,677                           |       | 2,736                            |       |
| Raw materials    |       | 4,345                           |       | 4,586                            |       |
|             |       | $                               | 89,486     |                             | $          | 94,259 |   |

 

**5.****                 ACCRUED EXPENSES ANDOTHER CURRENT LIABILITIES**

Accrued expenses and other current liabilities werecomprised of the following (in thousands):
|                                                              | ** ** | **December 31, 2006** | ** ** | **September 30, 2006** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| Salaries, wages  and employee benefits                       |       | $                               | 9,428      |                             | $          | 14,657 |   |
| Income taxes  payable                                        |       | 1,044                           |       | 1,565                            |       |
| Interest                                                     |       | 4,350                           |       | 2,273                            |       |
| Deferred rent                                                |       | 4,360                           |       | 4,192                            |       |
| Sales taxes                                                  |       | 3,553                           |       | 3,170                            |       |
| Insurance                                                    |       | 1,963                           |       | 1,892                            |       |
| Audit and legal                                              |       | 3,298                           |       | 4,137                            |       |
| Remaining payout  for redemption of Series A Preferred Stock |       | 679                             |       | 679                              |       |
| Accrued store  construction costs                            |       | 802                             |       | 681                              |       |
| Gift  certificates and store credits                         |       | 7,193                           |       | 3,895                            |       |
| Other                                                        |       | 6,469                           |       | 7,312                            |       |
|                                                         |       | $                               | 43,139     |                             | $          | 44,453 |   |

 

Interest payments on the Company’s 111¤4%senior notes (the “Senior Notes”) are made semiannually on February 1st and August 1st.

**6.****              LOSS ONEXTINGUISHMENT OF DEBT**

In November 2006, the Company’s Board ofDirectors authorized the repurchase of $25,000,000 principal amount of theCompany’s Senior Notes.  OnDecember 8, 2006, the Company completed the repurchase of the authorizedamount at 105.625% of the $25,000,000 principal amount, plus accrued and unpaidinterest.  In connection with therepurchase, the Company recorded a pre-tax charge totaling $2,093,000,representing the premium paid plus the write-off of unamortized debt issuancediscount and deferred financing costs.

8

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**7.****              NEW ACCOUNTINGPRONOUNCEMENTS**

FASB Interpretation No. 48

In June 2006, the FASB issued FASB InterpretationNo. 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.

EITF Issue 06-3

In June 2006, the Emerging Issues Task Force (“EITF”)issued EITF Issue 06-3, “How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation).”  EITFIssue 06-3 provides guidance related to the presentation in financialstatements of any tax assessed by a governmental authority that is directlyimposed on a revenue-producing transaction between a seller and a customer,including, but not limited to, sales, use, value added, and some excisetaxes.  The EITF concluded that thepresentation of taxes within the scope of EITF Issue 06-3 on either a gross(included in revenues and costs) or a net (excluded from revenues) basis is anaccounting policy decision that should disclosed.  In addition, the aggregate amount of any suchtaxes that are reported on a gross basis should be disclosed in interim andannual financial statements.  Theguidance in EITF Issue 06-3 is effective for interim and annual reportingperiods beginning after December 15, 2006. The Company presently reports taxes within the scope of EITF Issue 06-3on a net basis and adoption is not expected to have an impact on theconsolidated financial statements.

**8.****              GUARANTORSUBSIDIARIES**

Pursuant to the terms of the indenture relating to theSenior Notes, each of the domestic subsidiaries of Mothers Work, Inc. (the“Guarantor Subsidiaries”) has jointly and severally provided an unconditionalguarantee of the obligations of Mothers Work with respect to the SeniorNotes.  There are no restrictions on anyof the assets of the Guarantor Subsidiaries which would limit their ability totransfer funds to Mothers Work in the form of loans, advances or cashdividends, except as provided by applicable law.  None of the Company’s foreign subsidiaries(the “Non-Guarantor Subsidiaries”) have guaranteed the Senior Notes.  The condensed consolidating financialinformation for the Company, the Guarantor Subsidiaries, and the Non-GuarantorSubsidiaries as of December 31, 2006 and September 30, 2006 and for thethree months ended December 31, 2006 and 2005 as presented below has beenprepared from the books and records maintained by the Guarantor Subsidiariesand the Company.  The condensedconsolidating financial information may not necessarily be indicative of theresults of operations or financial position had the Guarantor Subsidiaries operatedas independent entities.  Certainintercompany revenues and expenses included in the subsidiary records areeliminated in consolidation.  As a resultof this activity, an amount due to/due from parent will exist at any time.

9

----

**Mothers Work, Inc.**

**Condensed Consolidating Balance Sheet**

**December 31, 2006**

(in thousands)

(unaudited)
| ** **                                        | ** ** | **Mothers Work  (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| **ASSETS**                                        | ** ** | ** **                               | ** ** | ** **                  | ** ** | ** **                                             | ** ** | ** **                      | ** ** | ** **                          | ** ** |
| Current  assets:                                  |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |
| Cash and cash equivalents                         |       | $                                        | 15,401     |                        | $          | 85                                                     |       | $                               | 577        |                                | $          | — |   | $ | 16,063 |   |
| Trade receivables, net                            |       | 12,238                                   |       | —                      |       | —                                                 |       | —                          |       | 12,238                              |       |
| Inventories                                       |       | 86,839                                   |       | —                      |       | 2,647                                                  |       | —                          |       | 89,486                              |       |
| Deferred income taxes                             |       | 6,018                                    |       | —                      |       | —                                                 |       | —                          |       | 6,018                               |       |
| Prepaid expenses and other current assets         |       | 8,044                                    |       | 3                           |       | 66                                                     |       | —                          |       | 8,113                               |       |
| Total current assets                              |       | 128,540                                  |       | 88                          |       | 3,290                                                  |       | —                          |       | 131,918                             |       |
| Property,  plant and equipment, net               |       | 68,981                                   |       | —                      |       | 2,363                                                  |       | —                          |       | 71,344                              |       |
| Assets  held for sale                             |       | —                                   |       | —                      |       | 700                                                    |       | —                          |       | 700                                 |       |
| Other  assets                                     |       | 66,254                                   |       | 67                          |       | 126                                                    |       | —                          |       | 66,447                              |       |
| Investments  in and advances to (from) affiliates |       | 284                                      |       | 283,549                     |       | (2,485                                                 | )          | (281,348                        | )          | —                              |       |
| Total assets                                      |       | $                                        | 264,059    |                        | $          | 283,704                                                |       | $                               | 3,994      |                                | $          | (281,348 | ) | $ | 270,409 |   |
|                                              |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**    | ** ** | ** **                               | ** ** | ** **                  | ** ** | ** **                                             | ** ** | ** **                      | ** ** | ** **                          | ** ** |
| Current  liabilities:                             |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |
| Line of credit borrowings                         |       | $                                        | —     |                        | $          | —                                                 |       | $                               | —     |                                | $          | — |   | $ | — |   |
| Current portion of long-term debt                 |       | 778                                      |       | —                      |       | —                                                 |       | —                          |       | 778                                 |       |
| Accounts payable                                  |       | 21,866                                   |       | —                      |       | —                                                 |       | —                          |       | 21,866                              |       |
| Accrued expenses and other current liabilities    |       | 37,942                                   |       | 4,823                       |       | 374                                                    |       | —                          |       | 43,139                              |       |
| Total current liabilities                         |       | 60,586                                   |       | 4,823                       |       | 374                                                    |       | —                          |       | 65,783                              |       |
| Long-term  debt                                   |       | 92,632                                   |       | —                      |       | —                                                 |       | —                          |       | 92,632                              |       |
| Deferred  rent and other non-current liabilities  |       | 21,238                                   |       | —                      |       | 1,153                                                  |       | —                          |       | 22,391                              |       |
| Total liabilities                                 |       | 174,456                                  |       | 4,823                       |       | 1,527                                                  |       | —                          |       | 180,806                             |       |
|                                              |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |
| Total  stockholders’ equity                  |       | 89,603                                   |       | 278,881                     |       | 2,467                                                  |       | (281,348                        | )          | 89,603                              |       |
| Total  liabilities and stockholders’ equity  |       | $                                        | 264,059    |                        | $          | 283,704                                                |       | $                               | 3,994      |                                | $          | (281,348 | ) | $ | 270,409 |   |

 

10

----

**Mothers Work, Inc.**

**Condensed Consolidating Balance Sheet**

**September 30, 2006**

(in thousands)

(unaudited)
| ** **                                       | ** ** | **Mothers Work  (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| **ASSETS**                                       | ** ** | ** **                               | ** ** | ** **                  | ** ** | ** **                                             | ** ** | ** **                      | ** ** | ** **                          | ** ** |
| Current assets:                                  |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |
| Cash and cash equivalents                        |       | $                                        | 16,878     |                        | $          | 96                                                     |       | $                               | 1,930      |                                | $          | — |   | $ | 18,904 |   |
| Short-term investments                           |       | 9,425                                    |       | —                      |       | —                                                 |       | —                          |       | 9,425                               |       |
| Trade receivables, net                           |       | 11,631                                   |       | —                      |       | —                                                 |       | —                          |       | 11,631                              |       |
| Inventories                                      |       | 91,653                                   |       | —                      |       | 2,606                                                  |       | —                          |       | 94,259                              |       |
| Deferred income taxes                            |       | 6,018                                    |       | —                      |       | —                                                 |       | —                          |       | 6,018                               |       |
| Prepaid expenses and other  current assets       |       | 8,226                                    |       | —                      |       | 169                                                    |       | —                          |       | 8,395                               |       |
| Total current assets                             |       | 143,831                                  |       | 96                          |       | 4,705                                                  |       | —                          |       | 148,632                             |       |
| Property, plant and equipment, net               |       | 69,026                                   |       | —                      |       | 2,404                                                  |       | —                          |       | 71,430                              |       |
| Assets held for sale                             |       | —                                   |       | —                      |       | 700                                                    |       | —                          |       | 700                                 |       |
| Other assets                                     |       | 66,774                                   |       | 69                          |       | 131                                                    |       | —                          |       | 66,974                              |       |
| Investments in and advances to (from) affiliates |       | 1,839                                    |       | 274,649                     |       | (4,184                                                 | )          | (272,304                        | )          | —                              |       |
| Total assets                                     |       | $                                        | 281,470    |                        | $          | 274,814                                                |       | $                               | 3,756      |                                | $          | (272,304 | ) | $ | 287,736 |   |
|                                             |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    | ** ** | ** **                               | ** ** | ** **                  | ** ** | ** **                                             | ** ** | ** **                      | ** ** | ** **                          | ** ** |
| Current liabilities:                             |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |
| Line of credit borrowings                        |       | $                                        | —     |                        | $          | —                                                 |       | $                               | —     |                                | $          | — |   | $ | — |   |
| Current portion of long-term  debt               |       | 814                                      |       | —                      |       | —                                                 |       | —                          |       | 814                                 |       |
| Accounts payable                                 |       | 19,593                                   |       | —                      |       | —                                                 |       | —                          |       | 19,593                              |       |
| Accrued expenses and other  current liabilities  |       | 39,281                                   |       | 4,756                       |       | 416                                                    |       | —                          |       | 44,453                              |       |
| Total current liabilities                        |       | 59,688                                   |       | 4,756                       |       | 416                                                    |       | —                          |       | 64,860                              |       |
| Long-term debt                                   |       | 117,535                                  |       | —                      |       | —                                                 |       | —                          |       | 117,535                             |       |
| Deferred rent and other non-current liabilities  |       | 23,547                                   |       | —                      |       | 1,094                                                  |       | —                          |       | 24,641                              |       |
| Total liabilities                                |       | 200,770                                  |       | 4,756                       |       | 1,510                                                  |       | —                          |       | 207,036                             |       |
|                                             |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |
| Total stockholders’ equity                  |       | 80,700                                   |       | 270,058                     |       | 2,246                                                  |       | (272,304                        | )          | 80,700                              |       |
| Total liabilities and stockholders’ equity  |       | $                                        | 281,470    |                        | $          | 274,814                                                |       | $                               | 3,756      |                                | $          | (272,304 | ) | $ | 287,736 |   |

 

11

----

**Mothers Work, Inc.**

**Consolidating Statement of Operations**

**For the Three Months Ended December 31, 2006 and 2005**

(in thousands)

(unaudited)
| ** **                                         | ** ** | **Mothers Work  (Parent Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Companies)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| **For the  Three Months Ended December 31, 2006**  |       |                                         |       |                        |       |                                                  |       |                            |       |                                |       |
| Net sales                                          |       | $                                            | 144,217    |                        | $          | 7,699                                                 |       | $                               | 4,267      |                                | $          | (7,699 | ) | $ | 148,484 |   |
| Cost of goods sold                                 |       | 69,653                                       |       | —                      |       | 1,781                                                 |       | —                          |       | 71,434                              |       |
| Gross profit                                       |       | 74,564                                       |       | 7,699                       |       | 2,486                                                 |       | (7,699                          | )          | 77,050                              |       |
| Selling, general and administrative expenses       |       | 75,006                                       |       | 118                         |       | 2,123                                                 |       | (7,699                          | )          | 69,548                              |       |
| Operating income (loss)                            |       | (442                                         | )          | 7,581                       |       | 363                                                   |       | —                          |       | 7,502                               |       |
| Interest income (expense), net                     |       | (9,125                                       | )          | 5,993                       |       | —                                                |       | —                          |       | (3,132                              | )          |
| Loss on extinguishment of debt                     |       | (2,093                                       | )          | —                      |       | —                                                |       | —                          |       | (2,093                              | )          |
| Equity in earnings of subsidiaries                 |       | 13,937                                       |       | —                      |       | —                                                |       | (13,937                         | )          | —                              |       |
| Income before income taxes                         |       | 2,277                                        |       | 13,574                      |       | 363                                                   |       | (13,937                         | )          | 2,277                               |       |
| Income tax provision                               |       | 888                                          |       | 4,751                       |       | 142                                                   |       | (4,893                          | )          | 888                                 |       |
| Net income                                         |       | $                                            | 1,389      |                        | $          | 8,823                                                 |       | $                               | 221        |                                | $          | (9,044 | ) | $ | 1,389 |   |
|                                               |       |                                         |       |                        |       |                                                  |       |                            |       |                                |       |
| **For the Three Months Ended  December  31, 2005** |       |                                         |       |                        |       |                                                  |       |                            |       |                                |       |
| Net sales                                          |       | $                                            | 147,535    |                        | $          | 7,893                                                 |       | $                               | 3,858      |                                | $          | (7,893 | ) | $ | 151,393 |   |
| Cost of goods sold                                 |       | 73,811                                       |       | —                      |       | 1,399                                                 |       | —                          |       | 75,210                              |       |
| Gross profit                                       |       | 73,724                                       |       | 7,893                       |       | 2,459                                                 |       | (7,893                          | )          | 76,183                              |       |
| Selling, general and administrative expenses       |       | 77,325                                       |       | 82                          |       | 2,174                                                 |       | (7,893                          | )          | 71,688                              |       |
| Operating income                                   |       | (3,601                                       | )          | 7,811                       |       | 285                                                   |       | —                          |       | 4,495                               |       |
| Interest income (expense), net                     |       | (8,344                                       | )          | 4,550                       |       | —                                                |       | —                          |       | (3,794                              | )          |
| Equity in earnings of subsidiaries                 |       | 12,646                                       |       | —                      |       | —                                                |       | (12,646                         | )          | —                              |       |
| Income before income taxes                         |       | 701                                          |       | 12,361                      |       | 285                                                   |       | (12,646                         | )          | 701                                 |       |
| Income tax provision                               |       | 273                                          |       | 4,326                       |       | 111                                                   |       | (4,437                          | )          | 273                                 |       |
| Net  income                                        |       | $                                            | 428        |                        | $          | 8,035                                                 |       | $                               | 174        |                                | $          | (8,209 | ) | $ | 428 |   |

 

12

----

**Mothers Work, Inc.**

**Consolidating Cash Flow Statement**

**For the Three Months Ended December 31, 2006**

(in thousands)

(unaudited)
| ** **                                                                                   | ** ** | **Mothers Work  (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Companies)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| **Cash Flows from Operating Activities**                                                     | ** ** | ** **                               | ** ** | ** **                  | ** ** | ** **                                            | ** ** | ** **                      | ** ** | ** **                          | ** ** |
| Net income                                                                                   |       | $                                        | 1,389      |                        | $          | 8,823                                                 |       | $                               | 221        |                                | $          | (9,044 | ) | $ | 1,389 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |       |                                     |       |                        |       |                                                  |       |                            |       |                                |       |
| Depreciation and amortization                                                                |       | 3,760                                    |       | 2                           |       | 115                                                   |       | —                          |       | 3,877                               |       |
| Stock-based compensation  expense                                                            |       | 471                                      |       | —                      |       | —                                                |       | —                          |       | 471                                 |       |
| Loss on impairment of  long-lived assets                                                     |       | 250                                      |       | —                      |       | —                                                |       | —                          |       | 250                                 |       |
| Gain on disposal of assets                                                                   |       | (63                                      | )          | —                      |       | —                                                |       | —                          |       | (63                                 | )          |
| Accretion of discount on  senior notes                                                       |       | 44                                       |       | —                      |       | —                                                |       | —                          |       | 44                                  |       |
| Loss on extinguishment of debt                                                               |       | 2,093                                    |       | —                      |       | —                                                |       | —                          |       | 2,093                               |       |
| Deferred income tax benefit                                                                  |       | (176                                     | )          | —                      |       | —                                                |       | —                          |       | (176                                | )          |
| Amortization of deferred  financing costs                                                    |       | 154                                      |       | —                      |       | —                                                |       | —                          |       | 154                                 |       |
| Changes in assets and liabilities:                                                           |       |                                     |       |                        |       |                                                  |       |                            |       |                                |       |
| Decrease (increase) in—                                                                 |       |                                     |       |                        |       |                                                  |       |                            |       |                                |       |
| Trade receivables                                                                            |       | (607                                     | )          | —                      |       | —                                                |       | —                          |       | (607                                | )          |
| Inventories                                                                                  |       | 4,814                                    |       | —                      |       | (41                                                   | )          | —                          |       | 4,773                               |       |
| Prepaid expenses and other  assets                                                           |       | 195                                      |       | (3                          | )          | 103                                                   |       | —                          |       | 295                                 |       |
| Investments in and advances to  (from) affiliates                                            |       | 1,555                                    |       | (8,900                      | )          | (1,699                                                | )          | 9,044                           |       | —                              |       |
| Increase (decrease) in—                                                                 |       |                                     |       |                        |       |                                                  |       |                            |       |                                |       |
| Accounts payable, accrued  expenses and other current liabilities                            |       | 179                                      |       | 67                          |       | (45                                                   | )          | —                          |       | 201                                 |       |
| Deferred rent and other  non-current liabilities                                             |       | (995                                     | )          | —                      |       | 59                                                    |       | —                          |       | (936                                | )          |
| Net cash provided by (used in)  operating activities                                         |       | 13,063                                   |       | (11                         | )          | (1,287                                                | )          | —                          |       | 11,765                              |       |
| **Cash Flows from Investing Activities**                                                     | ** ** | ** **                               | ** ** | ** **                  | ** ** | ** **                                            | ** ** | ** **                      | ** ** | ** **                          | ** ** |
| Purchase of short-term investments                                                           |       | (19,550                                  | )          | —                      |       | —                                                |       | —                          |       | (19,550                             | )          |
| Proceeds from sale of short-term  investments                                                |       | 28,975                                   |       | —                      |       | —                                                |       | —                          |       | 28,975                              |       |
| Capital expenditures                                                                         |       | (2,938                                   | )          | —                      |       | (66                                                   | )          | —                          |       | (3,004                              | )          |
| Purchase of intangible assets                                                                |       | (9                                       | )          | —                      |       | —                                                |       | —                          |       | (9                                  | )          |
| Net cash provided by (used in)  investing activities                                         |       | 6,478                                    |       | —                      |       | (66                                                   | )          | —                          |       | 6,412                               |       |
| **Cash Flows from Financing Activities**                                                     | ** ** | ** **                               | ** ** | ** **                  | ** ** | ** **                                            | ** ** | ** **                      | ** ** | ** **                          | ** ** |
| Decrease in cash overdraft                                                                   |       | (67                                      | )          | —                      |       | —                                                |       | —                          |       | (67                                 | )          |
| Repayment of long-term debt                                                                  |       | (25,165                                  | )          | —                      |       | —                                                |       | —                          |       | (25,165                             | )          |
| Premium on repurchase of long-term debt                                                      |       | (1,406                                   | )          | —                      |       | —                                                |       | —                          |       | (1,406                              | )          |
| Proceeds from exercise of stock options                                                      |       | 3,357                                    |       | —                      |       | —                                                |       | —                          |       | 3,357                               |       |
| Excess tax benefit of stock option  exercises                                                |       | 2,263                                    |       | —                      |       | —                                                |       | —                          |       | 2,263                               |       |
| Net cash used in financing  activities                                                       |       | (21,018                                  | )          | —                      |       | —                                                |       | —                          |       | (21,018                             | )          |
| **Net Decrease in Cash and Cash  Equivalents**                                               |       | (1,477                                   | )          | (11                         | )          | (1,353                                                | )          | —                          |       | (2,841                              | )          |
| **Cash and Cash Equivalents, Beginning of Period**                                           |       | 16,878                                   |       | 96                          |       | 1,930                                                 |       | —                          |       | 18,904                              |       |
| **Cash and  Cash Equivalents, End of  Period**                                               |       | $                                        | 15,401     |                        | $          | 85                                                    |       | $                               | 577        |                                | $          | — |   | $ | 16,063 |   |

 

13

----

**Mothers Work, Inc.**

**Consolidating Cash Flow Statement**

**For the Three Months Ended December 31, 2005**

(in thousands)

(unaudited)
| ** **                                                                                   | ** ** | **Mothers Work  (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Companies)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| **Cash Flows from Operating Activities**                                                     | ** ** | ** **                               | ** ** | ** **                  | ** ** | ** **                                            | ** ** | ** **                      | ** ** | ** **                          | ** ** |
| Net income                                                                                   |       | $                                        | 428        |                        | $          | 8,035                                                 |       | $                               | 174        |                                | $          | (8,209 | ) | $ | 428 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |       |                                     |       |                        |       |                                                  |       |                            |       |                                |       |
| Depreciation and amortization                                                                |       | 3,903                                    |       | —                      |       | 114                                                   |       | —                          |       | 4,017                               |       |
| Stock-based compensation  expense                                                            |       | 410                                      |       | —                      |       | —                                                |       | —                          |       | 410                                 |       |
| Loss on impairment of  long-lived assets                                                     |       | 1,566                                    |       | —                      |       | —                                                |       | —                          |       | 1,566                               |       |
| Loss on disposal of assets                                                                   |       | 97                                       |       | —                      |       | —                                                |       | —                          |       | 97                                  |       |
| Accretion of discount on  senior notes                                                       |       | 45                                       |       | —                      |       | —                                                |       | —                          |       | 45                                  |       |
| Deferred income tax benefit                                                                  |       | (153                                     | )          | —                      |       | —                                                |       | —                          |       | (153                                | )          |
| Amortization of deferred  financing costs                                                    |       | 155                                      |       | —                      |       | —                                                |       | —                          |       | 155                                 |       |
| Changes in assets and liabilities:                                                           |       |                                     |       |                        |       |                                                  |       |                            |       |                                |       |
| Decrease (increase) in—                                                                 |       |                                     |       |                        |       |                                                  |       |                            |       |                                |       |
| Trade receivables                                                                            |       | (2,015                                   | )          | —                      |       | (24                                                   | )          | —                          |       | (2,039                              | )          |
| Inventories                                                                                  |       | 11,328                                   |       | —                      |       | 120                                                   |       | —                          |       | 11,448                              |       |
| Prepaid expenses and other  assets                                                           |       | 637                                      |       | —                      |       | —                                                |       | —                          |       | 637                                 |       |
| Investments in and advances to  (from) affiliates                                            |       | (7,100                                   | )          | (1,351                      | )          | 242                                                   |       | 8,209                           |       | —                              |       |
| Increase (decrease) in—                                                                 |       |                                     |       |                        |       |                                                  |       |                            |       |                                |       |
| Accounts payable, accrued  expenses and other current liabilities                            |       | 14,015                                   |       | (6,706                      | )          | (329                                                  | )          | —                          |       | 6,980                               |       |
| Deferred rent and other  non-current liabilities                                             |       | (542                                     | )          | —                      |       | 41                                                    |       | —                          |       | (501                                | )          |
| Net cash provided by (used in)  operating activities                                         |       | 22,774                                   |       | (22                         | )          | 338                                                   |       | —                          |       | 23,090                              |       |
| **Cash Flows from Investing Activities**                                                     | ** ** | ** **                               | ** ** | ** **                  | ** ** | ** **                                            | ** ** | ** **                      | ** ** | ** **                          | ** ** |
| Purchase of short-term investments                                                           |       | (14,500                                  | )          | —                      |       | —                                                |       | —                          |       | (14,500                             | )          |
| Proceeds from sale of short-term  investments                                                |       | 3,000                                    |       | —                      |       | —                                                |       | —                          |       | 3,000                               |       |
| Capital expenditures                                                                         |       | (3,326                                   | )          | —                      |       | (62                                                   | )          | —                          |       | (3,388                              | )          |
| Purchase of intangible assets                                                                |       | (7                                       | )          | —                      |       | (4                                                    | )          | —                          |       | (11                                 | )          |
| Net cash used in investing  activities                                                       |       | (14,833                                  | )          | —                      |       | (66                                                   | )          | —                          |       | (14,899                             | )          |
| **Cash Flows from Financing Activities**                                                     | ** ** | ** **                               | ** ** | ** **                  | ** ** | ** **                                            | ** ** | ** **                      | ** ** | ** **                          | ** ** |
| Increase in cash overdraft                                                                   |       | 2,739                                    |       | —                      |       | —                                                |       | —                          |       | 2,739                               |       |
| Repayment of long-term debt                                                                  |       | (156                                     | )          | —                      |       | —                                                |       | —                          |       | (156                                | )          |
| Proceeds from exercise of stock options                                                      |       | 9                                        |       | —                      |       | —                                                |       | —                          |       | 9                                   |       |
| Excess tax benefit of stock option  exercises                                                |       | 1                                        |       | —                      |       | —                                                |       | —                          |       | 1                                   |       |
| Net cash provided by financing  activities                                                   |       | 2,593                                    |       | —                      |       | —                                                |       | —                          |       | 2,593                               |       |
| **Net Increase (Decrease) in Cash and Cash Equivalents**                                     |       | 10,534                                   |       | (22                         | )          | 272                                                   |       | —                          |       | 10,784                              |       |
| **Cash and Cash Equivalents, Beginning of Period**                                           |       | 2,901                                    |       | 37                          |       | 99                                                    |       | —                          |       | 3,037                               |       |
| **Cash and  Cash Equivalents, End of  Period**                                               |       | $                                        | 13,435     |                        | $          | 15                                                    |       | $                               | 371        |                                | $          | — |   | $ | 13,821 |   |

 

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**9.****                 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.

**10.**          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.

***GeographicInformation***.  Information concerning the Company’soperations by geographic area is as follows (in thousands):
|                                          | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **Net Sales to Unaffiliated  Customers** |       |                                                |       |   |   |
| United  States                           |       | $                                                   | 144,217    |   | $ | 147,535 |   |
| Canada                                   |       | $                                                   | 4,267      |   | $ | 3,858 |   |

 
|                       | ** ** | **December 31,  2006** | ** ** | **September 30,  2006** | ** ** |
|-----------------------|------------|-----------------------------|------------|------------------------------|------------|
| **Long-Lived Assets** |       |                        |       |                         |       |
| United  States        |       | $                           | 69,550     |                         | $          | 69,621 |   |
| Canada                |       | $                           | 2,489      |                         | $          | 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.

**11.**          INTERESTEXPENSE, NET

Interestexpense, net is comprised of the following (in thousands):
|                        | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Interest expense       |       | $                                                   | 3,370      |   | $ | 3,837 |   |
| Interest income        |       | (238                                                | )          | (43 | ) |
| Interest  expense, net |       | $                                                   | 3,132      |   | $ | 3,794 |   |

 

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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 months ended December 31:
|                                                  | ** ** | **% of Net Sales (1)** | ** ** | **% Increase** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|---------------------|------------|
| ** **                                       | ** ** | **2006**                                   | ** ** | **2005**            | ** ** | **2006 vs. 2005** | ** ** |
|                                             |       |                                       |       |                |       |   |   |
| Net sales                                        |       | 100.0                                      | %          | 100.0               | %          | (1.9 | )% |
| Cost of goods sold (2)                           |       | 48.1                                       |       | 49.7                |       | (5.0 | ) |
| Gross profit                                     |       | 51.9                                       |       | 50.3                |       | 1.1 |   |
| Selling, general and administrative expenses (3) |       | 46.8                                       |       | 47.4                |       | (3.0 | ) |
| Operating income                                 |       | 5.1                                        |       | 3.0                 |       | 66.9 |   |
| Interest expense, net                            |       | 2.1                                        |       | 2.5                 |       | (17.4 | ) |
| Loss on extinguishment of debt                   |       | 1.4                                        |       | 0.0                 |       | N.M. |   |
| Income (loss) before income  taxes               |       | 1.5                                        |       | 0.5                 |       | 224.8 |   |
| Income tax provision (benefit)                   |       | 0.6                                        |       | 0.2                 |       | 225.3 |   |
| Net  income (loss)                               |       | 0.9                                        | %          | 0.3                 | %          | 224.5 | % |

 

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N.M.–Not meaningful

(1)     Components maynot add to total due to rounding.

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

(3)     The “Selling, general and administrative 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** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **December 31, 2006**  | ** ** | **December 31, 2005** | ** ** |
| **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                    |       | 3                                |       | 60 |   | 63 |   | 6 |   | 10 |   | 16 |   |
| Closed                    |       | (6                               | )          | (4 | ) | (10 | ) | (7 | ) | (6 | ) | (13 | ) |
| End  of period            |       | 807                              |       | 787 |   | 1,594 |   | 851 |   | 743 |   | 1,594 |   |

 

Our fiscal yearends on September 30.  All references inthis discussion to our fiscal years refer to the fiscal year ended on September30 in the year mentioned.  For example, our“fiscal 2007” will end on September 30, 2007.

**Three Months Ended December 31, 2006 and 2005**

***Net Sales.***  Our netsales for the first quarter of fiscal 2007 decreased by 1.9%, or $2.9 million,to $148.5 million from $151.4 million for the first quarter of fiscal2006.  Net sales decreased primarilydue to our comparable store sales decrease. Comparable store sales decreased by 2.1% for the first quarter of fiscal2007, based on 1,454 retail locations, versus a comparable store sales increaseof 3.1% for the first quarter of fiscal 2006, based on 1,019 retaillocations.  The comparable store salesdecrease of 2.1% for the first quarter of fiscal 2007 was adversely impacted byapproximately 1.0 percentage points due to having one less Saturday in thisfiscal year’s October and first quarter compared to last year.  The comparable store sales increase of 3.1%for the first quarter of fiscal 2006 was favorably impacted by approximately0.5

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percentage pointsdue to having one more Saturday in December 2005 than in December 2004.

As ofDecember 31, 2006, we operated a total of 807 stores and 1,594 total retaillocations, compared to 851 stores and 1,594 total retail locations as ofDecember 31, 2005.  In addition, our OhBaby! by MotherhoodTM collection is available at Kohl’s® stores throughout theUnited States.  During the first quarterof fiscal 2007, we opened three stores and closed six stores, with one of thesestore closings related to a prior period multi-brand store opening.

***Gross Profit.***  Our grossprofit for the first quarter of fiscal 2007 increased by 1.1%, or $0.9 million,to $77.1 million from $76.2 million for the first quarter of fiscal 2006,reflecting an increase in gross margin.  Gross profit as a percentage ofnet sales (gross margin) for the first quarter of fiscal 2007 was 51.9%compared to 50.3% for the first quarter of fiscal 2006.  Theincrease in gross margin of 1.6 percentage points compared to the prior yearresulted primarily from a higher maintained gross margin in our own stores,which resulted primarily from lower overall markdowns compared to last yearand, to a lesser extent, product cost reductions.

***Selling, General and AdministrativeExpenses.***  Our selling, general and administrativeexpenses for the first quarter of fiscal 2007 decreased by 3.0%, orapproximately $2.2 million, to $69.5 million from $71.7 million for thefirst quarter of fiscal 2006.  Thisdecrease in expense for the quarter resulted primarily from lower storeoccupancy expenses, as a result of our reduced number of stores, and a decreasein impairment charges for write-downs of store long-lived assets,partially offset by increases in legal expenses, employee benefits expenses andcredit card expense.  As a percentage ofnet sales, selling, general and administrative expenses decreased to 46.8% forfiscal 2007 compared to 47.4% for fiscal 2006. This decrease in the expense percentage for the quarter resultedprimarily from the lower store occupancy expenses and decreased impairmentcharges for write-downs of store long-lived assets, partially offset byhigher legal, employee benefits and credit card expenses.  During the first quarter of fiscal 2006, werecognized a non-recurring reduction to selling, general and administrativeexpenses of $0.5 million for our portion of the Visa®/MasterCard® class actionsettlement fund.  We incurred impairmentcharges for write-downs of store long-lived assets of $0.3 million forfiscal 2007, as compared to $1.6 million for fiscal 2006.  In addition, we recorded a negligible gain($27,000) relating to store closings for the first quarter of fiscal 2007, ascompared to $0.2 million of charges incurred for store closings in the firstquarter of fiscal 2006 (primarily lease termination expenses).

***Operating Income.***  Our operating income for the first quarterof fiscal 2007 increased by 66.9%, or $3.0 million, to $7.5 million from$4.5 million for the first quarter of fiscal 2006, due to increased grossprofit and lower selling, general and administrative expenses.  Operating income as a percentage of net sales(operating income margin) for thefirst quarter of fiscal 2007 increased to 5.1% from 3.0% for the first quarterof fiscal 2006.  The increase inoperating income margin was due to our increased gross margin and our loweroperating expense ratio.

***Interest Expense, Net.***  Our netinterest expense for the first quarter of fiscal 2007 decreased by 17.4%, or$0.7 million, to $3.1 million from $3.8 million for the first 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, increased interest incomeresulting from increased balances of cash and short-term investments.  During the first quarter of fiscal 2007, wehad no direct borrowings under our credit facility.  During the first quarter of fiscal 2006, ouraverage level of direct borrowings under our credit facility was $1.3 million.

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

***Income Tax Provision.***  Oureffective tax rate was a provision of 39.0% for the first quarter of fiscal2007 and 38.9% for the first quarter of fiscal 2006.  We expect our effective tax rate for the full year fiscal 2007 to be approximately39%.

***Net Income.***  Netincome for the first quarter of fiscal 2007 was $1.4 million, or $0.23 pershare (diluted), compared to net income of $0.4 million, or $0.08 per share(diluted), for the first quarter of fiscal 2006, representing increases versuslast year of 225% in net income and 188% in diluted earnings per share.  Net income for the first quarter of fiscal 2007includes an after-tax debt extinguishment charge of $1.3 million, or $0.21 pershare (diluted).  We had no debtextinguishment charges in the first quarter of fiscal 2006.

Our average diluted shares outstanding of 6,138,000 forthe first quarter of fiscal 2007 was 15.7% higher than the 5,303,000 averagediluted shares outstanding for the first 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, as

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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. After giving effect to both the $10.0 million repurchase in fiscal 2006and the $25.0 million redemption completed on December 8, 2006, we have$90.0 million remaining outstanding principal amount of the original$125.0 million principal amount of our Senior Notes.  On January 24, 2007, we announced that we arecurrently exploring ways to refinance the remaining $90 million principalamount of our Senior Notes with lower cost debt.  We expect that any refinancing of our SeniorNotes would result in a one-time charge to earnings from the early retirementof the Senior Notes, but would result in decreased interest expense on anongoing basis.  We cannot guarantee thatwe will be able to successfully refinance our Senior Notes.

Cash and cash equivalents decreased by $2.8 millionduring the first quarter of fiscal 2007 compared to an increase of $10.8million for the first quarter of fiscal 2006.  Cash provided by operationsof $11.8 million for the first quarter of fiscal 2007 decreased by $11.3million from the $23.1 million cash provided by operations for the firstquarter of fiscal 2006.  This decrease in cash provided byoperations was primarily the result of: (i) a lesser reduction of inventoriesin the first quarter of fiscal 2007 compared to the first quarter of fiscal2006, and (ii) a lesser increase in accrued expenses and other currentliabilities in the first quarter of fiscal 2007 compared to the first quarterof fiscal 2006.  Total inventories as ofDecember 31, 2006 were $89.5 million, a decrease of $4.8 million or 5.1% belowthe $94.3 million inventories balance as of September 30, 2006.  Total inventories of $94.5 million as ofDecember 31, 2005 were $11.4 million below the $105.9 million inventoriesbalance as of September 30, 2005.  Duringthe first quarter of fiscal 2007, we used a portion of our cash provided byoperations to pay for capital expenditures.  The remaining cash provided by operations, aswell as cash generated by net proceeds from the sales (net of purchases) of short-terminvestments and from stock option exercises, was used to complete the$25.0 million principal repurchase of our Senior Notes.  During the first quarter of fiscal 2006, weused our cash provided by operations primarily to increase our short-term investments and cash balance and, to amuch lesser extent, to pay for capital expenditures.

Forthe first quarter of fiscal 2007, we spent $3.0 million on capitalexpenditures, including $1.4 million for leasehold improvements, fixturesand equipment principally for new store facilities, as well as improvements toexisting stores, and $1.6 million for our information systems anddistribution and corporate facilities. This compares to $3.4 million in capital expenditures for the firstquarter of fiscal 2006, of which $2.8 million was spent for new storefacilities and improvements to existing stores and retail locations, and$0.6 million for our information systems and distribution and corporatefacilities. The decrease in capital expenditures was primarily due to decreasedexpenditures for new stores, partially offset by increased expenditures forinformation systems enhancements.

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OnOctober 15, 2004, we entered into a five-year $60.0 million senior securedrevolving credit facility (the “Credit Facility”).  The Credit Facility will mature onOctober 15, 2009.  There are no financial covenant requirementsunder the Credit Facility unlesseither (i) Excess Availability (as defined in the agreement) falls below$10 million, or (ii) average Financial Covenant Adjusted Availability (asdefined in the agreement) for any calendar month is less than $15 million.  If either of the events in items (i) or(ii) above occurs, we would be required to meet a certain minimum fixedcharge coverage ratio (which increases from 1.00x during the first two years ofthe Credit Facility to 1.10x during the fifth year of the CreditFacility). During the first quarter of fiscal 2007 and the first quarter of fiscal2006, we exceeded the requirements for Excess Availability and average FinancialCovenant Adjusted Availability.

As of December 31, 2006, outstanding borrowingsunder the Credit Facility consisted of no direct borrowings and $8.4 million inletters of credit, with $51.6 million of availability under our creditline.  We had no direct borrowings under our credit facility for thefirst quarter of fiscal 2007, compared to average direct borrowings of $1.3million during the first quarter 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 thereporting period.

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 net realizablevalues.  Criteria utilized by us toquantify aging trends include factors such as the amount of merchandisereceived within the past twelve months, merchandise received more than one yearbefore with quantities on-hand in excess of 12 months of sales, andmerchandise currently selling below cost. A provision is recorded to reduce the cost of inventories to itsestimated net realizable value, if required. Inventories as of December 31, 2006 and September 30, 2006 totaled$89.5 million and $94.3 million, respectively, representing 33.1% 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 arerecorded at cost and are amortized using the straight-line method over theshorter of the lease term or their useful life. Net long-lived assets as of December 31, 2006 and September 30,2006 totaled $72.0 million and $72.2 million, respectively,representing 26.6% and 25.1% of total assets, respectively.

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Inassessing potential impairment of these assets, we periodically evaluate thehistorical and forecasted operating results and cash flows on a store-by-storebasis.  Newly opened stores may take timeto generate positive operating and cash flow results.  Factors such as (i) store type, that is,company store or leased department, (ii) store concept, that is,Motherhood Maternity®, Mimi Maternity, A Pea in the Pod or Destination Maternity,(iii) store location, for example, urban area versus suburb,(iv) current marketplace awareness of our brands, (v) local customerdemographic data, (vi) anchor stores within the mall in which our store islocated and (vii) current fashion trends are all considered in determiningthe time frame required for a store to achieve positive financial results,which is assumed to be within two years from the date a store location isopened.  If economic conditions aresubstantially different from our expectations, the carrying value of certain ofour long-lived assets may become impaired. As a result of our impairment assessment, we recorded write-downsof long-lived assets of $0.3 million forthe first quarter of fiscal 2007, and $1.6 million for the first quarter offiscal 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 intangibleassets.  Goodwill represents the excessof the aggregate purchase price over the fair value of net assets acquired inbusiness combinations and is separately disclosed in our consolidated balancesheets.  As of both December 31, 2006 andSeptember 30, 2006, goodwill totaled $50.4 million, representing18.6% 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 ofgoodwill, we have determined that we have one reporting unit for purposes ofapplying SFAS No. 142 based on our reporting structure.  The fair value of our single reporting unitis determined based on the fair market value of our outstanding common stock ona control basis and, if necessary, an outside independent valuation is obtainedto determine the fair value.  Thecarrying value of our single reporting unit, expressed on a per share basis, isrepresented by the book value per share of our outstanding common stock.  The results of the annual impairment testperformed as of September 30, 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 December 31,2006, our book value was $15.20 per share of outstanding common stock and theclosing trading price of our common stock was $39.39 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 December 31, 2006 and September 30, 2006 totaled$18.7 million and $18.6 million, respectively, representing 6.9% 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 SFAS No. 5,“Accounting for Contingencies.”  SFASNo. 5 requires us to record an estimated loss contingency when informationavailable prior to issuance of our financial statements indicates that it isprobable that an asset has been impaired or a liability has been incurred atthe date of the financial statements and the amount of the loss can bereasonably estimated.  An interpretationof SFAS No. 5 further states that when there is a range of loss and noamount within that range is a better estimate than any other, then the minimumamount of the range shall be accrued. Accounting for contingencies arising from contractual or legalproceedings requires management, after consultation with outside legal counsel,to use its best judgment when estimating an accrual related to suchcontingencies.  As additional informationbecomes known, our accrual for a loss

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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.

**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.

*EITFIssue 06-3*

*In June2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement (That Is, Gross versus Net Presentation).”  EITF Issue 06-3 provides guidance related tothe presentation in financial statements of any tax assessed by a governmentalauthority that is directly imposed on a revenue-producing transaction between aseller and a customer, including, but not limited to, sales, use, value added,and some excise taxes.  The EITFconcluded that the presentation of taxes within the scope of EITF Issue 06-3 oneither a gross (included in revenues and costs) or a net (excluded fromrevenues) basis is an accounting policy decision that should disclosed.  In addition, the aggregate amount of any suchtaxes that are reported on a gross basis should be disclosed in interim andannual financial statements.  Theguidance in EITF Issue 06-3 is effective for interim and annual reportingperiods beginning after December 15, 2006. We presently report taxes within the scope of EITF Issue 06-3 on a netbasis and adoption is not expected to have an impact on our consolidatedfinancial statements.*

**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 achievementsexpressed or 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, changes in consumer spending patterns, raw material priceincreases, consumer preferences and overall economic conditions, the impact ofcompetition and pricing, availability of suitable store locations, continuedavailability of capital and financing, ability to hire and develop seniormanagement and sales associates, ability to develop and source merchandise,ability to receive production from foreign sources on a timely basis, potentialstock repurchases, potential debt repurchases or refinancing, 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 as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “proforma,” “anticipates,” “intends,” “continues,” “could,” “estimates,” “plans,” “potential,”“predicts,” “goal,” “objective,” or the negative of any of these terms, orcomparable terminology, or by discussions of our outlook, plans, goals,strategy or intentions.  Forward-lookingstatements speak only as of the date made. We assume no obligation to update any of these forward-lookingstatements to reflect actual results, changes in assumptions or changes inother factors affecting these forward-looking statements.

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**Item 3.  Quantitative 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 ofDecember 31, 2006, we had cash and cash equivalents of $16.1 million, whichinclude money market accounts that bear interest at variable rates.  A changein market interest rates earned on the cash and cash equivalents impacts the interest income and cash flows, butdoes not impact the fair market value of the financial instruments.  Due to the average maturity and conservativenature of our investment portfolio, we believe a sudden change in interestrates would not have a material effect on the value of our investment portfolio.

As of December 31, 2006, the principal components of ourdebt portfolio were the $90.0 million of Senior Notes and the$60.0 million Credit Facility, both of which are denominated in U.S.dollars.  The fair market value of the debt portfolio is referred to asthe “debt value.”  The Senior Notes bear interest at a fixed ratedof 111⁄4%.  Although a change in market interest rates would not affect theinterest incurred or cash flow related to this fixed rate portion of the debtportfolio, the Debt Value would be affected.

Our Credit Facility carries a variable interest ratethat is tied to market indices.  As of December 31, 2006, 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 6.58% and 8.25% per annum as ofDecember 31, 2006.  Any future borrowings under the Credit Facility would,to the extent of outstanding borrowings, be affected by changes in marketinterest rates.  A change in marketinterest rates on the variable portion of the debt portfolio impacts theinterest incurred and cash flows, but does not impact the Debt Value of thefinancial instrument.

The sensitivity analysis as it relates to the fixed rateportion of our debt portfolio assumes an instantaneous 100 basis point move ininterest rates from their levels as of December 31, 2006, with all othervariables held constant.  The Debt Valueof the Senior Notes as of December 31, 2006 is approximately $94,950,000, whichis slightly higher than its carrying value. A 100 basis point increase in market interest rates would result in adecrease in the debt value by approximately $0.5 million asof December 31, 2006.  A 100 basis point decline in market interest rateswould cause the Debt Value to increase by approximately $0.3 million as ofDecember 31, 2006.

Basedon the limited variable rate debt included in our debt portfolio as of December31, 2006, 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 our managementon 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 December 31,2006. Based on this evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer have concluded that as of December 31, 2006, these controlsand 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 endedDecember 31, 2006, 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.

**Item1A.  Risk Factors**

In addition to the other information set forth in thisForm 10-Q, you should carefully consider the factors discussed in Part I, Item1A “Risk Factors”  of our Form 10-K forthe year ended September 30, 2006. The risks described in our Form-K are notthe only risks that we face. Additional risks not presently known to us or thatwe do not currently consider significant may also have an adverse effect on us.If any of the risks actually occur, our business, results of operations, cashflows or financial condition could suffer.

**Item 6.  Exhibits**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                             | ** ** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|         |       |                                                                                                                                                                                        |       |
| 10.30*† |       | Management Incentive Program  (effective as of December 13, 2006) (Exhibit 10.1 to the Company’s Current Report  on Form 8-K dated December 13, 2006).                                 |       |
| 31.1         |       | Certification of the Chief Executive Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                               |       |
| 31.2         |       | Certification of the Executive Vice President-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 Executive Vice President-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

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                        |     | MOTHERS WORK, INC.                                        |       |       |       |       |
|------------------------|----------|-----------------------------------------------------------|------------|------------|------------|------------|
|                   |     |                                                      |       |       |       |       |
| Date: February 9, 2007 | By:      | **/s/ DAN W. MATTHIAS**                              | ** ** | ** ** | ** ** | ** ** |
|                   |     | Dan W. Matthias                                           | * *   | * *   | * *   | * *   |
|                   | * * | *Chairman of the Board and  Chief Executive Officer*      |       |       |       |       |
|                   |     |                                                      |       |       |       |       |
|                   |     |                                                      |       |       |       |       |
| Date: February 9, 2007 | By:      | **/s/ EDWARD M. KRELL**                              | ** ** | ** ** | ** ** | ** ** |
|                   |     | Edward M. Krell                                           |       |       |       |       |
|                   | * * | *Executive Vice President—  Chief Financial Officer* |       |       |       |       |

 

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**INDEX OF EXHIBITS FILED WITH**

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

**FOR THE QUARTER ENDED DECEMBER 31, 2006**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                             | ** ** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|         |       |                                                                                                                                                                                        |       |
| 10.30*† |       | Management Incentive Program  (effective as of December 13, 2006) (Exhibit 10.1 to the Company’s Current  Report on Form 8-K dated December 13, 2006).                                 |       |
| 31.1         |       | Certification of the Chief Executive Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                               |       |
| 31.2         |       | Certification of the Executive Vice President-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 Executive Vice President-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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