UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K

(Mark One)

| | x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ------------------------------------------------------------------------------------

For the fiscal year ended September 30, 2009

or



| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------

For the transition period
fromto

Commission file number 0-21196





Destination
Maternity Corporation

(Exact name of Registrant as specified in its charter)



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 13-3045573                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|456 North Fifth Street, Philadelphia, PA                       |  | 19123                            
|(Address of principal executive offices)                       |  | (Zip Code)                       

(215) 873-2200

(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



|                                       |  |                                          
|-------------------------------------- |  | -----------------------------------------
|Title of each class                    |  | Name of each exchange on which
registered
|Common Stock, par value $.01 per share |  | The NASDAQ Stock Market LLC              

Securities registered pursuant to Section 12(g) of the Act:

Series B Junior Participating Preferred Stock Purchase Rights

(Title of class)

Indicate by check mark if the Registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.    Yes   ̈    No  x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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

Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                           |  |                      |  |                                              |  |                             
|-------------------------- |  | -------------------- |  | -------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer   ̈ |  | Non-accelerated filer   ̈                     |  | Smaller reporting company  x
|                           |  |                      |  | (Do not check if a smallerreporting company) |  |                             

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed using $6.31, the price at which the
common equity was last sold as of March 31, 2009 (the last business day of the Registrants most recently completed second fiscal quarter), was approximately $37,000,000.

On December 7, 2009, there were 6,192,911 shares of the Registrants common stock, $.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Stockholders scheduled to be held on January 22, 2010 are incorporated by
reference into Part III of this Form 10-K.











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PART I.

Our fiscal year ends on September 30. All references in this report to our fiscal years refer to the fiscal year
ended on September 30 in the year mentioned. For example, our fiscal 2009 ended on September 30, 2009. Unless otherwise indicated, operating data referred to in this report is as of September 30, 2009. As used in this
report, retail locations include our stores and leased departments and exclude locations where Kohls® sells our products under an exclusive product and license agreement, and international franchise locations.



|Item 1. | Business
|------- | --------

Overview

We are the leading designer and retailer of maternity apparel in the United States and are the only nationwide chain of
maternity specialty stores. As of September 30, 2009, we operate 1,084 retail locations, including 724 stores in all 50 states, Puerto Rico, Guam and Canada, and 360 leased departments located within department stores and baby specialty stores
throughout the United States. We are also the exclusive provider of maternity apparel to Kohls, which operates approximately 1,059 stores throughout the United States. We operate our 724 stores under three retail nameplates: Motherhood
Maternity®, A Pea in the Pod® and Destination Maternity®.
In addition to our 724 stores, we operate 360 maternity apparel departments, which we refer to as leased departments, within leading retailers such as Sears®, Kmart®, Macys®, Bloomingdales®, BabiesRUs®,
Boscovs® and Gordmans®. We are the exclusive maternity apparel provider in each of our leased department relationships. In October 2009, we re-launched our Two Hearts Maternity by
Destination Maternity collection, available exclusively at Sears and Kmart stores. As of November 30, 2009, we operate maternity apparel departments in 522 Sears locations and 101 Kmart locations. The Two Hearts Maternity collection was
previously offered in Sears stores from April 2004 through June 2008. We also are expanding internationally and have entered into exclusive store franchise and product supply relationships in India and the Middle East. Finally, we also sell
merchandise on the Internet, primarily through DestinationMaternity.com and our various brand-specific websites.

In July 2008, we announced that we were streamlining our merchandise brands and store nameplates and implementing cost reductions in order to simplify our business model, reduce our overhead costs and improve and tighten our merchandise
assortments to drive the best possible results both in the near term and in the long term. Pursuant to our strategic restructuring, we rebranded our Mimi Maternity® merchandise brand under our A Pea in the Pod brand beginning with the Spring 2009 collection. Also beginning with the Spring 2009 collection, we rebranded our
existing luxury-priced A Pea in the Pod merchandise assortment as the A Pea in the Pod Collection to emphasize its exclusive designer brand position. We also streamlined our store nameplates, by renaming our single-brand Mimi Maternity stores
as A Pea in the Pod, and by renaming our multi-brand Mimi Maternity stores as Destination Maternity. In connection with the strategic restructuring we also reduced our corporate and field management headcount, and during fiscal 2009 we began to
implement actions to achieve further cost reductions. The objectives of our restructuring and cost reduction program are to improve and simplify critical processes, consolidate activities and infrastructure, and reduce our expense structure to be
more appropriately aligned with our generation of revenue. We feel strongly that the strategic restructuring and streamlining of our merchandise brands and store nameplates and our other cost reduction initiatives are helping to improve our
near-term and long-term profitability by simplifying our brand structure, reducing our cost structure, and leveraging both our renowned A Pea in the Pod luxury brand and our growing multi-brand Destination Maternity store nameplate. These
initiatives resulted in approximate pretax savings of $12 million in fiscal 2009, with incremental pretax savings of approximately $5 million projected for fiscal 2010. We project total annualized pretax savings of approximately $22 to $25 million
in fiscal 2011 as a result of our cost reduction initiatives, which includes the savings realized in fiscal 2009 plus the incremental projected savings for fiscal 2010.

On December 8, 2008, we changed our corporate name from Mothers Work, Inc. to Destination Maternity Corporation (the Company). The corporate name change was
undertaken as an extension of our previously announced strategic restructuring and streamlining of our merchandise brands and store nameplates.



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Our Nasdaq® symbol also changed from MWRK to
DEST coincident with the name change. Our comprehensive focus on the needs of all maternity customers is epitomized by our Destination Maternity multi-brand store concept, which includes both our moderate-priced Motherhood Maternity
brand and our luxury-priced A Pea in the Pod brand, and provides the broadest range of maternity apparel products, accessories and services available to the maternity customer for all of her lifestyle needs. With Destination Maternity effectively
having become our umbrella brand, we believe the name Destination Maternity Corporation better aligns our corporate name with our merchandise brands, our store nameplates, and our overall business scope.

We believe we have maintained our leading position across all major price points of maternity apparel through our four distinct merchandise
brands, which enable us to reach a broad range of maternity customers. Through our 724 stores and certain of our leased departments, we offer maternity apparel under our two primary merchandise brands, Motherhood Maternity (Motherhood)
at value prices and A Pea in the Pod (Pea) at both contemporary and luxury prices. Our A Pea in the Pod Collection (Pea Collection) is the distinctive premier maternity line within the A Pea in the Pod brand, featuring
exclusive designer label product at luxury prices. We also have an additional value-priced maternity apparel brand, our Oh Baby by Motherhood collection, which we sell exclusively through Kohls, and is the exclusive maternity apparel
offering in this chain. Additionally, in October 2009, we re-launched our Two Hearts Maternity by Destination Maternity collection, available exclusively at Sears and Kmart stores.

We believe that one of our key competitive advantages is our ability to fulfill, in a high-service store environment, all of an expectant and
nursing mothers clothing needs, including casual and career wear, formal attire, lingerie, sportswear and outerwear, in sizes that cover all trimesters of the maternity cycle. We believe that our vertically-integrated business model enables us
to offer the broadest assortment of in-stock, fashionable maternity apparel. We design and contract for the production of approximately 90% of the merchandise we sell using sewing factories located throughout the world, predominantly outside of the
United States.

In recent years, we have developed and introduced new multi-brand store concepts to offer merchandise from our
various brands in a single location, in order to provide a broader product assortment at multiple price ranges to our customers and to increase average store sales and profitability. We believe the continued rollout of our multi-brand store
initiative provides the opportunity for us to improve store operating profit margins over time by reducing store operating expense percentages through economies of scale, and may increase overall sales in the geographical markets they serve. Our
multi-brand stores are operated under our Destination Maternity nameplate, which includes Destination Maternity combo stores (carrying Motherhood Maternity and A Pea in the Pod merchandise) and Destination Maternity superstores, which also carry
both our Motherhood and Pea merchandise brands, as well as a significant array of maternity-related products and customer service features. These multi-brand stores are larger and have historically had higher average sales than our average store.
Opening these multi-brand stores will typically involve closing two or more smaller stores and may frequently result in one-time store closing costs resulting primarily from early lease terminations.

We plan to open approximately 12  17 new retail stores during fiscal 2010, of which we expect approximately 7  13 will be new
Destination Maternity combo or superstores, with the balance primarily under the Motherhood brand. We estimate that we will close approximately 29  47 stores in fiscal 2010, with approximately 17  28 of these store closings related to
the opening of new Destination Maternity stores.

Currently, we operate 38 Motherhood stores in Canada and we operate a
Motherhood website under a Canadian URL (MotherhoodCanada.ca). In addition, we believe there is a significant opportunity to develop international sales beyond Canada. We currently have franchise agreements in place in the Middle East and in India
to expand our business internationally. The initial franchise stores through our arrangement in the Middle East opened during 2009, with the first Middle East franchise store opening in 360 Mall in South Surra, Kuwait in July 2009 under our A Pea in
the Pod retail nameplate, and the second Middle East franchise store opening in Al Bairaq Mall in Fintas, Kuwait in October 2009 under our Motherhood Maternity retail nameplate. Additionally, beginning during fiscal 2009, our Motherhood Maternity
branded merchandise is available in our India franchisees new Mom & Me stores. As of September 30, 2009, our merchandise is offered in seven Mom & Me stores in India.



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We believe that our customers, particularly first-time mothers, are entering a new life
stage that drives widespread changes in purchasing needs and behavior, thus making our maternity customer and her family a highly-valued demographic for a range of consumer products and services companies. As a result, we have been able to expand
and leverage the relationship we have with our customers and generate incremental revenues and earnings by offering other value-added baby and parent-related products and services through a variety of marketing partnership programs utilizing our
extensive opt-in customer database and various in-store marketing initiatives.

Destination Maternity Corporation (formerly
Mothers Work, Inc.) was founded in 1982 as a mail-order maternity apparel catalog. We began operating retail stores in 1985 and completed our initial public offering in 1993. To address multiple price points in maternity apparel and improve
operating productivity, we acquired Motherhood and A Pea in the Pod in 1995 and eSpecialty Brands, LLC, or iMaternity, in October 2001. Since the acquisitions of Motherhood and A Pea in the Pod, we have developed and grown these brands
along with growing our Destination Maternity brand. Also, since the 1990s we have partnered with other retailers to sell our products through maternity apparel departments within their stores.

Industry Overview

We are
unaware of any reliable external data on the size of the maternity apparel business. We believe that there is an opportunity to grow the industry, and our business, by selling maternity clothes to those pregnant women who currently purchase
loose-fitting or larger-sized non-maternity clothing as a substitute for maternity wear. We also believe that our business can grow by reducing the amount of hand-me-down and borrowing associated with maternity apparel,
particularly in the value-priced segment. Further, we believe that the demand for maternity apparel is relatively stable when compared to non-maternity apparel. Expectant mothers continue to need to replace most of their wardrobe and the current
rate of approximately four million United States births per year has remained relatively stable over the last decade. Also, although we are affected by fashion trends, we believe that maternity apparel is less fashion sensitive than womens
specialty apparel in general, as demand is driven primarily by the need to replace wardrobe basics as opposed to a desire to add to ones wardrobe in order to meet current fashion trends.

Our Competitive Strengths

We are the leader in maternity apparel.    We are the leading designer and retailer of maternity apparel in the United States and are the only nationwide chain of maternity specialty stores. We believe that
our brands are the most recognized in maternity apparel. We have established a broad distribution network, with stores in a wide range of geographic areas and retailing venues. In addition, we have a leading position across all major price points of
maternity apparel through our retail store nameplates and our merchandise brands. Our exclusive focus on maternity apparel and our leadership position enable us to gain a comprehensive understanding of the needs of our maternity customers and keep
abreast of fashion and product developments. We further enhance our leadership position, increase market penetration and build our brands by distributing our products under exclusive leased department and licensed relationships. We are also using
the strength of our products, brands and store nameplates in the United States to expand internationally, having opened 38 stores in Canada over the past several years and recently beginning to develop franchise arrangements to further expand
internationally.

We offer a comprehensive assortment of maternity apparel and
accessories.    A primary consideration for expectant mothers shopping for maternity clothes is product assortment, as pregnant women typically need to replace almost their entire wardrobe. We believe that we offer the
widest selection of merchandise in the maternity apparel business. We also offer product for multiple seasons, as pregnant womens clothing needs vary depending on their due date. Our ability to offer a broad assortment of product is due, in
large part, to our vertically-integrated business model, which includes our extensive in-house design and contract manufacturing capabilities, as well as our rapid inventory replenishment system.

We are vertically integrated.    We design and contract manufacture approximately 90% of the merchandise we
sell. We believe that vertical integration enables us to offer the broadest assortment of maternity apparel, to



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respond quickly to fashion trends and to optimize in-stock levels. We combine our in-house design expertise, domestic and international sourcing capabilities, a rapid inventory replenishment
process and extensive proprietary systems to enhance operational and financial results.

We utilize a rapid inventory
replenishment system.    We are able to offer a wide selection of merchandise in our retail locations due, in large part, to our rapid inventory replenishment system. Our proprietary inventory replenishment system enables
us to offer our customers a much broader selection than any of our competitors, without dedicating retail space to back-stock storage. We coordinate the rapid replenishment of inventory for all of our retail locations through our
Philadelphia, Pennsylvania and Mississauga, Ontario distribution centers to meet the individualized needs of our retail locations. Our stores receive shipments from our distribution centers between two and seven times per week. This enables us to
maintain a high percentage in-stock merchandise position in each of our stores.

We have proprietary systems that support
our business.    In order to support our vertically-integrated business model and inventory replenishment system, we have developed a fully integrated, proprietary enterprise resource planning (ERP) system. This system
includes point-of-sale systems, our proprietary merchandise analysis and planning system, our materials requirement planning system, and our web-based, global sourcing and logistics systems. These systems also support our automated picking and
sorting systems and other aspects of our logistics infrastructure. We believe that our proprietary systems are a critical competitive strength that enables us to offer a broad product assortment and respond quickly to fashion trends as well as helps
us to reduce product costs and rapidly replenish inventory in our retail locations.

We are able to obtain prime real
estate locations.    We believe our ability to lease attractive real estate locations is enhanced due to the brand awareness of our concepts, our multiple price point approach, our highly sought after maternity customer
and our dedicated in-house real estate management and procurement capabilities. We are the only maternity apparel retailer to provide mall operators with differently priced retail concepts, depending on the malls target demographics. We are
also able to provide a multi-brand store for malls whose maternity customers seek a wide range of price alternatives. In addition, in the case of multi-mall operators, we have the flexibility to provide several stores across multiple malls. As a
result, we have been able to locate stores in many of what we believe are the most desirable shopping malls in the country and are able to obtain attractive locations within these malls.

We are able to enhance our leadership position by distributing our products under exclusive leased department and licensed
relationships.    As of September 30, 2009, we operate 360 leased departments within leading retailers such as Sears, Kmart, Macys, Bloomingdales, BabiesRUs, Boscovs and Gordmans. In
addition, in October 2009 we re-launched our leased department relationship with Sears and, as of November 30, 2009, we operate maternity apparel departments in 522 Sears locations and 101 Kmart locations. We are also the exclusive provider of
maternity apparel to Kohls pursuant to an exclusive licensed relationship. We believe that we have an opportunity to continue to increase the sales we generate from these ongoing relationships through expanding our relationships with our
current partners as well as developing relationships with new partners. We see the re-launch of our Two Hearts Maternity by Destination Maternity collection in Sears and Kmart as an example of how we are continuing to enhance our leadership position
through our leased department and licensed relationships.

We have a highly experienced management
team.    We have a management team with significant experience in all aspects of the retail and apparel business, including our Chief Executive Officer (CEO), Edward (Ed) Krell, who has served as a senior
executive of the Company for nearly eight years and has nearly 25 years of business experience encompassing apparel, retail, finance and overall management. In addition, although our co-founder Rebecca Matthias will retire as our President and Chief
Creative Officer on June 15, 2010, we have secured Ms. Matthias availability to us through September 30, 2012 (first in a part-time employment capacity from June 15, 2010 to September 30, 2010, and thereafter in a
consulting capacity through September 30, 2012).



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Merchandise Brands

We believe that our brands are the most recognized brands in the maternity apparel business. We sell our merchandise under the following four distinct brands:



|                                                  |  |                                                                                                                                                 |  |                            
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------
|Brand                                             |  | Brand Positioning                                                                                                                               |  | Typical Apparel Price Range
|Motherhood Maternity                              |  | Broad assortment of the latest fashions, offering great quality merchandise at everyday low prices                                              |  | $9  $45                   
|                                                  |  |                                                                                                                                                
|A Pea in the Pod                                  |  | Contemporary, fashion-forward and luxury, offering sophisticated career, as well as fun casual merchandise, including exclusive designer labels |  | $16  $400                 
|                                                  |  |                                                                                                                                                
|Two Hearts Maternity by Destination Maternity (1) |  | Select assortment of the latest fashions, offering great quality merchandise at value price points                                              |  | $9  $45                   
|                                                  |  |                                                                                                                                                
|Oh Baby by Motherhood                             |  | Select assortment of the latest fashions, offering great quality merchandise at value price points                                              |  | $8  $42 (2)               





|(1) | In October 2009, we re-launched our Two Hearts Maternity by Destination Maternity collection, available exclusively at Sears and Kmart stores. The Two Hearts Maternity
collection was previously offered in Sears stores from April 2004 through June 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Kohls, which sells our Oh Baby by Motherhood brand under an exclusive product and license agreement, sets the prices for this merchandise.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

Motherhood Maternity.    Our Motherhood Maternity brand serves the
value-priced portion of the maternity apparel business, which has the greatest number of customers. The Motherhood brand is positioned with a broad assortment of quality fashion at everyday low prices. We believe that the Motherhood customer shops
at moderate-priced department stores and discount stores when she is not expecting.

A Pea in the
Pod.    Our A Pea in the Pod brand serves both the medium-priced portion and, through our A Pea in the Pod Collection line, the luxury portion of the maternity apparel business. The Pea brand is generally positioned as
contemporary, fashion-forward and luxury, with prices ranging from affordable mid-priced to true luxury prices, offering the mom-to-be exceptional contemporary maternity pieces that reflect her uncompromising sense of style in both casual and career
apparel. The Pea Collection is the distinctive premier maternity luxury line within the Pea brand, featuring a selection of extraordinary styles along with exclusive designer labels. In our stores which carry A Pea in the Pod brand merchandise, we
also offer exclusive maternity versions of select styles from well-known designer and contemporary brands, where we have assisted in developing these maternity versions. We believe that the typical Pea customer shops at department stores and
specialty apparel chains when she is not expecting, with the Pea Collection customer typically shopping at higher-end department stores and luxury designer boutiques when not pregnant. We believe the Pea brand is the leading luxury maternity brand
in the United States. Publicity, including celebrities wearing our clothes, is an important part of the marketing and positioning of the Pea brand.

Two Hearts Maternity by Destination Maternity.    Our Two Hearts Maternity by Destination Maternity collection was re-launched in October 2009 at over 600 Sears and Kmart
locations throughout the United States through an exclusive leased department relationship. The new collection delivers the latest in career and casual sportswear as well as dresses, swimwear, lingerie and nursing-friendly sleepwear, all specially
designed to complement the pregnant silhouette, with most items priced under $25. The Two Hearts Maternity collection was previously offered in Sears stores from April 2004 through June 2008.

Oh Baby by Motherhood.    Our Oh Baby by Motherhood collection was launched in February 2005 at Kohls
stores throughout the United States and on Kohls.com. The Oh Baby by Motherhood collection is



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available at all Kohls stores under an exclusive product and license agreement. The collection features a modern assortment of quality fashions, with most items having initial prices
(before price promotions) under $40.

Retail Nameplates

We sell maternity apparel through the stores, leased departments and licensed relationships identified in the table below.



|                                 |  |                                                                                                                                                |  |                                                            |  |                            |  |                       
|-------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------- |  | -------------------------- |  | ----------------------
|Store Nameplate                  |  | Description of Target Location                                                                                                                 |  | Brand(s) Carried                                           |  | Typical ApparelPrice Range |  | Average Size (Sq. Ft.)
|Stores:                          |  |                                                                                                                                                |  |                                                            |  |                            |  |                       
|                                 |  |                                                                                                                                                |  |                                                           
|Motherhood Maternity             |  | Mid-priced and moderate regional malls, strip and power centers, and central business districts                                                |  | Motherhood                                                 |  | $9  $45                   |  | 1,800                 
|                                 |  |                                                                                                                                                |  |                                                           
|A Pea in the Pod                 |  | Mid-priced and high-end regional malls, lifestyle centers, central business districts and some stand-alone stores in affluent street locations |  | Pea (including, in some cases, Pea Collection)             |  | $16  $400                 |  | 1,900                 
|                                 |  |                                                                                                                                                |  |                                                           
|Destination Maternity            |  | Combo stores located in mid-priced regional malls and lifestyle centers                                                                        |  | Motherhood; Pea (including, in some cases, Pea Collection) |  | $9  $400                  |  | Combo stores 2,800    
|                                 |  | Superstores located primarily in outdoor and power centers and central business districts                                                      |  |                                                            |  |                            |  | Superstores 6,700     
|                                 |  |                                                                                                                                                |  |                                                           
|Leased Departments:              |  |                                                                                                                                                |  |                                                            |  |                            |  |                       
|                                 |  |                                                                                                                                                |  |                                                           
|Sears (1)                        |  | Mid-priced and moderate regional malls                                                                                                         |  | Two Hearts Maternity by Destination Maternity              |  | $9  $45                   |  |                      
|                                 |  |                                                                                                                                                |  |                                                           
|Kmart (1)                        |  | Moderate strip centers and freestanding locations                                                                                              |  | Two Hearts Maternity by Destination Maternity              |  | $9  $45                   |  |                      
|                                 |  |                                                                                                                                                |  |                                                           
|Macys                           |  | Mid-priced regional malls                                                                                                                      |  | Motherhood; Pea                                            |  | $9  $150                  |  |                      
|                                 |  |                                                                                                                                                |  |                                                           
|BabiesRUs                      |  | Big box power centers                                                                                                                          |  | Motherhood                                                 |  | $9  $45                   |  |                      
|                                 |  |                                                                                                                                                |  |                                                           
|Boscovs                         |  | Mid-priced and moderate regional malls                                                                                                         |  | Motherhood                                                 |  | $9  $45                   |  |                      
|                                 |  |                                                                                                                                                |  |                                                           
|Gordmans                         |  | Big box power centers                                                                                                                          |  | Motherhood                                                 |  | $9  $45                   |  |                      
|                                 |  |                                                                                                                                                |  |                                                           
|Exclusive Licensed Relationship: |  |                                                                                                                                                |  |                                                            |  |                            |  |                       
|                                 |  |                                                                                                                                                |  |                                                           
|Kohls                           |  | Big box power centers                                                                                                                          |  | Oh Baby by Motherhood                                      |  | $8  $42 (2)               |  |                      



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|(1) | In October 2009, we re-launched our Two Hearts Maternity by Destination Maternity collection, available exclusively at Sears and Kmart stores. The Two Hearts Maternity
collection was previously offered in Sears stores from April 2004 through June 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Kohls, which sells our Oh Baby by Motherhood brand under an exclusive product and license agreement, sets the apparel price range for this merchandise.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

The following table sets forth our store count by nameplate as of September 30, 2009.



|                                   |  |                                    
|---------------------------------- |  | -----------------------------------
|                                   |  | Store Count as ofSeptember 30, 2009
|Motherhood Maternity               |  | 591                                
|A Pea in the Pod                   |  | 67                                 
|Destination Maternity              |  |                                    
|Combo stores                       |  | 44                                 
|Superstores                        |  | 22                                 
|                                   |  |                                    
|Total Destination Maternity stores |  | 66                                 
|                                   |  |                                    
|Total stores                       |  | 724                                
|                                   |  |                                    

Major regional malls with several department stores and a wide range of price points
may be able to accommodate a multi-brand store, or more than one maternity store. Our retail nameplates provide us with the ability to address multiple price alternatives at a given mall. As of September 30, 2009, we had at least two of our
store concepts in 16 major regional malls. Our preference is, over time and assuming we can obtain a suitable location under acceptable financial terms, to operate one larger-sized multi-brand store under the Destination Maternity nameplate in or
near these malls, rather than two smaller single-brand stores.

Motherhood Maternity
Stores.     Motherhood Maternity is our largest chain with 591 stores as of September 30, 2009. Motherhood is positioned with a broad assortment of quality fashion at everyday low prices. Motherhood stores
average approximately 1,800 square feet and are located primarily in mid-priced and moderate regional malls, strip and power centers, and central business districts. Motherhood stores include 86 outlet locations that carry Motherhood-branded
merchandise as well as some closeout merchandise. In fiscal 2009, we opened nine new Motherhood stores and outlets and closed 34 Motherhood stores and outlets, with six of these store closings related to multi-brand store openings. As of
September 30, 2009, we operated 38 Motherhood stores in Canada and believe that market opportunities may permit us to open additional stores in Canada in the future.

A Pea in the Pod Stores.     As of September 30, 2009, we had 67 A Pea in the Pod stores, averaging approximately 1,900 square feet. In connection with our
fiscal 2009 retail nameplate rebranding, several of our A Pea in the Pod stores may continue to carry the Mimi Maternity storefront sign for an indefinite period. Certain of the A Pea in the Pod stores are located in mid-priced regional malls,
lifestyle centers and central business districts while others are located in upscale venues, including Beverly Hills, Oak Street, South Coast Plaza, Bal Harbour and Newbury Street. In fiscal 2009, we closed seven Pea stores, with two of these store
closings related to multi-brand store openings.

Destination Maternity Stores.    As
of September 30, 2009, we had 66 Destination Maternity stores averaging approximately 4,100 square feet, including 44 Destination Maternity combo stores and 22 Destination Maternity superstores.

Destination Maternity Combo Stores.    As of September 30, 2009, we have 44 Destination
Maternity combo stores. Our combo stores are larger (average of approximately 2,800 square feet) than our single-brand stores, generally have higher average sales volume than our average store and provide the opportunity to improve store operating
profit margins over time. A new combo store typically involves closing two stores (often one Motherhood store and one single-brand Pea store), although we sometimes close only one store in a given geographical market in situations where we believe
we can expand sales through replacing a single-brand store with a Destination Maternity combo store. Store closings will often involve one-time store closing costs resulting primarily from early lease terminations. Based on our internal



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research, we believe that over the next several years we have the potential to expand the Destination Maternity combo store chain to 70 or more total Destination Maternity combo stores in the
United States. In fiscal 2009, we opened two Destination Maternity combo stores and we closed two Destination Maternity combo stores.

Destination Maternity Superstores.     In March 2004, we opened our first Destination Maternity superstore in Danbury, Connecticut. As of September 30, 2009, we have 22
Destination Maternity superstores. Destination Maternity superstores currently carry both of our primary merchandise brands (Motherhood and Pea), plus a greatly expanded line of maternity-related accessories, nursing products, health and fitness
products, books, and body and nutritional products. Certain Destination Maternity superstores also carry our luxury A Pea in the Pod Collection portion of the Pea brand. Our Destination Maternity superstores also typically feature a dedicated
learning center area for maternity-related classes, a relax area for husbands and shoppers alike, and an inside play area for the pregnant moms toddlers and young children, with seven of our superstores also having our
Edamame® The Maternity Spa. These elements combine to give our Destination Maternity superstore not only
the largest assortment of maternity apparel and accessories available, but also a unique and engaging atmosphere and experience for the maternity customer. A new Destination Maternity superstore typically involves closing at least two, and sometimes
more, single-brand stores, is expected to decrease store operating expense percentages through economies of scale, and may increase overall sales in the geographical areas it serves. Destination Maternity superstores range from nearly 4,000 square
feet to approximately 11,000 square feet, with an average of approximately 6,700 square feet for the 22 stores open as of September 30, 2009. In February 2006, we opened our flagship Destination Maternity superstore on the corner of
57th Street and Madison Avenue in New York Citys Manhattan borough. This is the largest maternity store in the world, spanning three floors and including our Edamame The Maternity Spa, all of our primary apparel brands, prenatal education
and yoga classes, a juice bar with Internet access, relax area and childrens play area. As the only national retailer that is solely focused on maternity, we are further differentiating ourselves as the ultimate maternity destination with
these large, well-assorted, must visit superstores. We opened three Destination Maternity superstores during fiscal 2009. Based on our internal research, we believe that over the next several years we have the potential to expand the
Destination Maternity superstore chain to 50 or more total Destination Maternity superstores in the United States.

Leased Departments.     In addition to the stores we operate, we have arrangements with department stores and baby specialty stores, including Sears, Kmart, Macys, Bloomingdales,
BabiesRUs, Boscovs and Gordmans, to operate maternity apparel departments in their stores. We are the exclusive maternity apparel provider in each of our leased department locations. We staff these leased departments at varying
levels and maintain control of the pricing terms and the timing and degree of the markdowns of our merchandise that is sold in the leased departments. We operate our leased departments during the same hours and days as the host store and are
responsible for replenishment of the merchandise in the leased departments. These leased departments typically involve the lease partner collecting all of the revenue from the leased department. The revenue is remitted to us, less a fixed percentage
of the net sales earned by the lease partner as stipulated in each agreement.

Exclusive Licensed
Relationship.     Our Oh Baby by Motherhood collection is available at all Kohls stores under an exclusive product and license agreement. The collection was launched in February 2005 at Kohls stores throughout
the United States and on Kohls.com. As of September 30, 2009, Kohls operated approximately 1,059 stores throughout the United States.

International.     Currently, we operate 38 Motherhood stores in Canada and we operate a Motherhood website under a Canadian URL (MotherhoodCanada.ca).

In October 2008, we announced our planned expansion into six key markets in the Middle East through an international franchise agreement with
Multi Trend, a member of the Al-Homaizi Group, to introduce our Destination Maternity, Motherhood Maternity, A Pea in the Pod, and Edamame The Maternity Spa brands into the Middle East. Our initial franchise locations through our international
franchise agreement in the Middle East opened during 2009, with the first Middle East franchise store opening in 360 Mall in South Surra, Kuwait in July 2009 under our A Pea in the Pod retail nameplate, and the second Middle East franchise store
opening in Al Bairaq Mall in Fintas, Kuwait in October 2009 under our Motherhood Maternity retail nameplate.



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In April 2009, we announced our planned expansion into India through an international
franchise agreement with Mahindra Retail, part of the Mahindra Group, to introduce our Motherhood Maternity, Destination Maternity, and A Pea in the Pod retail nameplates into India. We have initially made our Motherhood Maternity product available
for sale through Mahindra Retails exciting, new Mom & Me stores in India. As of September 30, 2009, our Motherhood Maternity merchandise is offered in seven Mom & Me stores in India.

We continue to evaluate other international sales opportunities. As our Middle East and India franchise relationships demonstrate, we
anticipate that our initial international strategy will consist primarily of franchising, licensing or similar arrangements with foreign partners, although we anticipate that our strategy, particularly over the longer term, may include both
licensing arrangements with foreign partners, as well as potentially entering into joint ventures or developing our own operations in certain countries.

Internet Operations

We sell our merchandise on the Internet primarily at
our DestinationMaternity.com website, as well as our brand-specific websites such as Motherhood.com. We also sell our merchandise through our Canadian website, MotherhoodCanada.ca. We believe that many pregnant women use the Internet to find
maternity-related information and to purchase maternity clothes. Our websites are therefore important tools for educating existing and potential customers about our brands and driving traffic to our stores. In addition to providing links to all of
our websites, our DestinationMaternity.com website contains maternity advice and information, related baby product information and editorial content. Our marketing and technology capabilities and the replenishment capabilities of our distribution
centers and stores enable us to incorporate Internet design, operations and fulfillment into our existing operations. We believe that our Internet operations represent a growth opportunity for the Company and we look to increase our sales driven by
our Internet operations in the future.

Marketing Partnerships

We believe our customers, particularly first-time mothers, are entering a new life stage that drives widespread changes in purchasing needs
and behavior, thus making our maternity customer and her family a highly-valued demographic for a range of consumer products and services companies. We have been able to leverage the relationship we have with our customers to earn incremental
revenues and expect to expand these revenues through marketing partnerships.

We expect to continue to expand and leverage the
relationship we have with our customers and earn incremental revenues through a variety of marketing partnership programs utilizing our extensive opt-in customer database and various in-store marketing initiatives, which help introduce our customers
to various baby and parent-related products and services offered by leading third-party consumer products companies. Our current revenues in this area have predominantly been derived from the prenatal portion of our customer database. We are taking
steps to update and manage our entire customer database so we can actively market our full customer database to a much broader range of consumer products and services companies that market to families with children.

Through our stores and our Internet sites, we market our futuretrust college savings program to our customers.
Futuretrust is a MasterCard®based college savings
program that enables members to help save for college when they link their futuretrust MasterCard to a tax advantaged 529 College Savings account. Members earn rebates on all purchases with their futuretrust MasterCard that are automatically
contributed to their 529 College Savings account and can also earn additional college savings at merchants in the futuretrust Preferred Merchant Network. We have entered into relationships with select providers of 529 savings programs, tax
preparation services, home mortgages, online banking, life insurance and real estate services to provide additional services for our futuretrust members.

Operations

Brand-Specific Operations
Teams.     To obtain maximum efficiencies, we are organized primarily along functional lines, such as store operations, merchandising, design and production. Our business consists of four merchandise brands, which each
require decisions on a brand-specific basis. As such, we have built business



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teams by brand where the functional leaders within each brand work together. Each brand team is led by the head merchant and includes a brand-specific head designer, head planner and distributor,
key production manager, and, where applicable, a director of stores. These teams also include visual, fabric purchasing and other necessary professionals.

Store Operations.     The typical maternity customer, especially the first-time mother, seeks more advice and assistance than the typical non-maternity customer.
Therefore, we aim to employ skilled and motivated store team members who are trained to provide the high level of service and reassurance needed by our customers. We attempt to provide a boutique level of attentive service that differentiates us
from our competitors. Our centralized merchandising and store operations also enable our store team members to focus primarily on selling and maintaining the appearance of the stores. In addition, visual merchants coordinate with the merchandising
department to develop floor-sets, design store display windows and define and enhance the product presentation.

The
field/store management reporting structure for each chain consists of a director, regional managers, district managers and store managers. These members of field/store management are each eligible to receive incentive-based compensation related to
store, district, regional and chain-level performance.

Merchandising, Design and Inventory Planning and Allocation

Merchandising.     We strive to maintain an appropriate balance between new merchandise and proven styles,
as well as between basic and fashion items. Our merchandising decisions are based on current fashion trends, as well as input from our designers and outside vendors. This information is used in conjunction with the item-specific sales data provided
by our proprietary merchandising and replenishment system. Each brand has its own team of merchants, designers and planners. These teams are led by the head merchant of the brand who each report to our Chief Merchandising Officer.

Design.     Our design department creates and produces samples and patterns for our contract-manufactured
products under the guidance of the merchandising department. This capability differentiates us from many of our competitors, who source their products from a limited number of maternity wear vendors. The design of our products begins with a review
of European and New York runway trends, current non-maternity retail trends, fashion reporting service information and fabric samples. The designers review our best selling items from prior seasons and integrate current fashion ideas from the
non-maternity apparel business.

Inventory Planning and Allocation.     Our inventory
planning and allocation department is responsible for planning future inventory purchases and markdowns, as well as targeting overall inventory levels and turnover. We establish target inventories for each store using our inventory planning system
with the goals of optimizing our merchandise assortment and turnover, maintaining adequate depth of merchandise by style and managing closeout and end-of-season merchandise consolidation. Our proprietary capabilities enable us to continually monitor
and respond quickly to consumer demand and are integral to our inventory management program. These capabilities are facilitated by our customized merchandise analysis and planning system, which provides daily product sell-through data and
merchandising information.

Production and Distribution

We design and contract for the production of approximately 90% of the merchandise we sell using sewing factories located throughout the world, predominantly outside of the United States, and we continue
to seek additional contractors for our sourcing needs. No individual contractor represents a material portion of our sewing. A majority of our merchandise is purchased full package as finished product made to our specifications,
typically utilizing our designs. Fabric, trim and other supplies are obtained from a variety of sources. Substantially all of the merchandise produced outside of the United States is paid for in U.S. dollars.

Our production personnel monitor production at contractor facilities in the United States and work with our buying representatives abroad to
ensure quality control, compliance with our design specifications and timely delivery of finished goods. This quality control effort is enhanced by our worldwide Internet-based contracting and logistics systems, which include advanced features such
as measurement specifications and digital photography. We also use a third-party consulting firm to help monitor working conditions at our contractors facilities on a worldwide basis.



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We operate our primary distribution center in Philadelphia, Pennsylvania and a distribution
center in Mississauga, Ontario to support our stores in Canada. We also lease a facility located in the Philadelphia Naval Business Center in Philadelphia, Pennsylvania, which we use for warehousing, distribution and raw material cutting.

Finished garments from contractors and other manufacturers are received at our primary distribution center in Philadelphia,
Pennsylvania and our Canadian distribution center. Garments are inspected using statistical sampling methods and stored for picking. Our primary distribution center utilizes sophisticated fulfillment technology to serve as a replenishment center, as
opposed to solely a distribution center. This distribution center sends a specific selection that meets individual store needs from our overall inventory, with each store shipped between two and seven times per week. Retail location replenishment
decisions are made automatically based upon target inventories established by the planning and allocation department and individual retail location sales data. Our primary distribution center uses several automated systems, including our
pick-to-light system for flat-packed goods and our hanging garment sortation system, which speed up deliveries to our retail locations and reduce costs. Freight is routed through zone-skipping, over-the-road carriers and delivered locally by a
variety of carriers, and is supplemented by a small percentage of second-day air, providing one to three day delivery to our retail locations.

In November 2003, we were certified to participate in Customs-Trade Partnership Against Terrorism (C-TPAT), a United States Department of Homeland Security sponsored program, with United
States Customs and Border Protection (U.S. Customs), through which we implement and monitor our procedures to manage the security of our supply chain as part of the effort to protect the United States and our imported products against
potential acts of terrorism. In January 2005, we were certified to participate in the Importer Self Assessment Program (ISA), a U.S. Customs program available only to C-TPAT participants with strong internal controls. Through our
participation in the ISA program, we assume responsibility for monitoring our own compliance activities with applicable U.S. Customs regulations in exchange for certain benefits, which may help increase efficiency in importing. These benefits
include exemption from government audits, increased speed of cargo release from U.S. Customs, front of the line access to U.S. Customs cargo exams, enhanced prior disclosure rights from U.S. Customs in the event of alleged trade violations,
availability of voluntary additional compliance guidance from U.S. Customs, and less intrusive government oversight of trade compliance.

In May 2007, we were accepted to participate in the U.S. Customs and Border Protections Drawback Compliance Program. The benefits of this program include (i) waiver of prior notice where we do
not have to notify U.S. Customs at the time of export of product to Canada and (ii) accelerated payment privileges, with respect to goods we export from the United States, which we previously imported into the United States, to receive drawback
refunds of United States import duties previously paid within 30 days of filing the claim for refund.

Management Information and
Control Systems

We believe that our proprietary systems are instrumental to our ability to offer the broadest assortment
of maternity apparel merchandise and accomplish rapid replenishment of inventory. We continuously develop, maintain and upgrade our systems and we employ an in-house team of programmers. Our stores have point-of-sale terminals that provide
information used in our customized merchandise analysis and planning system. This system provides daily financial and merchandising information that is integral to monitoring trends and making merchandising decisions. Our systems have numerous
features designed to integrate our retail operations with our design, manufacturing and financial functions. These features include custom merchandise profiles for each store, rapid inventory replenishment, item-tracking providing daily updated
selling information for every style, classification open-to-buy and inventory control, as well as the daily collection of customer payment data, including cash, check, credit card and gift card sales data.

As part of our proprietary enterprise resource planning (ERP) system, we employ a comprehensive materials requirement planning (MRP) system
to manage our production inventories, documentation, work orders and scheduling. This system provides a perpetual inventory of raw materials, actual job costing, scheduling and bill of materials capabilities. The foundation of our ERP system is a
perpetual inventory of finished goods by SKU and location across all of our retail locations, which interfaces directly with our distribution facility.

Our proprietary, Internet-based point-of-sale system provides real-time access to financial and merchandising information in addition to rapid credit authorization. This point-of-sale system significantly



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reduces the amount of training required for new sales associates and store managers. In addition, we regularly add new features and functionality to the system, and the system improves our
customer relationship

management capabilities by enhancing our ability to create customized promotional and marketing strategies.

Given the importance of our management information systems, we have taken extensive measures to ensure

their responsiveness and security. Our hardware and communications systems are based on a redundant and multiprocessing architecture, which allows their
continued operation on a parallel system in the event that there is a disruption within the primary system. Our main computer system, located at our headquarters in Philadelphia, Pennsylvania, is duplicated by a fully mirrored system in a separate
part of the building with a separate power source that is designed to assume full operations should disruption in the primary system occur. In addition, our software programs and data are backed up and securely stored off-site. Our communications
links come from two telephone frame rooms and are delivered through underground and aboveground feeds.

Pricing

Our merchandise brands target customers at different price points of the maternity apparel business. Our Motherhood Maternity and Two Hearts
Maternity by Destination Maternity brands are positioned as moderate-priced brands, primarily at everyday low prices, while Pea employs both middle level pricing and, through our Pea Collection line, luxury pricing. Our stores do not rely
significantly on point-of-sale high/low promotional strategies to drive traffic into the stores. Our price reductions are done at the individual style level and are used to accelerate the sale of slower selling merchandise. Generally, merchandise
that is selling slowly is quickly marked down or moved to another store where the item is selling faster. For our leased department relationships, we consider a number of factors in determining pricing, including the target customer base, and we may
use alternative pricing strategies to promote sales. The pricing of our Oh Baby by Motherhood merchandise is determined by Kohls pursuant to the terms of our exclusive product and licensing relationship. With respect to our international
franchise locations our respective franchisees determine the pricing of merchandise.

Advertising and Marketing

We believe that we drive traffic into our stores through the power of our brands, referrals from friends and family of prior customers, our
various websites and, perhaps most importantly, our convenient, high-traffic locations in various types of shopping malls and, to a much lesser extent, street locations. Therefore, we have modest advertising and marketing expenditures. Our
advertising and publicity efforts include e-mail marketing, web-based advertising, in-store marketing, prenatal consumer-targeted advertising and our websites. For our Destination Maternity superstores, we also advertise locally prior to their grand
opening and do some ongoing advertising nationally and in their local markets thereafter. We advertise one or more of our brands in pregnancy-targeted publications, such as Fit Pregnancy and Pregnancy, as well as in other broad-reach
publications, such as Glamour, In StyleandPeople. For our luxury A Pea in the Pod brand, we advertise in high-fashion publications, such as Vogue and the New York Times Magazine: Fashion of the Times. In addition, we
utilize our publicity efforts to generate free editorial coverage for all of our brands on broadcast television, radio, the Internet and in magazines and newspapers.

Competition

Our business is highly competitive and characterized by low
barriers to entry. The following are several important factors to competing successfully in the retail apparel industry: breadth of selection in sizes; colors and styles of merchandise; product procurement and pricing; ability to anticipate fashion
trends and customer preferences; inventory control; reputation; quality of merchandise; store design and location; visual presentation and advertising; and customer service. We face competition in our maternity apparel lines from various sources,
including department stores, specialty retail chains, discount stores, independent retail stores and catalog and Internet-based retailers, from both new and existing competitors. Many of our competitors are larger and have substantially greater
financial and other resources than us. Our mid- and luxury-priced merchandise faces a highly fragmented competitive landscape that includes locally based, single unit retailers, as well as a handful of multi-unit maternity operations, none of which
we believe has more than 10 stores nationwide. In the value-priced maternity apparel business, we currently face competition on a nationwide basis from retailers such



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as Gap®, JCPenney®, Old Navy®,
Target® and Wal-Mart®. All of these competitors also sell maternity apparel on their websites. We believe that over the past several years there has been increased competition in the
maternity apparel business, from both new and existing competitors.

Employees

As of September 30, 2009, we had 2,157 full-time and 2,527 part-time employees. None of our employees are covered by a collective
bargaining agreement. We consider our employee relations to be good.

Executive Officers of the Company

The following table sets forth the name, age and position of each of our executive officers:



|                    |  |     |  |                                                
|------------------- |  | --- |  | -----------------------------------------------
|Name                |  | Age |  | Position                                       
|Edward M. Krell     |  | 47  |  | Chief Executive Officer                        
|Rebecca C. Matthias |  | 56  |  | President & Chief Creative Officer             
|Lisa H. Hendrickson |  | 48  |  | Chief Merchandising Officer                    
|Judd P. Tirnauer    |  | 40  |  | Senior Vice President & Chief Financial Officer

Edward M. Krellhas served as our Chief Executive Officer and a director since
October 1, 2008. From July 2008 until October 1, 2008, Mr. Krell served as our Chief Operating Officer and from May 2007 to July 2008, Mr. Krell served as our Chief Operating Officer & Chief Financial Officer. From
November 2003 to May 2007, Mr. Krell served as our Executive Vice PresidentChief Financial Officer, having served as Senior Vice PresidentChief Financial Officer from the time he joined us in January 2002 until November 2003. Prior
to joining us, Mr. Krell served in various senior financial management positions, including having served as Chief Financial Officer of Mammoth Sports Group, Inc. (an Internet and catalog retailer of golf equipment and accessories) and
London Fog Industries, Inc. (a wholesale and retail distributor of rainwear and outerwear). Mr. Krell began his career as an investment banker with Kidder, Peabody & Co. Incorporated and earned an M.B.A. degree from Stanford
University and a B.A. degree from Harvard University.

Rebecca C. Matthias co-founded the Company in 1982 (along with
Dan W. Matthias) and has served as a director and our President since our inception. Ms. Matthias is also currently serving as our President & Chief Creative Officer. From January 1993 to May 2007, Ms. Matthias also served as our Chief
Operating Officer. In 1992, Ms. Matthias was chosen as Regional Entrepreneur of the Year by Inc. magazine and Merrill Lynch Corporation, and in September 2003, Ms. Matthias was recognized as a top woman entrepreneur by the
United States Small Business Administration. Prior to 1982, Ms. Matthias was a construction engineer for the Gilbane Building Company. Ms. Matthias also serves as a director on the Board of Directors of CSS Industries, Inc. In
November 2009 we announced that Ms. Matthias will retire at the end of our current fiscal year, ending September 30, 2010. Ms. Matthias will continue to serve the Company in a full-time capacity until June 15, 2010, at which time
she will be available to the Company on a part-time basis until September 30, 2010. After her retirement in September, Ms. Matthias will remain available to management in an advisory capacity through September 30, 2012.
Ms. Matthias continues to serve as a director of the Company.

Lisa H. Hendricksonhas served as our Chief
Merchandising Officer since January 2008. From May 2006 to January 2008, Ms. Hendrickson served as our Vice President of Design, having served as Design Director of Motherhood Maternity from the time she joined us in February 1998 until May
2006. Prior to joining us, Ms. Hendrickson served as the Design Director for Stephanie Queller, a private label sportswear company, from September 1992 to January 1998. Ms. Hendrickson began her career as a Designer with
Etcetera, a division of J.G. Hook.

Judd P. Tirnauerhas served as our Senior Vice President & Chief Financial
Officer since July 2008. From June 2005 to July 2008, Mr. Tirnauer served as our Vice PresidentFinance, having previously served with us as our Vice PresidentFinancial Planning & Analysis since October 2003, and
Director of Financial Planning & Analysis since joining us in November 2001. Mr. Tirnauer has earned both a Masters of Business Administration degree and a Juris Doctorate legal degree, and has earned a Certified Public
Accountant designation.



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Our executive officers are appointed annually by our Board of Directors and serve at the
discretion of the Board. There is a husband and wife relationship between the Chairman of our Board of Directors, Dan Matthias, and Rebecca Matthias. There are no family relationships among any of our other executive officers.

Intellectual Property

We own trademark and service mark rights that we believe are sufficient to conduct our business as currently operated. We own several trademarks, including Destination Maternity Corporation, Mothers
Work®, A Pea in the Pod®, A Pea in the Pod Collection, Mimi Maternity®, Motherhood®, Motherhood
Maternity®, Destination Maternity®, Edamame The Maternity Spa®,
Two Hearts® Maternity, Oh Baby by Motherhood®, Motherhood Maternity Outlet®, MaternityMall.com® and
iMaternity.com. Additionally, we own the marks futuretrust®, Real Time Retailing®, Whats Showing is Your Style®, Maternity Redefined®, The
Art of Maternity, Made With the Earth in Mind, Secret Fit Belly®, Super Stretch® and Expect Low Prices Every Day®.

In addition, from time to time, we may
pursue patent protection for certain maternity apparel related technologies that we develop. For example, in fiscal 2007 we filed a patent application for our Secret Fit Belly. The Secret Fit Belly is made of seamless super stretch fabric that can
form part of nearly any type of bottom (such as jeans, pants, shorts and skirts) to provide a better, more comfortable fit and a seamless look.

Seasonality

Our business, like that of many other retailers, is seasonal. Our quarterly net sales have
historically been highest in our third fiscal quarter, corresponding to the Spring selling season, followed by our first fiscal quarter, corresponding to the Fall/holiday selling season. Given the historically higher sales level in our third fiscal
quarter and the relatively fixed nature of most of our operating expenses and interest expense, we have typically generated a very significant percentage of our full year operating income and net income during our third fiscal quarter. Results for
any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Quarterly results may fluctuate materially depending upon, among other things, increases or decreases in comparable store sales, the timing of new
store openings and new leased department openings, net sales and profitability contributed by new stores and leased departments, the timing of the fulfillment of purchase orders under our product and license arrangements, adverse weather conditions,
shifts in the timing of certain holidays and promotions, changes in inventory and production levels and the timing of deliveries of inventory, and changes in our merchandise mix.

Securities and Exchange Commission Filings

Our Securities and Exchange
Commission (SEC) filings are available free of charge on our website, investor.destinationmaternity.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports are posted on our website as soon as practicable after we furnish such materials to the SEC.



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|Item 1A. | Risk Factors
|-------- | ------------

You
should consider carefully all of the information set forth or incorporated by reference in this document and, in particular, the following risk factors associated with our business and forward-looking information in this document (see also
Forward-Looking Statements included in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations). The risks described below are not the only ones we face. Additional risks not
presently known to us or that we do not currently consider significant may also have an adverse effect on us. If any of the risks below actually occur, our business, results of operations, cash flows or financial condition could suffer.

Our performance may be affected by general economic conditions and the continued global financial difficulties.

Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending, which have deteriorated
significantly over the past approximately one year and may remain depressed, or be subject to further deterioration, for the foreseeable future. Some of the factors that are having an impact on discretionary consumer spending include general
economic conditions, employment, consumer debt, reductions in net worth based on securities market declines, residential real estate and mortgage markets, taxation, healthcare costs, fuel and energy prices, interest rates, credit availability,
consumer confidence and other macroeconomic factors.

The worldwide apparel industry is heavily influenced by general economic
cycles. Apparel retailing is a cyclical industry that is heavily dependent upon the overall level of consumer spending. Purchases of specialty apparel and related goods tend to be highly correlated with the cycles of the levels of disposable income
of consumers. As a result, any substantial deterioration in general economic conditions could adversely affect our net sales and results of operations. Downturns, or the expectation of a downturn, in general economic conditions could adversely
affect consumer spending patterns, our sales and our results of operations.

Consumer purchases of discretionary items
generally decline during recessionary periods and other periods where disposable income is adversely affected. The downturn in the economy may continue to affect consumer purchases of our merchandise and have an adverse impact on our sales, results
of operations and cash flow. Because apparel generally is a discretionary purchase, declines in consumer spending may have a more negative effect on apparel retailers than on other retailers. We may not be profitable if there is a decline in
consumer spending.

The turmoil in the financial markets over the past approximately 15 months has resulted in extreme
volatility in security prices and diminished liquidity and credit availability, and there can be no assurance that our liquidity will not be affected by changes in the financial markets and the global economy. Tightening of the credit markets and
recent or future turmoil in the financial markets could also make it more difficult for us to access funds, to refinance our existing indebtedness (if necessary), to enter into agreements for new indebtedness, or to obtain funding through the
issuance of our securities.

In addition, the continued fallout from last years credit crisis is having a significant
negative impact on businesses around the world, and the impact of this crisis on our suppliers cannot be predicted. The inability of suppliers to access liquidity, or the insolvency of suppliers, could lead to their failure to deliver our
merchandise. Worsening economic conditions could also result in difficulties for financial institutions (including bank failures) and other parties that we may do business with, which could potentially impair our ability to access financing under
existing arrangements or to otherwise recover amounts as they become due under our other contractual arrangements. Additionally, either as a result of or independent of the current financial difficulties and economic weakness in the United States,
material fluctuations in currency exchange rates could have a negative impact on our business.

Our comparable store sales and quarterly
operating results have fluctuated in the past and can be expected to continue to fluctuate in the future and, as a result, the market price of our common stock may fluctuate or decline substantially.

Our comparable store sales and quarterly results of operations have fluctuated in the past and can be expected to continue to fluctuate in
the future and are affected by a variety of factors, including:



| |  |  | the opening of new stores and success of our leased department and licensed relationships;
| | - |  | ------------------------------------------------------------------------------------------



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| |  |  | the timing of new store openings and leased department and licensed brand business openings;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | the timing of the fulfillment of purchase orders under our product and license arrangements;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | the extent of cannibalization of sales volume of some of our existing retail locations by our new retail locations opened in the same geographic
markets;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in our merchandise mix;
| | - |  | -------------------------------



| |  |  | any repositioning of our brands;
| | - |  | --------------------------------



| |  |  | general economic conditions and, in particular, the retail sales environment;
| | - |  | -----------------------------------------------------------------------------



| |  |  | calendar shifts, including shifts of holiday or seasonal periods, or shifts in the number of weekend days occurring in a given month;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in pregnancy rates;
| | - |  | ---------------------------



| |  |  | actions of competitors;
| | - |  | -----------------------



| |  |  | the level of success and/or actions of anchor tenants where we have stores or leased department and licensed relationships;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | fashion trends; and
| | - |  | -------------------



| |  |  | weather conditions and seasonality.
| | - |  | -----------------------------------

If, at any time, our comparable store sales or quarterly results of operations decline or do not meet the expectations of investors, the price of our common stock could decline substantially.

Our share price may be volatile and could decline substantially.

The market price of our common stock has been, and is expected to continue to be, volatile, both because of actual and perceived changes in
our financial results and prospects and because of general volatility in the stock market. The factors that could cause fluctuations in our share price may include, among other factors discussed in this section, the following:



| |  |  | actual or anticipated variations in the financial results and prospects of our business or other companies in the retail business;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in financial estimates by Wall Street research analysts;
| | - |  | ----------------------------------------------------------------



| |  |  | actual or anticipated changes in the United States economy or the retailing environment;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | changes in the market valuations of other specialty apparel or retail companies;
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| |  |  | announcements by our competitors or us;
| | - |  | ---------------------------------------



| |  |  | additions and departures of key personnel;
| | - |  | ------------------------------------------



| |  |  | changes in accounting principles;
| | - |  | ---------------------------------



| |  |  | the passage of legislation or other developments affecting us or our industry;
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| |  |  | the trading volume of our common stock in the public market;
| | - |  | ------------------------------------------------------------



| |  |  | changes in economic conditions;
| | - |  | -------------------------------



| |  |  | financial market conditions;
| | - |  | ----------------------------



| |  |  | natural disasters, terrorist acts, acts of war or periods of civil unrest; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | the realization of some or all of the risks described in this section entitled Risk Factors.
| | - |  | ----------------------------------------------------------------------------------------------



17



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In addition, the stock markets have experienced significant price and trading volume
fluctuations from time to time, and the market prices of the equity securities of retailers have been extremely volatile and are sometimes subject to sharp price and trading volume changes. These broad market fluctuations may adversely affect the
market price of our common stock.

We may not be successful in expanding our business and opening new stores.

Any future growth depends significantly on our ability to successfully establish and operate new stores (including combo stores and
superstores) and our leased department and licensed relationships on a profitable basis, as well as the success and profitability of our international business, including through franchising relationships. This growth, if it occurs, will place
increased demands on our management, operational and administrative resources. These increased demands and operating complexities could cause us to operate our business less effectively, which, in turn, could cause a deterioration in our financial
performance and negatively impact our growth. Any planned growth will also require that we continually monitor and upgrade our management information and other systems, as well as our distribution infrastructure.

Our ability to establish and operate new stores and our leased department and licensed relationships successfully depends on many factors,
including, among others, our ability to:



| |  |  | identify and obtain suitable store locations, including mall locations, the availability of which is outside of our control;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | retain existing, expand existing and establish new leased department and licensed relationships;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | negotiate favorable lease terms for stores, including desired tenant improvement allowances;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | negotiate favorable lease terminations for existing store locations in markets where we intend to open new combo stores or superstores;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | source sufficient levels of inventory to meet the needs of new stores and our leased department and licensed relationships;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | successfully address competition, merchandising and distribution challenges; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | hire, train and retain a sufficient number of qualified store personnel.
| | - |  | ------------------------------------------------------------------------

The success and profitability of our international relationships depends on many factors, including, among others:



| |  |  | the ability of our franchisees to identify and obtain suitable store locations, including mall locations, the availability of which is outside of their
control;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of our franchisees to negotiate favorable lease terms for stores, including desired tenant improvement allowances;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to source sufficient levels of inventory to meet the needs of our franchisees international operations;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | our ability and the ability of our franchisees to successfully address competition, merchandising and distribution challenges; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of our franchisees to hire, train and retain a sufficient number of qualified store personnel.
| | - |  | ----------------------------------------------------------------------------------------------------------

There can be no assurance that we will be able to grow our business and achieve our goals. Even if we succeed in establishing new stores,
further developing our leased department and licensed relationships and further expanding our international relationships, we cannot assure that these initiatives will achieve planned revenue or profitability levels in the time periods estimated by
us, or at all. If any of these initiatives fails to achieve or is unable to sustain acceptable revenue and profitability levels, we may incur significant costs.



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Our business, financial condition and results of operations may be materially and adversely impacted
at any time by a significant number of competitors.

We operate in a highly competitive environment characterized by
few barriers to entry. We compete against department stores, specialty retail chains, discount stores, independent retail stores and catalog and Internet-based retailers. Many of our competitors are larger and have substantially greater financial
and other resources than us. Further, we do not typically advertise using television and radio media and thus do not reach customers through means our competitors may use. Our mid- and luxury-priced merchandise faces a highly fragmented competitive
landscape that includes locally based, single unit retailers, as well as a handful of multi-unit maternity operations, none of which we believe have more than 10 stores nationwide. In the value-priced maternity apparel business, we face competition
on a nationwide basis from retailers such as Gap, JCPenney, Old Navy, Target and Wal-Mart. All of these competitors also sell maternity apparel on their websites. Over the past few years, there has been increased competition in the maternity apparel
business from both new and existing competition. Our business, financial condition and results of operations may be materially and adversely affected by this competition, including the potential for increased competition in the future. For example,
the maternity apparel business has previously experienced oversupply conditions due to increased competition in the maternity apparel business, which resulted in a greater level of industry-wide markdowns and markdowns recognized by us on sales from
our retail locations. There can be no assurance that these conditions will not occur again or worsen.

Our relationships with
third-party retailers may not be successful.

We cannot guarantee successful results from or the continuation of our
leased department and licensed relationships with third-party retailers such as Sears, Kmart, Macys, Bloomingdales, BabiesRUs, Boscovs, Gordmans and Kohls. Under our agreement with Kohls, subject to certain notice
obligations, Kohls is not obligated to purchase any maternity apparel from us and we are not obligated to sell any maternity apparel to them. Under our agreement with our leased department partners, those partners do not make any promises or
representations as to the potential amount of business we can expect from the sale of our product in their stores. We do not control the pricing terms or the timing or degree of the markdowns at Kohls. The success of our leased department and
licensed brand businesses is highly dependent on the actions and decisions of the third-party retailers, which are outside of our control. The retailers could limit the merchandise carried, close stores, go out of business or terminate their
agreements with us. Our failure to properly manage our leased department and licensed brand businesses (including any failure by us in timely delivering goods to any third-party retailer or any failure to respond to the actions of or changes in
business conditions at third-party retailers) would have a direct impact on the profitability and continuation of these relationships.

We require a significant amount of cash to service our indebtedness, which reduces the cash available to finance any growth and could adversely affect our financial health.

We have a significant amount of indebtedness and we have the ability to incur substantial additional indebtedness in the future. Our ability
to make required payments on our indebtedness, as well as to fund our operations and future growth, depends upon our ability to generate cash. Our success in generating cash depends upon the results of our operations, as well as upon general
economic, financial, competitive and other factors beyond our control.

Additionally, our substantial indebtedness could have
important consequences. For example, it could:



| |  |  | increase our vulnerability to general adverse economic and industry conditions;
| | - |  | -------------------------------------------------------------------------------



| |  |  | require us to dedicate a portion of our cash flow from operations to making payments on our indebtedness, thereby reducing the availability of our cash
flow to implement our growth strategy, or to fund working capital, capital expenditures and other general corporate needs;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
| | - |  | --------------------------------------------------------------------------------------------------------------------



19



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| |  |  | result in higher interest expense in the event of increases in interest rates as some of our debt is, and will continue to be, at variable rates of
interest, and our available borrowings under our credit facility, to the extent borrowed in the future, would be at variable rates of interest;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | place us at a competitive disadvantage compared to our competitors that have less debt, or debt at lower interest rates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our ability to borrow additional funds;
| | - |  | ---------------------------------------------



| |  |  | make it more difficult for us to open new stores or improve or expand existing stores;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | restrict our ability to pay dividends or make distributions to our stockholders;
| | - |  | --------------------------------------------------------------------------------



| |  |  | require us to pledge all or substantially all of our assets as collateral to secure indebtedness; and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | make it more difficult for us to pursue strategic acquisitions, alliances and partnerships.
| | - |  | -------------------------------------------------------------------------------------------

If we are unable to meet our expenses and debt obligations, we may need to refinance all or a portion of our indebtedness before the
scheduled maturity dates of such debt, sell assets or raise equity. On such maturity dates, we may need to refinance our indebtedness if our operations do not generate enough cash to pay such indebtedness in full and if we do not raise additional
capital. Our ability to refinance will depend on the capital markets and our financial condition at such time. We cannot assure you that we would be able to refinance any of our indebtedness, sell assets or raise equity on commercially reasonable
terms or at all, which could cause us to default on our obligations and impair our liquidity.

Our variable rate indebtedness subjects
us to interest rate risk, which could cause our debt service obligations to increase significantly.

Our term loan,
with an outstanding balance of $54.8 million as of September 30, 2009, bears interest at a variable rate equal to, at our election, either (i) the prime rate plus 1.00%, or (ii) a LIBOR rate plus the applicable margin. The applicable
margin for LIBOR rate borrowings is either 2.25% or 2.50%, depending on our Consolidated Leverage Ratio (as defined). Based upon our applicable quarterly Consolidated Leverage Ratio during fiscal 2009, the applicable margin for LIBOR rate borrowings
remained at 2.50% for fiscal 2009 and the first quarter of fiscal 2010. Based upon our Consolidated Leverage Ratio as of September 30, 2009, the applicable margin for LIBOR rate borrowings will be 2.25% effective for the second quarter of
fiscal 2010. In order to mitigate our floating rate interest risk on the variable rate term loan, we entered into an interest rate swap agreement that commenced on April 18, 2007 and expires on April 18, 2012. The interest rate swap
agreement enables us to effectively convert an amount of the term loan equal to the notional amount of the interest rate swap from a floating interest rate of LIBOR plus 2.50% (subject to reduction to LIBOR plus 2.25% if we achieve a specified
leverage ratio), to a fixed interest rate of 7.50% (subject to reduction to 7.25% if we achieve a specified leverage ratio) for the significant majority of the term loan. The notional amount of the interest rate swap was $75.0 million at the
inception of the swap agreement and decreases over time to a notional amount of $5.0 million at the expiration date. The notional amount of the swap was $42.5 million as of September 30, 2009 and over the next eighteen months decreases as
follows: to $35.0 million starting October 19, 2009; to $27.5 million starting April 19, 2010; and to $20.0 million starting October 18, 2010. Regardless of our attempts to mitigate our exposure to interest rate fluctuations through
the interest rate swap, we still have exposure for the un-swapped amounts of the term loan borrowings, which remain subject to a variable interest rate. As a result, an increase in interest rates could result in a substantial increase in interest
expense, especially as the swapped amount of the term loan decreases over time.

We are heavily dependent on our management information
systems and our ability to maintain and upgrade these systems from time to time.

The efficient operation of our
business is heavily dependent on our internally developed management information systems. In particular, we rely on point-of-sale terminals, which provide information to our customized merchandise analysis and planning system used to track sales and
inventory. The merchandise



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analysis and planning system helps integrate our design, manufacturing, distribution and financial functions, and also provides daily financial and merchandising information. Although our
software programs and data are backed up and securely stored off-site, our servers and computer systems are located at our headquarters in Philadelphia, Pennsylvania. As a result, our business, financial condition and results of operations could be
materially and adversely affected if our servers and systems were inoperable or inaccessible.

From time to time, we improve
and upgrade our management information systems. We have a proprietary, Internet-based point-of-sale system. If we are unable to maintain and upgrade our systems or to integrate new and updated systems in an efficient and timely manner, our business,
financial condition and results of operations could be materially and adversely affected.

As an apparel retailer, we rely on numerous
third parties in the supply chain to produce and deliver the products that we sell, and our business may be negatively impacted by disruptions in the supply chain.

If we lose the services of one or more of our significant suppliers or one or more of them fail to meet our product needs, we may be unable to obtain replacement merchandise in a timely manner. If our
existing suppliers cannot meet our increased needs and we cannot locate alternative supply sources, we may be unable to obtain sufficient quantities of the most popular items at attractive prices, which could negatively impact our sales and results
of operations. We obtain apparel and other merchandise from foreign sources, both purchased directly in foreign markets and indirectly through domestic vendors with foreign sources. To the extent that any of our vendors are located overseas or rely
on overseas sources for a large portion of their products, any event causing a disruption of imports, including the imposition of import restrictions, could harm our ability to source product. This disruption could materially limit the merchandise
that we would have available for sale and reduce our sales and earnings. The flow of merchandise from our vendors could also be adversely affected by financial or political instability, or war, in or affecting any of the countries in which the goods
we purchase are manufactured or through which they flow. Trade restrictions in the form of tariffs or quotas, embargos and customs restrictions that are applicable to the products that we sell also could affect the import of those products and could
increase the cost and reduce the supply of products available to us. Any material increase in tariff levels, or any material decrease in quota levels or available quota allocation, could negatively impact our business. Further, changes in tariffs or
quotas for merchandise imported from individual foreign countries could lead us to shift our sources of supply among various countries. Any such shift we undertake in the future could result in a disruption of our sources of supply and lead to a
reduction in our sales and earnings. Supply chain security initiatives undertaken by the United States government that impede the normal flow of product could also negatively impact our business. In addition, decreases in the value of the United
States dollar against foreign currencies could increase the cost of products that we purchase from overseas vendors.

We also
face a variety of other risks generally associated with relying on vendors that do business in foreign markets and import merchandise from abroad, such as:



| |  |  | political instability or the threat of terrorism, particularly in countries where our vendors source merchandise;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | enhanced security measures at United States and foreign ports, which could delay delivery of imports;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | imposition of new or supplemental duties, taxes, and other charges on imports;
| | - |  | ------------------------------------------------------------------------------



| |  |  | delayed receipt or non-delivery of goods due to the failure of foreign-source suppliers to comply with applicable import regulations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delayed receipt or non-delivery of goods due to organized labor strikes or unexpected or significant port congestion at United States ports; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | local business practice and political issues, including issues relating to compliance with domestic or international labor standards, which may result
in adverse publicity.
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The United States may impose new initiatives that adversely affect the trading status of
countries where apparel is manufactured. These initiatives may include retaliatory duties or other trade sanctions that, if enacted, would increase the cost of products imported from countries where our vendors acquire merchandise. Any of these
factors could have a material adverse effect on our business, financial condition and results of operations.

We could be materially and
adversely affected if our distribution operations were disrupted.

To support our distribution of product throughout
the world, we operate our main distribution facility in Philadelphia, Pennsylvania and two significantly smaller distribution facilities, one in Philadelphia, Pennsylvania and the other, serving as our Canadian distribution facility, in Mississauga,
Ontario. Finished garments from contractors and other manufacturers are inspected and stored for distribution to our stores. We do not have other distribution facilities to support our distribution needs. If our main Philadelphia distribution
facility were to shut down or otherwise become inoperable or inaccessible for any reason, we could incur significantly higher costs and longer lead times associated with the distribution of our products to our stores during the time it takes to
reopen or replace this facility. In light of our strategic emphasis on rapid replenishment as a competitive strength, a distribution disruption might have a disproportionately adverse effect on our operations and profitability relative to other
retailers. In addition, the loss or material disruption of service from any of our shippers for any reason, whether due to freight difficulties, strikes, natural disaster or other difficulties at our principal transport providers or otherwise, could
have a material adverse impact on our business, financial condition and results of operations.

We could be materially and adversely
affected if we are unable to obtain sufficient raw materials or maintain satisfactory manufacturing arrangements.

We
do not own any manufacturing facilities and therefore depend on third parties to manufacture our products. We place our orders for production of merchandise and raw materials by purchase order and do not have any long-term contracts with any
manufacturer or supplier. We compete with many other companies for production facilities and raw materials. Furthermore, we have received in the past, and may receive in the future, shipments of products from manufacturers that fail to conform to
our quality control standards. In such event, unless we are able to obtain replacement products in a timely manner, we may lose sales. If we fail to maintain favorable relationships with these third parties, or if we cannot obtain an adequate supply
of quality raw materials on commercially reasonable terms, it could have a material adverse impact on our business, financial condition and results of operations.

Our stores are heavily dependent on the customer traffic generated by shopping malls.

We depend heavily on locating our stores in prominent locations within successful shopping malls in order to generate customer traffic. We cannot control the development of new shopping malls, the
availability or cost of appropriate locations within existing or new shopping malls or the success of existing or new mall stores.

The success of all of our mall stores will depend, in part, on the ability of each malls anchor tenants, such as large department stores, other tenants and area attractions to generate consumer traffic in the vicinity of our stores,
and the continuing popularity of malls as shopping destinations. Many traditional enclosed malls are experiencing significantly lower levels of customer traffic than in the past driven by overall poor economic conditions as well as the closure of
certain mall anchor tenants. Sales volume and mall traffic may be adversely affected by economic downturns in a particular area, the closing of anchor tenants or competition from non-mall retailers and other malls where we do not have stores.

Our success depends on our ability to identify and rapidly respond to fashion trends.

The apparel industry is subject to rapidly changing fashion trends and shifting consumer demands. Accordingly, our success depends on the
priority that our target customers place on fashion and our ability to anticipate, identify and capitalize upon emerging fashion trends. Our ability or our failure to anticipate, identify or react appropriately to changes in styles or trends could
lead to, among other things, excess inventories and



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higher markdowns, as well as the decreased appeal of our brands. Particular fashion trends, or an inaccuracy of our forecasts regarding fashion trends, could have a material adverse effect on our
business, financial condition and results of operations. For example, in fiscal 2007 we were negatively impacted from the popularity of certain styles in the non-maternity womens apparel market, such as trapeze and baby-doll dresses and tops,
which can more readily fit a pregnant woman early in her pregnancy than typical non-maternity fashions.

The failure to attract and
retain highly skilled and qualified senior management personnel could have a material adverse impact on our business, financial condition and results of operations.

Our business requires disciplined execution at all levels of our organization in order to timely deliver and display fashionable merchandise
in appropriate quantities in our stores. This execution requires experienced and talented management. We currently have a management team with a great deal of experience with us and in apparel retailing. If we were to lose the benefit of this
experience, our business, financial condition and results of operations could be materially and adversely affected. On November 6, 2009, we announced the retirement of Rebecca Matthias, our co-founder, at the end of fiscal 2010. Pursuant to our
transition agreement with Ms. Matthias, she will be a full-time employee of the Company until June 5, 2010. After June 15, 2010, Ms. Matthias will remain in an employment relationship with us on a part-time basis through
September 30, 2010, and will then provide consulting services to us, as requested, through September 30, 2012. If we were unable to compensate for the loss of the benefit of Ms. Matthias experience, our business, financial
condition and results of operations could be materially and adversely affected.

In addition, as our business expands, we
believe that our success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for personnel in the retail industry. Like most retailers, we experience
significant employee turnover rates, particularly among store sales associates and managers, and our continued growth will require us to hire and train even more new personnel. We therefore must continually attract, hire and train new personnel to
meet our staffing needs. We constantly compete for qualified personnel with companies in our industry and in other industries. A significant increase in the turnover rate among our sales associates and managers would increase our recruiting and
training costs and could decrease our operating efficiency and productivity. If we are unable to retain our employees or attract, train, assimilate or retain other skilled personnel in the future, we may not be able to service our customers as
effectively, which could impair our ability to increase sales and could otherwise harm our business.

Our quarterly operating results
and inventory levels may fluctuate significantly as a result of seasonality in our business.

Our business, like that
of other retailers, is seasonal. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Quarterly results may fluctuate materially depending upon, among other things, increases or decreases
in comparable store sales, the timing of new store openings and new leased department openings, net sales and profitability contributed by new stores and leased departments, the timing of the fulfillment of purchase orders under our product and
license arrangements, adverse weather conditions, shifts in the timing of certain holidays and promotions, changes in inventory and production levels and the timing of deliveries of inventory, and changes in our merchandise mix. Our quarterly net
sales have historically been highest in our third fiscal quarter, corresponding to the Spring selling season, followed by our first fiscal quarter, corresponding to the Fall/holiday selling season. Given the historically higher sales level in our
third fiscal quarter and the relatively fixed nature of most of our operating expenses and interest expense, we have typically generated a very significant percentage of our full year operating income and net income during our third fiscal quarter.
Thus, any factors which result in a material reduction of our sales for the third quarter could have a material adverse effect on our results of operations for our fiscal year as a whole. Seasonal fluctuations in sales also affect our inventory
levels, as we usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory, especially before the Fall/holiday and Spring
selling seasons. If we are not successful in selling our inventory during this period, we may be forced to rely on markdowns or promotional sales to sell the excess inventory or we may not be able to sell the inventory at all, which could have a
material adverse effect on our business, financial condition and results of operations.



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Our business depends on sustained demand for maternity clothing and is sensitive to birth rates,
womens fashion trends, economic conditions and consumer spending.

Our business depends upon sustained demand for
maternity clothing. Our future performance will be subject to a number of factors beyond our control, including demographic changes, fashion trends, economic conditions and consumer spending. If demand for maternity clothing were to decline for any
reason, such as a decrease in the number of pregnancies, our operating results could be adversely affected. Additionally, our operating results could be adversely affected if certain non-maternity womens apparel fashions have a more
pregnancy-friendly fit. For example, in fiscal 2007, we were negatively impacted by the popularity of certain styles in the non-maternity womens apparel market, such as trapeze and baby-doll dresses and tops, which can more readily fit a
pregnant woman early in her pregnancy than typical non-maternity fashions. Downturns, or the expectation of a downturn, in general economic conditions could adversely affect consumer spending patterns, our business, financial condition and results
of operations. In addition, the specialty apparel retail business historically has been subject to cyclical variations. Consumer purchases of specialty apparel products, including maternity wear, may decline during recessionary periods and at other
times when disposable income is lower. Declines in consumer spending patterns may have a more negative effect on apparel retailers than some other retailers. Therefore, we may not be able to maintain our historical sales and earnings, or remain as
profitable, if there is a decline in consumer spending patterns. A prolonged economic downturn could have a material adverse impact on our business and results of operations.

If an independent manufacturer violates labor or other laws, or is accused of violating any such laws, or if their labor practices diverge from those generally accepted as ethical, it could harm our
business and brand image.

While we maintain policies and guidelines with respect to labor practices that independent
manufacturers that produce goods for us are contractually required to follow, and while we have an independent firm and Company employees inspect certain manufacturing sites to monitor compliance, we cannot control the actions of such manufacturers
or the publics perceptions of them, nor can we assure that these manufacturers will conduct their businesses using ethical or legal labor practices. Apparel companies can be held jointly liable for the wrongdoings of the manufacturers of their
products. While many of our independent manufacturers are routinely monitored by buying representatives, who assist us in the areas of compliance, garment quality and delivery, we do not control the manufacturers business practices or their
employees employment conditions, and manufacturers act in their own interest which may be in a manner that results in negative public perceptions of us, and/or employee allegations against us or court determinations that we are jointly liable.
Violations of law by our importers, buying agents, manufacturers or distributors could result in delays in shipments and receipt of goods and could subject us to fines or other penalties, any of which could restrict our business activities, increase
our operating expenses or cause our sales to decline.

We may be unable to protect our trademarks and other intellectual property and
may be subject to liability if we are alleged to have infringed on another partys intellectual property.

We
believe that our trademarks, service marks and other intellectual property are important to our continued success and our competitive position due to their recognition with our customers. We devote substantial resources to the establishment and
protection of our trademarks, service marks and other intellectual property. Although we actively protect our intellectual property, there can be no assurance that the actions that we have taken to establish and protect our trademarks, service marks
and other intellectual property, including our rights in our management information systems and our proprietary rights in products for which we have applied for patent protection (for example, our Secret Fit Belly innovation), will be adequate
to prevent imitation of our marks, products or services by others or to prevent others from seeking to block sales of our products as a violation of their trademarks, service marks or other proprietary rights. Also, others may assert rights in, or
ownership of, our trademarks and other proprietary rights or may allege that we have or are infringing on their intellectual property rights and we may not be able to successfully resolve these types of conflicts. In addition, the laws of certain
foreign countries may not protect our trademarks and proprietary rights to the same extent as



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do the laws of the United States. We cannot assure you that these registrations will prevent imitation of our name, merchandising concept, store design or private label merchandise, or the
infringement of our other intellectual property rights by others. Imitation of our name, concept, store design or merchandise in a manner that projects lesser quality or carries a negative connotation of our brand image could have a material adverse
effect on our business, financial condition and results of operations. Additionally, the high expense in both prosecuting and defending against, and potential liability related to, alleged infringements of intellectual property rights could be
substantial and could have a material adverse effect on our business, financial condition and results of operations.

War or acts of
terrorism or the threat of either may negatively impact availability of merchandise and otherwise adversely impact our business.

In the event of war or acts of terrorism, or if either is threatened, our ability to obtain merchandise available for sale may be negatively affected. A substantial portion of our merchandise is imported
from other countries. If goods become difficult or impossible to import into the United States, and if we cannot obtain such merchandise from other sources at similar costs, our sales and profit margins may be adversely affected. In the event that
commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty shipping merchandise to our main distribution facility and retail locations, as well as fulfilling Internet orders.

The terms of our debt instruments impose financial and operating restrictions.

Our credit facility and term loan agreements each contain restrictive covenants that limit our ability to engage in activities that may be in
our long term best interests. These covenants limit or restrict, among other things, our ability to:



| |  |  | incur additional indebtedness;
| | - |  | ------------------------------



| |  |  | pay dividends or make other distributions in respect of our equity securities, or purchase or redeem capital stock, or make certain investments;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | have our subsidiaries pay dividends, make loans or transfer assets to us;
| | - |  | -------------------------------------------------------------------------



| |  |  | sell assets, including the capital stock of our subsidiaries;
| | - |  | -------------------------------------------------------------



| |  |  | enter into any transactions with our affiliates;
| | - |  | ------------------------------------------------



| |  |  | transfer any capital stock of any subsidiary or permit any subsidiary to issue capital stock;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | create liens;
| | - |  | -------------



| |  |  | enter into certain sale/leaseback transactions; and
| | - |  | ---------------------------------------------------



| |  |  | effect a consolidation or merger or transfer of all or substantially all of our assets.
| | - |  | ---------------------------------------------------------------------------------------

These limitations and restrictions may adversely affect our ability to finance our future operations or capital needs or engage in other
business activities that may be in our best interests. In addition, our ability to borrow under the credit facility is subject to borrowing base requirements. If we breach any of the covenants in our credit facility or term loan agreements, we may
be in default under our credit facility and/or our term loan. If we default, the lenders under our term loan or the lender under our credit facility could declare all borrowings owed to them, including accrued interest and other fees, to be due and
payable.

Our charter documents contain certain anti-takeover provisions, and we are entitled to certain other protective provisions
under Delaware law.

We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various
impediments to the ability of a third party to acquire control of the Company, even if a change of control would be beneficial to our existing stockholders. We also have adopted a stockholder rights plan, commonly known as a poison pill,
that entitles our stockholders to acquire additional shares of us, or a potential acquirer of us, at a



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substantial discount to their market value in the event of an attempted takeover. In addition, our amended and restated certificate of incorporation and by-laws contain provisions that may
discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable by, among other things:



| |  |  | authorizing the issuance of preferred stock, the terms of which may be determined at the discretion of our Board of Directors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | restricting the ability of stockholders to call special meetings of stockholders; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | establishing advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted on by
stockholders at meetings.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These provisions may also reduce the market value of our common stock.

We do not expect to pay cash dividends in the foreseeable future.

We have not paid any cash dividends on our common stock since our initial public offering and do not anticipate paying cash dividends on our
common stock in the foreseeable future. In addition, the terms of each of our credit facility and term loan agreements restrict our ability to declare or pay dividends on our common stock. Even if our ability to pay dividends were not restricted,
any future payment of dividends would still be at the discretion of our Board of Directors and would be based upon any applicable restrictive financial covenants, earnings, capital requirements and our financial condition, among other factors, at
the time any such dividend is considered.

Any increase in our sales and marketing efforts that target markets outside the United States
and Canada would expose us to additional risks associated with international operations.

Although an immaterial amount
of our sales are currently derived from international sales outside of Canada, we are actively seeking to expand our international presence, and we have begun to do so through franchise arrangements in the Middle East and India. We may not be
successful in these efforts. International operations and sales subject us to risks and challenges that we would otherwise not face if we conducted our business only in the United States. For example, we may depend on third parties to market our
products through foreign sales channels, and we may be challenged by laws and business practices favoring local competitors. In addition, our ability to succeed in foreign markets will depend on our ability to protect our intellectual property. We
must also adapt our pricing structure to address different pricing environments and may face difficulty in enforcing revenue collection internationally. Emerging markets are a significant focus of our international growth strategy. The developing
nature of these markets presents a number of risks. Deterioration of social, political, labor, or economic conditions in a specific country or region and difficulties in staffing and managing foreign operations may also adversely affect our
operations or financial results or those of our franchisees. Operations outside the United States may be affected by changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment, including
the Foreign Corrupt Practices Act and local laws prohibiting corrupt payments. To the extent we achieve significant sales outside of the United States in the future, we may have significant exposure to fluctuating foreign currency exchange rates.

We could have failures in our system of internal controls.

We maintain a documented system of internal controls which is reviewed and monitored by management, who meet regularly with our Audit
Committee of the Board of Directors. We believe we have a well-designed system to maintain adequate internal controls on the business. We cannot assure you that there will not be any control deficiencies in the future. Should we become aware of any
control deficiencies, we would report them to the Audit Committee and recommend prompt remediation. We have devoted significant resources to document, test, monitor and improve our internal controls and will continue to do so; however, we cannot be
certain that these measures will ensure that our controls are adequate in the future or that adequate controls will be effective in preventing fraud. If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud. Any failures in the effectiveness of our internal controls could have a material adverse effect on our financial condition or operating results or cause us to fail to meet reporting obligations.



26



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|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

Not applicable.



|Item 2. | Properties
|------- | ----------

We own our
principal executive offices and distribution facility, which is located at 456 North Fifth Street, Philadelphia, Pennsylvania, subject to a mortgage under the terms of which we owe approximately $2.4 million as of September 30, 2009.
This facility consists of approximately 318,000 square feet, of which approximately 45,000 square feet is dedicated to office space and the remaining square footage is used for finished goods warehousing and distribution. On August 26, 2002, we
entered into a ten-year lease for a facility located at 2001 Kitty Hawk Avenue, Philadelphia, Pennsylvania in the Philadelphia Naval Business Center. The area leased at this facility, which we use for some finished goods warehousing and
distribution, as well as raw material cutting and warehousing, consists of approximately 64,000 square feet of space. To facilitate our store growth in Canada, we entered into a three-year lease commencing November 1, 2002 for approximately
12,000 square feet of finished goods warehouse and distribution space in Mississauga, Ontario in Canada. Since this time, we have renewed this lease in Canada on multiple occasions and it currently expires on October 31, 2010. From time to time
we may also utilize third-party warehousing services in the Philadelphia, Pennsylvania area when we have increased storage requirements. These services essentially operate on a month-to-month basis. We believe that these facilities will be adequate
to support our anticipated distribution needs for the near term and, potentially, longer. In the event we need additional space to meet our future distribution needs, we believe that such space would be readily available. Our facilities are subject
to state and local regulations that range from building codes to health and safety regulations.

We lease our store premises
for initial terms averaging from five to ten years. Certain leases allow us to terminate or reduce our obligations at specified points in time in the event that the applicable store does not achieve a specified sales volume. Some of our store leases
also provide for contingent payments based on sales volume, escalations of the base rent, as well as increases in operating costs, marketing costs and real estate taxes.

As of September 30, 2009, the following numbers of store leases are set to expire as listed in the table below. We do not expect the expiration of any leases to have a material adverse impact on our
business or operations.



|                          |  |                
|------------------------- |  | ---------------
|Fiscal Year Leases Expire |  | Numberof Stores
|2010                      |  | 104            
|2011                      |  | 108            
|2012                      |  | 85             
|2013                      |  | 119            
|2014                      |  | 136            
|2015 and later            |  | 172            
|                          |  |                
|Total                     |  | 724            
|                          |  |                

In addition to the stores we operate, we have arrangements with department and
specialty stores, including Sears, Kmart, Macys, Bloomingdales, BabiesRUs, Boscovs and Gordmans to operate maternity apparel departments in their stores. These leased departments typically involve the lease partner
collecting all of the revenue from the leased department. The revenue is remitted to us, less a fixed percentage of the net sales earned by the lease partner as stipulated in the agreement. We provide at least some amount of staffing for each of the
leased departments, with the amount varying depending on the specific arrangement. Generally, under each of our leased department agreements, our lease partner has the right to terminate any or all of our rights to operate our leased departments in
their stores subject to varying notice requirements.



|Item 3. | Legal Proceedings
|------- | -----------------

From
time to time, we are named as a defendant in legal actions arising from our normal business activities. Litigation is inherently unpredictable and although the amount of any liability that could arise with respect to currently pending actions cannot
be accurately predicted, we do not believe that the resolution of any pending action will have a material adverse effect on our financial position or liquidity.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

Not applicable.



27



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PART II.



|Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ------------------------------------------------------------------------------------------------------------

Our common stock is traded on the Nasdaq Global Market under the symbol DEST. Prior to December 9, 2008 (before giving
effect to our corporate name change), our common stock traded under the symbol MWRK. The following table sets forth for the periods indicated below the reported high and low sales prices of our common stock as reported on the Nasdaq
Global Market:



|                                      |  |      |       |     |   |      
|------------------------------------- |  | ---- | ----- | --- | - | -----
|                                      |  | High |       | Low
|Fiscal Year Ended September 30, 2009: |  |      |       |     |   |      
|Quarter ended December 31, 2008       |  | $    | 14.68 |     | $ | 5.72 
|Quarter ended March 31, 2009          |  |      | 8.70  |     |   | 4.42 
|Quarter ended June 30, 2009           |  |      | 18.13 |     |   | 5.92 
|Quarter ended September 30, 2009      |  |      | 23.74 |     |   | 16.30
|                                      |  |     
|Fiscal Year Ended September 30, 2008: |  |      |       |     |   |      
|Quarter ended December 31, 2007       |  | $    | 19.78 |     | $ | 14.93
|Quarter ended March 31, 2008          |  |      | 20.21 |     |   | 14.58
|Quarter ended June 30, 2008           |  |      | 18.46 |     |   | 8.97 
|Quarter ended September 30, 2008      |  |      | 17.39 |     |   | 9.61 

As of December 1, 2009, there were 1,288 holders of record and 949 estimated
beneficial holders of our common stock.

We have not paid any cash dividends on our common stock since our initial public
offering and do not anticipate paying cash dividends on our common stock in the foreseeable future. In addition, the terms of our senior secured Term Loan B due March 13, 2013 (the Term Loan) and our credit facility restrict our
ability to declare or pay dividends on our common stock. Even if we were not restricted under the terms of our Term Loan or our credit facility from being able to pay dividends, any future payment of dividends would still be at the discretion of our
Board of Directors and would be based upon certain restrictive financial covenants, earnings, capital requirements and our financial condition, among other factors, at the time any such dividend is considered.

Under our Amended and Restated 2005 Equity Incentive Plan (the 2005 Plan), awards may be granted in the form of options, stock
appreciation rights, restricted stock or restricted stock units. Up to 700,000 shares of our common stock may be issued in respect of awards under our 2005 Plan, with no more than 350,000 of those shares permitted to be issued in respect of
restricted stock or restricted stock units granted under the 2005 Plan.

In July 2008, our Board of Directors approved a
program to repurchase up to $7.0 million of our outstanding common stock. Under the program, we may repurchase shares from time to time through solicited or unsolicited transactions in the open market or in negotiated or other transactions. The
program will be in effect until the end of July 2010. There were no repurchases of common stock under the program during fiscal 2009 or fiscal 2008.



28



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Stock Price Performance Graph

The graph below compares the cumulative total stockholder return on our Common Stock for the period from September 30, 2004 to
September 30, 2009, with the cumulative total return of the Standard & Poors 500 Index and the Standard & Poors Apparel Retail Index. The comparison assumes $100 was invested on September 30, 2004 in our
Common Stock and in each of the foregoing indices and assumes reinvestment of dividends.

COMPARISON OF 5 YEAR CUMULATIVE
TOTAL RETURN*

Among Destination Maternity Corporation, The S&P 500 Index

And The S&P Apparel Retail Index

LOGO





|* | $100 invested on 9/30/04 in stock or indexincluding reinvestment of dividends. Fiscal year ending September 30.
|- | ----------------------------------------------------------------------------------------------------------------



|                                  |  |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |   |       
|--------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ |  | - | ------
|                                  |  | 2004 |        | 2005 |   | 2006   |  | 2007 |        | 2008 |   | 2009  
|Destination Maternity Corporation |  | $    | 100.00 |      | $ | 68.97  |  | $    | 331.86 |      | $ | 128.76 |  | $ | 95.72  |  | $ | 125.03
|S&P 500                           |  | $    | 100.00 |      | $ | 112.25 |  | $    | 124.36 |      | $ | 144.81 |  | $ | 112.99 |  | $ | 105.18
|S&P Apparel Retail Index          |  | $    | 100.00 |      | $ | 95.12  |  | $    | 120.21 |      | $ | 119.08 |  | $ | 104.08 |  | $ | 120.43



29



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|Item 6. | Selected Consolidated Financial and Operating Data
|------- | --------------------------------------------------

The following tables set forth selected consolidated statement of operations data, operating data, other financial data, and balance sheet data as of and for the periods indicated. The selected
consolidated statement of operations and balance sheet data for each of the five fiscal years presented below are derived from our consolidated financial statements. You should read this information in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes included elsewhere in this report.



|                                                            |  |                                          |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|----------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - | ---- | - | ------- |  | - | ------- | -
|                                                            |  | Year Ended September 30,                 |        
|                                                            |  | 2009                                     |         |   | 2008 |   |         | 2007 |  |   | 2006    |   | 2005 |  
|                                                            |  | (in thousands, except per share amounts) |        
|Statement of Operations Data:                               |  |                                          |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Net sales                                                   |  | $                                        | 531,251 |   |      | $ | 564,602 |      |  | $ | 581,371 |   |      | $ | 602,744 |  | $ | 561,627 |  
|Cost of goods sold                                          |  |                                          | 248,476 |   |      |   | 281,561 |      |  |   | 281,155 |   |      |   | 288,082 |  |   | 277,453 |  
|                                                            |  |                                          |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Gross profit                                                |  |                                          | 282,775 |   |      |   | 283,041 |      |  |   | 300,216 |   |      |   | 314,662 |  |   | 284,174 |  
|Selling, general and administrative expenses                |  |                                          | 259,552 |   |      |   | 271,592 |      |  |   | 279,719 |   |      |   | 279,713 |  |   | 264,652 |  
|Store closing, asset impairment and asset disposal expenses |  |                                          | 536     |   |      |   | 2,916   |      |  |   | 1,788   |   |      |   | 4,621   |  |   | 5,284   |  
|Restructuring and other charges                             |  |                                          | 1,557   |   |      |   | 3,461   |      |  |   |        |   |      |   |        |  |   |        |  
|Goodwill impairment expense                                 |  |                                          | 50,389  |   |      |   |        |      |  |   |        |   |      |   |        |  |   |        |  
|                                                            |  |                                          |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Operating income (loss)                                     |  |                                          | (29,259 | ) |      |   | 5,072   |      |  |   | 18,709  |   |      |   | 30,328  |  |   | 14,238  |  
|Interest expense, net                                       |  |                                          | 4,720   |   |      |   | 6,974   |      |  |   | 9,848   |   |      |   | 14,534  |  |   | 15,293  |  
|Loss on extinguishment of debt                              |  |                                          | 123     |   |      |   | 97      |      |  |   | 9,423   |   |      |   | 873     |  |   |        |  
|                                                            |  |                                          |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Income (loss) before income taxes                           |  |                                          | (34,102 | ) |      |   | (1,999  | )    |  |   | (562    | ) |      |   | 14,921  |  |   | (1,055  | )
|Income tax provision (benefit)                              |  |                                          | 6,580   |   |      |   | (610    | )    |  |   | (169    | ) |      |   | 5,819   |  |   | (880    | )
|                                                            |  |                                          |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Net income (loss)                                           |  | $                                        | (40,682 | ) |      | $ | (1,389  | )    |  | $ | (393    | ) |      | $ | 9,102   |  | $ | (175    | )
|                                                            |  |                                          |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Net income (loss) per shareBasic                           |  | $                                        | (6.79   | ) |      | $ | (0.23   | )    |  | $ | (0.07   | ) |      | $ | 1.70    |  | $ | (0.03   | )
|                                                            |  |                                          |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Average shares outstandingBasic                            |  |                                          | 5,992   |   |      |   | 5,924   |      |  |   | 5,802   |   |      |   | 5,348   |  |   | 5,242   |  
|                                                            |  |                                          |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Net income (loss) per shareDiluted                         |  | $                                        | (6.79   | ) |      | $ | (0.23   | )    |  | $ | (0.07   | ) |      | $ | 1.63    |  | $ | (0.03   | )
|                                                            |  |                                          |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Average shares outstandingDiluted                          |  |                                          | 5,992   |   |      |   | 5,924   |      |  |   | 5,802   |   |      |   | 5,591   |  |   | 5,242   |  
|                                                            |  |                                          |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  



30



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|                                                                                                                                                          |  |                                                                                |           |    |      |   |           |      |  |   |           |    |  |      |           |   |  |   |           |   
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ | --------- | -- | ---- | - | --------- | ---- |  | - | --------- | -- |  | ---- | --------- | - |  | - | --------- | --
|                                                                                                                                                          |  | Year Ended September 30,                                                       |          
|                                                                                                                                                          |  | 2009                                                                           |           |    | 2008 |   |           | 2007 |  |   | 2006      |    |  | 2005 |          
|                                                                                                                                                          |  | (unaudited; in thousands, except operating data, ratios and per share amounts) |          
|Operating Data:                                                                                                                                           |  |                                                                                |           |    |      |   |           |      |  |   |           |    |  |      |           |   |  |   |           |   
|Comparable store sales increase (decrease) (1)                                                                                                            |  |                                                                                | (4.3      | )% |      |   | 0.2       | %    |  |   | (4.8      | )% |  |      | 4.3       | % |  |   | (2.5      | )%
|Average net sales per gross square foot (2)                                                                                                               |  | $                                                                              | 290       |    |      | $ | 302       |      |  | $ | 299       |    |  | $    | 305       |   |  | $ | 295       |   
|Average net sales per store (2)                                                                                                                           |  | $                                                                              | 573,000   |    |      | $ | 588,000   |      |  | $ | 568,000   |    |  | $    | 570,000   |   |  | $ | 534,000   |   
|Gross store square footage at period end (3)                                                                                                              |  |                                                                                | 1,462,000 |    |      |   | 1,492,000 |      |  |   | 1,498,000 |    |  |      | 1,532,000 |   |  |   | 1,579,000 |   
|Gross retail location square footage at period end (4)                                                                                                    |  |                                                                                | 1,619,000 |    |      |   | 1,623,000 |      |  |   | 1,811,000 |    |  |      | 1,819,000 |   |  |   | 1,874,000 |   
|Number of retail locations at period end:                                                                                                                 |  |                                                                                |           |    |      |   |           |      |  |   |           |    |  |      |           |   |  |   |           |   
|Motherhood Maternity stores                                                                                                                               |  |                                                                                | 591       |    |      |   | 616       |      |  |   | 635       |    |  |      | 659       |   |  |   | 690       |   
|Mimi Maternity stores (5)                                                                                                                                 |  |                                                                                |          |    |      |   | 89        |      |  |   | 100       |    |  |      | 106       |   |  |   | 117       |   
|A Pea in the Pod stores (5)                                                                                                                               |  |                                                                                | 67        |    |      |   | 30        |      |  |   | 32        |    |  |      | 33        |   |  |   | 37        |   
|Destination Maternity stores (5)                                                                                                                          |  |                                                                                | 66        |    |      |   | 19        |      |  |   | 14        |    |  |      | 12        |   |  |   | 8         |   
|                                                                                                                                                          |  |                                                                                |           |    |      |   |           |      |  |   |           |    |  |      |           |   |  |   |           |   
|Total stores                                                                                                                                              |  |                                                                                | 724       |    |      |   | 754       |      |  |   | 781       |    |  |      | 810       |   |  |   | 852       |   
|Leased departments                                                                                                                                        |  |                                                                                | 360       |    |      |   | 278       |      |  |   | 795       |    |  |      | 731       |   |  |   | 739       |   
|                                                                                                                                                          |  |                                                                                |           |    |      |   |           |      |  |   |           |    |  |      |           |   |  |   |           |   
|Total retail locations                                                                                                                                    |  |                                                                                | 1,084     |    |      |   | 1,032     |      |  |   | 1,576     |    |  |      | 1,541     |   |  |   | 1,591     |   
|                                                                                                                                                          |  |                                                                                |           |    |      |   |           |      |  |   |           |    |  |      |           |   |  |   |           |   
|Other Financial Data:                                                                                                                                     |  |                                                                                |           |    |      |   |           |      |  |   |           |    |  |      |           |   |  |   |           |   
|Adjusted EBITDA (6)(7)                                                                                                                                    |  | $                                                                              | 38,762    |    |      | $ | 25,501    |      |  | $ | 38,579    |    |  | $    | 51,715    |   |  | $ | 33,906    |   
|Ratio of total debt to Adjusted EBITDA                                                                                                                    |  |                                                                                | 1.5x      |    |      |   | 3.1x      |      |  |   | 2.4x      |    |  |      | 2.3x      |   |  |   | 3.8x      |   
|Ratio of Adjusted EBITDA to interest expense, net                                                                                                         |  |                                                                                | 8.2x      |    |      |   | 3.7x      |      |  |   | 3.9x      |    |  |      | 3.6x      |   |  |   | 2.2x      |   
|Adjusted EBITDA before restructuring and other charges (6)(7)                                                                                             |  |                                                                                | 40,191    |    |      |   | 28,717    |      |  |   | 38,579    |    |  |      | 51,715    |   |  |   | 33,906    |   
|Adjusted net income (loss), before goodwill impairment expense (7)                                                                                        |  |                                                                                | 9,707     |    |      |   | (1,389    | )    |  |   | (393      | )  |  |      | 9,102     |   |  |   | (175      | ) 
|Adjusted net income (loss) per shareDiluted, before goodwill impairment expense (7)                                                                      |  |                                                                                | 1.60      |    |      |   | (0.23     | )    |  |   | (0.07     | )  |  |      | 1.63      |   |  |   | (0.03     | ) 
|Adjusted net income (loss), before goodwill impairment expense, restructuring and other charges, and loss on extinguishment of
debt (7)                   |  |                                                                                | 10,751    |    |      |   | 843       |      |  |   | 5,355     |    |  |      | 9,635     |   |  |   | (175      | ) 
|Adjusted net income (loss) per shareDiluted, before goodwill impairment expense, restructuring and other charges, and loss
on extinguishment of debt (7) |  |                                                                                | 1.77      |    |      |   | 0.14      |      |  |   | 0.87      |    |  |      | 1.72      |   |  |   | (0.03     | ) 
|Cash flows provided by operating activities                                                                                                               |  |                                                                                | 42,525    |    |      |   | 27,822    |      |  |   | 27,398    |    |  |      | 42,413    |   |  |   | 7,324     |   
|Cash flows used in investing activities                                                                                                                   |  |                                                                                | (12,455   | )  |      |   | (13,347   | )    |  |   | (8,112    | )  |  |      | (23,166   | ) |  |   | (11,414   | ) 
|Cash flows used in financing activities                                                                                                                   |  |                                                                                | (21,592   | )  |      |   | (12,457   | )    |  |   | (28,060   | )  |  |      | (3,380    | ) |  |   | (1,340    | ) 
|Capital expenditures                                                                                                                                      |  |                                                                                | (12,639   | )  |      |   | (15,688   | )    |  |   | (15,444   | )  |  |      | (13,933   | ) |  |   | (17,644   | ) 
|                                                                                                                                                          |  |                                                                                |           |    |     
|Balance Sheet Data (at end of period):                                                                                                                    |  |                                                                                |           |    |      |   |           |      |  |   |           |    |  |      |           |   |  |   |           |   
|Cash and cash equivalents                                                                                                                                 |  | $                                                                              | 20,626    |    |      | $ | 12,148    |      |  | $ | 10,130    |    |  | $    | 18,904    |   |  | $ | 3,037     |   
|Short-term investments                                                                                                                                    |  |                                                                                |          |    |      |   |          |      |  |   |          |    |  |      | 9,425     |   |  |   |          |   
|Working capital                                                                                                                                           |  |                                                                                | 50,580    |    |      |   | 61,611    |      |  |   | 64,923    |    |  |      | 83,772    |   |  |   | 71,228    |   
|Total assets                                                                                                                                              |  |                                                                                | 196,007   |    |      |   | 256,248   |      |  |   | 275,925   |    |  |      | 287,736   |   |  |   | 273,317   |   
|Total debt                                                                                                                                                |  |                                                                                | 57,409    |    |      |   | 78,646    |      |  |   | 93,180    |    |  |      | 118,349   |   |  |   | 128,856   |   
|Net debt (7)(8)                                                                                                                                           |  |                                                                                | 36,783    |    |      |   | 66,498    |      |  |   | 83,050    |    |  |      | 90,020    |   |  |   | 125,819   |   
|Stockholders equity                                                                                                                                      |  |                                                                                | 49,800    |    |      |   | 89,468    |      |  |   | 88,523    |    |  |      | 80,700    |   |  |   | 63,328    |   



31



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|(1) | Comparable store sales figures represent sales at retail locations that have been in operation by us for at least twelve full months at the beginning of the period for
which such data is presented. As used in this Form 10-K, retail locations include stores and leased departments, and exclude locations where Kohls sells our products under an exclusive product and license agreement and
international franchise locations.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Based on stores in operation by us during the entire twelve-month period (which does not include leased department or licensed relationships).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Based on stores in operation by us at the end of the period.
|--- | ------------------------------------------------------------



|(4) | Based on all retail locations in operation at the end of the period.
|--- | --------------------------------------------------------------------



|(5) | In fiscal 2009, as part of our merchandise brand and store nameplate restructuring, we renamed our single-brand Mimi Maternity stores as A Pea in the Pod, and we
renamed our multi-brand Mimi Maternity stores as Destination Maternity.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Adjusted EBITDA represents operating income (loss) before deduction for the following non-cash charges: (i) depreciation and amortization expense; (ii) loss
on impairment of tangible and intangible assets; (iii) (gain) loss on disposal of assets; and (iv) stock-based compensation expense. We have presented Adjusted EBITDA to enhance your understanding of our operating results.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Other Financial and Balance Sheet Data contain non-GAAP financial measures within the meaning of the Securities and Exchange Commissions Regulation G, including:
(a) Adjusted EBITDA; (b) Adjusted EBITDA before restructuring and other charges; (c) Adjusted net income (loss), before goodwill impairment expense; (d) Adjusted net income (loss) per shareDiluted, before goodwill
impairment expense; (e) Adjusted net income (loss), before goodwill impairment expense, restructuring and other charges, and loss on extinguishment of debt; (f) Adjusted net income (loss) per shareDiluted, before goodwill impairment
expense, restructuring and other charges, and loss on extinguishment of debt; and (g) net debt. We believe that each of these non-GAAP financial measures provides useful information about our results of operations and/or financial position to
both investors and management. Each non-GAAP financial measure is provided because we believe it is an important measure of financial performance used in the retail industry to measure operating results, to determine the value of companies within
the industry and to define standards for borrowing from institutional lenders. We use each of these non-GAAP financial measures as a measure of the performance of the Company. We provide these measures to investors to assist them in performing
their analysis of our historical operating results. The non-GAAP financial measures included in Other Financial Data reflect a measure of our operating results before consideration of certain charges and consequently, none of these measures should
be construed as an alternative to net income (loss) or operating income (loss) as an indicator of our operating performance, or as an alternative to cash flows from operating activities as a measure of our liquidity, as determined in accordance with
generally accepted accounting principles. We may calculate each of these non-GAAP financial measures differently than other companies. With respect to the non-GAAP financial measures included in Other Financial Data, we have presented below a
reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | Net debt represents total debt minus cash and cash equivalents and short-term investments.
|--- | ------------------------------------------------------------------------------------------



32



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Reconciliation of Net Income (Loss) to Adjusted EBITDA

and Adjusted EBITDA Before Restructuring and Other Charges

(in thousands)

(unaudited)



|                                                       |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|------------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                       |  | Year Ended September 30, |        
|                                                       |  | 2009                     |         |   | 2008 |   |        | 2007 |  |   | 2006   |   |  | 2005 |       
|Net income (loss)                                      |  | $                        | (40,682 | ) |      | $ | (1,389 | )    |  | $ | (393   | ) |  | $    | 9,102  |   |  | $ | (175   | )
|Add: income tax provision (benefit)                    |  |                          | 6,580   |   |      |   | (610   | )    |  |   | (169   | ) |  |      | 5,819  |   |  |   | (880   | )
|Add: interest expense, net                             |  |                          | 4,720   |   |      |   | 6,974  |      |  |   | 9,848  |   |  |      | 14,534 |   |  |   | 15,293 |  
|Add: loss on extinguishment of debt                    |  |                          | 123     |   |      |   | 97     |      |  |   | 9,423  |   |  |      | 873    |   |  |   |       |  
|                                                       |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Operating income (loss)                                |  |                          | (29,259 | ) |      |   | 5,072  |      |  |   | 18,709 |   |  |      | 30,328 |   |  |   | 14,238 |  
|Add: depreciation and amortization expense             |  |                          | 14,982  |   |      |   | 15,974 |      |  |   | 16,410 |   |  |      | 16,118 |   |  |   | 15,502 |  
|Add: loss on impairment of long-lived assets           |  |                          | 667     |   |      |   | 1,628  |      |  |   | 1,781  |   |  |      | 2,612  |   |  |   | 3,440  |  
|Add: goodwill impairment expense                       |  |                          | 50,389  |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Add: (gain) loss on disposal of assets                 |  |                          | (48     | ) |      |   | 546    |      |  |   | (422   | ) |  |      | (139   | ) |  |   | 726    |  
|Add: stock-based compensation expense                  |  |                          | 2,031   |   |      |   | 2,281  |      |  |   | 2,101  |   |  |      | 2,796  |   |  |   |       |  
|                                                       |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Adjusted EBITDA                                        |  |                          | 38,762  |   |      |   | 25,501 |      |  |   | 38,579 |   |  |      | 51,715 |   |  |   | 33,906 |  
|Add: restructuring and other charges (1)               |  |                          | 1,429   |   |      |   | 3,216  |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                                       |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Adjusted EBITDA before restructuring and other charges |  | $                        | 40,191  |   |      | $ | 28,717 |      |  | $ | 38,579 |   |  | $    | 51,715 |   |  | $ | 33,906 |  
|                                                       |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  





|(1) | Excludes accelerated depreciation expense of $128 and $245 for the years ended September 30, 2009 and 2008, respectively, included in depreciation and amortization
expense above.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33



---

Reconciliation of Net Income (Loss) to Adjusted Net Income (Loss),

Before Goodwill Impairment Expense and Adjusted Net Income (Loss),

Before Goodwill Impairment Expense, Restructuring and Other Charges,

and Loss on Extinguishment of Debt and Net Income (Loss) Per Share-Diluted

to Adjusted Net Income (Loss) Per ShareDiluted, Before Goodwill Impairment Expense

and Adjusted Net
Income (Loss) Per ShareDiluted, Before Goodwill Impairment Expense, Restructuring and Other Charges, and Loss on Extinguishment of Debt

(in thousands, except per share amounts)

(unaudited)



|                                                                                                                                                      |  |                          |         |   |      |   |        |      |  |   |       |   |      |   |       |  |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ----- | - | ---- | - | ----- |  | - | ----- | -
|                                                                                                                                                      |  | Year Ended September 30, |        
|                                                                                                                                                      |  | 2009                     |         |   | 2008 |   |        | 2007 |  |   | 2006  |   | 2005 |  
|Net income (loss), as reported                                                                                                                        |  | $                        | (40,682 | ) |      | $ | (1,389 | )    |  | $ | (393  | ) |      | $ | 9,102 |  | $ | (175  | )
|Add: goodwill impairment expense, net of tax                                                                                                          |  |                          | 50,389  |   |      |   |       |      |  |   |      |   |      |   |      |  |   |      |  
|                                                                                                                                                      |  |                          |         |   |      |   |        |      |  |   |       |   |      |   |       |  |   |       |  
|Adjusted net income (loss), before goodwill impairment expense                                                                                        |  |                          | 9,707   |   |      |   | (1,389 | )    |  |   | (393  | ) |      |   | 9,102 |  |   | (175  | )
|Add: restructuring and other charges, net of tax                                                                                                      |  |                          | 968     |   |      |   | 2,171  |      |  |   |      |   |      |   |      |  |   |      |  
|Add: loss on extinguishment of debt, net of tax                                                                                                       |  |                          | 76      |   |      |   | 61     |      |  |   | 5,748 |   |      |   | 533   |  |   |      |  
|                                                                                                                                                      |  |                          |         |   |      |   |        |      |  |   |       |   |      |   |       |  |   |       |  
|Adjusted net income (loss), before goodwill impairment expense, restructuring and other charges, and loss on extinguishment of
debt                   |  | $                        | 10,751  |   |      | $ | 843    |      |  | $ | 5,355 |   |      | $ | 9,635 |  | $ | (175  | )
|                                                                                                                                                      |  |                          |         |   |      |   |        |      |  |   |       |   |      |   |       |  |   |       |  
|Net income (loss) per shareDiluted, as reported                                                                                                      |  | $                        | (6.79   | ) |      | $ | (0.23  | )    |  | $ | (0.07 | ) |      | $ | 1.63  |  | $ | (0.03 | )
|                                                                                                                                                      |  |                          |         |   |      |   |        |      |  |   |       |   |      |   |       |  |   |       |  
|Average shares outstandingDiluted, as reported (1)                                                                                                   |  |                          | 5,992   |   |      |   | 5,924  |      |  |   | 5,802 |   |      |   | 5,591 |  |   | 5,242 |  
|                                                                                                                                                      |  |                          |         |   |      |   |        |      |  |   |       |   |      |   |       |  |   |       |  
|Adjusted net income (loss) per shareDiluted, before goodwill impairment expense                                                                      |  | $                        | 1.60    |   |      | $ | (0.23  | )    |  | $ | (0.07 | ) |      | $ | 1.63  |  | $ | (0.03 | )
|                                                                                                                                                      |  |                          |         |   |      |   |        |      |  |   |       |   |      |   |       |  |   |       |  
|Average shares outstandingDiluted (1)                                                                                                                |  |                          | 6,067   |   |      |   | 5,924  |      |  |   | 5,802 |   |      |   | 5,591 |  |   | 5,242 |  
|                                                                                                                                                      |  |                          |         |   |      |   |        |      |  |   |       |   |      |   |       |  |   |       |  
|Adjusted net income (loss) per shareDiluted, before goodwill impairment expense, restructuring and other charges, and loss
on extinguishment of debt |  | $                        | 1.77    |   |      | $ | 0.14   |      |  | $ | 0.87  |   |      | $ | 1.72  |  | $ | (0.03 | )
|                                                                                                                                                      |  |                          |         |   |      |   |        |      |  |   |       |   |      |   |       |  |   |       |  
|Average shares outstandingDiluted (1)                                                                                                                |  |                          | 6,067   |   |      |   | 6,048  |      |  |   | 6,135 |   |      |   | 5,591 |  |   | 5,242 |  
|                                                                                                                                                      |  |                          |         |   |      |   |        |      |  |   |       |   |      |   |       |  |   |       |  



|(1) | For fiscal years with net loss or adjusted net loss, diluted shares reflect the elimination of the dilutive impact of outstanding stock options and warrants and
restricted stock.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Overview

The following
discussion should be read in conjunction with the consolidated financial statements and their related notes included elsewhere in this report.

We are the leading designer and retailer of maternity apparel in the United States with 1,084 retail locations, including 724 stores in all 50 states, Puerto Rico, Guam and Canada, and 360 leased
departments located within department stores and baby specialty stores throughout the United States. We are also the exclusive provider of maternity apparel to Kohls®, which operates approximately 1,059 stores throughout the United States. During fiscal 2009, we operated our stores under the Motherhood Maternity, A Pea in the Pod
and Destination Maternity retail concepts. We are the exclusive maternity apparel provider in each of our leased department relationships. In October 2009, we re-launched our Two Hearts Maternity by Destination Maternity collection at Sears and
Kmart stores. As of November 30, 2009, we operate maternity apparel departments in 522 Sears locations and 101 Kmart locations. The Two Hearts Maternity collection was previously offered in Sears stores from April 2004 through June 2008. We
also are expanding internationally and have entered into exclusive store franchise and product supply relationships in India and the Middle East. Finally, we also sell merchandise on the Internet, primarily through DestinationMaternity.com and our
various brand-specific websites. We design and contract manufacture approximately 90% of the merchandise we sell, using sewing factories located throughout the world, predominantly outside of the United States. Substantially all of the merchandise
produced outside of the United States is paid for in U.S. dollars.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated
financial statements and the reported amounts of net sales and expenses during the reporting period.

Our significant
accounting policies are described in Note 2 of Notes to Consolidated Financial Statements included elsewhere in this report. We believe that the following discussion addresses our critical accounting policies, which are those that
are most important to the portrayal of our financial condition and results of operations and require managements most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that
are inherently uncertain. If actual results were to differ significantly from estimates made, future reported results could be materially affected. However, we are not currently aware of any reasonably likely events or circumstances that would
result in materially different results.

Our senior management has reviewed these critical accounting policies and estimates
and the related Managements Discussion and Analysis of Financial Condition and Results of Operations with the Audit Committee of our Board of Directors.

Inventories.     We value our inventories, which consist primarily of maternity apparel, at the lower of cost or market. Cost is determined on the first-in, first-out method
(FIFO) and includes the cost of merchandise, freight, duty and broker fees, as well as applied product related overhead. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly valued at the
lower of cost or market. Factors related to current inventories such as future consumer demand and fashion trends, current aging, current analysis of merchandise based on receipt date, current and anticipated retail markdowns or wholesale discounts,
and class or type of inventory are analyzed to determine estimated net realizable values. Criteria utilized by us to determine the net realizable value of our inventories and the related level of required inventory reserves include factors such as
the amount of merchandise received within the past twelve months, merchandise received more than one year before with quantities on-hand in excess of twelve months of sales, and merchandise currently selling below cost. A provision is recorded
to reduce the cost of inventories to its estimated net realizable value, if required. Inventories as of September 30, 2009 and 2008 totaled $78.9 million and



35



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$88.1 million, respectively, representing 40.2% and 34.4% of total assets, respectively. Given the significance of inventories to our consolidated financial statements, the determination of
net realizable values is considered to be a critical accounting estimate. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.

Long-Lived Assets.Our long-lived assets consist principally of store leasehold
improvements and furniture and equipment (included in the property, plant and equipment, net line item in our consolidated balance sheets) and, to a much lesser extent, patent and lease acquisition costs (included in the other
intangible assets, net line item in our consolidated balance sheets). These long-lived assets are recorded at cost and are amortized using the straight-line method over the shorter of the lease term or their useful life. Net long-lived assets
as of September 30, 2009 and 2008 totaled $63.8 million and $66.8 million, respectively, representing 32.5% and 26.1% of total assets, respectively.

In assessing potential impairment of these assets, we periodically evaluate the historical and forecasted operating results and cash flows on a store-by-store basis. Newly opened stores may take time to
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, Pea or Destination Maternity, (iii) store location, for example,
urban area versus suburb, (iv) current marketplace awareness of our brands, (v) local customer demographic data, (vi) anchor stores within the mall in which our store is located and (vii) current fashion trends are all considered
in determining the 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 is opened. If economic conditions are substantially different from our expectations, the
carrying value of certain of our long-lived assets may become impaired. As a result of our impairment assessment, we recorded write-downs of long-lived assets of $0.7 million and $1.6 million during fiscal 2009 and fiscal 2008, respectively.

Goodwill.The purchase method of accounting for business combinations requires the use
of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the aggregate purchase price over the fair value of net
assets acquired in business combinations and is separately disclosed in our consolidated balance sheets. In June 2001, the Financial Accounting Standards Board (FASB) issued an accounting pronouncement, which required that goodwill no
longer be amortized, but instead be tested for impairment at least annually or as impairment indicators arise. The impairment test requires us to compare the fair value of business reporting units to their carrying value, including assigned
goodwill. In assessing potential impairment of goodwill, we have determined that we have one reporting unit for purposes of applying the accounting requirements based on our reporting structure. The fair value of our single reporting unit is
determined based on a combination of the fair market value of our outstanding common stock on a control basis, a discounted cash flow analysis and other generally accepted valuation methodologies and, if necessary, with the assistance of an outside
independent valuation specialist. To arrive at the fair market value of our outstanding common stock we consider our market capitalization as of the valuation date and comparative market multiples of other companies generally influenced by similar
business and economic conditions. Our discounted cash flow analysis is based on assumptions that are consistent with our estimates of future growth used to manage the underlying business. Factors requiring significant judgment include assumptions
related to future growth rates, discount factors and control premium, among other considerations. The carrying value of our single reporting unit, expressed on a per share basis, is represented by the book value per share of our outstanding common
stock.

As of September 30, 2009 and 2008, goodwill totaled zero and $50.4 million, respectively, representing zero
percent and 19.7% of total assets, respectively. As of September 30, 2008, our book value was $14.74 per share of outstanding common stock and the closing trading price of our common stock was $13.88 per share. As part of our impairment
analysis as of September 30, 2008, an outside independent valuation was obtained and the results indicated the fair value of our single reporting unit exceeded the carrying value. If the per share fair value of our single reporting unit was
less than the book value per share on September 30, 2008, our goodwill would have been impaired. Our goodwill also needs to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of our single reporting unit below its carrying value. As a result of a substantial decrease in the market price of our common stock subsequent to



36



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September 30, 2008, reflecting deteriorating overall economic conditions and the very difficult equity market conditions, we reassessed the carrying value of our goodwill as of
December 31, 2008, in accordance with the interim period accounting requirements and concluded that our goodwill was impaired. Consequently, we recorded a preliminary non-cash goodwill impairment charge of $47.0 million, on both a pretax and
after tax basis, in the first quarter of fiscal 2009. The preliminary goodwill impairment charge reflected the indication from the impairment analysis performed in the first quarter of fiscal 2009, was subject to finalization of certain fair value
estimates being performed with the assistance of an outside independent valuation specialist, and was subject to adjustment when all aspects of the analysis were completed. The final results of our evaluation completed during the second quarter of
fiscal 2009 indicated the goodwill was fully impaired. Accordingly, we recorded a $3.4 million non-cash goodwill impairment charge, on both a pretax and after tax basis, in the second quarter of fiscal 2009, representing the remaining carrying value
of the goodwill as of December 31, 2008. The goodwill impairment analysis involved calculating the implied fair value of our goodwill by allocating the fair value of our single reporting unit to all assets and liabilities other than goodwill
(including both recognized and unrecognized intangible assets) and comparing the residual amount to the carrying value of goodwill.

Accounting for Income Taxes.As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.
This process requires us to estimate our actual current tax exposure (including interest and penalties) together with assessing temporary differences resulting from differing treatment of items, such as depreciation of property and equipment and
valuation of inventories, for tax and accounting purposes. We establish reserves for certain tax positions that we believe are supportable, but such tax positions are potentially subject to successful challenge by the applicable taxing authority. We
determine our provision for income taxes based on federal and state tax laws and regulations currently in effect, some of which have been recently revised. Legislation changes currently proposed by certain of the states in which we operate, if
enacted, could increase our transactions or activities subject to tax. Any such legislation that becomes law could result in an increase in our state income tax expense and our state income taxes paid, which could have a material and adverse effect
on our net income or cash flow.

The temporary differences between the book and tax treatment of income and expenses result in
deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from our
assessments if adequate taxable income is not generated in future periods. Net deferred tax assets as of September 30, 2009 and 2008 totaled $21.4 million and $23.6 million, respectively, representing 10.9% and 9.2% of total assets,
respectively. To the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. To the extent we establish a valuation allowance or change the allowance in a future period, income tax expense will be
impacted.

Accounting for Contingencies.From time to time, we are named as a defendant
in legal actions arising from our normal business activities. We account for contingencies such as these in accordance with applicable accounting standards, which require us to record an estimated loss contingency when information available prior to
issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for
contingencies arising from contractual or legal proceedings requires management, after consultation with outside legal counsel, to use its best judgment when estimating an accrual related to such contingencies. As additional information becomes
known, our accrual for a loss contingency could fluctuate, thereby creating variability in our results of operations from period to period. Likewise, an actual loss arising from a loss contingency which significantly exceeds the amount accrued for
in our financial statements could have a material adverse impact on our operating results for the period in which such actual loss becomes known.

Restructuring and Other Charges

On July 1, 2008, we announced that we were streamlining our merchandise
brands and store nameplates and implementing cost reductions in order to simplify our business model, reduce overhead costs and improve and tighten our merchandise assortments. Pursuant to the strategic restructuring, we rebranded our Mimi Maternity
merchandise brand under our A Pea in the Pod brand beginning with the Spring 2009 collection, which initially



37



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debuted in November 2008. We also streamlined our store nameplates, which began in November 2008, by renaming our single-brand Mimi Maternity stores as A Pea in the Pod, and by renaming our
multi-brand Mimi Maternity stores as Destination Maternity. In connection with the strategic restructuring we also reduced our corporate and field management headcount, and during fiscal 2009 we began to implement actions to achieve further cost
reductions. The objectives of our restructuring and cost reduction program are to improve and simplify critical processes, consolidate activities and infrastructure, and reduce our expense structure to be more appropriately aligned with our
generation of revenue. We incurred pretax expense of approximately $1.6 million from our restructuring and cost reduction actions in fiscal 2009, consisting of approximately $1.1 million for consulting services related to our cost reduction
initiatives, $0.4 million for cash severance expense and severance-related benefits, and approximately $0.1 million of non-cash expense for accelerated depreciation of existing store signs resulting from planned store signage changes. We
incurred pretax expense of approximately $0.9 million from our restructuring in fiscal 2008, consisting of approximately $0.7 million for cash severance expense and severance-related benefits, and approximately $0.2 million of
non-cash expense for accelerated depreciation of existing store signs. As of September 30, 2009, we had a commitment under a consulting agreement for minimum fees and expenses of approximately $1.6 million, of which approximately
$0.6 million was recorded in fiscal 2009, based upon services rendered in fiscal 2009. We expect total additional expense of approximately $3.3 million, including but not entirely consisting of the remaining minimum commitment for
consulting services related to our cost reduction initiatives, to be recorded in fiscal 2010, of which the majority may occur in the first quarter. These initiatives resulted in approximate pretax savings of $12 million in fiscal 2009, with
incremental pretax savings of approximately $5 million projected for fiscal 2010. We project total annualized pretax savings of approximately $22 to $25 million in fiscal 2011 as a result of our cost reduction initiatives, which includes the
savings realized in fiscal 2009 plus the incremental projected savings for fiscal 2010.

In connection with the retirement of
Dan Matthias, our former Chief Executive Officer (Former CEO), effective September 30, 2008, we recognized pretax expense of $2.5 million in the fourth quarter of fiscal 2008. The charge reflects benefit costs and payroll taxes
related to an amendment to the executives supplemental retirement agreement with us. Subsequent to his retirement, our Former CEO continued to serve us as non-executive Chairman of the Board and is available to our CEO in a consulting
capacity, for which our Former CEO is being paid an annual retainer of $200,000 through September 2012. In November 2009, our Former CEO entered into a letter agreement with us, which confirmed that he would not seek reelection to the Board of
Directors after the expiration of his current term in January 2010. The agreement does not change the terms of payment under his annual retainer for advisory services, however we will incur a non-cash pretax charge of approximately $0.6 million
primarily in the first quarter of fiscal 2010, representing the amount due for the remaining term of the advisory arrangement.

In connection with the announced retirement of Rebecca Matthias, our President and Chief Creative Officer, at the end of fiscal 2010, we expect to incur a pretax charge of approximately $0.9 million in the first quarter of fiscal 2010. The
charge reflects benefit costs related to an amendment to the executives supplemental retirement agreement with us.



38



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Results of Operations

The following table sets forth certain operating data from our consolidated statements of operations as a percentage of net sales and as a percentage change for the periods indicated:



|                                                            |  |                         |    |  |                         |    |  |       |    |  |               |    |  |               |   
|----------------------------------------------------------- |  | ----------------------- | -- |  | ----------------------- | -- |  | ----- | -- |  | ------------- | -- |  | ------------- | --
|                                                            |  | % of Net Sales (1)      |    |  | % Increase (Decrease)   |   
|                                                            |  | Year EndedSeptember 30, |    |  | Year EndedSeptember 30, |   
|                                                            |  | 2009                    |    |  | 2008                    |    |  | 2007  |    |  | 2009 vs. 2008 |    |  | 2008 vs. 2007 |   
|Net sales                                                   |  | 100.0                   | %  |  | 100.0                   | %  |  | 100.0 | %  |  | (5.9          | )% |  | (2.9          | )%
|Cost of goods sold (2)                                      |  | 46.8                    |    |  | 49.9                    |    |  | 48.4  |    |  | (11.8         | )  |  | 0.1           |   
|                                                            |  |                         |    |  |                         |    |  |       |    |  |               |    |  |               |   
|Gross profit                                                |  | 53.2                    |    |  | 50.1                    |    |  | 51.6  |    |  | (0.1          | )  |  | (5.7          | ) 
|Selling, general and administrative expenses (3)            |  | 48.9                    |    |  | 48.1                    |    |  | 48.1  |    |  | (4.4          | )  |  | (2.9          | ) 
|Store closing, asset impairment and asset disposal expenses |  | 0.1                     |    |  | 0.5                     |    |  | 0.3   |    |  | (81.6         | )  |  | 63.1          |   
|Restructuring and other charges                             |  | 0.3                     |    |  | 0.6                     |    |  |      |    |  | (55.0         | )  |  | N.M.          |   
|Goodwill impairment expense                                 |  | 9.5                     |    |  |                        |    |  |      |    |  | N.M.          |    |  | N.M.          |   
|                                                            |  |                         |    |  |                         |    |  |       |    |  |               |    |  |               |   
|Operating income (loss)                                     |  | (5.5                    | )  |  | 0.9                     |    |  | 3.2   |    |  | N.M.          |    |  | (72.9         | ) 
|Interest expense, net                                       |  | 0.9                     |    |  | 1.2                     |    |  | 1.7   |    |  | (32.3         | )  |  | (29.2         | ) 
|Loss on extinguishment of debt                              |  | 0.0                     |    |  | 0.0                     |    |  | 1.6   |    |  | 26.8          |    |  | (99.0         | ) 
|                                                            |  |                         |    |  |                         |    |  |       |    |  |               |    |  |               |   
|Loss before income taxes                                    |  | (6.4                    | )  |  | (0.4                    | )  |  | (0.1  | )  |  | N.M.          |    |  | N.M.          |   
|Income tax provision (benefit)                              |  | 1.2                     |    |  | (0.1                    | )  |  | (0.0  | )  |  | N.M.          |    |  | N.M.          |   
|                                                            |  |                         |    |  |                         |    |  |       |    |  |               |    |  |               |   
|Net loss                                                    |  | (7.7                    | )% |  | (0.2                    | )% |  | (0.1  | )% |  | N.M.          |    |  | N.M.          |   
|                                                            |  |                         |    |  |                         |    |  |       |    |  |               |    |  |               |   



N.M.Not meaningful



|(1) | Components may not add to total due to rounding.
|--- | ------------------------------------------------



|(2) | The cost of goods sold line item includes: merchandise costs (including customs duty expenses), expenses related to inventory shrinkage, product related
corporate expenses (including expenses related to our payroll, benefit costs and operating expenses of our buying departments), 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 our distribution network.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The selling, general and administrative expenses line item includes: advertising and marketing expenses, corporate administrative expenses, and store
expenses (including store payroll and store occupancy expenses).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table sets forth certain
information regarding the number of our retail locations, including stores and leased maternity apparel departments and excluding locations where Kohls sells our products under an exclusive product and license agreement and international
franchise locations, for the fiscal years indicated:



|                    |  |                          |   |  |                   |   |  |                      |   |  |        |   |  |                   |   |  |                      |   |  |        |   |  |                   |   |  |                      |  
|------------------- |  | ------------------------ | - |  | ----------------- | - |  | -------------------- | - |  | ------ | - |  | ----------------- | - |  | -------------------- | - |  | ------ | - |  | ----------------- | - |  | -------------------- | -
|                    |  | Year Ended September 30, |  
|                    |  | 2009                     |   |  | 2008              |   |  | 2007                 |  
|Retail Locations    |  | Stores                   |   |  | LeasedDepartments |   |  | TotalRetailLocations |   |  | Stores |   |  | LeasedDepartments |   |  | TotalRetailLocations |   |  | Stores |   |  | LeasedDepartments |   |  | TotalRetailLocations |  
|Beginning of period |  | 754                      |   |  | 278               |   |  | 1,032                |   |  | 781    |   |  | 795               |   |  | 1,576                |   |  | 810    |   |  | 731               |   |  | 1,541                |  
|Opened              |  | 13                       |   |  | 85                |   |  | 98                   |   |  | 28     |   |  | 7                 |   |  | 35                   |   |  | 18     |   |  | 121               |   |  | 139                  |  
|Closed              |  | (43                      | ) |  | (3                | ) |  | (46                  | ) |  | (55    | ) |  | (524              | ) |  | (579                 | ) |  | (47    | ) |  | (57               | ) |  | (104                 | )
|                    |  |                          |   |  |                   |   |  |                      |   |  |        |   |  |                   |   |  |                      |   |  |        |   |  |                   |   |  |                      |  
|End of period       |  | 724                      |   |  | 360               |   |  | 1,084                |   |  | 754    |   |  | 278               |   |  | 1,032                |   |  | 781    |   |  | 795               |   |  | 1,576                |  
|                    |  |                          |   |  |                   |   |  |                      |   |  |        |   |  |                   |   |  |                      |   |  |        |   |  |                   |   |  |                      |  



39



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Year Ended September 30, 2009 Compared to Year Ended September 30, 2008

Net Sales.    Our net sales for fiscal 2009 decreased by 5.9%, or approximately $33.3 million, to $531.3 million
from $564.6 million for fiscal 2008. Comparable store sales decreased by 4.3% during fiscal 2009 versus a comparable store sales increase of 0.2% during fiscal 2008. The decrease in sales versus last year resulted primarily from the decrease in
comparable store sales and the decrease in Sears leased department sales due to the closure of all of the remaining leased departments within Sears stores during June 2008. In October 2009 we re-launched our Two Hearts Maternity collection at over
600 Sears and Kmart locations.

As of September 30, 2009, we operated a total of 724 stores and 1,084
total retail locations: 591 Motherhood Maternity stores (including 86 Motherhood Maternity Outlet stores), 67 A Pea in the Pod stores, 66 Destination Maternity stores, and 360 leased maternity apparel departments, which were primarily
under the Motherhood brand. In addition, our Oh Baby by Motherhood collection is available at Kohls stores throughout the United States. In comparison, as of September 30, 2008, we operated a total of 754 stores and 1,032 total retail
locations: 616 Motherhood Maternity stores (including 87 Motherhood Maternity Outlet stores), 89 Mimi Maternity stores, 30 A Pea in the Pod stores, 19 Destination Maternity superstores, and 278 leased maternity apparel departments. As
of September 30, 2009, our store total included 66 multi-brand stores, including 44 Destination Maternity combo stores and 22 Destination Maternity superstores. In comparison, as of September 30, 2008, we operated 64 multi-brand
stores, including 19 Destination Maternity superstores, with the remaining multi-brand stores under the Mimi Maternity brand. The increase in leased department locations at the end of September 2009 versus the end of September 2008 predominantly
reflects the opening of an additional 69 BabiesRUs® leased department locations in January 2009 and
February 2009. During fiscal 2009, we opened 13 stores, including 5 multi-brand stores, and closed 43 stores, with 8 of these store closings related to multi-brand store openings. In addition, during fiscal 2009, we opened 85 leased department
locations and closed 3 leased department locations.

Gross Profit.    Our gross profit for fiscal
2009 decreased by 0.1%, or approximately $0.2 million, to $282.8 million compared to $283.0 million for fiscal 2008, primarily reflecting the effect of our lower sales volume compared to last year, substantially offset by increased gross
profit as a percentage of net sales (gross margin). Gross margin was 53.2% for fiscal 2009, compared to 50.1% for fiscal 2008. The increase in gross margin for fiscal 2009 as compared to fiscal 2008 was due primarily to higher merchandise gross
margin from reduced product costs and lower overall markdown levels, and to a lesser extent due to reduced product-related overhead costs related to our cost reduction initiatives.

Selling, General and Administrative Expenses.    Our selling, general and administrative expenses for fiscal 2009
decreased by 4.4%, or $12.0 million, to $259.6 million from $271.6 million for fiscal 2008. This decrease in expense resulted primarily from: (1) our restructuring and cost reduction initiatives, including reduced corporate payroll, field
management payroll, store payroll and store occupancy expenses; and (2) the elimination of operating expenses related to the Sears leased departments, which were not open at all during fiscal 2009; partially offset by higher variable incentive
compensation expense resulting from increased profitability. As a percentage of net sales, selling, general and administrative expenses for fiscal 2009 increased to 48.9% compared to 48.1% for fiscal 2008. This increase in the expense percentage for
fiscal 2009 resulted primarily from negative expense leverage from the decrease in sales, partially offset by the $12.0 million decrease in selling, general and administrative expenses.

Store Closing, Asset Impairment and Asset Disposal Expenses.    Our store closing, asset impairment and asset
disposal expenses for fiscal 2009 decreased by 81.6%, or $2.4 million, to $0.5 million from $2.9 million for fiscal 2008. We incurred impairment charges for write-downs of long-lived assets of $0.7 million for fiscal 2009, as compared to
$1.6 million for fiscal 2008. We incurred charges relating to store closings and other asset disposals of approximately $0.1 million for fiscal 2009, comprised primarily of non-cash other asset disposal costs related to store closings, as
compared to $1.3 million for fiscal 2008, comprised of $0.7 million of cash lease termination costs and $0.6 million of non-cash other asset disposal costs, which were primarily related to store relocations. In fiscal 2009, we recognized a gain of
$0.3 million from the sale of the remaining Costa Rica facility acquired in a fiscal 2002 business purchase.

Restructuring
and Other Charges.    In fiscal 2009, we incurred pretax expense of $1.6 million from our restructuring and cost reduction initiatives compared to $0.9 million in fiscal 2008. In fiscal 2008 we also



40



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recognized a $2.5 million charge in connection with the retirement of our Former CEO. The charge reflects benefit costs and payroll taxes related to an amendment to the executives
supplemental retirement agreement with us. See Restructuring and Other Charges in this Item 7 above for a detailed description of these charges.

Goodwill Impairment Expense.    We recorded non-cash goodwill impairment charges of $50.4 million in fiscal 2009 to reflect the full impairment of our goodwill based on the
results of the impairment analysis performed in fiscal 2009. See Note 5 of the Notes to Consolidated Financial Statements, included elsewhere in this report for additional discussion.

Operating Income (Loss).    We had an operating loss of $(29.3) million for fiscal 2009. Before the goodwill
impairment charges, our operating income for fiscal 2009 was $21.1 million, an increase of 317% or approximately $16.0 million, from the $5.1 million of operating income for fiscal 2008, which had no goodwill impairment charge. The increase in
operating income, before the goodwill impairment charges, was primarily due to lower selling, general and administrative expenses, and lower store closing, asset impairment and asset disposal costs. Operating income, before the goodwill impairment
charges, as a percentage of net sales for fiscal 2009 increased to 4.0% from 0.9% for fiscal 2008. The increase in operating income, before the goodwill impairment charges, as a percentage of net sales was primarily due to our higher gross margin,
partially offset by our higher operating expense ratio compared to fiscal 2008.

Interest Expense,
Net.    Our net interest expense for fiscal 2009 decreased by 32.3%, or $2.3 million, to $4.7 million from $7.0 million in fiscal 2008. This decrease was due to our lower debt level, primarily as a result of the $20.0
million of Term Loan prepayments we made in fiscal 2009, and to a lesser extent, lower interest rates and lower credit line borrowings. During fiscal 2009 and 2008, our average daily level of direct borrowings under our credit facility was $0.2
million and $5.2 million, respectively. We did not have any direct borrowings outstanding under our credit facility as of September 30, 2009.

Loss on Extinguishment of Debt.    During fiscal 2009, we prepaid $20.0 million principal amount of our outstanding Term Loan, which resulted in pretax charges totaling $0.1
million, representing the write-off of unamortized deferred financing costs. During fiscal 2008, we prepaid $13.0 million principal amount of our outstanding Term Loan, which resulted in pretax charges totaling $0.1 million.

Income Taxes.     Our income tax provision for fiscal 2009 was $6.6 million. There was no tax benefit associated
with our $50.4 million of goodwill impairment charges. Before the goodwill impairment charges, our income before income taxes was $16.3 million and our effective tax rate was a provision of 40.4% for fiscal 2009 compared to a benefit of 30.5% in
fiscal 2008. Our income tax rates for fiscal 2009 and fiscal 2008 reflect the effect of additional income tax expense (including interest and penalties) recognized as required by the accounting standard for uncertain income tax positions.
Additionally, our income tax rates for both fiscal 2009 and fiscal 2008 reflect the effects of certain minimum state tax requirements, partially offset by allowable federal tax credits. See Note 15 of the Notes to Consolidated Financial Statements,
included elsewhere in this report, for the reconciliation of the statutory federal income tax rate to our effective tax rate.

Net Loss.     Net loss for fiscal 2009 was $(40.7) million, or $(6.79) per share (diluted), compared to net loss of $(1.4) million for fiscal 2008, or $(0.23) per share (diluted). Net loss for fiscal 2009 includes
the goodwill impairment charges of $50.4 million, restructuring and other charges of $1.6 million and loss on extinguishment of debt of $0.1 million. Net loss for fiscal 2008 includes restructuring and other charges of $3.5 million and loss on
extinguishment of debt of $0.1 million. Before the goodwill impairment expense, restructuring and other charges, and loss on extinguishment of debt, our net income was $10.8 million or $1.77 per share (diluted), compared to $0.8 million or $0.14 per
share (diluted) for fiscal 2008.

Our average shares outstanding (basic and diluted) of 5,992,000 shares for fiscal 2009 was
1.1% higher than the 5,924,000 average shares outstanding (basic and diluted) for fiscal 2008. The increase in average shares outstanding reflects higher shares outstanding in fiscal 2009 compared to fiscal 2008, as a result of vesting of restricted
stock awards and stock option exercises. There is no difference between basic and diluted shares outstanding for both fiscal 2009 and fiscal 2008, as a result of the elimination of the dilutive impact of outstanding stock options and restricted
stock, due to the net loss in both fiscal 2009 and fiscal 2008. Had we



41



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reported a profit for fiscal 2009 and fiscal 2008, the weighted average number of dilutive shares outstanding for computation of diluted earnings per share (Diluted EPS) would have
been approximately 6,067,000 and 6,048,000, respectively.

Following is a reconciliation of net loss and net loss per share
(diluted) to net income before goodwill impairment expense, restructuring and other charges, and loss on extinguishment of debt, and net income per share before goodwill impairment expense, restructuring and other charges, and loss on extinguishment
of debt (diluted) for the years ended September 30, 2009 and 2008 (in thousands, except per share amounts):



|                                                                                                                    |  |                              |         |   |                              |       |            |   |       |                 |  |   |        |   |            |       |  |   |       |  
|------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | ----- | ---------- | - | ----- | --------------- |  | - | ------ | - | ---------- | ----- |  | - | ----- | -
|                                                                                                                    |  | Year EndedSeptember 30, 2009 |         |   | Year EndedSeptember 30, 2008 |      
|                                                                                                                    |  | NetIncome(Loss)              |         |   | Shares                       |       | DilutedEPS |   |       | NetIncome(Loss) |  |   | Shares |   | DilutedEPS |      
|As reported                                                                                                         |  | $                            | (40,682 | ) |                              | 5,992 |            | $ | (6.79 | )               |  | $ | (1,389 | ) |            | 5,924 |  | $ | (0.23 | )
|Goodwill impairment expense, net of tax                                                                             |  |                              | 50,389  |   |                              |      |            |   |       |                 |  |   |       |   |            |      |  |   |       |  
|Restructuring and other charges, net of tax                                                                         |  |                              | 968     |   |                              |      |            |   |       |                 |  |   | 2,171  |   |            |      |  |   |       |  
|Loss on extinguishment of debt, net of tax                                                                          |  |                              | 76      |   |                              |      |            |   |       |                 |  |   | 61     |   |            |      |  |   |       |  
|Incremental shares from the assumed lapse of restrictions on restricted stock awards                                |  |                              |        |   |                              | 16    |            |   |       |                 |  |   |       |   |            | 22    |  |   |       |  
|Incremental shares from the assumed exercise of outstanding stock options                                           |  |                              |        |   |                              | 59    |            |   |       |                 |  |   |       |   |            | 102   |  |   |       |  
|                                                                                                                    |  |                              |         |   |                              |       |            |   |       |                 |  |   |        |   |            |       |  |   |       |  
|As adjusted before goodwill impairment expense, restructuring and other charges, and loss on extinguishment of
debt |  | $                            | 10,751  |   |                              | 6,067 |            | $ | 1.77  |                 |  | $ | 843    |   |            | 6,048 |  | $ | 0.14  |  
|                                                                                                                    |  |                              |         |   |                              |       |            |   |       |                 |  |   |        |   |            |       |  |   |       |  

Year Ended September 30, 2008 Compared to Year Ended September 30, 2007

Net Sales.    Our net sales for fiscal 2008 decreased by 2.9%, or $16.8 million, to $564.6 million from
$581.4 million for fiscal 2007. The decrease in sales versus last year resulted primarily from a decrease in sales from our leased department and licensed relationships, largely due to a decrease in Sears leased department sales due to the
closure of all of the remaining leased departments within Sears stores during June 2008, as well as reduced sales volume from the ongoing closure of certain underperforming stores, partially offset by increased Internet sales and a slight increase
in comparable store sales. Comparable store sales increased by 0.2% during fiscal 2008 versus a comparable store sales decrease of 4.8% during fiscal 2007.

As of September 30, 2008, we operated a total of 754 stores and 1,032 total retail locations: 616 Motherhood Maternity stores (including 87 Motherhood Maternity Outlet stores), 89 Mimi Maternity
stores, 30 A Pea in the Pod stores, 19 Destination Maternity superstores, and 278 leased maternity apparel departments, which were primarily under the Motherhood brand. In addition, our Oh Baby by Motherhood collection is available at
Kohls stores throughout the United States. In comparison, as of September 30, 2007, we operated a total of 781 stores and 1,576 total retail locations: 635 Motherhood Maternity stores (including 91 Motherhood Maternity Outlet
stores), 100 Mimi Maternity stores, 32 A Pea in the Pod stores, 14 Destination Maternity superstores, and 795 leased departments. As of September 30, 2008, our store total included 64 multi-brand stores, including 19 Destination
Maternity superstores, with the remaining multi-brand stores under the Mimi Maternity brand. In comparison, as of September 30, 2007, we operated 57 multi-brand stores, including 14 Destination Maternity superstores. These multi-brand store
figures for fiscal 2008 and fiscal 2007 exclude our A Pea in the Pod stores, which have traditionally carried a full line of both A Pea in the Pod and Mimi branded merchandise. During fiscal 2008, we opened 28 stores, including 7 multi-brand
stores, and closed 55 stores, with 18 of these store closings related to multi-brand store openings. In addition, during fiscal 2008, we opened 7 leased department locations and closed 524 leased department locations, including the 501 Sears
leased departments operated by us at the end of September 2007.

Gross Profit.    Our gross profit
for fiscal 2008 decreased by 5.7%, or $17.2 million, to $283.0 million compared to $300.2 million for fiscal 2007, reflecting the decrease in net sales as well as a decrease in gross



42



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margin. Gross profit as a percentage of net sales (gross margin) was 50.1% for fiscal 2008, compared to 51.6% for fiscal 2007. The decrease in gross margin for fiscal 2008 as compared to fiscal
2007 reflects increased markdowns to help manage our inventory level, product cost inflation pressures that are being felt throughout the apparel industry, and the effect of spreading fixed product overhead costs over a smaller sales volume.

Selling, General and Administrative Expenses.    Our selling, general and administrative expenses
for fiscal 2008 decreased by 2.9%, or $8.1 million, to $271.6 million from $279.7 million for fiscal 2007. This decrease in expense resulted primarily from significantly lower legal expenses, and from lower store occupancy, payroll and employee
benefits costs, as a result of our reduced number of stores and leased departments. As a percentage of net sales, selling, general and administrative expenses remained consistent at 48.1% for fiscal 2008 and fiscal 2007.

Store Closing, Asset Impairment and Asset DisposalExpenses.    Our store closing, asset impairment and
asset disposal expenses for fiscal 2008 increased by 63.1%, or $1.1 million, to $2.9 million from $1.8 million for fiscal 2007. We incurred impairment charges for write-downs of long-lived assets of $1.6 million for fiscal 2008, as
compared to $1.8 million for fiscal 2007. We incurred charges relating to store closings and other asset disposals of $1.3 million for fiscal 2008, comprised of $0.7 million of cash lease termination fees and $0.6 million of non-cash other
asset disposal costs, which were primarily related to store relocations, as compared to $7,000 for fiscal 2007, comprised of $0.4 million of cash lease termination fees offset by $0.4 million non-cash gain on asset disposals from closed stores.

Restructuring and Other Charges.    In the fourth quarter of fiscal 2008, we incurred pretax
expense of $0.9 million from our strategic restructuring and cost reduction initiatives. We also recognized a $2.5 million charge in connection with the retirement of our Former CEO. The charge reflects benefit costs and payroll taxes related to an
amendment to the executives supplemental retirement agreement with us.

Operating
Income.    Our operating income for fiscal 2008 decreased by 72.9%, or $13.6 million, to $5.1 million from $18.7 million for fiscal 2007, due to the lower sales volume, lower gross margin and associated gross profit
reduction, as well as the restructuring and other charges and increased store closing and asset impairment costs, partially offset by lower selling, general and administrative expenses. Operating income as a percentage of net sales (operating income
margin) for fiscal 2008 decreased to 0.9% from 3.2% for fiscal 2007. The decrease in operating income margin was primarily due to our decreased gross margin for fiscal 2008 compared to fiscal 2007 and the restructuring and other charges incurred in
fiscal 2008.

Interest Expense, Net.    Our net interest expense for fiscal 2008
decreased by 29.2%, or approximately $2.8 million, to $7.0 million from $9.8 million in fiscal 2007. This decrease was primarily due to the lower interest rate on our $90.0 million Term Loan, which was used to redeem the remaining outstanding
balance of our 111/4% senior notes (the Senior Notes) and, to a lesser
extent, our lower debt level, as a result of the repurchase of $25.0 million of our Senior Notes in December 2006, and the $13.0 million of Term Loan prepayments in fiscal 2008, partially offset by higher average borrowings under our credit
facility. During fiscal 2008, our average level of direct borrowings under our credit facility was $5.2 million, but we did not have any direct borrowings under our credit facility as of September 30, 2008. During fiscal 2007, our average level
of direct borrowings under our credit facility was $1.0 million.

Loss on Extinguishment of
Debt.    During fiscal 2008, we prepaid $13.0 million principal amount of our outstanding Term Loan. The $13.0 million Term Loan prepayments resulted in pretax charges totaling $0.1 million. During fiscal 2007, we repurchased
$25.0 million principal amount of Senior Notes in December 2006 and, with the proceeds of a new Term Loan, we redeemed the remaining $90.0 million principal amount of Senior Notes in April 2007. The $115.0 million of Senior Note repurchases resulted
in pretax charges totaling $9.4 million in fiscal 2007, representing the premium paid plus the write-off of unamortized debt issuance discount and deferred financing costs.

IncomeTaxes.    Our effective tax rate was a benefit of 30.5% in fiscal 2008, compared to a benefit of
30.1% in fiscal 2007. Our income tax rate for fiscal 2008 reflects the effect of additional income tax expense (including interest and penalties) recognized as required by the accounting standard for uncertain income tax positions implemented during
fiscal 2008. Additionally, our income tax rates for both fiscal 2008 and fiscal 2007



43



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reflect the effects of certain minimum state tax requirements, partially offset by allowable federal tax credits. See Note 15 of the Notes to Consolidated Financial Statements, included elsewhere
in this report, for the reconciliation of the statutory federal income tax rate to our effective tax rate.

Net
Loss.    Net loss for fiscal 2008 was $(1.4) million, or $(0.23) per share (diluted), compared to net loss of $(0.4) million for fiscal 2007, or $(0.07) per share (diluted). Before the restructuring and other charges,
and loss on extinguishment of debt in fiscal 2008, and the loss on extinguishment of debt in fiscal 2007, net income for fiscal 2008 was $0.9 million, or $0.14 per share (diluted), compared to net income of $5.4 million for fiscal 2007, or
$0.87 per share (diluted).

The average diluted shares outstanding of 5,924,000 shares for fiscal 2008 was 2.1% higher than the
5,802,000 shares outstanding for fiscal 2007. The increase in average diluted shares outstanding reflects higher shares outstanding in fiscal 2008 compared to fiscal 2007, as a result of stock option exercises and vesting of restricted stock awards.

Following is a reconciliation of net loss and net loss per share (diluted) to net income before restructuring and other
charges, and loss on extinguishment of debt, and net income per share before restructuring and other charges, and loss on extinguishment of debt (diluted) for the years ended September 30, 2008 and 2007 (in thousands, except per share amounts):



|                                                                                       |  |                              |        |   |                              |       |            |   |       |                 |  |   |        |   |            |       |  |   |       |  
|-------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---------------------------- | ----- | ---------- | - | ----- | --------------- |  | - | ------ | - | ---------- | ----- |  | - | ----- | -
|                                                                                       |  | Year EndedSeptember 30, 2008 |        |   | Year EndedSeptember 30, 2007 |      
|                                                                                       |  | NetIncome(Loss)              |        |   | Shares                       |       | DilutedEPS |   |       | NetIncome(Loss) |  |   | Shares |   | DilutedEPS |      
|As reported                                                                            |  | $                            | (1,389 | ) |                              | 5,924 |            | $ | (0.23 | )               |  | $ | (393   | ) |            | 5,802 |  | $ | (0.07 | )
|Restructuring and other charges, net of tax                                            |  |                              | 2,171  |   |                              |      |            |   |       |                 |  |   |       |   |            |      |  |   |       |  
|Loss on extinguishment of debt, net of tax                                             |  |                              | 61     |   |                              |      |            |   |       |                 |  |   | 5,748  |   |            |      |  |   |       |  
|Incremental shares from the assumed lapse of restrictions on restricted stock awards   |  |                              |       |   |                              | 22    |            |   |       |                 |  |   |       |   |            | 36    |  |   |       |  
|Incremental shares from the assumed exercise of outstanding stock options              |  |                              |       |   |                              | 102   |            |   |       |                 |  |   |       |   |            | 297   |  |   |       |  
|                                                                                       |  |                              |        |   |                              |       |            |   |       |                 |  |   |        |   |            |       |  |   |       |  
|As adjusted before restructuring and other charges, and loss on extinguishment of debt |  | $                            | 843    |   |                              | 6,048 |            | $ | 0.14  |                 |  | $ | 5,355  |   |            | 6,135 |  | $ | 0.87  |  
|                                                                                       |  |                              |        |   |                              |       |            |   |       |                 |  |   |        |   |            |       |  |   |       |  

Liquidity and Capital Resources

Our cash needs have primarily been for: (i) debt service, including prepayments, (ii) capital expenditures, including leasehold
improvements, fixtures and equipment for new stores, store relocations and expansions of our existing stores, as well as improvements and new equipment for our distribution and corporate facilities and information systems, and (iii) working
capital, including inventory to support our business. We have historically financed these capital requirements from cash flows from operations, borrowings under our credit facilities or available cash balances.

Cash and cash equivalents increased by $8.5 million during fiscal 2009 compared to an increase of $2.0 million during fiscal 2008.

Cash provided by operations of $42.5 million for fiscal 2009 increased by $14.7 million from $27.8 million for fiscal
2008. This increase in cash provided by operations versus the prior year was primarily the result of the net income before non-cash goodwill impairment charges in fiscal 2009 as compared with a net loss in fiscal 2008, and to a lesser extent,
working capital changes that provided more cash in fiscal 2009 compared to fiscal 2008. The working capital changes were primarily (i) a slight increase in accounts payable, accrued expenses and other current and non-current liabilities in
fiscal 2009 compared to a significant decrease in fiscal 2008, and (ii) a decrease in other current assets in fiscal 2009, which primarily reflected the receipt of a $1.5 million federal income tax refund, partially offset by (iii) a
slight decrease in trade accounts receivable in fiscal 2009 compared to a much larger decrease in fiscal 2008, and (iv) a smaller decrease in inventories in fiscal 2009 compared to the fiscal 2008 decrease.



44



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During fiscal 2009 we used cash provided by operations primarily to fund repayments of
long-term debt and to pay for capital expenditures. Our repayments of long-term debt in fiscal 2009 consisted predominately of $20.0 million of prepayments of our Term Loan, including a $0.6 million prepayment required under the annual excess
cash flow provision of the Term Loan. For fiscal 2009 we spent $12.6 million on capital expenditures, including $9.5 million for leasehold improvements, fixtures and equipment principally for new store facilities, as well as improvements to
existing stores, and $3.1 million for our information systems and distribution and corporate facilities.

Cash provided by
operations of $27.8 million for fiscal 2008 increased by $0.4 million from $27.4 million for fiscal 2007. This increase in cash provided by operations versus the prior year was primarily the result of working capital changes that
provided more cash in fiscal 2008 compared to 2007, primarily due to a decrease in inventories in fiscal 2008, partially offset by the larger net loss and smaller loss on extinguishment of debt in fiscal 2008 compared to fiscal 2007. Total
inventories as of September 30, 2008 were $88.1 million, a decrease of $12.4 million or 12.4% below the $100.5 million inventories balance as of September 30, 2007.

During fiscal 2008 we used the majority of our cash provided by operations to pay for capital expenditures. For fiscal 2008 we spent
$15.7 million in capital expenditures, including $12.3 million for leasehold improvements, fixtures and equipment principally for new store facilities, as well as improvements to existing stores, and $3.4 million for our information
systems and distribution and corporate facilities. We funded repayments of long-term debt in fiscal 2008, consisting predominately of $13.0 million of prepayments of our Term Loan, by using the remaining cash provided by operations and the cash
received from the Grantor Trust related to amendments to certain supplemental executive retirement agreements (as described later in this section).

On December 8, 2006, we completed the repurchase of $25.0 million principal amount of our Senior Notes at 105.625% of the principal amount, plus accrued and unpaid interest. On April 18,
2007, we completed the redemption of the remaining $90.0 million principal amount of our outstanding Senior Notes through our Term Loan financing. The December 2006 and April 2007 redemptions of the Senior Notes, which were both at a
price of 105.625% of principal amount, plus accrued interest, resulted in loss on extinguishment of debt of $9.4 million on a pretax basis, consisting of the $6.5 million cash redemption premium and $2.9 million of non-cash expense from
the write-off of unamortized deferred financing costs and debt issuance costs.

We have in place an agreement for a senior
secured Term Loan B (the Term Loan Agreement), which matures on March 13, 2013, the proceeds of which were used to redeem the Senior Notes. The interest rate on the Term Loan is equal to, at our election, either (i) the prime
rate plus 1.00%, or (ii) a LIBOR rate plus the applicable margin. The applicable margin for LIBOR rate borrowings is either 2.25% or 2.50%, depending on our Consolidated Leverage Ratio (as defined). Based upon our applicable quarterly
Consolidated Leverage Ratio during fiscal 2009, the applicable margin for LIBOR rate borrowings remained at 2.50% for fiscal 2009 and the first quarter of fiscal 2010. Based upon our Consolidated Leverage Ratio as of September 30, 2009, the
applicable margin for LIBOR rate borrowings will be 2.25% effective for the second quarter of fiscal 2010. We are required to make minimum repayments of the principal amount of the Term Loan in quarterly installments of $225,000 each. We are also
required to make an annual principal repayment equal to 25% or 50% of Excess Cash Flow (as defined) in excess of $5.0 million for each fiscal year, with the 25% or 50% factor depending on our Consolidated Leverage Ratio. The effect of any non-cash
goodwill impairment charges is excluded from the calculation of Excess Cash Flow under our Term Loan Agreement. The required principal repayment for fiscal 2009, which was calculated based on the 25% factor, is $5.8 million and is due in December
2009. The required principal repayment for fiscal 2008, which was calculated based on the 50% factor, was $0.6 million and was paid in December 2008. Additionally, the Term Loan can be prepaid at our option, in part or in whole, at any time without
any prepayment premium or penalty. For fiscal 2009 we made the following prepayments: $10.0 million in the first quarter, including the $0.6 million prepayment required under the annual excess cash flow provision of the Term Loan, $5.0 million in
the third quarter and $5.0 million in the fourth quarter. For fiscal 2008 we made the following prepayments: $5.0 million in the second quarter and $8.0 million in the third quarter. At September 30, 2009, our indebtedness under the Term Loan
Agreement was $54.8 million.



45



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The Term Loan is secured by a security interest in our accounts receivable, inventory, real
estate interests, letter of credit rights, cash, intangibles and certain other assets. The security interest granted to the Term Lenders is, in certain respects, subordinate to the security interest granted to the credit facility lender. The Term
Loan Agreement imposes certain restrictions on our ability to, among other things, incur additional indebtedness, pay dividends, repurchase stock, and enter into other various types of transactions. The Term Loan Agreement also contains quarterly
financial covenants that require us to maintain a specified maximum permitted Consolidated Leverage Ratio and a specified minimum permitted Consolidated Interest Coverage Ratio (as defined). Since the inception of the Term Loan Agreement we have
been in compliance with all covenants of our Term Loan Agreement.

In order to mitigate our floating rate interest risk on the
variable rate Term Loan, we entered into an interest rate swap agreement with the Agent bank for the Term Loan that commenced on April 18, 2007, the date the Term Loan proceeds were received, and expires on April 18, 2012. The interest
rate swap agreement enables us to effectively convert an amount of the Term Loan equal to the notional amount of the interest rate swap from a floating interest rate of LIBOR plus 2.50% (subject to reduction to LIBOR plus 2.25% if we achieve a
specified leverage ratio), to a fixed interest rate of 7.50% (subject to reduction to 7.25% if we achieve a specified leverage ratio) for the significant majority of the Term Loan. The notional amount of the interest rate swap was $75.0 million at
the inception of the swap agreement and decreases over time to a notional amount of $5.0 million at the expiration date. The notional amount of the swap was $42.5 million as of September 30, 2009 and over the next eighteen months decreases as
follows: to $35.0 million starting October 19, 2009; to $27.5 million starting April 19, 2010; and to $20.0 million starting October 18, 2010.

We also have in place a $65.0 million revolving credit facility (the Credit Facility), which matures on March 13, 2012. There are no financial covenant requirements under the Credit
Facility provided that Excess Availability (as defined) does not fall below 10% of the Borrowing Base (as defined). If Excess Availability were to fall below 10% of the Borrowing Base, we would be required to meet a specified minimum Fixed Charge
Coverage Ratio (as defined). During all of fiscal 2009 and fiscal 2008, we exceeded the minimum requirements for Excess Availability under the Credit Facility.

As of September 30, 2009, we had no outstanding borrowings under the Credit Facility and $11.5 million in letters of credit, with $36.0 million of availability under our credit line based on our
Borrowing Base formula, compared to no outstanding borrowings and $10.6 million in letters of credit, with $45.9 million of availability under our credit line as of September 30, 2008. Borrowings under the Credit Facility as of
September 30, 2009 would have borne interest at a rate of between approximately 1.25% and 3.25% per annum. During fiscal 2009 and 2008, our average level of direct borrowings under the Credit Facility was $0.2 million and $5.2 million,
respectively. We expect that we will have borrowings under our Credit Facility during certain periods of fiscal 2010, reflecting seasonal and other timing variations in cash flow.

In March 2007, we entered into Supplemental Executive Retirement Agreements (the SERP Agreements) with our Chairman of the
Board and Former CEO and our President and Chief Creative Officer (the SERP Executives). In April 2007, we made an initial required contribution of $2.7 million to a Grantor Trust, which was established for the purpose of
accumulating assets in anticipation of our payment obligations under the SERP Agreements. In November 2007, we made an additional required contribution to the Grantor Trust of $1.2 million. In order to impact positively our ability to
comply with the Consolidated Leverage Ratio covenant of our Term Loan Agreement at March 31, 2008, with the consent of the SERP Executives we withdrew $1.0 million from the Grantor Trust on March 28, 2008. The withdrawn funds were
used to repay indebtedness under our credit facility. On May 20, 2008, we entered into (i) a Letter Agreement with the SERP Executives and the trustee for the Grantor Trust (the Trustee) and (ii) an amendment to the
Grantor Trust agreement with the Trustee (collectively, the Agreements). The Agreements amended the SERP Agreements and the Grantor Trust agreement to provide for us to deliver an irrevocable standby letter of credit to the Trustee
in an amount equal to our then current funding obligation under the SERP Agreements, which was $3.9 million. As provided in the Agreements, in the third quarter of fiscal 2008 we received a distribution of the remaining assets held in the
Grantor Trust amounting to $2.8 million. The amendments affected by the Agreements also allow for the issuance, from time to time, of irrevocable standby letters of credit, or the increase of size of an irrevocable



46



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standby letter of credit already held by the Trustee, in lieu of any deposit to the Grantor Trust otherwise required in the future. In addition, the Agreements permit us, from time to time
at our sole discretion, to reduce the size of any irrevocable standby letter of credit issued to the Trustee, so long as we simultaneously fund the Grantor Trust with an amount of cash equal to the amount of the reduction of the letter of credit. In
October 2008, we increased the irrevocable standby letter of credit issued to the Trustee to a total of $6.8 million, in lieu of deposits to the Grantor Trust, in connection with additional vesting of the SERP Executives benefits. In April and
July 2009, we reduced the irrevocable standby letter of credit by $1.0 million and $0.6 million, respectively, to a total of $5.2 million as of September 30, 2009, in connection with corresponding SERP benefit payments made in April and July
2009. In November 2009, we increased the irrevocable standby letter of credit by $0.7 million to a total of $5.9 million, in connection with additional vesting of the SERP Executives benefits.

Our management believes that our current cash and working capital positions, expected operating cash flows and available borrowing capacity
under our Credit Facility, will be sufficient to fund our working capital, capital expenditures and debt repayment requirements and to fund stock repurchases and/or debt repayments, if any, for at least the next twelve months.

Contractual Obligations and Commercial Commitments

We have entered into agreements that create contractual obligations and commercial commitments. These obligations and commitments will have an impact on future liquidity and the availability of capital
resources. The tables below set forth a summary of these obligations and commitments as of September 30, 2009 (in thousands):

Contractual Obligations:



|                                       |  |                      |         |                        |   |                    |  |                |        |  |   |         |  |   |       
|-------------------------------------- |  | -------------------- | ------- | ---------------------- | - | ------------------ |  | -------------- | ------ |  | - | ------- |  | - | ------
|Description                            |  | TotalObligations (1) |         | Payments Due by Period
|                                       |  | Less ThanOne Year    |         | One toThreeYears       |   | Three toFive Years |  | AfterFiveYears
|Long-term debt                         |  | $                    | 57,409  |                        | $ | 7,013              |  | $              | 2,281  |  | $ | 46,675  |  | $ | 1,440 
|Interest related to long-term debt (2) |  |                      | 7,320   |                        |   | 2,913              |  |                | 3,501  |  |   | 616     |  |   | 290   
|Operating leases (3)                   |  |                      | 232,186 |                        |   | 52,689             |  |                | 86,950 |  |   | 54,811  |  |   | 37,736
|Purchase obligations (4)               |  |                      | 90,897  |                        |   | 90,897             |  |                |       |  |   |        |  |   |      
|                                       |  |                      |         |                        |   |                    |  |                |        |  |   |         |  |   |       
|Total contractual cash obligations     |  | $                    | 387,812 |                        | $ | 153,512            |  | $              | 92,732 |  | $ | 102,102 |  | $ | 39,466
|                                       |  |                      |         |                        |   |                    |  |                |        |  |   |         |  |   |       





|(1) | The amounts in this table exclude obligations under employment and retirement agreements. For a discussion of the compensation of our executive officers, see the
information contained under the caption Executive Compensation in our proxy statement, which will be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders scheduled to be held on
January 22, 2010.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Interest costs on our floating rate long-term debt were estimated using the interest rates in effect as of September 30, 2009. This presentation of interest costs
on our floating rate long-term debt includes the effect of our interest rate swap agreement further described above in Liquidity and Capital Resources.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Includes store operating leases, which generally provide for payment of direct operating costs in addition to rent. The amounts reflected include future minimum lease
payments and exclude such direct operating costs.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Our purchase orders with contract manufacturers are cancelable by us at any time prior to our acceptance of the merchandise. Excludes purchase orders for supplies in
the normal course of business.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



47



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Commercial Commitments:



|                                |  |                  |        |                                 |   |                   |  |                |   |  |   |   |  |   |  
|------------------------------- |  | ---------------- | ------ | ------------------------------- | - | ----------------- |  | -------------- | - |  | - | - |  | - | -
|Description                     |  | TotalObligations |        | Amount of Commitment Per Period
|                                |  | LessThan OneYear |        | One toThreeYears                |   | Threeto FiveYears |  | AfterFiveYears
|Credit facility (1)             |  | $                | 11,545 |                                 | $ | 11,545            |  | $              |  |  | $ |  |  | $ | 
|Other standby letters of credit |  |                  |       |                                 |   |                  |  |                |  |  |   |  |  |   | 
|                                |  |                  |        |                                 |   |                   |  |                |   |  |   |   |  |   |  
|Total commercial commitments    |  | $                | 11,545 |                                 | $ | 11,545            |  | $              |  |  | $ |  |  | $ | 
|                                |  |                  |        |                                 |   |                   |  |                |   |  |   |   |  |   |  





|(1) | Consists of outstanding letter of credit commitments under our credit facility.
|--- | -------------------------------------------------------------------------------

New Accounting Pronouncements

In June 2009, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168 establishes the FASB Accounting Standards
Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied to nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting
principles (GAAP). Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. SFAS No. 168 and the ASC are not intended to change GAAP and the adoption of SFAS No. 168 did not have any impact on the Companys consolidated financial position or
results of operations but does change the way specific accounting standards are referenced.

In June 2008, the FASB issued
Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. FSP EITF 03-6-1 provides guidance for the calculation of earnings per share under FASB ASC
260, Earnings Per Share, for share-based payment awards with rights to dividends or dividend equivalents. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those years. The adoption of this guidance will not have any impact on our consolidated financial position, results of operations or reported earnings per share.

Inflation

We do not believe that the relatively moderate levels of
inflation which have been experienced in the United States in recent years have had a significant effect on our net sales or profitability. However, there can be no assurance that our business will not be affected by inflation in the future.

Forward-Looking Statements

Some of the information in this report, including the information incorporated by reference (as well as information included in oral statements or other written statements made or to be made by us),
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). The forward-looking
statements involve a number of risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or
implied by these forward-looking statements. These factors include, but are not limited to: the impact of the current global economic slowdown on the retail industry in general and on apparel purchases in particular, our ability to successfully
manage various business initiatives, our ability to successfully implement our merchandise brand and retail nameplate restructuring, the success of our international expansion, our ability to successfully manage and retain our leased department and
licensed relationships and marketing partnerships, future sales trends in our existing store base, unusual weather patterns, changes in consumer



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spending patterns, raw material price increases, overall economic conditions and other factors affecting consumer confidence, demographics and other macroeconomic factors that may impact the
level of spending for maternity apparel, expense savings initiatives, our ability to anticipate and respond to fashion trends and consumer preferences, anticipated fluctuations in our operating results, the impact of competition and fluctuations in
the price, availability and quality of raw materials and contracted products, availability of suitable store locations, continued availability of capital and financing, goodwill impairment charges, our ability to hire and develop senior management
and sales associates, our ability to develop and source merchandise, our ability to receive production from foreign sources on a timely basis, potential stock repurchases, potential debt prepayments, changes in market interest rates, war or acts of
terrorism and other factors referenced in this report, including those set forth under the caption Item 1A. Risk Factors.

In addition, these forward-looking statements necessarily depend upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking
statements included in this report do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward-looking terms such as
believes, expects, may, will, should, seeks, pro forma, anticipates, intends, continues, could,
estimates, plans, potential, predicts, goal, objective, or the negative of any of these terms, or comparable terminology, or by discussions of our outlook, plans, goals,
strategy or intentions. Forward-looking statements speak only as of the date made. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we assume no obligation to
update any of these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting these forward-looking statements.



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|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------

Destination Maternity Corporation is exposed to market risk from changes in interest rates. We have not entered into any market sensitive instruments for trading purposes. The analysis below
presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates. The range of changes presented reflects our view of changes that are reasonably possible over a one-year period.

As of September 30, 2009, we had cash and cash equivalents of $20.6 million. Our cash equivalents consist of money market accounts
that bear interest at variable rates. A change in market interest rates earned on our investments impacts the interest income and cash flows, but does not materially impact the fair market value of the financial instruments. Due to the average
maturity and conservative nature of our investment portfolio, we believe a sudden change in interest rates would not have a material effect on the value of our investment portfolio. The impact on our future interest income resulting from changes in
investment yields will depend largely on the gross amount of our investment portfolio at that time. However, based upon the conservative nature of our investment portfolio and current experience, we do not believe a decrease in investment yields
would have a material negative effect on our interest income.

As of September 30, 2009, the principal components of our
debt portfolio were the $54.8 million Term Loan and the $65.0 million Credit Facility, both of which are denominated in United States dollars.

Our Credit Facility carries a variable interest rate that is tied to market indices. As of September 30, 2009, we had no direct borrowings and $11.5 million of letters of credit outstanding
under our Credit Facility. Borrowings under the Credit Facility would have resulted in interest at a rate between approximately 1.25% and 3.25% per annum as of September 30, 2009. Any future borrowings under the Credit Facility
would, to the extent of outstanding borrowings, be affected by changes in market interest rates. A change in market interest rates on the variable rate portion of the debt portfolio impacts the interest expense incurred and cash flows.

The Term Loan carries a variable interest rate that is tied to market indices. The sensitivity analysis as it relates to this portion of
our debt portfolio assumes an instantaneous 100 basis point move in interest rates from their levels as of September 30, 2009, with all other variables held constant. The principal amount of the Term Loan was $54.8 million as of
September 30, 2009. A 100 basis point increase in market interest rates would result in additional annual interest expense on the Term Loan of approximately $0.5 million. A 100 basis point decline in market interest rates would
correspondingly lower our annual interest expense on the Term Loan by approximately $0.5 million.

In order to mitigate our
floating rate interest risk on the variable rate Term Loan, we entered into an interest rate swap agreement with the Agent bank for the Term Loan that commenced on April 18, 2007. The interest rate swap agreement enables us to effectively
convert an amount of the Term Loan equal to the notional amount of the interest rate swap from a floating interest rate (LIBOR plus 2.50%, subject to reduction to LIBOR plus 2.25% if we achieve a specified leverage ratio), to a fixed interest rate
(7.50%, subject to reduction to 7.25% if we achieve a specified leverage ratio). The notional amount of the interest rate swap was $75.0 million at inception of the swap agreement and decreases over time to a notional amount of $5.0 million at the
expiration date. The notional amount of the swap was $42.5 million as of September 30, 2009 and over the next twelve months decreases as follows: to $35.0 million starting October 19, 2009; and to $27.5 million starting April 19,
2010. Based on the scheduled swap notional amount during the next 12 months of the swap agreement, a 100 basis point increase in market interest rates would result in interest expense savings for the year of approximately $0.3 million related to the
swap agreement. A 100 basis point decline in market interest rates would correspondingly increase our interest expense for the year by approximately $0.3 million related to the swap agreement. Thus, a 100 basis point increase in market interest
rates during the next 12 months of the swap agreement would result in additional interest expense for the year of approximately $0.2 million on the Term Loan and swap agreement combined. A 100 basis point decline in market interest rates during
the next 12 months of the swap agreement would correspondingly lower our interest expense for the year by approximately $0.2 million on the Term Loan and swap agreement combined.

Based on the limited other variable rate debt included in our debt portfolio as of September 30, 2009, a 100 basis point increase in
interest rates would result in additional interest incurred for the year of less than



50



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$0.1 million. A 100 basis point decrease in interest rates would correspondingly lower our interest expense for the year by less than $0.1 million.

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



|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

Our Consolidated Financial Statements appear on pages F-1 through F-34, as set forth in Item 15.



|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

Disclosure
Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information required to be
disclosed by us in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. These disclosure controls and procedures
include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to our management on a timely basis to allow decisions regarding required disclosure. We evaluated
the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that as of
September 30, 2009, these controls and procedures were effective.

Internal Control over Financial Reporting

(a)    Managements Annual Report on Internal Control over Financial Reporting

The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of the Companys financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material
effect on the financial statements.

Management assessed the Companys internal control over financial reporting as of
September 30, 2009, the end of the Companys fiscal year. Management based its assessment on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Managements assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and the Companys overall control environment.

Based on its assessment, management has concluded that the Companys internal control over financial reporting was
effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting
principles. The results of managements assessment were reviewed with the Audit Committee of the Companys Board of Directors.

KPMG LLP independently assessed the effectiveness of the Companys internal control over financial reporting. KPMG LLP has issued an attestation report, which is included below.



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(b)    Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Destination Maternity Corporation:

We have audited Destination Maternity Corporations (formerly Mothers Work,
Inc.s) internal control over financial reporting as of September 30, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Destination Maternity Corporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
Managements Annual Report on Internal Control over Financial Reporting presented above. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Destination Maternity Corporation maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Destination Maternity Corporation and
subsidiaries as of September 30, 2009 and 2008, and the related consolidated statements of operations, stockholders equity and comprehensive loss and cash flows for each of the years in the three-year period ended September 30, 2009
and the related financial statement schedule, and our report dated December 14, 2009 expressed an unqualified opinion on those consolidated financial statements and the related financial statement schedule.

/s/ KPMG LLP

Philadelphia, Pennsylvania

December 14, 2009

(c)    Change in Internal Control over Financial Reporting

There have been no changes in
internal control over financial reporting identified in connection with managements evaluation that occurred during the last fiscal quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.



|Item 9B. | Other Information
|-------- | -----------------

None



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PART III.



|Item 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

Information concerning directors and corporate governance, appearing under the captions Corporate Governance, Election of Directors (Proposal 1) and Section 16(a)
Beneficial Ownership Reporting Compliance in our Proxy Statement, is incorporated herein by reference in response to this Item 10. Information concerning executive officers, appearing under the caption Item 1.
BusinessExecutive Officers of the Company in Part I of this Form 10-K, is incorporated herein by reference in response to this Item 10.

The Board of Directors has adopted a Code of Business Conduct and Ethics, which can be found on the Companys corporate website at investor.destinationmaternity.com. We intend to satisfy the
amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers to, the Code of Business Conduct and Ethics on our website.



|Item 11. | Executive Compensation
|-------- | ----------------------

The information contained in the Proxy Statement from the sections titled Compensation Discussion and Analysis, Reports of Committees of the Board of Directors and Executive Compensation with respect to
executive compensation, and in the section titled Compensation of Directors with respect to director compensation, is incorporated herein by reference in response to this Item 11.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The information contained in the section titled Security Ownership of Certain Beneficial Owners and Management in the Proxy
Statement, with respect to security ownership of certain beneficial owners and management, and in the section titled Securities Authorized for Issuance Under Equity Compensation Plans, with respect to securities authorized for issuance
under equity compensation plans, is incorporated herein by reference in response to this Item 12.



|Item 13. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

The information contained in the sections titled Corporate Governance and Election of Directors (Proposal 1) in the
Proxy Statement with respect to certain relationships and director independence, is incorporated herein by reference in response to this Item 13.



|Item 14. | Principal Accounting Fees and Services
|-------- | --------------------------------------

The information contained in the Proxy Statement in the section titled Auditor Fees and Services is incorporated herein by reference in response to this Item 14.



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PART IV.



|Item 15. | Exhibits, Financial Statement Schedules
|-------- | ---------------------------------------



|(a)    (1) | Financial Statements
|---------- | --------------------



| | The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Form 10-K, commencing on page F-1.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Financial Statement Schedules
| | --- | -----------------------------



| | Schedule IIValuation and Qualifying Accounts.
| | ----------------------------------------------



| | All other schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial
statements or notes thereto.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Exhibits
| | --- | --------



| | See following Index of Exhibits.
| | --------------------------------



54



---

INDEX OF EXHIBITS



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | 
|*3.1        |  | Restated Certificate of Incorporation of the Company (Exhibit 3.1 to the Companys Annual Report on Form 10-K for the year ended September 30, 2008).                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 
|*3.2        |  | By-Laws of the Company (to become effective at the 2010 Annual Meeting of Stockholders) (Exhibit 3.2 to the Companys Current Report on Form 8-K dated November 4,
2009 (the November 4, 2009 Form 8-K).                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 
|*4.1        |  | Specimen certificate representing shares of the Companys common stock with legend regarding Preferred Stock Purchase Rights (Exhibit 4.2 to the Companys Current
Report on Form 8-K dated October 12, 1995).                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 
|*4.2        |  | Amended and Restated Rights Agreement, dated as of October 9, 2005, between the Company and StockTrans, Inc., which includes the Form of Series B Rights
Certificate, the Certificate of Designation of the voting powers, designations, preferences, and relative, participating, optional or other special rights and qualifications, limitations and restrictions of the Series B Junior Participating
Preferred Stock, and a Summary of Rights to Purchase Preferred Stock attached thereto as Exhibits A, B and C respectively (Exhibit 4.1 to the Companys Current Report on Form 8-K dated October 9, 2005).
|            | 
|*10.1      |  | 1994 Director Stock Option Plan (Exhibit 10.12 to the Companys Annual Report on Form 10-K for the year ended September 30, 1994).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | 
|*10.2       |  | Loan Agreement dated September 1, 1995 between Philadelphia Authority For Industrial Development (PAID) and the Company (Exhibit 10.26 to the Companys
Registration Statement on Form S-1, Registration No. 33-97318, dated October 26, 1995 (the 1995 Registration Statement)).                                                                                                                                                                                                                                                                                                                               
|            | 
|*10.3       |  | Indenture of Trust dated September 1, 1995 between PAID and Society National Bank (Exhibit 10.29 to the Companys 1995 Registration Statement).                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | 
|*10.4       |  | Variable/Fixed Rate Federally Taxable Economic Development Bond (Mothers Work, Inc.), Series of 1995, in the aggregate principal amount of $4,000,000 (Exhibit 10.30
to the Companys 1995 Registration Statement).                                                                                                                                                                                                                                                                                                                                                                                                 
|            | 
|*10.5       |  | Note dated as of February 14, 1996 from the Company to PIDC Local Development Corporation (Exhibit 10.29 to the Companys Annual Report on Form 10-K for the year
ended September 30, 1996).                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 
|*10.6      |  | 1987 Stock Option Plan (as amended and restated) (Exhibit 4.1 to the Companys Registration Statement on Form S-8, Registration No. 333-59529, dated
July 21, 1998).                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | 
|*10.7      |  | Amendment to the Companys 1987 Stock Option Plan, as amended and restated, effective as of November 13, 2002 (Exhibit 10.25 to the Companys Form 10-Q for
the quarter ended March 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 
|*10.8      |  | Form of Non-Qualified Stock Option Agreement under the Companys 1987 Stock Option Plan (Exhibit 10.18 to the Companys Annual Report on Form 10-K for the
year ended September 30, 2004 (the 2004 Form 10-K)).                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 
|*10.9      |  | Form of Non-Qualified Stock Option Agreement under the Companys 1994 Director Stock Option Plan (Exhibit 10.19 to the 2004 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 
|*10.10     |  | Description of the Companys Non-Employee Directors Compensation Policy (See Compensation of Directors in Companys 2007 Fiscal Year Proxy Statement filed
December 15, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|*10.11     |  | Form of Waiver of Rights Under Companys 1987 Stock Option Plan and 1994 Director Stock Option Plan executed by each of the Companys Non-Management Directors
(Exhibit 10.21 to the Companys Current Report on Form 8-K dated December 29, 2005 (the December 29, 2005 Form 8-K)).                                                                                                                                                                                                                                                                                                                              



55



---

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 
|*10.12     |  | Form of Waiver of Rights Under Companys 1987 Stock Option Plan executed by certain of the Companys executive officers (Exhibit 10.22 to the December 29,
2005 Form 8-K).                                                                                                                                                                                                                                                                            
|            | 
|*10.13     |  | Form of Restricted Stock Award Agreement under the Companys 2005 Equity Incentive Plan (Exhibit 10.28 to the Companys Annual Report on Form 10-K for the
year ended September 30, 2006 (the 2006 Form 10-K)).                                                                                                                                                                                                                                     
|            | 
|*10.14     |  | Form of Non-Qualified Stock Option Agreement under the Companys 2005 Equity Incentive Plan (Exhibit 10.29 to the 2006 Form 10-K).                                                                                                                                                                                                                                                                                                                    
|            | 
|*10.15     |  | Management Incentive Program (Exhibit 10.1 to the Companys Current Report on Form 8-K dated December 19, 2006).                                                                                                                                                                                                                                                                                                                                      
|            | 
|*10.16     |  | Second Amended and Restated Employment Agreement dated as of March 2, 2007, between Rebecca C. Matthias and the Company (Exhibit 10.1 to the Companys Current Report on Form
8-K dated March 8, 2007 (the March 8, 2007 Form 8-K)).                                                                                                                                                                                                                
|            | 
|*10.17     |  | Second Amended and Restated Employment Agreement dated March 2, 2007, between Dan W. Matthias and the Company (Exhibit 10.2 to the March 8, 2007 Form
8-K).                                                                                                                                                                                                                                                                                           
|            | 
|*10.18     |  | Supplemental Retirement Agreement dated as of March 2, 2007, between the Company and Rebecca C. Matthias (Exhibit 10.3 to the March 8, 2007 Form 8-K).                                                                                                                                                                                                                                                                                                
|            | 
|*10.19     |  | Supplemental Retirement Agreement dated as of March 2, 2007, between the Company and Dan W. Matthias (Exhibit 10.4 to the March 8, 2007 Form 8-K).                                                                                                                                                                                                                                                                                                    
|            | 
|*10.20      |  | Term Loan and Security Agreement, dated March 13, 2007, among the Company and Cave Springs, Inc., each as a Borrower, and Mothers Work Canada, Inc., as a Guarantor, and Bank of
America, N.A, as Term Administrative Agent and Term Collateral Agent, and Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Runner (Exhibit 10.1 to the Companys Current Report on Form 8-K dated March 15, 2007 (the March
15, 2007 Form 8-K)).
|            | 
|*10.21      |  | Second Amended and Restated Loan and Security Agreement, dated March 13, 2007, among the Company and Cave Springs, Inc., each as a Borrower, and Mothers Work Canada, Inc., as a
Guarantor, and Bank of America, N.A, as the Lender (Exhibit 10.2 to the March 15, 2007 Form 8-K).                                                                                                                                                                    
|            | 
|*10.22     |  | Second Amended and Restated Employment Agreement dated May 15, 2007 between Edward M. Krell and the Company (Exhibit 10.1 to the Companys Current Report on Form 8-K dated May
21, 2007).                                                                                                                                                                                                                                                            
|            | 
|*10.23     |  | Amended and Restated 2005 Equity Incentive Plan (Exhibit 10.1 to the Companys Current Report on Form 8-K dated January 23, 2009).                                                                                                                                                                                                                                                                                                                    
|            | 
|*10.24     |  | Letter dated January 18, 2008, between the Company and Lisa Hendrickson (Exhibit 10.2 to the Companys Current Report on Form 8-K dated January 22, 2008 Form 8-K (the
January 22, 2008 Form 8-K).                                                                                                                                                                                                                                                  
|            | 
|*10.25     |  | Employment Agreement dated January 18, 2008 between the Company and Lisa Hendrickson (Exhibit 10.3 to the January 22, 2008 Form 8-K).                                                                                                                                                                                                                                                                                                                 
|            | 
|*10.26      |  | Confidentiality Agreement dated March 10, 2008, by and among the Company, Crescendo Partners II, L.P., Series K, Crescendo Investments II, LLC, Crescendo Partners III,
L.P., and Crescendo Investments III, LLC. (Exhibit 10.1 to the Companys Current Report on Form 8-K dated March 10, 2008).                                                                                                                                                    
|            | 
|*10.27     |  | Letter Agreement dated March 28, 2008, between the Company and Dan W. Matthias and Rebecca C. Matthias (Exhibit 10.1 to the Companys Current Report on Form 8-K dated
March 28, 2008).                                                                                                                                                                                                                                                               



56



---

|            |  |                                                                                                                                                                                                                                                            
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                
|            | 
|*10.28     |  | Letter Agreement dated May 20, 2008, between the Company and Dan W. Matthias and Rebecca C. Matthias (Exhibit 10.1 to the Companys Current Report on Form 8-K dated May
20, 2008).                                                                        
|            | 
|*10.29     |  | Employment Agreement dated July 23, 2008 between the Company and Judd P. Tirnauer (Exhibit 10.1 to the Companys Current Report on Form 8-K dated July 21,
2008 (the July 21, 2008 Form 8-K)).                                                           
|            | 
|*10.30     |  | Restrictive Covenant Agreement with Judd P. Tirnauer dated July 23, 2008 (Exhibit 10.2 to the July 21, 2008 Form 8-K).                                                                                                                                     
|            | 
|*10.31     |  | Restricted Stock Award Agreement with Judd P. Tirnauer dated July 23, 2008 (Exhibit 10.3 to the July 21, 2008 Form 8-K).                                                                                                                                   
|            | 
|*10.32     |  | Amendment to Second Amended and Restated Employment Agreement dated September 26, 2008 between Edward M. Krell and the Company (Exhibit 10.1 to the Companys Current
Report on Form 8-K dated September 26, 2008 (the September 26, 2008 Form 8-K)).    
|            | 
|*10.33     |  | Transition Agreement dated September 26, 2008 between Dan W. Matthias and the Company (Exhibit 10.2 to the September 26, 2008 Form 8-K).                                                                                                                   
|            | 
|*10.34     |  | Amendment to Second Amended and Restated Employment Agreement dated December 18, 2008, between Rebecca C. Matthias and the Company (Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the quarter ended December 31, 2008).                  
|            | 
|*10.35     |  | Letter Agreement dated November 6, 2009, between Dan W. Matthias and the Company (Exhibit 10.1 to the Companys Current Report on Form 8-K dated November 4, 2009 (the
November 4, 2009 Form 8-K)).                                                      
|            | 
|*10.36      |  | Letter Agreement dated November 6, 2009, by and among the Company, Crescendo Partners II, L.P., Series K, Crescendo Investments II, LLC, Crescendo Partners III, L.P., and
Crescendo Investments III, LLC. (Exhibit 10.2 to the November 4, 2009 Form 8-K).
|            | 
|*10.37     |  | Transition Agreement dated November 6, 2009, between Rebecca C. Matthias and the Company (Exhibit 10.3 to the November 4, 2009 Form 8-K).                                                                                                                  
|            | 
|21          |  | Subsidiaries of the Company.                                                                                                                                                                                                                               
|            | 
|23          |  | Consent of KPMG LLP.                                                                                                                                                                                                                                       
|            | 
|31.1        |  | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                    
|            | 
|31.2        |  | Certification of the Senior 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 Senior 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.                                                                             





|* | Incorporated by reference.
|- | --------------------------



| | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------



57



---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on December 14, 2009.



DESTINATION MATERNITY CORPORATIONBy:

/S/  EDWARD M.
KRELLEdward M. KrellChief Executive Officer (Principal Executive Officer)By:

/S/  JUDD P.
TIRNAUERJudd P. TirnauerSenior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on December 14, 2009, in the capacities indicated:



|                                                 |  |                                                                                             
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------
|/S/  EDWARD M. KRELL Edward M. Krell             |  | Chief Executive Officer and Director (Principal Executive Officer)                          
|                                                 | 
|/S/  REBECCA C.
MATTHIAS Rebecca C. Matthias     |  | President, Chief Creative Officer and Director                                              
|                                                 | 
|/S/  JUDD P. TIRNAUER
Judd P. Tirnauer           |  | Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)
|                                                 | 
|/S/  DAN W. MATTHIAS Dan W. Matthias             |  | Director (Chairman of the Board)                                                            
|                                                 | 
|/S/  ARNAUD AJDLER Arnaud Ajdler                 |  | Director                                                                                    
|                                                 | 
|/S/  JOSEPH A.
GOLDBLUM                          |  | Director                                                                                    
|Joseph A. Goldblum                               |  |                                                                                             
|                                                 | 
|/S/  ELAM M. HITCHNER, III Elam M. Hitchner, III |  | Director                                                                                    



58



---

|                                                 |  |         
|------------------------------------------------ |  | --------
|/S/  ANNE T. KAVANAGH
Anne T. Kavanagh           |  | Director
|                                                 | 
|/S/  MELISSA
PAYNER-GREGOR Melissa Payner-Gregor |  | Director
|                                                 | 
|/S/  DAVID
SCHLESSINGER                          |  | Director
|David Schlessinger                               |  |         
|                                                 | 
|/S/  WILLIAM A.
SCHWARTZ, JR.                    |  | Director
|William A. Schwartz, Jr.                         |  |         



59



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE



|                                                                       |  |            
|---------------------------------------------------------------------- |  | -----------
|Report of Independent Registered Public Accounting Firm                |  | F-2        
|                                                                       | 
|Consolidated Balance Sheets                                            |  | F-3        
|                                                                       | 
|Consolidated Statements of Operations                                  |  | F-4        
|                                                                       | 
|Consolidated Statements of Stockholders Equity and Comprehensive Loss |  | F-5 to F-6 
|                                                                       | 
|Consolidated Statements of Cash Flows                                  |  | F-7        
|                                                                       | 
|Notes to Consolidated Financial Statements                             |  | F-8 to F-34
|                                                                       | 
|Schedule Supporting the Consolidated Financial Statements:             |  |            
|                                                                       | 
|Valuation and Qualifying Accounts                                      |  | F-35       



F-1



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Destination Maternity Corporation:

We have audited the accompanying consolidated balance sheets of Destination
Maternity Corporation (formerly Mothers Work, Inc.) and subsidiaries as of September 30, 2009 and 2008, and the related consolidated statements of operations, stockholders equity and comprehensive loss and cash flows for each of the years
in the three-year period ended September 30, 2009. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule, Valuation and Qualifying Accounts. These consolidated
financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our
audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Destination Maternity Corporation and subsidiaries as of September 30, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2009, in conformity with U.S generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have
audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Destination Maternity Corporations internal control over financial reporting as of September 30, 2009, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 14, 2009 expressed an unqualified opinion on the effectiveness
of the Companys internal control over financial reporting.

/s/ KPMG LLP

Philadelphia, Pennsylvania

December 14, 2009



F-2



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



|                                                                                                                                |  |               |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                |  | September 30, |        
|                                                                                                                                |  | 2009          |         |   | 2008 |  
|ASSETS                                                                                                                          |  |               |         |   |      |   |         |  
|Current assets:                                                                                                                 |  |               |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                       |  | $             | 20,626  |   |      | $ | 12,148  |  
|Trade receivables                                                                                                               |  |               | 6,529   |   |      |   | 7,085   |  
|Inventories                                                                                                                     |  |               | 78,872  |   |      |   | 88,056  |  
|Deferred income taxes                                                                                                           |  |               | 6,035   |   |      |   | 8,154   |  
|Prepaid expenses and other current assets                                                                                       |  |               | 3,857   |   |      |   | 6,777   |  
|                                                                                                                                |  |               |         |   |      |   |         |  
|Total current assets                                                                                                            |  |               | 115,919 |   |      |   | 122,220 |  
|                                                                                                                                |  |               |         |   |      |   |         |  
|Property, plant and equipment, net                                                                                              |  |               | 62,852  |   |      |   | 66,098  |  
|Assets held for sale                                                                                                            |  |               |        |   |      |   | 207     |  
|Other assets:                                                                                                                   |  |               |         |   |      |   |         |  
|Goodwill                                                                                                                        |  |               |        |   |      |   | 50,389  |  
|Deferred financing costs, net of accumulated amortization of $547 and $358                                                      |  |               | 585     |   |      |   | 929     |  
|Other intangible assets, net of accumulated amortization of $2,096 and $2,105                                                   |  |               | 924     |   |      |   | 695     |  
|Deferred income taxes                                                                                                           |  |               | 15,413  |   |      |   | 15,411  |  
|Other non-current assets                                                                                                        |  |               | 314     |   |      |   | 299     |  
|                                                                                                                                |  |               |         |   |      |   |         |  
|Total other assets                                                                                                              |  |               | 17,236  |   |      |   | 67,723  |  
|                                                                                                                                |  |               |         |   |      |   |         |  
|Total assets                                                                                                                    |  | $             | 196,007 |   |      | $ | 256,248 |  
|                                                                                                                                |  |               |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                            |  |               |         |   |      |   |         |  
|Current liabilities:                                                                                                            |  |               |         |   |      |   |         |  
|Line of credit borrowings                                                                                                       |  | $             |        |   |      | $ |        |  
|Current portion of long-term debt                                                                                               |  |               | 7,013   |   |      |   | 1,860   |  
|Accounts payable                                                                                                                |  |               | 16,316  |   |      |   | 20,937  |  
|Accrued expenses and other current liabilities                                                                                  |  |               | 42,010  |   |      |   | 37,806  |  
|                                                                                                                                |  |               |         |   |      |   |         |  
|Total current liabilities                                                                                                       |  |               | 65,339  |   |      |   | 60,603  |  
|Long-term debt                                                                                                                  |  |               | 50,396  |   |      |   | 76,786  |  
|Deferred rent and other non-current liabilities                                                                                 |  |               | 30,472  |   |      |   | 29,391  |  
|                                                                                                                                |  |               |         |   |      |   |         |  
|Total liabilities                                                                                                               |  |               | 146,207 |   |      |   | 166,780 |  
|                                                                                                                                |  |               |         |   |      |   |         |  
|Commitments and contingencies (Note 16)                                                                                         |  |               |         |   |      |   |         |  
|Stockholders equity:                                                                                                           |  |               |         |   |      |   |         |  
|Preferred stock, 1,656,381 shares authorized                                                                                    |  |               |         |   |      |   |         |  
|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, 6,111,669 and 6,070,813 shares issued and outstanding, respectively |  |               | 61      |   |      |   | 61      |  
|Additional paid-in capital                                                                                                      |  |               | 84,557  |   |      |   | 83,274  |  
|Retained earnings (accumulated deficit)                                                                                         |  |               | (33,177 | ) |      |   | 7,505   |  
|Accumulated other comprehensive loss                                                                                            |  |               | (1,641  | ) |      |   | (1,372  | )
|                                                                                                                                |  |               |         |   |      |   |         |  
|Total stockholders equity                                                                                                      |  |               | 49,800  |   |      |   | 89,468  |  
|                                                                                                                                |  |               |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                      |  | $             | 196,007 |   |      | $ | 256,248 |  
|                                                                                                                                |  |               |         |   |      |   |         |  

The accompanying notes are an integral part of these Consolidated Financial
Statements.



F-3



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                            |  | Year Ended September 30, |        
|                                                            |  | 2009                     |         |   | 2008 |   |         | 2007 | 
|Net sales                                                   |  | $                        | 531,251 |   |      | $ | 564,602 |      |  | $ | 581,371 |  
|Cost of goods sold                                          |  |                          | 248,476 |   |      |   | 281,561 |      |  |   | 281,155 |  
|                                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Gross profit                                                |  |                          | 282,775 |   |      |   | 283,041 |      |  |   | 300,216 |  
|Selling, general and administrative expenses                |  |                          | 259,552 |   |      |   | 271,592 |      |  |   | 279,719 |  
|Store closing, asset impairment and asset disposal expenses |  |                          | 536     |   |      |   | 2,916   |      |  |   | 1,788   |  
|Restructuring and other charges                             |  |                          | 1,557   |   |      |   | 3,461   |      |  |   |        |  
|Goodwill impairment expense                                 |  |                          | 50,389  |   |      |   |        |      |  |   |        |  
|                                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Operating income (loss)                                     |  |                          | (29,259 | ) |      |   | 5,072   |      |  |   | 18,709  |  
|Interest expense, net                                       |  |                          | 4,720   |   |      |   | 6,974   |      |  |   | 9,848   |  
|Loss on extinguishment of debt                              |  |                          | 123     |   |      |   | 97      |      |  |   | 9,423   |  
|                                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Loss before income taxes                                    |  |                          | (34,102 | ) |      |   | (1,999  | )    |  |   | (562    | )
|Income tax provision (benefit)                              |  |                          | 6,580   |   |      |   | (610    | )    |  |   | (169    | )
|                                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Net loss                                                    |  | $                        | (40,682 | ) |      | $ | (1,389  | )    |  | $ | (393    | )
|                                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Net loss per shareBasic and diluted                        |  | $                        | (6.79   | ) |      | $ | (0.23   | )    |  | $ | (0.07   | )
|                                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Average shares outstandingBasic and diluted                |  |                          | 5,992   |   |      |   | 5,924   |      |  |   | 5,802   |  
|                                                            |  |                          |         |   |      |   |         |      |  |   |         |  

The accompanying notes are an integral part of these Consolidated Financial
Statements.



F-4



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

AND COMPREHENSIVE LOSS

(in thousands)



|                                                                                                  |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | -------------- | - | ------------------------ | ------ | -- | ------------------------------------ | - | ------ | --------------------------------- |  | - | ----------------- | - |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                                  |  | Common Stock   |   | AdditionalPaid-inCapital |        |    | RetainedEarnings(AccumulatedDeficit) |   |        | AccumulatedOtherComprehensiveLoss |  |   |                   |   |  |   |       
|                                                                                                  |  | NumberofShares |   |                          | Amount |    |                                      |   |        | Total                             |  |   | ComprehensiveLoss |  
|Balance as of September 30, 2006                                                                  |  | 5,624          |   |                          | $      | 56 |                                      | $ | 71,431 |                                   |  | $ | 9,213             |   |  | $ |       |   |  | $ | 80,700 |   |  |   |        |  
|Net loss                                                                                          |  |               |   |                          |        |   |                                      |   |       |                                   |  |   | (393              | ) |  |   |       |   |  |   | (393   | ) |  | $ | (393   | )
|Initial prior service cost for retirement plans, net of tax                                       |  |               |   |                          |        |   |                                      |   |       |                                   |  |   |                  |   |  |   | (1,202 | ) |  |   | (1,202 | ) |  |   |       |  
|Amortization of prior service cost for retirement plans, net of tax                               |  |               |   |                          |        |   |                                      |   |       |                                   |  |   |                  |   |  |   | 126    |   |  |   | 126    |   |  |   | 126    |  
|Change in fair value of interest rate swap, net of tax                                            |  |               |   |                          |        |   |                                      |   |       |                                   |  |   |                  |   |  |   | (325   | ) |  |   | (325   | ) |  |   | (325   | )
|Unrealized loss on investments, net of tax                                                        |  |               |   |                          |        |   |                                      |   |       |                                   |  |   |                  |   |  |   | (3     | ) |  |   | (3     | ) |  |   | (3     | )
|                                                                                                  |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |        |   |  |   |        |  
|Comprehensive loss                                                                                |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |        |   |  | $ | (595   | )
|                                                                                                  |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |        |   |  |   |        |  
|Stock-based compensation                                                                          |  | 121            |   |                          |        | 1  |                                      |   | 2,100  |                                   |  |   |                  |   |  |   |       |   |  |   | 2,101  |   |  |   |        |  
|Exercise of stock options                                                                         |  | 218            |   |                          |        | 3  |                                      |   | 3,734  |                                   |  |   |                  |   |  |   |       |   |  |   | 3,737  |   |  |   |        |  
|Excess tax benefit from stock option exercises                                                    |  |               |   |                          |        |   |                                      |   | 2,360  |                                   |  |   |                  |   |  |   |       |   |  |   | 2,360  |   |  |   |        |  
|Reclassification of equity award from liabilities                                                 |  |               |   |                          |        |   |                                      |   | 1,422  |                                   |  |   |                  |   |  |   |       |   |  |   | 1,422  |   |  |   |        |  
|                                                                                                  |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |        |   |  |   |        |  
|Balance as of September 30, 2007                                                                  |  | 5,963          |   |                          |        | 60 |                                      |   | 81,047 |                                   |  |   | 8,820             |   |  |   | (1,404 | ) |  |   | 88,523 |   |  |   |        |  
|Net loss                                                                                          |  |               |   |                          |        |   |                                      |   |       |                                   |  |   | (1,389            | ) |  |   |       |   |  |   | (1,389 | ) |  | $ | (1,389 | )
|Amortization of prior service cost for retirement plans, net of tax                               |  |               |   |                          |        |   |                                      |   |       |                                   |  |   |                  |   |  |   | 192    |   |  |   | 192    |   |  |   | 192    |  
|Retirement plan amendment, net of tax                                                             |  |               |   |                          |        |   |                                      |   |       |                                   |  |   |                  |   |  |   | 393    |   |  |   | 393    |   |  |   | 393    |  
|Change in fair value of interest rate swap, net of tax                                            |  |               |   |                          |        |   |                                      |   |       |                                   |  |   |                  |   |  |   | (556   | ) |  |   | (556   | ) |  |   | (556   | )
|Unrealized gain on investments, net of tax                                                        |  |               |   |                          |        |   |                                      |   |       |                                   |  |   |                  |   |  |   | 3      |   |  |   | 3      |   |  |   | 3      |  
|                                                                                                  |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |        |   |  |   |        |  
|Comprehensive loss                                                                                |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |        |   |  | $ | (1,357 | )
|                                                                                                  |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |        |   |  |   |        |  
|Cumulative effect of adoption of accounting standard for uncertain income tax positions (Note 15) |  |               |   |                          |        |   |                                      |   |       |                                   |  |   | 74                |   |  |   |       |   |  |   | 74     |   |  |   |        |  
|Stock-based compensation                                                                          |  | 41             |   |                          |        |   |                                      |   | 2,281  |                                   |  |   |                  |   |  |   |       |   |  |   | 2,281  |   |  |   |        |  
|Exercise of stock options                                                                         |  | 74             |   |                          |        | 1  |                                      |   | 691    |                                   |  |   |                  |   |  |   |       |   |  |   | 692    |   |  |   |        |  
|Tax benefit shortfall from stock option exercises and restricted stock vesting                    |  |               |   |                          |        |   |                                      |   | (627   | )                                 |  |   |                  |   |  |   |       |   |  |   | (627   | ) |  |   |        |  
|Repurchase and retirement of common shares                                                        |  | (7             | ) |                          |        |   |                                      |   | (118   | )                                 |  |   |                  |   |  |   |       |   |  |   | (118   | ) |  |   |        |  
|                                                                                                  |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |        |   |  |   |        |  
|Balance as of September 30, 2008                                                                  |  | 6,071          |   |                          | $      | 61 |                                      | $ | 83,274 |                                   |  | $ | 7,505             |   |  | $ | (1,372 | ) |  | $ | 89,468 |   |  |   |        |  
|                                                                                                  |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |        |   |  |   |        |  

The accompanying notes are an integral part of these Consolidated Financial
Statements.



F-5



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

AND COMPREHENSIVE LOSS (Continued)

(in thousands)



|                                                                               |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------ |  | -------------- | - | ------------------------ | ------ | -- | ------------------------------------ | - | ------ | --------------------------------- |  | - | ----------------- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                               |  | Common Stock   |   | AdditionalPaid-inCapital |        |    | RetainedEarnings(AccumulatedDeficit) |   |        | AccumulatedOtherComprehensiveLoss |  |   |                   |   |  |   |       
|                                                                               |  | NumberofShares |   |                          | Amount |    |                                      |   |        | Total                             |  |   | ComprehensiveLoss |  
|Balance as of September 30, 2008                                               |  | 6,071          |   |                          | $      | 61 |                                      | $ | 83,274 |                                   |  | $ | 7,505             |   |  | $ | (1,372 | ) |  | $ | 89,468  |   |  |   |         |  
|Net loss                                                                       |  |               |   |                          |        |   |                                      |   |       |                                   |  |   | (40,682           | ) |  |   |       |   |  |   | (40,682 | ) |  | $ | (40,682 | )
|Amortization of prior service cost for retirement plans, net of tax            |  |               |   |                          |        |   |                                      |   |       |                                   |  |   |                  |   |  |   | 123    |   |  |   | 123     |   |  |   | 123     |  
|Change in fair value of interest rate swap, net of tax                         |  |               |   |                          |        |   |                                      |   |       |                                   |  |   |                  |   |  |   | (392   | ) |  |   | (392    | ) |  |   | (392    | )
|                                                                               |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |         |   |  |   |         |  
|Comprehensive loss                                                             |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |         |   |  | $ | (40,951 | )
|                                                                               |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |         |   |  |   |         |  
|Stock-based compensation                                                       |  | 38             |   |                          |        |   |                                      |   | 2,031  |                                   |  |   |                  |   |  |   |       |   |  |   | 2,031   |   |  |   |         |  
|Exercise of stock options                                                      |  | 5              |   |                          |        |   |                                      |   | 55     |                                   |  |   |                  |   |  |   |       |   |  |   | 55      |   |  |   |         |  
|Tax benefit shortfall from stock option exercises and restricted stock vesting |  |               |   |                          |        |   |                                      |   | (789   | )                                 |  |   |                  |   |  |   |       |   |  |   | (789    | ) |  |   |         |  
|Repurchase and retirement of common shares                                     |  | (2             | ) |                          |        |   |                                      |   | (14    | )                                 |  |   |                  |   |  |   |       |   |  |   | (14     | ) |  |   |         |  
|                                                                               |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance as of September 30, 2009                                               |  | 6,112          |   |                          | $      | 61 |                                      | $ | 84,557 |                                   |  | $ | (33,177           | ) |  | $ | (1,641 | ) |  | $ | 49,800  |   |  |   |         |  
|                                                                               |  |                |   |                          |        |    |                                      |   |        |                                   |  |   |                   |   |  |   |        |   |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these Consolidated Financial
Statements.



F-6



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                |  | Year Ended September 30, |        
|                                                                                |  | 2009                     |         |   | 2008 |   |         | 2007 | 
|Operating Activities                                                            |  |                          |         |   |      |   |         |      |  |   |          |  
|Net loss                                                                        |  | $                        | (40,682 | ) |      | $ | (1,389  | )    |  | $ | (393     | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                          |         |   |      |   |         |      |  |   |          |  
|Depreciation and amortization                                                   |  |                          | 14,982  |   |      |   | 15,974  |      |  |   | 16,410   |  
|Stock-based compensation expense                                                |  |                          | 2,031   |   |      |   | 2,281   |      |  |   | 2,101    |  
|Loss on impairment of long-lived assets                                         |  |                          | 667     |   |      |   | 1,628   |      |  |   | 1,781    |  
|Loss on impairment of goodwill                                                  |  |                          | 50,389  |   |      |   |        |      |  |   |         |  
|(Gain) loss on disposal of assets                                               |  |                          | (48     | ) |      |   | 546     |      |  |   | (422     | )
|Loss on extinguishment of debt                                                  |  |                          | 123     |   |      |   | 97      |      |  |   | 9,423    |  
|Accretion of discount on notes                                                  |  |                          |        |   |      |   |        |      |  |   | 89       |  
|Deferred income tax provision (benefit)                                         |  |                          | 1,318   |   |      |   | (969    | )    |  |   | (3,067   | )
|Amortization of deferred financing costs                                        |  |                          | 221     |   |      |   | 246     |      |  |   | 437      |  
|Changes in assets and liabilities:                                              |  |                          |         |   |      |   |         |      |  |   |          |  
|Decrease (increase) in:                                                         |  |                          |         |   |      |   |         |      |  |   |          |  
|Trade receivables                                                               |  |                          | 556     |   |      |   | 5,009   |      |  |   | (463     | )
|Inventories                                                                     |  |                          | 9,184   |   |      |   | 12,429  |      |  |   | (6,226   | )
|Prepaid expenses and other current assets                                       |  |                          | 2,920   |   |      |   | (784    | )    |  |   | 1,788    |  
|Other non-current assets                                                        |  |                          | (15     | ) |      |   | 247     |      |  |   | (44      | )
|Increase (decrease) in:                                                         |  |                          |         |   |      |   |         |      |  |   |          |  
|Accounts payable, accrued expenses and other current liabilities                |  |                          | 769     |   |      |   | (14,702 | )    |  |   | 7,389    |  
|Deferred rent and other non-current liabilities                                 |  |                          | 110     |   |      |   | 7,209   |      |  |   | (1,405   | )
|                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|Net cash provided by operating activities                                       |  |                          | 42,525  |   |      |   | 27,822  |      |  |   | 27,398   |  
|                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|Investing Activities                                                            |  |                          |         |   |      |   |         |      |  |   |          |  
|Purchase of short-term investments                                              |  |                          |        |   |      |   |        |      |  |   | (19,550  | )
|Proceeds from sale of short-term investments                                    |  |                          |        |   |      |   |        |      |  |   | 28,975   |  
|Withdrawal from (contribution to) grantor trust                                 |  |                          |        |   |      |   | 2,684   |      |  |   | (2,662   | )
|Capital expenditures                                                            |  |                          | (12,639 | ) |      |   | (15,688 | )    |  |   | (15,444  | )
|Proceeds from sale of property, plant and equipment                             |  |                          |        |   |      |   |        |      |  |   | 85       |  
|Proceeds from sale of assets held for sale                                      |  |                          | 526     |   |      |   |        |      |  |   | 493      |  
|Purchase of intangible assets                                                   |  |                          | (342    | ) |      |   | (343    | )    |  |   | (9       | )
|                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|Net cash used in investing activities                                           |  |                          | (12,455 | ) |      |   | (13,347 | )    |  |   | (8,112   | )
|                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|Financing Activities                                                            |  |                          |         |   |      |   |         |      |  |   |          |  
|Increase (decrease) in cash overdrafts                                          |  |                          | (380    | ) |      |   | 1,524   |      |  |   | (584     | )
|Proceeds from issuance of long-term debt                                        |  |                          |        |   |      |   |        |      |  |   | 90,000   |  
|Repayment of long-term debt                                                     |  |                          | (21,237 | ) |      |   | (14,534 | )    |  |   | (116,039 | )
|Premium on repurchase of long-term debt                                         |  |                          |        |   |      |   |        |      |  |   | (6,469   | )
|Deferred financing costs                                                        |  |                          |        |   |      |   | (21     | )    |  |   | (1,065   | )
|Repurchase of common stock                                                      |  |                          | (14     | ) |      |   | (118    | )    |  |   |         |  
|Payout of redeemed Series A preferred stock                                     |  |                          | (16     | ) |      |   |        |      |  |   |         |  
|Proceeds from exercise of stock options                                         |  |                          | 55      |   |      |   | 692     |      |  |   | 3,737    |  
|Excess tax benefit from exercise of stock options                               |  |                          |        |   |      |   |        |      |  |   | 2,360    |  
|                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|Net cash used in financing activities                                           |  |                          | (21,592 | ) |      |   | (12,457 | )    |  |   | (28,060  | )
|                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|Net Increase (Decrease) in Cash and Cash Equivalents                            |  |                          | 8,478   |   |      |   | 2,018   |      |  |   | (8,774   | )
|Cash and Cash Equivalents, Beginning of Year                                    |  |                          | 12,148  |   |      |   | 10,130  |      |  |   | 18,904   |  
|                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|Cash and Cash Equivalents, End of Year                                          |  | $                        | 20,626  |   |      | $ | 12,148  |      |  | $ | 10,130   |  
|                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  

The accompanying notes are an integral part of these Consolidated Financial Statements.



F-7



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS

Destination Maternity
Corporation (formerly Mothers Work, Inc.) and subsidiaries (the Company) is a specialty designer and retailer of maternity clothing. On December 8, 2008, the Company changed its corporate name from Mothers Work, Inc. to
Destination Maternity Corporation. The name change was accomplished through the merger of a newly-formed, wholly-owned subsidiary, DM Newco, Inc., into Mothers Work, Inc. The Company operated 1,084 retail locations as of
September 30, 2009, including 724 stores and 360 leased departments, throughout the United States Puerto Rico, Guam and Canada and markets its maternity apparel on the Internet through its DestinationMaternity.com and brand-specific websites.
In addition, the Company markets maternity apparel at Kohls® stores throughout the United States under an
exclusive product and license agreement. The Company is expanding internationally and has entered into exclusive store franchise and product supply relationships in India and the Middle East. The Company was incorporated in Delaware in 1982.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Principles of Consolidation

The accompanying consolidated
financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries of Cave Springs, Inc., Mothers Work Canada, Inc., Maternity Factory Warehouse Centre, Inc. (a wholly-owned subsidiary of
Mothers Work Canada, Inc.), Mothers Work Services, Inc., Destination Maternity Apparel Private Limited and Confecciones Acona S.A. All significant intercompany transactions and accounts have been eliminated in consolidation.

b. Fiscal Year-End

The Company operates on a fiscal year ending September 30 of each year. All references to fiscal years of the Company refer to the fiscal years ended on September 30 in those years. For example,
the Companys fiscal 2009 ended on September 30, 2009.

c. Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management
to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

d. Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash in the bank and short-term investments with an original maturity of three
months or less when purchased. Cash overdrafts of $4,450,000 and $4,830,000 were included in accounts payable as of September 30, 2009 and 2008, respectively.

The Company maintains cash accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses from maintaining cash accounts in excess of such limits. Management
believes that it is not exposed to any significant credit risks on its cash accounts.

e. Investments

The Companys investments may be classified as either held-to-maturity or available-for-sale. Held-to-maturity
securities are carried at amortized cost and represent those securities that the Company has both the intent and ability to hold to maturity. Available-for-sale securities are carried at fair value, and are classified



F-8



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



as such because these securities are not actively traded and do not meet the classification of held-to-maturity. Interest on investments, as well as amortization of discounts and premiums, is
included in interest income. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported as accumulated other comprehensive income (loss) until realized. When available-for-sale securities are sold, the
cost of the securities is specifically identified and is used to determine the realized gain or loss.

f. Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out
(FIFO) method. Inventories of goods manufactured by the Company include the cost of materials, freight, direct labor, and manufacturing and distribution overhead.

g. Property, Plant and Equipment

Property, plant and equipment are
stated at cost. Depreciation and amortization are computed for financial reporting purposes on a straight-line basis, using service lives ranging principally from five to ten years for furniture and equipment and forty years for the building.
Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or their useful life. The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts
with any resulting gain or loss included in net income (loss). Maintenance and repairs are expensed as incurred except for the capitalization of major renewals and betterments that extend the life of the asset. Long-lived assets are reviewed for
impairment whenever adverse events, or changes in circumstances or business climate indicate that the carrying value may not be recoverable. Factors used in the evaluation include, but are not limited to, managements plans for future
operations, brand initiatives, recent operating results and projected cash flows. If the associated undiscounted cash flows are insufficient to support the recorded asset, an impairment loss is recognized to reduce the carrying value of the asset.
The amount of the impairment loss is determined by comparing the discounted expected future cash flows with the carrying value.

During fiscal 2009, 2008 and 2007, the Company recorded impairment write-downs of property, plant and equipment totaling $665,000, $1,615,000 and $1,776,000, respectively, on a pretax basis.

h. Goodwill and Intangible Assets

Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations. Goodwill is reviewed for impairment at least annually or when events or changes in circumstances
indicate the carrying value of the goodwill might exceed the fair value in accordance with applicable accounting standards. Management has determined that the Company has one reporting unit based on its reporting structure. The Company makes its
annual assessment of impairment as of September 30 of each fiscal year. The fair value of the Companys single reporting unit at each measurement date is determined based on a combination of the fair market value of the Companys
outstanding common stock on a control basis, a discounted cash flow analysis and other generally accepted valuation methodologies and, if necessary, with the assistance of an outside independent valuation specialist. As part of the Companys
impairment analysis as of September 30, 2008, an outside independent valuation was obtained and the fair value of the Companys single reporting unit exceeded the carrying value. As a result of a substantial decrease in the market price of
the Companys common stock subsequent to September 30, 2008, reflecting deteriorating overall economic conditions and the very difficult equity market conditions, the Company reassessed the carrying value of its goodwill as of
December 31, 2008, in accordance with interim period accounting requirements, and concluded that the goodwill was fully impaired.



F-9



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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Consequently, the Company recorded non-cash goodwill impairment charges of $50,389,000, on both a pretax and after tax basis, in fiscal 2009 (see Note 5).

Intangible assets with definite useful lives, which primarily consist of lease acquisition costs and patents, are amortized over the shorter
of their useful life or, if applicable, the lease term. Management reviews the carrying amount of these intangible assets as impairment indicators arise, to assess the continued recoverability based on future undiscounted cash flows and operating
results from the related asset, future asset utilization and changes in market conditions. During fiscal 2009, 2008 and 2007, the Company recorded write-downs of intangible assets totaling $2,000, $13,000 and $5,000, respectively, on a pretax basis.
The Company has not identified any indefinite-lived intangible assets. Aggregate amortization expense of intangible assets in fiscal 2009, 2008 and 2007 was $109,000, $119,000 and $153,000, respectively.

Estimated amortization expense for the next five fiscal years is as follows (in thousands):



|            |  |   |    
|----------- |  | - | ---
|Fiscal Year |  |  
|2010        |  | $ | 109
|2011        |  |   | 96 
|2012        |  |   | 87 
|2013        |  |   | 80 
|2014        |  |   | 66 

i. Interest Rate Derivatives

The Company mitigates a portion of its floating rate interest risk on variable rate long-term debt through an interest rate swap agreement.
In accordance with applicable accounting standards for derivative instruments, the Company recognizes the derivative on the balance sheet at fair value. On the date the derivative instrument was entered into, the Company designated it as a hedge of
the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). Changes in the fair value of a derivative that is designated as, and meets all the criteria for, a cash flow hedge are
recorded in accumulated other comprehensive loss and reclassified into earnings as the underlying hedged item affects earnings. The Company formally documents the relationship between hedging instruments and hedged items. The Company also formally
assesses at the inception of the hedge and on a quarterly basis, whether the derivative is highly effective in offsetting changes in cash flows of the hedged item. Any portion of the change in fair value of the derivative associated with hedge
ineffectiveness is included in current earnings. As of September 30, 2009 and for the year then ended, the Companys interest rate swap was determined to have no ineffectiveness.

j. Deferred Financing Costs

Deferred financing costs (see Note 10) are amortized to interest expense over the term of the related debt agreement. Amortization expense of deferred financing costs in fiscal 2009, 2008 and 2007
was $221,000, $246,000 and $437,000, respectively. In connection with debt extinguishments, in fiscal 2009, 2008 and 2007 the Company wrote off $123,000, $97,000 and $2,173,000 of unamortized deferred financing costs (see Note 10).



F-10



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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Estimated amortization expense of deferred financing costs for the next five fiscal
years is as follows (in thousands):



|            |  |   |    
|----------- |  | - | ---
|Fiscal Year |  |  
|2010        |  | $ | 204
|2011        |  |   | 203
|2012        |  |   | 137
|2013        |  |   | 41 
|2014        |  |   |   

k. Deferred Rent

Rent expense on operating leases, including rent holidays and scheduled rent increases, is recorded on a straight-line basis over the term of
the lease commencing on the date the Company takes possession of the leased property, which is generally four to six weeks prior to a stores opening date. The net excess of rent expense over the actual cash paid has been recorded as a deferred
rent liability in the accompanying Consolidated Balance Sheets. Tenant improvement allowances received from landlords are also included in the accompanying Consolidated Balance Sheets as deferred rent liabilities and are amortized as a reduction of
rent expense over the term of the lease from the possession date.

l. Treasury (Reacquired) Shares

Shares repurchased are retired and treated as authorized but unissued shares, with the cost in excess of par value of the reacquired
shares charged to additional paid-in capital and the par value charged to common stock.

m. Fair Value of Financial
Instruments

The carrying values of cash and cash equivalents, investments, trade receivables and accounts payable
approximate fair value due to the short-term nature of those instruments. The majority of the Companys long-term debt bears interest at variable rates, which adjust based on market conditions, and the carrying value of the long-term debt
approximates fair value. The difference between the carrying value and fair value of long-term debt held by the Company with fixed rates of interest is not significant. A portion of the Companys floating rate interest risk on variable rate
long-term debt is mitigated through an interest rate swap agreement. As of September 30, 2009 and 2008, the estimated fair value of the interest rate swap was an unrealized loss of $(2,025,000) and $(1,404,000), respectively.

n. Revenue Recognition, Sales Returns and Allowances

Revenue is recognized at the point of sale for retail store sales, including leased department sales, or when merchandise is shipped to
customers for licensed product and Internet sales, and when merchandise is shipped to the international franchisees. Allowances for returns are recorded as a reduction of revenue, based on the Companys historical experience. Revenues are
recorded net of applicable sales taxes.

o. Other Revenues

Included in net sales are revenues earned by the Company through a variety of marketing partnership programs utilizing the Companys
opt-in customer database and various in-store marketing initiatives, focused on baby and parent-related products and services. Also included in net sales are fees and royalties related to international franchise agreements. Franchise fees are earned
by the Company when all material services or conditions related to the franchise agreement have been substantially performed or satisfied and royalties are earned based on net sales of the Companys international franchisees and may include
minimum guaranteed royalties.



F-11



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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



p. Cost of Goods Sold

Cost of goods sold in the accompanying Consolidated Statements of Operations includes: merchandise costs (including customs duty expenses),
expenses related to inventory shrinkage, product-related corporate expenses (including expenses related to payroll, benefit costs and operating expenses of the Companys buying departments), 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 the Companys distribution network.

q. Shipping and Handling Fees and Costs

The Company includes shipping and handling revenue earned from its e-commerce activities in net sales. Shipping and handling costs, which are included in cost of goods sold in the accompanying
Consolidated Statements of Operations, include shipping supplies, related labor costs and third-party shipping costs.

r. Selling, General and Administrative Expenses

Selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations include: advertising and marketing expenses, corporate administrative expenses, store expenses (including store payroll and store occupancy expenses), and store opening expenses.

s. Advertising Costs

The Company expenses the costs of advertising when the advertising first occurs. Advertising expenses, including Internet advertising expenses, were $11,213,000, $12,697,000 and $11,938,000 in fiscal
2009, 2008 and 2007, respectively.

t. Store Closing, Asset Impairment and Asset Disposal Expenses

Store closing expenses include lease termination fees, gains or losses on disposal of closed store assets and recognition of unamortized
deferred rent. Asset impairment expenses represent losses recognized to reduce the carrying value of impaired long-lived assets. Asset disposal expenses represent gains or losses on disposal of assets other than in connection with store closings,
including assets disposed from remodeling or relocation of stores.

u. Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities
are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities as well as from net operating loss carryforwards. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

The Company
adopted the provisions of the accounting standard for uncertain income tax positions effective as of October 1, 2007. Under this standard, recognition of a tax benefit occurs when a tax position is more-likely-than-not to be sustained upon
examination, based solely on its technical merits. Derecognition of a previously recognized tax position would occur if it is subsequently determined that the tax position no longer meets the more-likely-than-not threshold of being sustained.
The accounting standard also provided guidance on the measurement of uncertain income tax positions. The Company records interest and penalties related to unrecognized tax benefits in income tax provision (benefit).



F-12



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



v. Earnings (Loss) per Share

Basic earnings (loss) per share (Basic EPS) is computed by dividing net income (loss) by the weighted average number of common
shares outstanding, excluding restricted stock awards for which the restrictions have not lapsed. Diluted earnings (loss) per share (Diluted EPS) is computed by dividing net income (loss) by the weighted average number of common
shares outstanding, after giving effect to the potential dilution, if applicable, from the assumed lapse of restrictions on restricted stock awards and from the exercise of stock options into shares of common stock as if those stock options were
exercised (see Note 14).

Options and restricted stock totaling 947,338, 1,039,866 and 962,220 shares of the Companys
common stock were outstanding as of September 30, 2009, 2008 and 2007, respectively, but were not included in the computation of Diluted EPS for fiscal 2009, 2008 and 2007, due to the Companys net loss position. Had the Company reported a
profit for fiscal 2009, 2008 and 2007, the average number of dilutive shares outstanding for computation of Diluted EPS would have been approximately 6,067,000, 6,048,000, and 6,135,000, respectively.

w. Statements of Cash Flows

In fiscal 2009, 2008 and 2007, the Company paid interest, including payments made on its interest rate swap agreement (see Note 10), of $4,809,000, $7,169,000 and $10,415,000, respectively, and made
income tax payments, net of refunds, of $2,357,000, $552,000 and $(972,000), respectively.

x. Subsequent Events

The Company has evaluated subsequent events through December 14, 2009, the date these consolidated financial
statements were issued.

y. Business and Credit Risk

Financial instruments, primarily cash and cash equivalents, investments and accounts receivable, potentially subject the Company to
concentrations of credit risk. The Company limits its credit risk associated with cash and cash equivalents and investments by placing such investments in highly liquid funds and instruments. Receivables associated with third-party credit cards are
processed by financial institutions, which are monitored for financial stability. The Company is dependent on key suppliers to provide sufficient quantities of inventory at competitive prices. No single supplier represented 10% or more of net
purchases in fiscal 2009, 2008 or 2007. A significant majority of the Companys purchases during fiscal 2009, 2008 and 2007 were imported. Management believes that any event causing a disruption of imports from any specific country could be
partially mitigated by moving production to readily available alternative sources.

z. Insurance

The Company is self-insured for workers compensation and employee-related health care benefits, up to certain stop-loss limits. Such
costs are accrued based on known claims and an estimate of incurred but not reported claims. Further, the Company utilizes a cooperative arrangement with a number of other companies to assist in managing certain workers compensation and
general liability insurance risks. The Companys expenses associated with this relationship could be impacted by the loss history associated with the cooperative as a whole. Liabilities associated with these risks are estimated by considering
historical claims experience and other actuarial assumptions.

aa. Store Preopening Costs

Non-capital expenditures, such as payroll costs incurred prior to the opening of a new store, are charged to expense in the period in which
they were incurred.



F-13



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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



bb. New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 168, The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168 establishes the FASB Accounting Standards Codification (ASC)
as the source of authoritative accounting principles recognized by the FASB to be applied to nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP). Rules
and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after
September 15, 2009. SFAS No. 168 and the ASC are not intended to change GAAP and the adoption of SFAS No. 168 did not have any impact on the Companys consolidated financial position or results of operations but does change the
way specific accounting standards are referenced.

In June 2008, the FASB issued Staff Position (FSP) EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. FSP EITF 03-6-1 provides guidance for the calculation of earnings per share under FASB ASC 260, Earnings Per Share, for share-based
payment awards with rights to dividends or dividend equivalents. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of this guidance
will not have any impact on the Companys consolidated financial position, results of operations or reported earnings per share.

3.
INVENTORIES

Inventories as of September 30 were comprised of the following (in thousands):



|                 |  |      |        |      |   |       
|---------------- |  | ---- | ------ | ---- | - | ------
|                 |  | 2009 |        | 2008
|Finished goods   |  | $    | 72,814 |      | $ | 81,028
|Work-in-progress |  |      | 2,470  |      |   | 2,904 
|Raw materials    |  |      | 3,588  |      |   | 4,124 
|                 |  |      |        |      |   |       
|                 |  | $    | 78,872 |      | $ | 88,056
|                 |  |      |        |      |   |       

4. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment as of September 30 was comprised of the following (in thousands):



|                                                |  |      |          |   |      |   |          |  
|----------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                |  | 2009 |          |   | 2008 |  
|Land                                            |  | $    | 1,400    |   |      | $ | 1,400    |  
|Building and improvements                       |  |      | 14,252   |   |      |   | 13,469   |  
|Furniture and equipment                         |  |      | 65,903   |   |      |   | 62,937   |  
|Leasehold improvements                          |  |      | 105,474  |   |      |   | 105,657  |  
|                                                |  |      |          |   |      |   |          |  
|                                                |  |      | 187,029  |   |      |   | 183,463  |  
|Less: accumulated depreciation and amortization |  |      | (124,177 | ) |      |   | (117,365 | )
|                                                |  |      |          |   |      |   |          |  
|                                                |  | $    | 62,852   |   |      | $ | 66,098   |  
|                                                |  |      |          |   |      |   |          |  

During fiscal 2009, 2008 and 2007, the Company recorded pretax charges of $665,000,
$1,615,000 and $1,776,000, respectively, related to the impairment of leasehold improvements and furniture and equipment at



F-14



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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



4. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)



certain of its retail locations. Aggregate depreciation and amortization expense of property, plant and equipment in fiscal 2009, 2008 and 2007 was $14,873,000, $15,855,000 and $16,257,000,
respectively.

As of September 30, 2008, $207,000 of assets (not included above) were separately reflected in the
accompanying Consolidated Balance Sheet as assets held for sale. The assets held for sale related to manufacturing and warehouse facilities located in Costa Rica that were acquired and shut down in a fiscal 2002 business purchase. Two of
these facilities were previously sold for an aggregate of $718,000. The remaining facility was sold during the first quarter of fiscal 2009 for $526,000 and the Company recognized a $319,000 gain on disposal of assets.

5. GOODWILL IMPAIRMENT

For
purposes of the Companys impairment testing under the accounting standard for goodwill, the Company has one reporting unit based on the Companys reporting structure. The fair value of the Companys single reporting unit is
determined based on a combination of the fair market value of the Companys outstanding common stock on a control basis, a discounted cash flow analysis and other generally accepted valuation methodologies and, if necessary, with the assistance
of an outside independent valuation specialist. As a result of a substantial decrease in the market price of the Companys common stock subsequent to September 30, 2008, reflecting deteriorating overall economic conditions and the very
difficult equity market conditions, the Company reassessed the carrying value of its goodwill as of December 31, 2008, in accordance with interim period accounting requirements, and concluded that its goodwill was impaired. Consequently, the
Company recorded a preliminary non-cash goodwill impairment charge of $47,000,000, on both a pretax and after tax basis, in the first quarter of fiscal 2009. The final results of the Companys evaluation completed during the second quarter of
fiscal 2009 indicated the goodwill was fully impaired. Accordingly, the Company recorded a $3,389,000 non-cash goodwill impairment charge, on both a pretax and after tax basis, in the second quarter of fiscal 2009, representing the remaining
carrying value of the goodwill as of December 31, 2008. The goodwill impairment analysis involved calculating the implied fair value of the Companys goodwill by allocating the fair value of the Companys single reporting unit to all
assets and liabilities other than goodwill (including both recognized and unrecognized intangible assets) and comparing the residual amount to the carrying value of goodwill. The non-cash goodwill impairment charges do not have any adverse effect on
the covenant calculations under the Companys debt agreements or the Companys overall compliance with the covenants of the Companys debt agreements.

6. RESTRUCTURING AND OTHER CHARGES

On July 1,
2008, the Company announced that it was streamlining its merchandise brands and store nameplates and was implementing cost reductions in order to simplify its business model, reduce overhead costs and improve its merchandise assortments. Pursuant to
the strategic restructuring, the Company rebranded its Mimi Maternity® merchandise brand under its A Pea in the
Pod® brand beginning with the Spring 2009 collection, which initially debuted in November 2008. The Company also
streamlined its store nameplates, by renaming its single-brand Mimi Maternity stores as A Pea in the Pod, and by renaming its multi-brand Mimi Maternity stores as Destination Maternity®. In connection with the strategic restructuring the Company also reduced its corporate and field management headcount, and during fiscal 2009 began to implement
actions to achieve further cost reductions. The objectives of the Companys restructuring and cost reduction program, are to improve and simplify critical processes, consolidate activities and infrastructure, and reduce its expense structure to
be more appropriately aligned with the generation of revenue. The Company incurred pretax expense of $1,557,000 from its restructuring and cost reduction actions in fiscal 2009, consisting of $1,072,000 for



F-15



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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



6. RESTRUCTURING AND OTHER CHARGES (Continued)



consulting services related to the Companys cost reduction initiatives, $357,000 for cash severance expense and severance-related benefits, and $128,000 of non-cash expense for accelerated
depreciation of existing store signs resulting from planned store signage changes. The Company incurred pretax expense of $936,000 from its restructuring in fiscal 2008, consisting of $691,000 for cash severance expense and severance-related
benefits, and $245,000 of non-cash expense for accelerated depreciation of existing store signs. As of September 30, 2009, the Company had a commitment under a consulting agreement for minimum fees and expenses of approximately $1,600,000, of which
approximately $600,000 was recorded in fiscal 2009, based upon services rendered in fiscal 2009. Remaining amounts to be charged to expense in fiscal 2010 related to the agreement, not to exceed $3,300,000, will be based upon services rendered and
performance results achieved.

A summary of the charges incurred and reserves recorded in connection with the restructuring
and cost reduction activities during fiscal 2009 and 2008 is as follows (in thousands):



|                                          |  |                                 |     |                              |   |       |                                 |   |                                               |       |  |   |     |  |   |      
|----------------------------------------- |  | ------------------------------- | --- | ---------------------------- | - | ----- | ------------------------------- | - | --------------------------------------------- | ----- |  | - | --- |  | - | -----
|                                          |  | BalanceAccruedSeptember 30,2008 |     | Year EndedSeptember 30, 2009 |   |       | BalanceAccruedSeptember 30,2009 |   | CumulativeChargesIncurred toSeptember 30,2009
|                                          |  | ChargesIncurred                 |     | Payments/Adjustments         |   |       |                                
|Severance and related benefits            |  | $                               | 224 |                              | $ | 357   |                                 | $ | (544                                          | )     |  | $ | 37  |  | $ | 1,048
|Accelerated depreciation of store signage |  |                                 |    |                              |   | 128   |                                 |   | (128                                          | ) (1) |  |   |    |  |   | 373  
|Other cost reduction initiatives          |  |                                 |    |                              |   | 1,072 |                                 |   | (434                                          | )     |  |   | 638 |  |   | 1,072
|                                          |  |                                 |     |                              |   |       |                                 |   |                                               |       |  |   |     |  |   |      
|Total                                     |  | $                               | 224 |                              | $ | 1,557 |                                 | $ | (1,106                                        | )     |  | $ | 675 |  | $ | 2,493
|                                          |  |                                 |     |                              |   |       |                                 |   |                                               |       |  |   |     |  |   |      
|                                          |  |                                 |     |                             
|                                          |  | BalanceAccruedSeptember 30,2007 |     | Year EndedSeptember 30, 2008 |   |       | BalanceAccruedSeptember 30,2008 |   |                                              
|                                          |  | ChargesIncurred                 |     | Payments/Adjustments         |   |       |                                
|Severance and related benefits            |  | $                               |    |                              | $ | 691   |                                 | $ | (467                                          | )     |  | $ | 224 |  |   |      
|Accelerated depreciation of store signage |  |                                 |    |                              |   | 245   |                                 |   | (245                                          | ) (1) |  |   |    |  |   |      
|                                          |  |                                 |     |                              |   |       |                                 |   |                                               |       |  |   |     |  |   |      
|Total                                     |  | $                               |    |                              | $ | 936   |                                 | $ | (712                                          | )     |  | $ | 224 |  |   |      
|                                          |  |                                 |     |                              |   |       |                                 |   |                                               |       |  |   |     |  |   |      





|(1) | Adjustment to reduce net book value of associated property, plant and equipment.
|--- | --------------------------------------------------------------------------------

In connection with the retirement of Dan Matthias, the Companys former Chief Executive Officer (Former CEO), the Company
recognized pretax expense of $2,525,000 in the fourth quarter of fiscal 2008, included in restructuring and other charges in the accompanying Consolidated Statements of Operations. The charge reflects benefit costs and payroll taxes
related to an amendment to the executives supplemental retirement agreement with the Company (see Notes 17 and 18). Subsequent to his retirement, the Former CEO continued to serve the Company as non-executive Chairman of the Board and is
available to the Company in a consulting capacity, for which the Former CEO is being paid an annual retainer of $200,000 through September 2012. In November 2009, the Former CEO entered into a letter agreement with the Company, which confirmed that
he would not seek reelection to the Board of Directors after the expiration of his current term in January 2010. The letter agreement does not change the terms of payment under the annual retainer for advisory services, however the Company will
incur a pretax charge of $583,000, primarily in the first quarter of fiscal 2010, representing the amount due for the remaining term of the advisory arrangement.



F-16



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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



6. RESTRUCTURING AND OTHER CHARGES (Continued)



In connection with the announced retirement of Rebecca Matthias, the Companys
President and Chief Creative Officer, at the end of fiscal 2010, the Company will incur a pretax charge of approximately $889,000 in the first quarter of fiscal 2010. The charge reflects benefit costs related to an amendment to the executives
supplemental retirement agreement with the Company (see Notes 17 and 18).

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

As of September 30, accrued expenses and other current liabilities were comprised of the following (in thousands):



|                                                |  |      |        |      |   |       
|----------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                |  | 2009 |        | 2008
|Employee compensation and benefits              |  | $    | 15,379 |      | $ | 10,596
|Income taxes payable                            |  |      | 512    |      |   |      
|Interest                                        |  |      | 749    |      |   | 1,012 
|Deferred rent                                   |  |      | 3,320  |      |   | 4,302 
|Sales taxes                                     |  |      | 2,646  |      |   | 2,627 
|Insurance                                       |  |      | 1,275  |      |   | 835   
|Accounting and legal                            |  |      | 1,114  |      |   | 1,464 
|Accrued store construction costs                |  |      | 1,226  |      |   | 760   
|Gift certificates and store credits             |  |      | 4,954  |      |   | 4,960 
|futuretrust® college savings program            |  |      | 1,226  |      |   | 1,811 
|Supplemental executive retirement plan benefits |  |      | 900    |      |   | 1,560 
|Other                                           |  |      | 8,709  |      |   | 7,879 
|                                                |  |      |        |      |   |       
|                                                |  | $    | 42,010 |      | $ | 37,806
|                                                |  |      |        |      |   |       

8. DEFERRED RENT AND OTHER NON-CURRENT LIABILITIES

As of September 30, deferred rent and other non-current liabilities were comprised of the following (in thousands):



|                                                                                 |  |      |        |   |      |   |        |  
|-------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                 |  | 2009 |        |   | 2008 |  
|Deferred rent                                                                    |  | $    | 24,753 |   |      | $ | 25,611 |  
|Less: current portion included in accrued expenses and other current liabilities |  |      | (3,320 | ) |      |   | (4,302 | )
|                                                                                 |  |      |        |   |      |   |        |  
|Non-current deferred rent                                                        |  |      | 21,433 |   |      |   | 21,309 |  
|Supplemental executive retirement plan benefits                                  |  |      | 4,426  |   |      |   | 4,323  |  
|Accrued state income taxes                                                       |  |      | 2,440  |   |      |   | 2,166  |  
|Interest rate swap                                                               |  |      | 2,025  |   |      |   | 1,404  |  
|Other                                                                            |  |      | 148    |   |      |   | 189    |  
|                                                                                 |  |      |        |   |      |   |        |  
|                                                                                 |  | $    | 30,472 |   |      | $ | 29,391 |  
|                                                                                 |  |      |        |   |      |   |        |  

9. LINE OF CREDIT

The Company has a $65,000,000 senior secured revolving credit facility (the Credit Facility). On March 13, 2007, in
connection with the refinancing of its senior long-term debt, the Company amended the Credit Facility in order to permit the refinancing transaction (see Note 10). This amendment of the Credit Facility also extended its maturity from
October 15, 2009 to March 13, 2012. Upon the Companys request and with the



F-17



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



9. LINE OF CREDIT (Continued)



consent of the lender, permitted borrowings under the Credit Facility may be increased up to an additional $20,000,000, in increments of $2,500,000, up to a maximum limit of $85,000,000. Proceeds
from advances under the Credit Facility, with certain restrictions, may be used to provide financing for working capital, letters of credit, capital expenditures, debt prepayments, dividends, share repurchases and other general corporate purposes.
The Company paid certain closing fees in connection with the negotiation and execution of the Credit Facility, as amended. The Company also pays an unused line fee under the Credit Facility.

The Credit Facility contains various affirmative and negative covenants and representations and warranties. There are no financial covenant
requirements under the Credit Facility unless Excess Availability (as defined in the agreement) falls below 10% of the Borrowing Base (as defined in the agreement) in which case the Company would be required to meet a certain minimum fixed charge
coverage ratio (which increases from 1.00x to 1.10x during the term of the Credit Facility). During all of fiscal 2009, 2008 and 2007, the Company exceeded the applicable excess availability requirements under the Credit Facility and was not subject
to any financial covenants. The Credit Facility is secured by a security interest in the Companys accounts receivable, inventory, real estate interests, letter of credit rights, cash, intangibles and certain other assets. The security interest
granted to the Credit Facility Lender is, in certain respects, subordinate to the security interest granted to the Term Lenders. The interest rate on outstanding borrowings is equal to, at the Companys election, either the lenders prime
rate or the lenders LIBOR rate plus the applicable margin. The applicable margin for LIBOR rate borrowings is variable, ranging from 1.00% to 1.50%, based upon the availability calculation made in accordance with the Credit Facility. The
applicable margin for LIBOR rate borrowings, based upon the availability calculation made in accordance with the agreement, has been the lowest available margin since the inception of the Credit Facility.

Any amounts outstanding under the Credit Facility may be accelerated and become due and payable immediately and all loan and letter of credit
commitments thereunder may be terminated upon an event of default and expiration of any applicable cure period. Events of default include: (i) nonpayment of obligations due under the Credit Facility, (ii) failure to perform any covenant or
agreement contained in the Credit Facility, (iii) material misrepresentations, (iv) failure to pay, or certain other defaults under, other material indebtedness of the Company, (v) certain bankruptcy or insolvency events, (vi) a
change of control, (vii) material uninsured losses, (viii) indictments of the Company or senior management in a material forfeiture action, and (ix) customary ERISA defaults, among others.

As of September 30, 2009, the Company had no outstanding borrowings under the Credit Facility and $11,545,000 in letters of credit, with
$35,984,000 of availability under the credit line based on the Companys Borrowing Base formula, compared to no outstanding borrowings and $10,605,000 in letters of credit, with $45,870,000 of availability under the credit line as of
September 30, 2008. Borrowings under the Credit Facility as of September 30, 2009 would have borne interest at a rate of between approximately 1.25% and 3.25% per annum. During fiscal 2009 and 2008, the Companys average level of
direct borrowings under the Credit Facility was $249,000 and $5,162,000, respectively.



F-18



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



10. LONG-TERM DEBT

The following table summarizes the Companys long-term debt as of September 30 (in thousands):



|                                                                                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                                                                                                           |  | 2009 |        |   | 2008 |  
|Senior secured Term Loan B, interest is variable (2.95% as of September 30, 2009; effective rate of 6.44% including effect
of interest rate swap), principal of $225 due quarterly through December 31, 2012 with the remaining balance due March 13, 2013 |  | $    | 54,750 |   |      | $ | 75,650 |  
|                                                                                                                                                                                                                                                           |  |     
|Industrial Revenue Bond, interest is variable (0.40% as of September 30, 2009), principal due annually until
September 1, 2020 (collateralized in full by a standby letter of credit)                                                                      |  |      | 2,356  |   |      |   | 2,516  |  
|                                                                                                                                                                                                                                                           |  |     
|Government Mortgage Notes:                                                                                                                                                                                                                                 |  |      |        |   |      |   |        |  
|Interest at 3.0%, principal due monthly until May 1, 2011 (collateralized by a second mortgage on certain property and
equipment at the Companys headquarters)                                                                                            |  |      | 269    |   |      |   | 424    |  
|                                                                                                                                                                                                                                                           |  |     
|Interest at 2.0%, principal due monthly until March 1, 2011 (collateralized by certain equipment at the Companys
headquarters)                                                                                                                            |  |      | 34     |   |      |   | 56     |  
|                                                                                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|                                                                                                                                                                                                                                                           |  |      | 57,409 |   |      |   | 78,646 |  
|                                                                                                                                                                                                                                                           |  |     
|Less: current portion                                                                                                                                                                                                                                      |  |      | (7,013 | ) |      |   | (1,860 | )
|                                                                                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|                                                                                                                                                                                                                                                           |  | $    | 50,396 |   |      | $ | 76,786 |  
|                                                                                                                                                                                                                                                           |  |      |        |   |      |   |        |  

Long-term debt maturities as of September 30, 2009 are as follows (in
thousands):



|                    |  |   |       
|------------------- |  | - | ------
|Fiscal Year         |  |  
|2010                |  | $ | 7,013 
|2011                |  |   | 1,196 
|2012                |  |   | 1,085 
|2013                |  |   | 46,475
|2014                |  |   | 200   
|2015 and thereafter |  |   | 1,440 
|                    |  |   |       
|                    |  | $ | 57,409
|                    |  |   |       

In November 2006, the Companys Board of Directors
authorized the repurchase of $25,000,000 principal amount of the Companys 111/4% senior notes (the Senior Notes). On December 8, 2006, the Company completed the repurchase of the authorized amount at 105.625% of the $25,000,000 principal amount, plus accrued and
unpaid interest. In connection with the December 2006 repurchase, the Company recorded a pretax charge totaling $2,093,000, representing the premium paid of $1,406,000 plus the write-off of unamortized debt issuance discount and deferred financing
costs of $687,000. On April 18, 2007, the Company completed the redemption of the remaining outstanding amount of its Senior Notes at 105.625% of the $90,000,000 principal amount, plus accrued and unpaid interest. In connection with the April
2007 redemption, the Company recorded a pretax charge totaling $7,330,000, representing the premium paid of $5,063,000 plus the write-off of unamortized debt issuance discount and deferred financing costs of $2,267,000.

On March 13, 2007, the Company entered into a Term Loan and Security Agreement (the Term Loan Agreement) for a senior
secured Term Loan B due March 13, 2013 (the Term Loan), the $90,000,000 proceeds of which were received on April 18, 2007 and were used to redeem the remaining $90,000,000 principal amount of the Senior Notes. The interest rate
on the Term Loan is equal to, at the Companys election, either (i) the prime rate



F-19



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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



10. LONG-TERM DEBT (Continued)



plus 1.00%, or (ii) a LIBOR rate plus the applicable margin. The applicable margin was initially fixed at 2.50% through and including the fiscal quarter ended September 30, 2007.
Thereafter, the applicable margin for LIBOR rate borrowings is either 2.25% or 2.50%, depending on the Companys Consolidated Leverage Ratio (as defined). Based upon the Companys applicable quarterly Consolidated Leverage Ratio during
fiscal 2008 and 2009, the applicable margin for LIBOR rate borrowings remained at 2.50% for fiscal 2008 and 2009. Based upon the Companys Consolidated Leverage Ratio as of September 30, 2009, the applicable margin for LIBOR rate
borrowings will be 2.25% for the second quarter of fiscal 2010. The Company is required to make minimum repayments of the principal amount of the Term Loan in quarterly installments of $225,000 each. The Company is also required to make an annual
principal repayment equal to 25% or 50% of Excess Cash Flow (as defined) in excess of $5,000,000 for each fiscal year, with the 25% or 50% factor depending on the Companys Consolidated Leverage Ratio. The required principal repayment for
fiscal 2009, which was calculated based on the 25% factor, is $5,765,000, is due in December 2009, and is reflected in current portion of long-term debt in the accompanying Consolidated Balance Sheet. The required principal repayment for
fiscal 2008, which was calculated based on the 50% factor, was $622,000 and was paid in December 2008. Future maturities of long-term debt for fiscal years 2011 and thereafter, included in the table above, do not include estimates of potential
required excess cash flow principal repayments, if any. Additionally, the Term Loan can be prepaid at the Companys option, in part or in whole, at any time without any prepayment premium or penalty. During fiscal 2009 and 2008, the Company
prepaid $20,000,000 (including the $622,000 prepayment required under the annual excess cash flow provision of the Term Loan) and $13,000,000, respectively, of the outstanding Term Loan. At September 30, 2009, the Companys indebtedness
under the Term Loan Agreement was $54,750,000.

The Term Loan is secured by a security interest in the Companys accounts
receivable, inventory, real estate interests, letter of credit rights, cash, intangibles and certain other assets. The security interest granted to the Term Lenders is, in certain respects, subordinate to the security interest granted to the Credit
Facility Lender. The Term Loan Agreement imposes certain restrictions on the Companys ability to, among other things, incur additional indebtedness, pay dividends, repurchase stock, and enter into other various types of transactions. The Term
Loan Agreement also contains quarterly financial covenants that require the Company to maintain a specified maximum permitted Consolidated Leverage Ratio and a specified minimum permitted Consolidated Interest Coverage Ratio (as defined). Since the
inception of the Term Loan, the Company has been in compliance with the financial covenants of its Term Loan Agreement. Any amounts outstanding under the Term Loan may be accelerated and become due and payable immediately upon an event of default
and expiration of any applicable cure period. Events of default include: (i) nonpayment of obligations due under the Term Loan, (ii) failure to perform any covenant or agreement contained in the Term Loan, (iii) material
misrepresentations, (iv) failure to pay, or certain other defaults under, other material indebtedness of the Company, (v) certain bankruptcy or insolvency events, (vi) a change of control, (vii) material uninsured losses,
(viii) indictments of the Company or senior management in a material forfeiture action, and (ix) customary ERISA defaults, among others.

In order to mitigate the Companys floating rate interest risk on the variable rate Term Loan, the Company entered into an interest rate swap agreement with the Agent bank for the Term Loan that
commenced on April 18, 2007, the date the $90,000,000 Term Loan proceeds were received, and expires on April 18, 2012. The interest rate swap agreement enables the Company to effectively convert an amount of the Term Loan equal to the
notional amount of the interest rate swap from a floating interest rate of LIBOR plus 2.50% (subject to reduction to LIBOR plus 2.25% if the Company achieves a specified leverage ratio), to a fixed interest rate of 7.50% (subject to reduction to
7.25% if the Company achieves a specified leverage ratio) for the significant majority of the Term Loan. The notional amount of the interest rate swap was $75,000,000 at the inception of the swap agreement and decreases over time to a notional
amount of $5,000,000 at the expiration date. The notional



F-20



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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



10. LONG-TERM DEBT (Continued)



amount of the swap was $42,500,000 as of September 30, 2009 and over the next eighteen months decreases as follows: to $35,000,000 starting October 19, 2009; to $27,500,000 starting
April 19, 2010; and to $20,000,000 starting October 18, 2010. As of September 30, 2009 and 2008, the estimated fair value of the interest rate swap was an unrealized loss of $(2,025,000) and $(1,404,000), respectively, which were
included in deferred rent and other non-current liabilities in the accompanying Consolidated Balance Sheets. During the years ended September 30, 2009, 2008 and 2007, pretax (loss) gain of $(1,413,000), $(720,000), and $121,000,
respectively, associated with the exchange of interest rate payments under the swap agreement were included as interest expense in the accompanying Consolidated Statements of Operations. The Company expects to reclassify $(1,433,000) of
pretax unrealized loss from accumulated other comprehensive loss into interest expense in fiscal 2010.

In connection with the
issuance of the Term Loan and the amendment of the Credit Facility (see Note 9), the Company incurred deferred financing costs of $1,086,000. These deferred financing costs are being amortized over the term of the related debt agreement and are
included in interest expense in the accompanying Consolidated Statements of Operations.

11. FAIR VALUE MEASUREMENTS

The Company adopted the accounting standard for fair value measurements on October 1, 2008. The accounting standard
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard establishes a framework for measuring fair value
focused on exit price and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements as follows:



| |  |  | Level 1Quoted market prices in active markets for identical assets or liabilities
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Level 2Observable market-based inputs or inputs that are corroborated by observable market data
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Level 3Unobservable inputs that are not corroborated by market data
| | - |  | --------------------------------------------------------------------

A portion of the Companys floating rate interest risk on variable rate long-term debt is mitigated through an interest rate swap
agreement. The Companys interest rate swap is required to be measured at fair value on a recurring basis. At September 30, 2009, the interest rate swap was a liability with a fair value of $2,025,000, included in deferred rent and
other non-current liabilities in the accompanying Consolidated Balance Sheet. The fair value of the interest rate swap was derived from a discounted cash flow analysis utilizing an interest rate yield curve that is readily available to the
public or can be derived from information available in publicly quoted markets, which the Company considers to be Level 2 inputs.

The fair value accounting standards provide a company with the option to report selected financial assets and liabilities on an instrument-by-instrument basis at fair value and requires such company to display the fair value of those assets
and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The Company adopted this reporting standard on October 1, 2008 and in accordance with implementation options, the Company chose not to
elect the fair value option for its financial assets and liabilities that had not been previously measured at fair value.

12. COMMON AND
PREFERRED STOCK

On July 29, 2008, the Company announced that its Board of Directors approved a program to repurchase
up to $7,000,000 of the Companys outstanding common stock. Under the program, the Company may repurchase



F-21



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



12. COMMON AND PREFERRED STOCK (Continued)



shares from time to time through solicited or unsolicited transactions in the open market or in negotiated or other transactions. The program will be in effect until the end of July 2010. There
were no repurchases of common stock under the program during fiscal 2009 and 2008.

The Company has authorization to issue up
to 1,656,381 shares of preferred stock, par value $0.01 with 300,000 shares authorized Series B Junior Participating Preferred Stock (Series B Preferred Stock). There was no preferred stock issued or outstanding as of
September 30, 2009 or 2008.

The Series B Preferred Stock can be purchased in units equal to one one-thousandth of a
share (the Series B Units) under the terms of the Rights Agreement (see Note 13). The holders of the Series B Units are entitled to receive dividends when and if declared on common stock. Series B Units are junior to the
common stock for both dividends and liquidations. Each Series B Unit votes as one share of common stock.

13. RIGHTS AGREEMENT

On October 9, 2005, the Company entered into an Amended and Restated Rights Agreement to renew its then existing
Rights Agreement (collectively referred to as the Rights Agreement) that would otherwise have expired on October 9, 2005. Under the Rights Agreement, the Company provided and will provide one Right (the Right) for each
share of Destination Maternity Corporation common stock now or hereafter outstanding. Under certain limited conditions, as defined in the Rights Agreement, each Right entitles the registered holder to purchase from the Company one Series B Unit
at $85 per share, subject to adjustment. The Rights expire on October 9, 2015 (the Final Expiration Date).

The Rights Agreement provides the independent directors of the Company with some discretion in determining when the Distribution Date (as defined in the Rights Agreement) shall occur and the date until which the Rights may be redeemed. In
addition, the Rights Agreement exempts from its operation any person that acquires, obtains the right to acquire, or otherwise obtains beneficial ownership of 15.0% or more of the then outstanding shares of the Companys common stock (an
Acquiring Person) without any intention of changing or influencing control of the Company provided that such person, as promptly as practicable, divests himself or itself of a sufficient number of shares of common stock so that such
person would no longer be an Acquiring Person.

The Rights are not exercisable until the Distribution Date, which will occur
upon the earlier of (i) ten business days following a public announcement that an Acquiring Person has acquired beneficial ownership of 15.0% or more of the Companys outstanding common stock, and ten business days following the
commencement of a tender offer or exchange offer that would result in a person or group owning 15.0% or more of the Companys outstanding common stock, or (ii) such later date as may be determined by action of a majority of the independent
directors. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on the redemption of the Rights.

The Rights can be mandatorily redeemed by action of a majority of the independent directors at any time prior to the earlier of the Final
Expiration Date and the Distribution Date for $0.01 per Right. Upon exercise and the occurrence of certain events, as defined in the Rights Agreement, each holder of a Right, except the Acquiring Person, will have the right to receive Series B
Units, or common stock of the acquiring company, in each case having a value equal to two times the exercise price of the Right.



F-22



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



14. EQUITY AWARD PLANS

The Company has three equity award plans: the Director Stock Option Plan (the Director Plan), the Amended and Restated 1987 Stock
Option Plan (the 1987 Plan) and the Amended and Restated 2005 Equity Incentive Plan (the 2005 Plan). The Director Plan expired on December 31, 2004 and no further awards may be granted under the Director Plan. The 1987
Plan expired on December 9, 2007, and no further awards may be issued under the 1987 Plan. Options issued under the Director Plan and the 1987 Plan will remain outstanding until they have expired, been exercised or have otherwise terminated. Up
to a total of 2,175,000 options were able to be issued under the 1987 Plan and the Director Plan (including up to a total of 200,000 options which were issuable under the Director Plan). In January 2006, the stockholders of the Company approved the
adoption of the 2005 Plan and, in January 2009, approved an amendment to increase the number of issuable shares. Under the 2005 Plan, employees, directors, consultants and other individuals who provide services to the Company, may be granted awards
in the form of options, stock appreciation rights, restricted stock or restricted stock units. Up to 700,000 shares of the Companys common stock may be issued in respect of awards under the 2005 Plan, with no more than 350,000 of those shares
permitted to be issued in respect of restricted stock or restricted stock units granted under the 2005 Plan. Awards of options to purchase the Companys common stock will have exercise prices as determined by the Compensation Committee of the
Board of Directors (the Compensation Committee), but such exercise prices may not be lower than the fair market value of the stock on the date of grant.

No options have been granted by the Company with an exercise price less than the fair market value of the Companys common stock on the date of grant for any of the periods presented. The majority of
the options issued under the plans vest ratably over a five-year period, although some options vest immediately, and options issued under the plans generally expire ten years from the date of grant. Restricted stock awards issued under the 2005 Plan
have restrictions that lapse ratably over periods ranging from one to five years. Each non-employee director of the Companys Board of Directors is granted 2,000 shares of restricted stock on an annual basis that will vest one year from the
date of grant. The Company issues new shares of common stock upon exercise of vested options. As of September 30, 2009, there were 259,213 shares of the Companys common stock available for grant under the 2005 Plan, with no more than
150,213 of those shares permitted to be issued in respect of restricted stock or restricted stock units granted under the 2005 Plan.

Stock option activity for all plans was as follows:



|                               |  |                    |   |  |                               |       |                               |     |                          |   |      
|------------------------------ |  | ------------------ | - |  | ----------------------------- | ----- | ----------------------------- | --- | ------------------------ | - | -----
|                               |  | OutstandingOptions |   |  | WeightedAverageExercise Price |       | WeightedAverageRemaining Life |     | AggregateIntrinsic Value
|                               |  | (in thousands)     |   |  |                               |       | (years)                       |     | (in thousands)          
|BalanceSeptember 30, 2008     |  | 923                |   |  | $                             | 13.34 |                               |     |                          |   |      
|Granted                        |  | 16                 |   |  |                               | 7.03  |                               |     |                          |   |      
|Exercised                      |  | (5                 | ) |  |                               | 11.92 |                               |     |                          |   |      
|Forfeited                      |  | (19                | ) |  |                               | 21.13 |                               |     |                          |   |      
|Expired                        |  | (69                | ) |  |                               | 12.68 |                               |     |                          |   |      
|                               |  |                    |   |  |                               |       |                               |     |                          |   |      
|BalanceSeptember 30, 2009     |  | 846                |   |  | $                             | 13.11 |                               | 5.5 |                          | $ | 4,923
|                               |  |                    |   |  |                               |       |                               |     |                          |   |      
|ExercisableSeptember 30, 2009 |  | 547                |   |  | $                             | 13.11 |                               | 4.2 |                          | $ | 3,323
|                               |  |                    |   |  |                               |       |                               |     |                          |   |      

As of September 30, 2009, $3,360,000 of total unrecognized compensation cost
related to non-vested awards is expected to be recognized over a weighted-average period of 1.54 years. During the years ended September 30, 2009, 2008 and 2007, the total intrinsic value of options exercised was $41,000, $469,000 and
$6,517,000, respectively. The total cash received from these option exercises was $55,000, $692,000 and $3,737,000, respectively, and the actual tax benefit realized for the tax deductions from these option exercises



F-23



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



14. EQUITY AWARD PLANS (Continued)



was $15,000, $175,000 and $2,541,000, respectively. During fiscal 2007, $1,422,000 of compensation cost recognized in fiscal 2006 and recorded as a liability was reclassified to additional
paid-in capital in conjunction with a modification of the original award.

On September 26, 2008, the Company granted to
an executive officer two stock options, each to purchase 100,000 shares of common stock, under the 2005 Plan (see Note 17). The first stock option vests ratably over a five-year period. The second stock option vests ratably over a five-year period
and is subject to the further condition that, on or before the fifth anniversary of the grant date, the closing price for a share of the Companys common stock shall have exceeded $30.00 for a period of 30 consecutive trading days.

The weighted average fair value of stock options granted during fiscal 2009 and 2008 was estimated to be $3.66 and $7.50 per option share,
respectively. No options were granted during fiscal 2007. The weighted average fair value of each option granted is calculated on the date of grant using the Black-Scholes option pricing model for most option grants and a Monte Carlo Simulation
option pricing model for the fiscal 2008 grant that included a market condition. Weighted-average assumptions for option grants were as follows:



|                          |  |                          |   |  |           |   |  |     
|------------------------- |  | ------------------------ | - |  | --------- | - |  | ----
|                          |  | Year Ended September 30,
|                          |  | 2009                     |   |  | 2008      |   |  | 2007
|Dividend yield            |  | none                     |   |  | none      |   |  |    
|Expected price volatility |  | 57                       | % |  | 57        | % |  |    
|Risk-free interest rates  |  | 2.2                      | % |  | 3.0       | % |  |    
|Expected lives            |  | 5.4 years                |   |  | 6.6 years |   |  |    

Expected volatility was determined using a weighted average of the historic
volatility of the Companys common stock as of the option grant date measured over a period equal to the expected life of the grant. Risk-free interest rates were based on the U. S. Treasury yield curve in effect at the date of the grant.
Expected lives were determined using a weighted average of the historic lives of previously issued grants of the Companys options.

The following table summarizes information about stock options outstanding as of September 30, 2009:



|                         |  |                     |  |                               |  |                               |       |                   |     |                               |   |      
|------------------------ |  | ------------------- |  | ----------------------------- |  | ----------------------------- | ----- | ----------------- | --- | ----------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable          
|Range of Exercise Prices |  | NumberOutstanding   |  | WeightedAverageRemaining Life |  | WeightedAverageExercise Price |       | NumberExercisable |     | WeightedAverageExercise Price
|                         |  | (in thousands)      |  |                               |  |                               |       | (in thousands)    |     |                              
|$  7.40 to $  9.00       |  | 53                  |  | 4.2                           |  | $                             | 7.59  |                   | 37  |                               | $ | 7.84 
|9.01 to   10.00          |  | 121                 |  | 1.0                           |  |                               | 9.50  |                   | 121 |                               |   | 9.50 
|10.01 to   12.00         |  | 140                 |  | 5.8                           |  |                               | 10.05 |                   | 86  |                               |   | 10.07
|12.01 to   13.00         |  | 224                 |  | 5.3                           |  |                               | 12.85 |                   | 190 |                               |   | 12.85
|13.01 to   14.00         |  | 215                 |  | 8.7                           |  |                               | 13.74 |                   | 35  |                               |   | 13.73
|14.01 to   23.00         |  | 25                  |  | 5.6                           |  |                               | 15.99 |                   | 18  |                               |   | 15.72
|23.01 to   24.00         |  | 24                  |  | 4.1                           |  |                               | 23.62 |                   | 24  |                               |   | 23.62
|24.01 to   37.05         |  | 44                  |  | 5.0                           |  |                               | 30.19 |                   | 36  |                               |   | 30.09
|                         |  |                     |  |                               |  |                               |       |                   |     |                               |   |      
|$  7.40 to $37.05        |  | 846                 |  | 5.5                           |  | $                             | 13.11 |                   | 547 |                               | $ | 13.11
|                         |  |                     |  |                               |  |                               |       |                   |     |                               |   |      



F-24



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



14. EQUITY AWARD PLANS (Continued)



Restricted stock activity for the 2005 Plan was as follows:



|                             |  |                   |   |  |                                     |      
|---------------------------- |  | ----------------- | - |  | ----------------------------------- | -----
|                             |  | OutstandingShares |   |  | WeightedAverageGrant DateFair Value
|                             |  | (in thousands)    |   |  |                                    
|NonvestedSeptember 30, 2008 |  | 117               |   |  | $                                   | 32.98
|Granted                      |  | 44                |   |  |                                     | 8.19 
|Vested                       |  | (53               | ) |  |                                     | 35.76
|Forfeited                    |  | (6                | ) |  |                                     | 24.71
|                             |  |                   |   |  |                                     |      
|NonvestedSeptember 30, 2009 |  | 102               |   |  | $                                   | 21.36
|                             |  |                   |   |  |                                     |      

15. INCOME TAXES

For the years ended September 30, the income tax provision (benefit) was comprised of the following (in thousands):



|                             |  |      |       |      |   |        |      |  |   |        |  
|---------------------------- |  | ---- | ----- | ---- | - | ------ | ---- |  | - | ------ | -
|                             |  | 2009 |       | 2008 |   |        | 2007 | 
|Current provision            |  | $    | 5,262 |      | $ | 359    |      |  | $ | 2,898  |  
|Deferred provision (benefit) |  |      | 1,318 |      |   | (969   | )    |  |   | (3,067 | )
|                             |  |      |       |      |   |        |      |  |   |        |  
|                             |  | $    | 6,580 |      | $ | (610   | )    |  | $ | (169   | )
|                             |  |      |       |      |   |        |      |  |   |        |  
|Federal provision (benefit)  |  | $    | 5,416 |      | $ | (1,062 | )    |  | $ | (275   | )
|State provision              |  |      | 1,164 |      |   | 452    |      |  |   | 106    |  
|                             |  |      |       |      |   |        |      |  |   |        |  
|                             |  | $    | 6,580 |      | $ | (610   | )    |  | $ | (169   | )
|                             |  |      |       |      |   |        |      |  |   |        |  

The reconciliations of the statutory federal tax rate to the Companys effective
income tax rates for the years ended September 30 were as follows:



|                                                                     |  |       |    |  |       |    |  |       |   
|-------------------------------------------------------------------- |  | ----- | -- |  | ----- | -- |  | ----- | --
|                                                                     |  | 2009  |    |  | 2008  |    |  | 2007  |   
|Statutory federal tax rate                                           |  | (35.0 | )% |  | (34.0 | )% |  | (34.0 | )%
|State tax rate, net of federal benefit                               |  | 1.7   |    |  | 7.9   |    |  | 15.9  |   
|Impact of goodwill impairment                                        |  | 51.7  |    |  |      |    |  |      |   
|Provision for uncertain income tax positions, net of federal benefit |  | 0.7   |    |  | 6.3   |    |  |      |   
|Other                                                                |  | 0.2   |    |  | (10.7 | )  |  | (12.0 | ) 
|                                                                     |  |       |    |  |       |    |  |       |   
|                                                                     |  | 19.3  | %  |  | (30.5 | )% |  | (30.1 | )%
|                                                                     |  |       |    |  |       |    |  |       |   



F-25



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



15. INCOME TAXES (Continued)



The deferred tax effects of temporary differences giving rise to the Companys net
deferred tax assets as of September 30 were as follows (in thousands):



|                                 |  |      |        |   |      |   |        |  
|-------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                 |  | 2009 |        |   | 2008 |  
|Deferred tax assets:             |  |      |        |   |      |   |        |  
|Net operating loss carryforwards |  | $    | 304    |   |      | $ | 2,076  |  
|Tax credit carryforwards         |  |      |       |   |      |   | 472    |  
|Depreciation                     |  |      | 3,045  |   |      |   | 3,012  |  
|Deferred rent                    |  |      | 9,395  |   |      |   | 9,558  |  
|Inventory reserves               |  |      | 708    |   |      |   | 903    |  
|Employee benefit accruals        |  |      | 2,116  |   |      |   | 1,750  |  
|Pension benefits                 |  |      | 2,051  |   |      |   | 2,196  |  
|Stock-based compensation         |  |      | 1,250  |   |      |   | 1,442  |  
|Other accruals                   |  |      | 1,745  |   |      |   | 1,243  |  
|Other                            |  |      | 1,673  |   |      |   | 1,736  |  
|                                 |  |      |        |   |      |   |        |  
|                                 |  |      | 22,287 |   |      |   | 24,388 |  
|Deferred tax liability:          |  |      |        |   |      |   |        |  
|Prepaid expenses                 |  |      | (839   | ) |      |   | (823   | )
|                                 |  |      |        |   |      |   |        |  
|                                 |  | $    | 21,448 |   |      | $ | 23,565 |  
|                                 |  |      |        |   |      |   |        |  

As of September 30, 2009, the Company has net operating loss carryforwards for
federal tax purposes of $870,000, which were acquired in a fiscal 2002 business acquisition and are subject to annual deduction limitations due to the change in ownership. The net operating loss carryforwards begin to expire in 2021. The Company
does not expect the limitations on the acquired net operating loss carryforwards to reduce its ability to ultimately use such carryforwards. The tax benefit of the acquired net operating loss carryforwards was recorded under the purchase method of
accounting.

No valuation allowance has been provided for the net deferred tax assets. Based on the Companys historical
and projected levels of taxable income, management believes it is more likely than not that the Company will realize the net deferred tax assets as of September 30, 2009. There can be no assurance that the Company will generate taxable earnings
or any specific level of earnings in the future.

The Company does not record state tax benefits associated with temporary
differences for certain states in which it is operating, given the continued historical uncertainty related to realizing such state tax benefits. Had the state tax benefits been reflected for these states, the deferred tax assets (excluding net
operating loss carryforwards) as of September 30, 2009 would be approximately $830,000 higher. In June 2006, the FASB issued an accounting standard for uncertain income tax positions that clarifies the accounting for income taxes by prescribing
the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements and also contains guidance on the measurement of uncertain tax positions. The Company adopted the provisions of the
accounting standard for uncertain income tax positions effective as of October 1, 2007. In accordance with the standard, during the first quarter of fiscal 2008, the Company recorded a cumulative effect adjustment of $74,000, decreasing
the liability for unrecognized tax benefits and increasing the September 30, 2007 balance of retained earnings.



F-26



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



15. INCOME TAXES (Continued)



A reconciliation of gross unrecognized tax benefits follows (in thousands):



|                                         |  |   |       |  
|---------------------------------------- |  | - | ----- | -
|BalanceOctober 1, 2007                  |  | $ | 2,315 |  
|Additions for current year tax positions |  |   | 158   |  
|Additions for prior year tax positions   |  |   | 126   |  
|Reductions of prior year tax positions   |  |   | (98   | )
|Settlements                              |  |   | (222  | )
|                                         |  |   |       |  
|BalanceSeptember 30, 2008               |  |   | 2,279 |  
|Additions for current year tax positions |  |   | 257   |  
|Additions for prior year tax positions   |  |   | 143   |  
|Reductions of prior year tax positions   |  |   | (79   | )
|                                         |  |   |       |  
|BalanceSeptember 30, 2009               |  | $ | 2,600 |  
|                                         |  |   |       |  

As of September 30, 2009, gross unrecognized tax benefits included accrued
interest and penalties of $1,214,000. During fiscal 2009 and 2008, interest and penalties of $188,000 and $145,000, respectively, related to unrecognized tax benefits were included in income tax provision (benefit). If recognized, the
portion of the liability for unrecognized tax benefits that would impact the Companys effective tax rate was $1,831,000, net of federal tax benefit.

During the twelve months subsequent to September 30, 2009, it is reasonably possible that the gross unrecognized tax benefits could potentially increase by approximately $131,000 (of which
approximately $80,000 would affect the effective tax rate, net of federal benefit) for federal and state tax positions related to the effect of interest on unrecognized tax benefits and limitations on certain potential tax credits, partially offset
by the effect of expiring statutes of limitations and settlements.

The Companys U.S. Federal income tax returns for the
years ended September 30, 2008 and thereafter remain subject to examination by the U.S. Internal Revenue Service. The Company also files returns in Canada and numerous state jurisdictions, which have varying statutes of
limitations. Generally, Canadian tax returns for years ended September 30, 2004 and thereafter and state tax returns for years ended September 30, 2005 and thereafter, depending upon the jurisdiction, remain subject to
examination. However, the statutes of limitations on certain of the Companys state returns remain open for years prior to fiscal 2005.

16. COMMITMENTS AND CONTINGENCIES

The Company leases its retail facilities and certain equipment under various
non-cancelable operating leases. Certain of these leases have renewal options. Total rent expense (including related occupancy costs, such as insurance, maintenance and taxes, paid to landlords) under operating leases amounted to $72,687,000,
$74,198,000 and $73,012,000 in fiscal 2009, 2008 and 2007, respectively. Such amounts include contingent rentals based upon a percentage of sales totaling $1,146,000, $1,232,000 and $1,022,000 in fiscal 2009, 2008 and 2007, respectively.



F-27



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



16. COMMITMENTS AND CONTINGENCIES (Continued)



Store operating leases and warehouse leases generally provide for payment of direct
operating costs in addition to rent. Future annual minimum operating lease payments, excluding such direct operating costs, as well as leases for equipment rental as of September 30, 2009 are as follows (in thousands):



|                    |  |   |        
|------------------- |  | - | -------
|Fiscal Year         |  |  
|2010                |  | $ | 52,689 
|2011                |  |   | 47,161 
|2012                |  |   | 39,789 
|2013                |  |   | 32,593 
|2014                |  |   | 22,218 
|2015 and thereafter |  |   | 37,736 
|                    |  |   |        
|                    |  | $ | 232,186
|                    |  |   |        

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

17. EMPLOYMENT
AGREEMENTS

On September 26, 2008, the Board of Directors appointed Edward M. Krell, the Companys Chief
Operating Officer & Chief Financial Officer at that time, to serve as Chief Executive Officer (CEO) of the Company, effective as of October 1, 2008, replacing Dan Matthias. In connection with Mr. Krells
promotion to CEO, the Company entered into an amendment to his May 15, 2007 employment agreement. The amendment provided for an increase in Mr. Krells annual base salary from $531,000 to $650,000. The Company previously entered into
employment agreements with Mr. Krell dated April 26, 2005, when Mr. Krell was the Companys Executive Vice PresidentChief Financial Officer, and May 15, 2007, in connection with Mr. Krells promotion to Chief
Operating Officer & Chief Financial Officer. Base compensation for Mr. Krell was $650,000, $531,000 and $471,000 for fiscal 2009, 2008 and 2007, respectively. Mr. Krells base compensation is subject to potential increase in
the future by the Company in an amount to be determined by the Compensation Committee at its discretion. The agreement also provides for salary continuation and severance payments should the employment of Mr. Krell be terminated under specified
conditions, as defined therein. Additionally, Mr. Krell is eligible for an annual cash bonus based on performance, as specified by the Compensation Committee. The agreement continues in effect until terminated by either the Company or
Mr. Krell in accordance with the termination provisions of the agreement. In connection with Mr. Krells appointment as CEO, the Company granted to Mr. Krell two stock options, each to purchase 100,000 shares of common stock,
under the Companys 2005 Equity Incentive Plan (see Note 14).

During fiscal 2008 and 2007, the Company had an employment
agreement with Dan W. Matthias, the Companys Chairman of the Board and Former CEO. Base compensation for Mr. Matthias was $542,000 and $532,000 for fiscal 2008 and 2007, respectively. Effective September 30, 2008,
Mr. Matthias retired as CEO. In connection with Mr. Matthias retirement as CEO, the Company entered into a Transition Agreement (the D. Matthias Transition Agreement) with Mr. Matthias. The D. Matthias Transition
Agreement, which has a term of four years expiring September 30, 2012, provides that Mr. Matthias will make himself available to the Company



F-28



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



17. EMPLOYMENT AGREEMENTS (Continued)



for strategic planning, corporate development and other matters as requested by the Board of Directors or the Companys CEO. Subsequent to his retirement, Mr. Matthias continued to
serve the Company as non-executive Chairman of the Board and is available to the Company as stipulated in the D. Matthias Transition Agreement. In consideration of Mr. Matthias advisory and board services (and in lieu of all other
director compensation), the Company will pay Mr. Matthias an annual retainer of $200,000 and continue certain insurance and fringe benefits during the term of the D. Matthias Transition Agreement. In November 2009, Mr. Matthias entered
into a letter agreement with the Company, which confirmed that he would not seek reelection to the Board of Directors after the expiration of his current term in January 2010. The letter agreement does not change the terms of payment under the
annual retainer for advisory services, however the Company will incur a pretax charge of $583,000 primarily in the first quarter of fiscal 2010, representing the amount due for the remaining term of the advisory arrangement. Payment of the retainer
and continuation of the benefits is subject to certain specified conditions, as defined in the D. Matthias Transition Agreement. The D. Matthias Transition Agreement also provides for the restrictive covenants set forth in Mr. Matthias
employment agreement to continue in effect until two years after Mr. Matthias ceases to serve the Company in any capacity (including service as a Board member or advisor).

During fiscal 2009, 2008 and 2007, the Company had an employment agreement with Rebecca C. Matthias, the Companys President and Chief
Creative Officer. Base compensation for Ms. Matthias was $572,000, $542,000 and $532,000, for fiscal 2009, 2008 and 2007, respectively. On November 6, 2009, the Company announced the retirement of Ms. Matthias at the end of
fiscal 2010. In connection with Ms. Matthias retirement, the Company entered into a Transition Agreement (the R. Matthias Transition Agreement) with Ms. Matthias on November 6, 2009 (the Effective
Date). The R. Matthias Transition Agreement, which expires on September 30, 2012, provides that Ms. Matthias will be a full-time employee of the Company until June 15, 2010 (the Transition Date). Following the
Transition Date, Ms. Matthias agrees to serve the Company as a part-time employee until September 30, 2010 (the Termination Date), at which point Ms. Matthias employment with the Company will terminate. Following the
Termination Date and through September 30, 2012, Ms. Matthias agrees to make herself available to the Company on a limited basis for strategic planning, merchandising, public relations, publicity and other matters as requested by the
Companys CEO. The R. Matthias Transition Agreement also provides for the restrictive covenants set forth in Ms. Matthias employment agreement to continue in effect until two years after Ms. Matthias ceases to serve the Company
in any capacity (including service as a Board member or advisor).

In consideration of the services described above, the
Company will pay Ms. Matthias: (i) a base salary at an annualized rate of $572,000 from the Effective Date through the Transition Date; (ii) a base salary at an annualized rate of $114,000 from the Transition Date to the Termination
Date, and (iii) certain fringe benefits, which will continue through the Termination Date. The R. Matthias Transition Agreement also provides that Ms. Matthias will be eligible for a pro-rata cash bonus based on performance, as specified
by the Compensation Committee, for fiscal 2010.

Effective January 24, 2008, the Company entered into a letter agreement
and an employment agreement with Lisa Hendrickson in connection with Ms. Hendricksons promotion to Chief Merchandising Officer. The letter agreement provided that Ms. Hendricksons annual base salary for the remainder of
fiscal 2008 would be $425,000. Ms. Hendricksons base compensation is subject to potential increase in the future by the Company in an amount to be determined by the Compensation Committee at its discretion. Base compensation for
Ms. Hendrickson was $434,000 for fiscal 2009. Additionally, Ms. Hendrickson is eligible for an annual cash bonus based on performance, as specified by the Compensation Committee. The agreements continue in effect until terminated by either
the Company or Ms. Hendrickson.



F-29



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



17. EMPLOYMENT AGREEMENTS (Continued)



Effective July 23, 2008, the Company entered into an employment agreement with Judd
P. Tirnauer, in connection with Mr. Tirnauers promotion to Senior Vice President & Chief Financial Officer. The agreement provided that Mr. Tirnauers annual base salary for the remainder of fiscal 2008 would be
$325,000. Mr. Tirnauers base compensation is subject to potential increase in the future by the Company in an amount to be determined by the Compensation Committee at its discretion. Base compensation for Mr. Tirnauer was $325,000
for fiscal 2009. The agreement also provides for salary continuation and severance payments should employment of the executive be terminated under specified conditions, as defined therein. Additionally, Mr. Tirnauer is eligible for an annual
cash bonus based on performance, as specified by the Compensation Committee. The agreement continues in effect until terminated by either the Company or the executive in accordance with the termination provisions of the agreement.

18. RETIREMENT PLANS

On
March 2, 2007, the Company entered into Supplemental Executive Retirement Agreements with Mr. and Ms. Matthias (the SERP Agreement(s)). The purpose of the SERP Agreements is to provide the executives with supplemental
pension benefits following their cessation of employment.

The Companys D. Matthias Transition Agreement, entered into in
September 2008 in connection with Mr. Matthias retirement as CEO, amended his SERP Agreement to provide for full vesting of the benefits payable to Mr. Matthias and to increase the total of the amounts payable under the SERP
Agreement to approximately 10% more than the amount that would have been payable on September 30, 2012 (the date the SERP Agreement had otherwise been expected to fully vest). The SERP Agreement benefits, totaling $3,960,000, will be paid to
Mr. Matthias in installments, which commenced on April 1, 2009, with the final installment due on October 1, 2012. On April 1, 2009, the Company paid Mr. Matthias $960,000 representing the first installment of the SERP
benefits. On July 1, 2009, the Company paid Mr. Matthias $600,000 representing the second installment of the SERP benefits.

The amount of the benefit payable under Ms. Matthias SERP Agreement is the actuarial present value of a single life annuity equal to 60% of Ms. Matthias deemed final pay,
commencing upon cessation of employment. For this purpose, deemed final pay means Ms. Matthias base salary on March 2, 2007, increased by 3% for each new fiscal year that begins before Ms. Matthias cessation of
employment. This benefit vested 331/3% on
March 2, 2007. On each September 30 thereafter for fiscal 2007, 2008 and 2009 the benefit vested 15% annually based on Ms. Matthias continuous full-time service provided to the Company during each entire fiscal year. The
Companys R. Matthias Transition Agreement, entered into on November 6, 2009 in connection with Ms. Matthias scheduled retirement, amended her SERP Agreement to provide that she will be credited with having served on a full-time
basis during the 2010 fiscal year and the SERP will vest an additional 15% effective on the Transition Date, to a cumulative total vested percentage of 931/3%. Pursuant to the R. Matthias Transition Agreement,
Ms. Matthias will receive a lump sum payment of the SERP Agreement benefits of approximately $4,166,000 on December 16, 2010. Notwithstanding the foregoing, the benefit is subject to full acceleration if, following a change in control,
Ms. Matthias employment ceases due to a termination without cause or a resignation with good reason.



F-30



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



18. RETIREMENT PLANS (Continued)



The Company is accounting for the SERP Agreements in accordance with the accounting
requirements for defined benefit pension and other post-retirement plans. Changes in the benefit obligation under the SERP Agreements as of September 30 were as follows (in thousands):



|                                                                                 |  |      |        |   |      |   |        |  
|-------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                 |  | 2009 |        |   | 2008 |  
|Benefit obligation at beginning of year                                          |  | $    | 5,883  |   |      | $ | 2,957  |  
|Service cost                                                                     |  |      | 573    |   |      |   | 973    |  
|Interest cost                                                                    |  |      | 316    |   |      |   | 178    |  
|Change in discount rate                                                          |  |      | 114    |   |      |   |       |  
|Plan amendment and curtailment                                                   |  |      |       |   |      |   | 1,775  |  
|Benefit payments                                                                 |  |      | (1,560 | ) |      |   |       |  
|                                                                                 |  |      |        |   |      |   |        |  
|Benefit obligation at end of year                                                |  |      | 5,326  |   |      |   | 5,883  |  
|Less: current portion included in accrued expenses and other current liabilities |  |      | (900   | ) |      |   | (1,560 | )
|                                                                                 |  |      |        |   |      |   |        |  
|Non-current benefit obligation at end of year                                    |  | $    | 4,426  |   |      | $ | 4,323  |  
|                                                                                 |  |      |        |   |      |   |        |  

The non-current benefit obligation at end of year was included in deferred rent
and other non-current liabilities in the accompanying Consolidated Balance Sheets. Estimated benefits expected to be paid during the next four fiscal years are as follows (in thousands):



|            |  |   |      
|----------- |  | - | -----
|Fiscal Year |  |  
|2010        |  | $ | 900  
|2011        |  |   | 4,916
|2012        |  |   | 600  
|2013        |  |   | 150  

The components of net periodic pension cost on a pretax basis were as follows for the
years ended September 30 (in thousands):



|                                        |  |      |       |      |   |       |  |   |      
|--------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                        |  | 2009 |       | 2008 |   | 2007 
|Service cost                            |  | $    | 573   |      | $ | 973   |  | $ | 918  
|Interest cost                           |  |      | 316   |      |   | 178   |  |   | 68   
|Amortization of prior service cost      |  |      | 196   |      |   | 353   |  |   | 206  
|Amortization of change in discount rate |  |      | 114   |      |   |      |  |   |     
|Plan amendment and curtailment          |  |      |      |      |   | 2,402 |  |   |     
|                                        |  |      |       |      |   |       |  |   |      
|Total net periodic benefit cost         |  | $    | 1,199 |      | $ | 3,906 |  | $ | 1,192
|                                        |  |      |       |      |   |       |  |   |      



F-31



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



18. RETIREMENT PLANS (Continued)



The following weighted-average assumptions were used to determine net periodic benefit
cost for the years ended September 30, 2009, 2008, and 2007: discount rate  5.0% for fiscal 2009 and 6.0% for fiscal 2008 and 2007; compensation increase rate  3.0%.

Amounts recorded in accumulated other comprehensive loss as of September 30 were as follows (in thousands):



|                                                                 |  |      |      |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                 |  | 2009 |      |   | 2008 |   |        | 2007 | 
|Unrecognized prior service costbeginning of year                |  | $    | (785 | ) |      | $ | (1,765 | )    |  | $ |       |  
|Initial prior service cost                                       |  |      |     |   |      |   |       |      |  |   | (1,971 | )
|Amortization of prior service cost                               |  |      | 196  |   |      |   | 353    |      |  |   | 206    |  
|Prior service cost recognized for plan amendment and curtailment |  |      |     |   |      |   | 627    |      |  |   |       |  
|                                                                 |  |      |      |   |      |   |        |      |  |   |        |  
|Unrecognized prior service costend of year                      |  |      | (589 | ) |      |   | (785   | )    |  |   | (1,765 | )
|Deferred income tax benefit                                      |  |      | 220  |   |      |   | 293    |      |  |   | 689    |  
|                                                                 |  |      |      |   |      |   |        |      |  |   |        |  
|Unrecognized prior service cost, net of taxend of year          |  | $    | (369 | ) |      | $ | (492   | )    |  | $ | (1,076 | )
|                                                                 |  |      |      |   |      |   |        |      |  |   |        |  

In connection with the amendment to Ms. Matthias SERP Agreement pursuant
to the R. Matthias Transition Agreement, the Company expects to fully amortize the $589,000 of prior service cost on a pretax basis from accumulated other comprehensive loss into net periodic pension cost in fiscal 2010.

On April 30, 2007, the Company made an initial required contribution of $2,662,000 to a Grantor Trust, which was established for the
purpose of accumulating assets in anticipation of the Companys payment obligations under the SERP Agreements. On November 27, 2007, the Company made an additional required contribution to the Grantor Trust of $1,160,000. In order to
impact positively the Companys ability to comply with the Consolidated Leverage Ratio covenant of its Term Loan Agreement at March 31, 2008, with the consent of the SERP executives, the Company withdrew $1,000,000 from the Grantor Trust
on March 28, 2008. The withdrawn funds were used to repay indebtedness under the Credit Facility.

On May 20, 2008,
the Company entered into (i) a Letter Agreement with the SERP executives and the trustee for the Grantor Trust (the Trustee), and (ii) an amendment to the Grantor Trust agreement with the Trustee (collectively the
Agreements). The Agreements amended the SERP Agreements and the Grantor Trust agreement to provide for the Company to deliver an irrevocable standby letter of credit to the Trustee in an amount equal to the Companys then
current funding obligation under the SERP Agreements, which was $3,885,000. As provided in the Agreements, in the third quarter of fiscal 2008 the Company received a distribution of the remaining assets held in the Grantor Trust, amounting to
$2,844,000.

The amendments effected by the May 20, 2008 Agreements also allow for, at the Companys option, the issuance
from time to time of irrevocable standby letters of credit, or the increase of size of an irrevocable standby letter of credit already held by the Trustee, in lieu of any deposit to the Grantor Trust otherwise required in the future. In
addition, the Agreements permit the Company, from time to time at its sole discretion, to reduce the size of any irrevocable standby letter of credit issued to the Trustee, so long as the Company simultaneously funds the Grantor Trust with an amount
of cash equal to the amount of the reduction of the letter of credit. In October 2008, the Company increased the irrevocable standby letter of credit issued to the Trustee to a total of $6,779,000, in lieu of deposits to the Grantor Trust, in
connection with the full vesting of Mr. Matthias benefits under the D. Matthias Transition Agreement and the annual increase in vesting of Ms. Matthias benefits. In April and July 2009, the Company reduced the irrevocable
standby letter of credit by $960,000 and $600,000, respectively, to a total of $5,219,000, in connection with the April and July 2009 benefit payments made to



F-32



---

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



18. RETIREMENT PLANS (Continued)



Mr. Matthias. In November 2009, the Company increased the irrevocable standby letter of credit by $718,000 to a total of $5,937,000, in connection with the annual increase in vesting of
Ms. Matthias benefits.

19. EMPLOYEE BENEFIT PLANS

The Company has a 401(k) savings plan for all employees who have at least six months of service and are at least 18 years of age.
Employees can contribute up to 20% of their annual salary. Employees who meet certain criteria are eligible for a matching contribution from the Company based on a sliding scale. Company matches are made in the first quarter of the succeeding
calendar year. Company matches vest over a period of approximately six years from each employees commencement of employment with the Company. Company matching contributions totaling $162,000, $175,000 and $158,000, were made in fiscal 2009,
2008 and 2007, respectively. In addition, the Company may make discretionary contributions to the plan, which vest over a period of approximately six years from each employees commencement of employment with the Company. The Company has not
made any discretionary contributions.

20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial results for the years ended September 30, 2009 and 2008 were as follows (in thousands, except per share amounts):



|                                    |  |               |         |   |          |   |          |  |   |          |       |  |   |         |      
|----------------------------------- |  | ------------- | ------- | - | -------- | - | -------- |  | - | -------- | ----- |  | - | ------- | -----
|                                    |  | Quarter Ended |        
|Fiscal 2009                         |  | 09/30/09      |         |   | 06/30/09 |   | 03/31/09 |  |   | 12/31/08 |      
|Net sales                           |  | $             | 123,828 |   |          | $ | 142,529  |  | $ | 130,082  |       |  | $ | 134,812 |      
|Gross profit                        |  |               | 67,537  |   |          |   | 77,528   |  |   | 69,855   |       |  |   | 67,855  |      
|Net income (loss)                   |  |               | 1,365   |   |          |   | 6,783    |  |   | (1,915   | ) (1) |  |   | (46,915 | ) (2)
|Net income (loss) per shareBasic   |  |               | 0.23    |   |          |   | 1.13     |  |   | (0.32    | ) (1) |  |   | (7.86   | ) (2)
|Net income (loss) per shareDiluted |  |               | 0.22    |   |          |   | 1.12     |  |   | (0.32    | ) (1) |  |   | (7.86   | ) (2)
|                                    | 
|                                    |  | Quarter Ended |        
|Fiscal 2008                         |  | 09/30/08      |         |   | 06/30/08 |   | 03/31/08 |  |   | 12/31/07 |      
|Net sales                           |  | $             | 130,497 |   |          | $ | 152,224  |  | $ | 139,005  |       |  | $ | 142,876 |      
|Gross profit                        |  |               | 63,191  |   |          |   | 78,202   |  |   | 69,686   |       |  |   | 71,962  |      
|Net income (loss)                   |  |               | (4,784  | ) |          |   | 4,137    |  |   | (390     | )     |  |   | (352    | )    
|Net income (loss) per shareBasic   |  |               | (0.80   | ) |          |   | 0.69     |  |   | (0.07    | )     |  |   | (0.06   | )    
|Net income (loss) per shareDiluted |  |               | (0.80   | ) |          |   | 0.68     |  |   | (0.07    | )     |  |   | (0.06   | )    





|(1) | Includes goodwill impairment expense of $3,389,000, or $(0.57) per share (see Note 5).
|--- | --------------------------------------------------------------------------------------



|(2) | Includes goodwill impairment expense of $47,000,000, or $(7.88) per share (see Note 5).
|--- | ---------------------------------------------------------------------------------------

The Companys business, like that of other retailers, is seasonal. The Companys quarterly net sales have historically been highest
in its third fiscal quarter, corresponding to the Spring selling season, followed by its first fiscal quarter, corresponding to the Fall/holiday selling season. Given the historically higher sales level in its third fiscal quarter and the relatively
fixed nature of most of the Companys operating expenses and interest expense, the Company has typically generated a very significant percentage of its full year operating income and net income during its third fiscal quarter.



F-33



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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



21. SEGMENT AND ENTERPRISE WIDE DISCLOSURES

Operating Segment.For purposes of the disclosure requirements for segments of a business
enterprise, the Company has determined 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 of products for sale, the
substantial portion of its products are initially distributed through the same distribution facilities, many of the Companys products are manufactured at common contract manufacturer production facilities, the Companys products are
marketed through a common marketing department, and these products are sold to a similar customer base, consisting of expectant mothers.

Geographic Information.Information concerning the Companys operations by geographic area is as follows (in thousands):



|                                    |  |                          |         |      |   |         |  |   |        
|----------------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | -------
|                                    |  | Year Ended September 30,
|                                    |  | 2009                     |         | 2008 |   | 2007   
|Net Sales to Unaffiliated Customers |  |                          |         |      |   |         |  |   |        
|United States                       |  | $                        | 510,669 |      | $ | 543,339 |  | $ | 562,519
|Foreign                             |  |                          | 20,582  |      |   | 21,263  |  |   | 18,852 



|                       |  |                   |        |                   |   |       
|---------------------- |  | ----------------- | ------ | ----------------- | - | ------
|                       |  | September 30,2009 |        | September 30,2008
|                       | 
|Long-Lived Assets, Net |  |                   |        |                   |   |       
|United States          |  | $                 | 61,612 |                   | $ | 64,699
|Foreign                |  |                   | 2,164  |                   |   | 2,301 

Major Customers.For the periods
presented, the Company did not have any one customer who represented more than 10% of its net sales.

22. INTEREST EXPENSE, NET

Interest expense, net for the years ended September 30 is comprised of the following (in thousands):



|                           |  |      |       |   |      |   |       |      |  |   |        |  
|-------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                           |  | 2009 |       |   | 2008 |   |       | 2007 | 
|Interest expense           |  | $    | 4,758 |   |      | $ | 6,971 |      |  | $ | 10,226 |  
|Interest income            |  |      | (38   | ) |      |   | (27   | )    |  |   | (378   | )
|Other investment loss, net |  |      |      |   |      |   | 30    |      |  |   |       |  
|                           |  |      |       |   |      |   |       |      |  |   |        |  
|Interest expense, net      |  | $    | 4,720 |   |      | $ | 6,974 |      |  | $ | 9,848  |  
|                           |  |      |       |   |      |   |       |      |  |   |        |  

23. RELATED PARTY TRANSACTIONS

There is a husband and wife relationship between Mr. Matthias and Ms. Matthias. There are no family relationships among any of the
Companys other executive officers or directors.

A director of the Company currently provides consulting services to
Pepper Hamilton LLP, which provides legal services to the Company. The Company paid legal fees to this law firm of $595,000, $728,000 and $1,061,000, in fiscal 2009, 2008 and 2007, respectively. As of September 30, 2009 and 2008, the Company
had accrued amounts outstanding to this law firm of $71,000 and $191,000, respectively.



F-34



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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

(in thousands)



|                              |  |                              |     |                                      |   |            |  |   |                        |   |  |   |    
|----------------------------- |  | ---------------------------- | --- | ------------------------------------ | - | ---------- |  | - | ---------------------- | - |  | - | ---
|                              |  | Balance atbeginningof period |     | Additionscharged tocosts andexpenses |   | Deductions |  |   | Balance atend ofperiod
|Year Ended September 30, 2009 |  |                              |     |                                      |   |            |  |   |                        |   |  |   |    
|Product return reserve        |  | $                            | 202 |                                      | $ | 122        |  | $ |                       |   |  | $ | 324
|                              |  |                              |     |                                     
|Year Ended September 30, 2008 |  |                              |     |                                      |   |            |  |   |                        |   |  |   |    
|Product return reserve        |  | $                            | 181 |                                      | $ | 21         |  | $ |                       |   |  | $ | 202
|                              |  |                              |     |                                     
|Year Ended September 30, 2007 |  |                              |     |                                      |   |            |  |   |                        |   |  |   |    
|Product return reserve        |  | $                            | 206 |                                      | $ |           |  | $ | (25                    | ) |  | $ | 181



F-35



---

INDEX OF EXHIBITS



|            |  |                                                                                                                                                                               
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                   
|            | 
|21          |  | Subsidiaries of the Company.                                                                                                                                                  
|            | 
|23          |  | Consent of KPMG LLP.                                                                                                                                                          
|            | 
|31.1        |  | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       
|            | 
|31.2        |  | Certification of the Senior 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 Senior 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.