**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

**(MarkOne)**

**x**                               ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the fiscal year ended September 30, 2006**

**or**

**o**                                  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the transition period from *               * to**

**Commission file number 0-21196**

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**MothersWork, Inc.**

(Exactname of Registrant as specified in its charter)

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

 

**(215)873-2200**

(Registrant’stelephone number, including area code)

Securitiesregistered 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 registeredpursuant to Section 12(g) of the Act:

**Series B JuniorParticipating Preferred Stock Purchase Rights**

(Titleof class)

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

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

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

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

Largeaccelerated filer o                                      Acceleratedfiler x                                       Non-acceleratedfiler o

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

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates computed using $24.02, the price at which the common equity waslast sold as of March 31, 2006 (the last business day of the Registrant’smost recently completed second fiscal quarter), was approximately $112,000,000.

OnDecember 11, 2006, there were 5,888,374 shares of the Registrant’s commonstock, $.01 par value, outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the Registrant’s Proxy Statement to befiled with the Commission in connection with the Annual Meeting of Stockholdersscheduled to be held on January 19, 2007 are incorporated by referenceinto Part III of this Form 10-K.

 

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**PART I.**

*Our fiscal yearends on September 30. All references in this report to our fiscal yearsrefer to the fiscal year ended on September 30 in the year mentioned. Forexample, our “fiscal 2006” ended on September 30, 2006. Unless otherwiseindicated, operating data referred to in this report is as of September 30,2006. As used in this report, “retail locations” include our stores and leaseddepartments and exclude locations where Kohl’s® sells our products under anexclusive product and license agreement.*

**Item 1.**                        Business

**Overview**

We are the leading designer and retailer of maternityapparel in the United States and are the only nationwide chain of maternityspecialty stores. We operate 1,541 retail locations, including 810 stores inall 50 states, Puerto Rico and Canada, and 731 leased departments locatedwithin department stores and baby specialty stores throughout the U.S. We arealso the exclusive provider of maternity apparel to Kohl’s®, which operatesapproximately 749 stores throughout the U.S. We operate our 810 stores underfour retail nameplates: Motherhood Maternity®, Mimi Maternity®, A Pea in thePod® and Destination MaternityTM. In addition to our 810 stores, we operate 731maternity apparel departments, which we refer to as leased departments, withinleading retailers such as Sears®, Macy’s® and Babies “R” Us®. We are theexclusive maternity apparel provider in each of our leased departmentrelationships. We also sell merchandise on the Internet, primarily throughDestinationMaternity.com and our various chain specific websites. We haveachieved 9.2% compounded annual sales growth over the past five years,resulting in sales of $602.7 million for fiscal 2006.

We have a leading position across all major pricepoints of maternity apparel through our five distinct merchandise brands,enabling us to reach a broad range of maternity customers. Through our 810stores and certain of our leased departments, we offer maternity apparel underour three primary merchandise brands, Motherhood Maternity, or Motherhood, atvalue prices, Mimi Maternity, or Mimi, at contemporary prices and A Pea in thePod, or Pea, at luxury prices. We also have two additional value-pricedmaternity apparel brands, our Two Hearts® Maternity collection and our Oh Baby!by MotherhoodTM collection which we sell exclusively through Sears and Kohl’s,respectively, and are the exclusive maternity apparel offerings in thesechains.

We believe that one of our key competitive advantagesis our ability to fulfill, in a high-service store environment, all of anexpectant and nursing mother’s clothing needs, including casual and careerwear, formal attire, lingerie, sportswear and outerwear, in sizes that coverall trimesters of the maternity cycle. Our sophisticated vertically-integratedbusiness model enables us to offer the broadest assortment of in-stock,fashionable maternity apparel. We design and contract for the production ofapproximately 90% of the merchandise we sell using sewing factories locatedthroughout the world, predominantly outside of the U.S.

In fiscal 2003, we began to develop and introduce, ona limited basis, new multi-brand store concepts that offer merchandise from ourMotherhood brand, Mimi brand and, sometimes, our Pea brand, in order to providea broader product assortment at multiple price ranges to our customers and toincrease average store sales and profitability. We continue to test, developand expand our new multi-brand store concepts, which consist of two-brandMimi nameplate “combo” stores, three-brand Mimi nameplate “triplex”stores, and Destination Maternity superstores, which generally carry all threeof our principal merchandise brands as well as a significant array of maternity-relatedproducts and customer service features. These multi-brand stores are largerand have higher average sales than our average store, provide the opportunityto improve store operating profit margins over time by reducing store operatingexpense percentages through economies of scale, and may increase overall salesin the geographical markets they serve. 

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Opening these multi-brandstores will typically involve closing two or more smaller stores and mayfrequently result in one-time store closing costs resulting primarilyfrom early lease terminations.

We plan to open approximately 15 - 20 new retailstores during fiscal 2007, of which we expect approximately 7 - 12 will be newmulti-brand stores that carry more than one of our merchandise brands, with thebalance primarily under the Motherhood brand. We estimate that we will closeapproximately 40 - 55 stores in fiscal 2007, with approximately 15 -25 of these store closings related to the opening of new multi-brand stores.

We believe our customers, particularly first-timemothers, are entering a new life stage that drives widespread changes inpurchasing needs and behavior, thus making our maternity customer and herfamily a highly-valued demographic for a range of consumer products andservices companies. As a result, we have been able to expand and leverage therelationship we have with our customers and generate incremental revenues andearnings by offering other value-added baby and parent-related products andservices through a variety of marketing partnership programs utilizing ourextensive opt-in customer database and various in-store marketinginitiatives.

Mothers Work was foundedby Dan and Rebecca Matthias in 1982 as a mail-order maternity apparelcatalog. We began operating retail stores in 1985 and completed our initialpublic offering in 1993. To address multiple price points in maternity appareland improve operating productivity, we acquired Motherhood and A Pea in the Podin 1995 and eSpecialty Brands, LLC, or iMaternity, in October 2001. Sincethe acquisitions of Motherhood and A Pea in the Pod, we have developed andgrown these brands along with growing our Mimi brand. Also, since the 1990s wehave partnered with other retailers to sell our products through maternityapparel departments within their stores. Since the beginning of fiscal 2005, wehave significantly expanded this third-party distribution channel by becomingthe exclusive maternity apparel provider to Sears and Kohl’s.

**Industry Overview**

We are unaware of anyreliable data on the size of the maternity apparel industry. However, based onour own analysis, we believe that there are approximately $1.2 billion ofmaternity clothes sold each year in the U.S. In addition, we believe that thereis an opportunity to grow the business by selling maternity clothes to pregnantwomen who currently purchase loose-fitting or larger-sized non-maternityclothing as a substitute for maternity wear. We also believe that the businesscan grow by reducing the amount of “hand-me-down” and “borrowing”associated with maternity apparel, particularly in the value-pricedsegment where low-priced, fashionable maternity apparel could provide aneconomical alternative to secondhand maternity wear. Further, we believe thatthe demand for maternity apparel is relatively stable when compared to non-maternityapparel. Expectant mothers continue to need to replace their clothes and thecurrent steady rate of approximately four million U.S. births per year hasremained stable over the last decade. We believe that maternity apparel is alsoless fashion sensitive than specialty apparel in general, as demand is drivenprimarily by the need to replace wardrobe basics as opposed to current fashiontrends.

**Our CompetitiveStrengths**

***We are the leaderin maternity apparel.***   We are the leadingdesigner and retailer of maternity apparel in the U.S. and are the onlynationwide chain of maternity specialty stores. We believe that our brands arethe most recognized in maternity apparel. We have established a broaddistribution network, with stores in a wide range of geographic areas andretailing venues. In addition, we have a leading position across all majorprice points of maternity apparel through our four retail store nameplates andour five merchandise brands. Our exclusive focus on maternity apparel and ourleadership position enable us to gain a comprehensive understanding of theneeds of our maternity customers and keep abreast of fashion and 

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product developments. Wefurther enhance our leadership position, increase market penetration and buildour brands by distributing our products under exclusive leased department andlicensed relationships.

***We offer acomprehensive assortment of maternity apparel and accessories.***   Aprimary consideration for expectant mothers shopping for maternity clothes isproduct assortment, as pregnant women need to replace almost their entirewardrobe. We believe that we offer the widest selection of merchandise in thematernity apparel industry. We also offer product for multiple seasons, aspregnant women’s clothing needs vary depending on their due date. Our abilityto offer a broad assortment of product is due, in large part, to our verticallyintegrated business model, which includes our extensive in-house designand contract manufacturing capabilities, as well as our rapid inventoryreplenishment system.

***We are verticallyintegrated.***   We design and contractmanufacture approximately 90% of the merchandise we sell. We believe thatvertical integration enables us to offer the broadest assortment of maternityapparel, to respond quickly to fashion trends and to maximize in-stocklevels. We combine our in-house design expertise, domestic andinternational sourcing capabilities, a rapid inventory replenishment processand extensive proprietary systems to enhance operational and financial results.

***We utilize a rapidinventory replenishment system.***   We are ableto offer a wide selection of merchandise in our retail locations due, in largepart, to our rapid inventory replenishment system. For example, in our stores,our proprietary system enables us to offer more than 3,000 stock keeping units,or SKUs, per store without dedicating retail space to “back-stock” storage. Wecoordinate the rapid replenishment of inventory for all of our retail locationsthrough our Philadelphia, Pennsylvania and Mississauga, Ontario distributioncenters to meet the individualized needs of our retail locations, which receiveshipments from our distribution centers between two and six times per week. Thisenables us to maintain a high percentage in-stock merchandise position in eachof our retail locations.

***We have proprietarysystems that support our business.***   In orderto support our vertically integrated business model and inventory replenishmentsystem, we have developed a fully integrated, proprietary enterprise resourceplanning (ERP) system. This system includes point-of-sale systems,our TrendTrackTM merchandise analysis and planning system, our materialsrequirement planning system and our web-based, global sourcing andlogistics systems. These systems also support our automated picking and sortingsystems and other aspects of our logistics infrastructure. We believe that ourproprietary systems are a critical competitive strength that enables us tooffer a broad product assortment and respond quickly to fashion trends as wellas helps us to reduce product costs and rapidly replenish inventory in ourretail locations.

***We are able toobtain prime real estate locations.***   Webelieve our ability to lease attractive real estate locations is enhanced dueto the brand awareness of our concepts, our multiple price point approach, ourhighly sought after maternity customer and our dedicated in-house real estatemanagement and procurement team. We are the only maternity apparel retailer toprovide mall operators with the ability to choose from three differently pricedconcepts, depending on the mall’s target demographics. We are also able toprovide multiple stores or a multi-brand store for malls that want tooffer their maternity customers a range of price alternatives. In addition, inthe case of multi-mall operators, we have the flexibility to provideseveral stores across multiple malls. As a result, we have been able to locatestores in many of what we believe are the most desirable shopping malls in thecountry and are able to obtain attractive locations within these malls.

***We are able toenhance our leadership position by distributing our products under exclusiveleased department and licensed relationships.***   Weoperate 731 leased departments within leading retailers such as Sears, Macy’sand Babies “R” Us. We are also the exclusive provider of maternity apparel toKohl’s pursuant to an exclusive licensed relationship. Over the past severalyears, we have increased the sales we generate from our leased department andlicensed relationships and believe that we have an opportunity to 

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continue to increase thesales we generate from these relationships through expanding our relationshipswith our current partners as well as developing relationships with newpartners.

***We have a highly experienced management team.***   DanMatthias, our Chairman and Chief Executive Officer, and Rebecca Matthias, ourPresident and Chief Operating Officer, founded the Company over 20 yearsago and are leaders in maternity apparel retailing. Additionally, we have amanagement team with significant experience in all aspects of the retail andapparel business.

**Merchandise Brands**

Webelieve that our brands are the most recognized brands in the maternity apparelbusiness. We sell our merchandise under the following five distinct brands:
| BRAND                  | ** ** | ** **                                                          | ** ** | **BRAND POSITIONING** | ** ** | **APPAREL   PRICE RANGE** |
|------------------------|------------|---------------------------------------------------------------------|------------|-----------------------|------------|---------------------------|
| Motherhood             |       | Broad assortment,  fashion, quality and everyday low price          |       | $9-$49                |
| Mimi                   |       | Contemporary,  fun, trendy and affordable                           |       | $18-$168              |
| Pea                    |       | Exclusive,  designer and luxury                                     |       | $60-$395              |
| Two Hearts Maternity   |       | Select assortment  of quality fashion sold at value price points    |       | $9-$44                |
| Oh Baby! by Motherhood |       | Select assortment  of basics and fashion sold at value price points |       | $9-$48*               |

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*                    Kohl’s, whichsells our Oh Baby! by Motherhood brand under an exclusive product and licenseagreement, sets the apparel price range for this merchandise.

***MotherhoodMaternity.***   Our Motherhood Maternity brandserves the value-priced portion of the maternity apparel industry, whichhas the greatest number of customers. The Motherhood brand is positioned with abroad assortment of quality fashion at everyday low prices. We believe that theMotherhood customer shops at moderate-priced department stores anddiscount stores when she is not expecting.

***Mimi Maternity.***   OurMimi Maternity brand serves the medium-priced portion of the maternity apparelindustry. The Mimi brand is positioned as trendy, contemporary, fun andaffordable. We believe that the Mimi customer shops at department stores andspecialty apparel chains when she is not expecting.

***A Pea in the Pod.***   Webelieve our A Pea in the Pod brand is the leading luxury maternity brand in theU.S. The Pea brand is positioned as exclusive, designer and luxury. Publicity,including celebrities wearing our clothes, is an important part of themarketing and positioning of the brand.

***Two HeartsMaternity.***   Our Two Hearts Maternity brand isthe exclusive maternity apparel offering in 549 Sears stores that offermaternity apparel. Two Hearts Maternity is a new fashionable collectionincluding career and casual sportswear as well as dresses, lingerie, swimwearand nursing sleepwear, with most items priced under $40.

***Oh Baby! byMotherhood.***   Our Oh Baby! by Motherhoodcollection was launched in February 2005 at Kohl’s stores throughout theU.S. and on Kohls.com. The Oh Baby! by Motherhood collection is available atall Kohl’s stores under an exclusive product and license agreement. Thecollection features a modern and complete assortment of sportswear, intimateapparel and sleepwear, with most items priced under $40. The collection isavailable at all of Kohl’s stores.

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**Retail Nameplates**

Wesell maternity apparel through the following stores, leased departments andlicensed relationships:

| **Store Nameplate**                     | ** ** | ** **                                                          | ** ** | **Description of  Target Location** | ** ** | **Brand(s) Carried**                       | ** ** | **Apparel   Price Range**                  | ** ** | **Average  Size (Sq. Ft.)** |
|-----------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------|
| ***Stores:***                           | ** ** | ** **                                                          | ** ** | ** **                          | ** ** | ** **                                      | ** ** | ** **                                 |
| Motherhood                              |       | Moderate regional  malls, strip centers and power centers           |       | Motherhood                          |       | $9-$49                                          |       | 1,700                                      |
| Mimi (1)                                |       | Mid-priced  regional malls and lifestyle centers                    |       | Motherhood Mimi                     |       | Single brand Mimi $18-$168

Mimi combo  $9-$168 |       | Single brand Mimi 1,700

Mimi combo  2,700 |
| Pea (2)                                 |       | Exclusive, high-end  regional malls and affluent residential areas  |       | Pea  Mimi Designer Merchandise      |       | $60-$395                                        |       | 2,300                                      |
| Destination Maternity (3)          |       | Primarily outdoor  and power centers and central business districts |       | Motherhood Mimi  Pea                |       | $9-$395                                         |       | 6,900                                      |
| ***Leased  Departments:***              |       |                                                                |       |                                |       |                                            |       |                                       |
| Macy’s                             |       | Mid-priced  regional malls                                          |       | Motherhood Mimi                     |       | $9-$168                                         |       | —                                     |
| Babies “R” Us                 |       | Big box power  centers                                              |       | Motherhood                          |       | $9-$49                                          |       | —                                     |
| Sears                                   |       | Moderate malls                                                      |       | Two Hearts Maternity                |       | $9-$44                                          |       | —                                     |
| ***Exclusive Licensed  Relationship:*** |       |                                                                |       |                                |       |                                            |       |                                       |
| Kohl’s                             |       | Big box power centers                                               |       | Oh  Baby! by Motherhood             |       | $9-$48  (4)                                     |       | —                                     |

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(1)          Our two-brand Mimi combostores carry a full line of both Mimi and Motherhood brand merchandise whileour triplex stores carry all three brands

(2)          Nearly all Pea stores carrya full line of both Pea and Mimi brand merchandise.

(3)          While most DestinationMaternity stores carry Pea brand merchandise, some do not.

(4)          Kohl’s, which sells ourOh Baby! by Motherhood brand under an exclusive product and license agreement,sets the apparel price range for this merchandise.

Major regional malls with several department storesand a wide range of price points may be able to accommodate a multi-brandstore, or more than one maternity store. We have the ability to addressmultiple price alternatives at a given mall, with Motherhood as our value-orientedbrand, Mimi as our mid-priced brand and A Pea in the Pod as our luxurybrand. As of September 30, 2006, we had at least two of our store conceptsin 41 major regional malls. In addition, almost all 33 of our A Pea in thePod stores 

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and 11 of our Motherhoodstores carry Mimi-branded merchandise, and 36 of our Mimi stores carryMotherhood-branded merchandise.

***MotherhoodMaternity Stores.***   Motherhood Maternity isour largest chain with 659 stores as of September 30, 2006. Motherhood ispositioned with a broad assortment of quality fashion at everyday low prices. Motherhoodstores average approximately 1,700 square feet and are located primarily inmoderate regional enclosed malls, strip and power centers and central businessdistricts. Motherhood stores include 97 outlet locations that carry Motherhood-brandedmerchandise as well as some closeout merchandise. Between 1998 and 2000, wesuccessfully broadened Motherhood’s customer base by lowering price pointsapproximately 40% to 45%. This reduced price position significantly expandedthe brand’s target market, increased revenues per store and increased unitvolumes. In fiscal 2006, we opened 13 new Motherhood stores and outlets,including one store as a result of a store conversion from Mimi to Motherhood,and closed 44 Motherhood stores and outlets, with nine of these store closingsrelated to multi-brand store openings. As of September 30, 2006, weoperate 34 Motherhood stores in Canada and believe that market opportunitiesmay permit us to open additional stores in Canada in the future. We may alsohave the opportunity to grow the number of our Motherhood leased departments inthe U.S.

***Mimi MaternityStores.***   As of September 30, 2006, wehad 106 Mimi Maternity stores that serve the medium-priced portion of thematernity apparel industry. The brand is positioned as contemporary, fun,trendy and affordable. Mimi stores average approximately 2,000 square feet andare located primarily in mid-priced regional malls, lifestyle centers andcentral business districts.

*Single-Brand MimiStores.*   As of September 30, 2006, 70 of ourMimi stores predominantly carry Mimi-branded product, as well as a smallselection of maternity merchandise developed by contemporary vendors for Mimi,and average approximately 1,700 square feet. Mimi was historically pricepositioned just below A Pea in the Pod. When Motherhood’s prices were lowered,there was an opportunity for Mimi to broaden its customer base by includinglower price points. Mimi was, therefore, repositioned during fiscal 2002 andits merchandise price points now range from just above Motherhood to the lowerend of A Pea in the Pod. This repositioning resulted in an expansion of Mimi’starget customer base, and provided us the opportunity to increase the number ofMimi stores over time.

*Mimi Combo Stores.*   Weare continuing to test, develop and expand our Mimi combo multi-brandstore concepts. Our current Mimi combo store concepts operated under the Miminame include two-brand stores (which carry both the Mimi and Motherhoodbrands) and triplex stores (which carry the Mimi, Motherhood and A Pea in thePod brands). These Mimi combo stores are larger (average of approximately2,700 square feet), have higher average sales volume than our averagestore and provide the opportunity to improve store operating profit marginsover time. A new Mimi combo store will typically involve closing one Motherhoodstore and one single-brand Mimi store, although we may occasionally close onlyone store in a given geographical market in situations where we believe we canexpand sales through replacing a single-brand Motherhood or Mimi store with aMimi combo store. Store closings will often involve one-time storeclosing costs resulting primarily from early lease terminations. As of September 30,2006, 36 of our stores are Mimi combo stores using the Mimi name, consisting of34 two-brand Mimi stores and two Mimi triplex stores. Based on ourinternal research, we believe that over the next several years we have thepotential to expand the Mimi combo store chain to approximately 70 to 80 ormore total Mimi combo stores in the U.S.

In fiscal 2006, we opened one single-brand MimiMaternity store and closed 12 Mimi stores, including two multi-brand Mimistores. One of the multi-brand Mimi closings was as a result of a storeconversion from Mimi to Motherhood.

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***A Pea in the PodStores.***   As of September 30, 2006, wehad 33 A Pea in the Pod stores. A Pea in the Pod stores average approximately2,300 square feet and are located in upscale venues, including Madison Avenue,Oak Street, Beverly Hills, South Coast Plaza and Bal Harbour. In addition tooffering a wide selection of both A Pea in the Pod and Mimi branded products inalmost all A Pea in the Pod stores, we seek out designer and contemporarybrands and assist them in developing maternity versions of select stylesexclusively for our A Pea in the Pod stores. As scarcity is part of the concept’sluxury image, we have chosen to further develop the brand primarily byoptimizing our customers’ in-store experience rather than by opening newstores. We therefore continuously upgrade the quality of the locations, ourstore designs, the product styling and our publicity to enhance our brandimage.

***DestinationMaternity Superstores.***   In March 2004,we opened our first Destination Maternity superstore in Danbury, Connecticut.Destination Maternity superstores typically carry all three of our primarymerchandise brands (Motherhood, Mimi and Pea), plus a greatly expanded line ofnursing accessories, fertility-related products and maternity-related exercisegear, books, and body and nutritional products. These stores also typicallyfeature a dedicated “learning center” area for maternity-related classes, a “relaxarea” for husbands and shoppers alike, and an inside play area for the pregnantmom’s toddlers and young children, with several of our superstores also havingour Edamame The Maternity Spa®. These elements combine to give our DestinationMaternity superstore not only the largest assortment of maternity apparel andaccessories available, but also a unique and engaging atmosphere and experiencefor the maternity customer. A new Destination Maternity superstore involvesclosing at least two, and typically more, single brand stores, is expected todecrease store operating expense percentages through economies of scale, andmay increase overall sales in the geographical areas they serve. DestinationMaternity superstores range from nearly 4,000 square feet to approximately11,000 square feet, with an average of approximately 6,900 square feet for the12 stores open as of September 30, 2006. We opened four of theseDestination Maternity superstores during fiscal 2006. In February 2006,we celebrated the grand opening of our Destination Maternity store on thecorner of 57th Street and Madison Avenue in Manhattan. This is the largestmaternity store in the world, spanning three floors and including our EdamameThe Maternity Spa, all three of our primary apparel brands, maternity yogaclasses, juice bar, relax area and children’s play area. As the only nationalretailer that is solely focused on maternity, we are further differentiatingourselves as the ultimate maternity destination with these large, well-assorted,“must visit” superstores. Based on our internal research, we believe that overthe next several years we have the potential to expand the DestinationMaternity chain to approximately 40 to 50 or more total Destination Maternitysuperstores in the U.S.

***Leased Departments.***   Inaddition to the stores we operate, we have arrangements with department storesand baby specialty stores, including Sears, Macy’s, Babies ”R” Us andBloomingdale’s®, to operate maternity apparel departments in their stores. Werecently entered into arrangements for exclusive leased departmentrelationships with Boscov’s® and Gordmans®, two regional department storechains. We are the exclusive maternity apparel provider in each of our leaseddepartment locations. We staff these leased departments at varying levels andmaintain 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 ourleased departments during the same hours and days as the host store and areresponsible for replenishment of the merchandise in the leased departments. Theseleased departments typically involve the lease partner collecting all of therevenue from the leased department. The revenue is remitted to us, less a fixedpercentage of the volume earned by the lease partner as stipulated in theagreement.

***Exclusive LicensedRelationship.***   Our Oh Baby! by Motherhoodcollection is available at all Kohl’s stores under an exclusive product andlicense agreement. The collection was launched in February 2005 at Kohl’sstores throughout the U.S. and on Kohls.com. Kohl’s operates approximately 749stores throughout the U.S.

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***International.***   Webelieve that in the future, an opportunity for sales growth may come from thedevelopment of international sales outside of North America. Currently, ouronly product sales outside of the U.S. are generated in Canada, where weoperate 34 Motherhood stores. We anticipate that our long-term strategymay include both licensing arrangements with foreign partners as well aspotentially developing our own operations in certain countries. However, wepresently have no commitment, agreement or plans relating to any productdistribution or development of selling operations outside of North America.

**Internet Operations**

We sell our merchandise onthe Internet at our DestinationMaternity.com, MaternityMall.com and iMaternity.comwebsites, as well as our chain-specific websites such as Motherhood.com. Webelieve that many pregnant women use the Internet to find maternity-relatedinformation and to purchase maternity clothes. Our websites are thereforeimportant tools for educating existing and potential customers about our brandsand driving traffic to our stores. In addition to providing links to all of ourwebsites, our DestinationMaternity.com and MaternityMall.com websites containmaternity advice and information, related baby product information andeditorial content. Our marketing and technology capabilities and thereplenishment capabilities of our distribution center and stores enable us toincorporate Internet design, operations and fulfillment into our existingoperations. Over the past several years, we have increased the sales wegenerate from our websites, and we look to continue to grow our Internet salesin the future.

**MarketingPartnerships**

We believe our customers, particularly first time mothers,are entering a new life stage that drives widespread changes in purchasingneeds and behavior, thus making our maternity customer and her family ahighly-valued demographic for a range of consumer products and servicescompanies. We have been able to leverage the relationship we have with ourcustomers to earn incremental revenues and expect to expand these revenuesthrough marketing partnerships and our futuretrust college savings program.

We expect to continue to expand and leverage therelationship we have with our customers and earn incremental revenues through avariety of marketing partnership programs utilizing our extensive opt-incustomer database and various in-store marketing initiatives, which helpintroduce our customers to various baby and parent-related products andservices offered by leading third-party consumer products companies. Whereasour current revenues in this area have predominantly been derived from the newpre-natal portion of our customer database, we have taken steps to update andmanage our entire customer database so we can actively market our full customerdatabase to a much broader range of consumer product and services companiesthat market to families with children.

Through our stores and ourInternet sites, we market our futuretrust® college savings program to ourcustomers. Futuretrust is a MasterCard® based college savings program thatenables members to help save for college when they link their futuretrustMasterCard to a tax advantaged 529 College Savings account. Members earn rebateson all purchases with their futuretrust MasterCard that are automaticallycontributed to their 529 College Savings account and can also earn additionalcollege savings at merchants in the futuretrust Preferred Merchant Network. Wehave recently entered into relationships with select providers of 529 savingsprograms, tax preparation services, home mortgages and real estate services forour futuretrust members and, in the future, we anticipate further developingour futuretrust program into a full service financial services and informationresource for our members known as the Futuretrust Family Financial CenterTM. Weanticipate that additional potential services offered through the FuturetrustFamily Financial Center may include online banking, life insurance, and otherfinancial services needed by families with children. We plan to offer suchservices through relationships with high-quality third-party providers of theseservices.

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**Operations**

***Brand-SpecificOperations Teams.***   To obtain maximumefficiencies, we are organized primarily along functional lines, such asmerchandising, store operations, design and production. Since our businessconsists of five merchandise brands requiring decisions on a brand-specificbasis, we have built business teams by brand where the functional leaderswithin each brand work together. Each brand team is led by the head merchantand includes the director of stores for that brand, the head designer, the headplanner and distributor and the key production manager. These teams alsoinclude visual, fabric purchasing and other necessary professionals.

***Store Operations.***   Thetypical maternity customer, especially the first-time mother, seeks moreadvice and assistance than the typical non-maternity customer. Therefore,we aim to employ skilled and motivated store team members who are trained toprovide the high level of service and reassurance needed by our customers. Weattempt to provide a boutique level of attentive service that differentiates usfrom our competitors. Our centralized merchandising and store operations alsoenable our store team members to focus primarily on selling and maintaining theappearance of the stores. In addition, visual merchants coordinate with themerchandising department to develop floor-sets, design store displaywindows and define and enhance the product presentation.

At Motherhood and Mimi,the management reporting chain consists of regional managers, district managersand store managers. At Pea, due to its smaller number of stores, the districtmanagers report to the director of stores. Our store, district and regionalmanagers are eligible to receive incentive-based compensation related tostore, district and regional-level performance.

**Merchandising,Design and Inventory Planning and Allocation**

***Merchandising.***   Westrive to maintain an appropriate balance between new merchandise and provenstyles, as well as between basic and fashion items. Our merchandising decisionsare based on current fashion trends, as well as input from our designers andoutside vendors. This information is used in conjunction with the item-specificsales data provided by our proprietary merchandising and replenishment system. Eachbrand has its own team of merchants, designers and planners. These teams areled by the head merchant of the brand.

***Design.***   Ourdesign department creates and produces samples and patterns for our contract-manufacturedproducts under the guidance of the merchandising department. This capabilitydifferentiates us from many of our competitors, who source their products froma limited number of maternity wear vendors. The design of our products beginswith a review of European and New York runway trends, current non-maternityretail trends, fashion reporting service slides and fabric samples. Thedesigners review our best selling items from prior seasons and integratecurrent fashion ideas from the non-maternity apparel business.

***Inventory Planning and Allocation.***   Ourplanning and allocation department is responsible for planning future inventorypurchases and markdowns, as well as targeting overall inventory levels andturnover. We establish target inventories for each store using our inventoryplanning system with the goals of optimizing our merchandise assortment andturnover, maintaining adequate depth of merchandise by style and managingcloseout and end-of-season merchandise consolidation. Ourproprietary capabilities enable us to continually monitor and respond quicklyto consumer demand and are integral to our inventory management program. Thesecapabilities are facilitated by our TrendTrack system, which provides dailyproduct sell-through data and merchandising information.

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**Production andDistribution**

We design and contract for the production ofapproximately 90% of the merchandise we sell using sewing factories locatedthroughout the world, predominantly outside of the U.S., and we continue toseek additional contractors for our sourcing needs. No individual contractorrepresents a material portion of our sewing. A majority of our merchandise ispurchased “full package” as finished product made to our specifications,typically utilizing our designs. Fabric, trim and other supplies are obtainedfrom a variety of sources. As we have expanded our stores and increased volumesover the past several years, we have generally been able to reduce our productcosts.

Our production and quality assurance personnel monitorproduction at contractor facilities in the U.S. and work with our agents abroadto ensure quality control, compliance with our design specifications and timelydelivery of finished goods. This quality control effort is enhanced by ourworldwide Internet-based contracting and logistics systems, which includeadvanced features such as measurement specifications and digital photography. Wealso use a third-party consulting firm to help monitor working conditions atour contractors’ facilities on a worldwide basis.

We operate our primary distribution center inPhiladelphia, Pennsylvania and a distribution center in Mississauga, Ontario tosupport our stores in Canada. We also lease a facility located in thePhiladelphia Naval Business Center in Philadelphia, Pennsylvania, which we usefor warehousing, distribution and raw material cutting.

Finished garments from contractors and othermanufacturers are received at our primary distribution center in Philadelphia,Pennsylvania and our Canadian distribution center. Garments are inspected usingstatistical sampling methods and stored for picking. Our primary distributioncenter utilizes sophisticated fulfillment technology to serve as areplenishment center, as opposed to solely a distribution center. Thisdistribution center sends a selection that meets individual retail locationneeds from our approximately 17,000 SKUs to our retail locations two to sixtimes per week. Retail location replenishment decisions are made automaticallybased upon target inventories established by the allocation department andindividual retail location sales data. Our primary distribution center usesseveral automated systems, including our pick-to-light system forflat-packed goods and our hanging garment sortation system, which speedup deliveries to our retail locations and reduce costs.

Shipments to retail locations are tracked by ourproprietary delivery tracking software. Freight is routed through zone-skipping,over-the-road carriers running 24 hours per day and deliveredlocally by a variety of carriers, and is supplemented by a small percentage ofsecond-day air, providing one to three-day delivery to our retaillocations.

In November 2003, wewere certified to participate in Customs-Trade Partnership AgainstTerrorism, or C-TPAT, a U.S. Department of Homeland Security sponsored program,with U.S. Customs and Border Protection (“U.S. Customs”), through which weimplement and monitor our procedures to manage the security of our supply chainas part of the effort to protect the U.S. against potential acts of terrorism.Also, in January 2005, we were certified to participate in the ImporterSelf Assessment Program, or ISA, a U.S. Customs program available only toC-TPAT participants with strong internal controls and oversight mechanisms, throughwhich we have assumed responsibility for monitoring our own compliance withapplicable U.S. Customs regulations in exchange for certain benefits, which mayhelp increase efficiency in importing. These benefits include exemption fromgovernment audits, increased speed of cargo release from U.S. Customs, enhancedprior disclosure rights from U.S. Customs in the event of alleged tradeviolations, availability of voluntary additional compliance guidance from U.S.Customs, and less intrusive government oversight of trade compliance.

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**ManagementInformation and Control Systems**

We believe that our proprietary systems areinstrumental to our ability to offer the broadest assortment of maternitymerchandise and accomplish rapid replenishment of inventory. We continuouslydevelop, maintain and upgrade our systems and currently employ an in-houseteam of programmers. Our stores have point-of-sale terminals thatprovide information used in our customized TrendTrack merchandise analysis andplanning system. This system provides daily financial and merchandisinginformation that is integral to monitoring trends and making merchandisingdecisions. The TrendTrack system has numerous features designed to integrateour retail operations with our design, manufacturing and financial functions. Thesefeatures include custom merchandise profiles for each store, rapid inventoryreplenishment, item-tracking providing daily updated selling informationfor every style, classification open-to-buy and inventory control,as well as the daily collection of customer payment data, including cash, checkand credit card sales data.

As part of our proprietary enterprise resourceplanning (ERP) system, we employ a comprehensive materials requirement planning(MRP) system to manage our production inventories, documentation, work ordersand scheduling. This system provides a perpetual inventory of raw materials,actual job costing, scheduling and bill of materials capabilities. Thefoundation of our ERP system is a perpetual inventory of finished goods bylocation across all of our retail locations, which interfaces directly with ourdistribution facility.

In fiscal 2003, we rolled out a proprietary, upgradedpoint-of-sale system to our stores and integrated this system withour existing systems. This Internet-based system provides real-timeaccess to financial and merchandising information in addition to rapid creditauthorization. This upgraded point-of-sale system has significantlyreduced the amount of training required for new sales associates and storemanagers. In addition, we plan to continue to add new features andfunctionality to the system, and anticipate that the system will improve ourcustomer relationship management capabilities by enhancing our ability tocreate customized promotional and marketing strategies.

Given the importance ofour management information systems, we have taken extensive measures to ensuretheir responsiveness and security. Our hardware and communications systems arebased on a redundant and multiprocessing architecture, which allows theircontinued operation on a parallel system in the event that there is adisruption within the primary system. Our main computer system, located in ourPhiladelphia facility, is duplicated by a fully mirrored system in a separatepart of the building with a separate power source that is designed to assumefull operations should disruption in the primary system occur. In addition, oursoftware programs and data are backed up and stored off-site. Ourcommunications links come from two telephone frame rooms and are deliveredthrough underground and aboveground feeds.

**Pricing**

Each of our merchandisebrands targets customers at different price points of the maternity apparelindustry. Our Motherhood brand is positioned primarily on everyday low prices,while Mimi employs middle level pricing and Pea employs luxury pricing. None ofour stores rely on point-of-sale high/low promotional strategies todrive traffic into the stores. Our price reductions are done at the individualstyle 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 anotherstore where the item is selling faster. For our leased departmentrelationships, we consider a number of factors in determining pricing,including the target customer base, and we may use alternative pricingstrategies to promote sales. The pricing of our Oh Baby! by Motherhoodmerchandise is determined by Kohl’s pursuant to the terms of our exclusiveproduct and licensing relationship.

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**Advertising andMarketing**

We believe that the powerof our merchandise brands, customer referrals and our convenient mall locationsdrive traffic into our stores. Therefore, we have modest advertising andmarketing expenditures. Our advertising and publicity efforts include in-storemarketing, prenatal consumer-targeted advertising and our Internetwebsites. For our Destination Maternity superstores, we advertise locally priorto the grand opening, as well as some ongoing advertising in the local marketthereafter. We also run full-page ads for all of our three principalmerchandise brands in pregnancy-targeted publications, as well asprenatal issues of leading baby and parenting magazines, including *American Baby, Pregnancy, ePregnancy, Healthy Pregnancy* and *Shape Fit Pregnancy*. A Pea in the Pod, Mimi and Motherhoodare also advertised in fashion and broad-reach magazines, such as *Vogue*, *In Style*, *Lucky*, *People* and *Glamour*. We also utilize our publicity efforts to generatefree editorial coverage in broadcast television, magazines, radio and selectednewspapers for all of our brands.

**Competition**

Our business is highlycompetitive and characterized by low barriers to entry. The following areseveral important factors to competing successfully in the retail apparelindustry: breadth of selection in sizes; colors and styles of merchandise;product procurement and pricing; ability to anticipate fashion trends andcustomer preferences; inventory control; reputation; quality of merchandise;store design and location; visual presentation and advertising; and customerservice. We face competition in our maternity apparel lines from varioussources, including department stores, specialty retail chains, discount stores,independent retail stores and catalog and Internet-based retailers, fromboth new and existing competitors. Many of our competitors are larger and havesubstantially greater financial and other resources than us. Our mid- andluxury-priced merchandise faces a highly fragmented competitive landscape thatincludes locally based, single unit retailers, as well as a handful of multi-unitmaternity operations, none of which we believe has more than 20 storesnationwide. In the value-priced maternity apparel business, we currentlyface competition on a nationwide basis from retailers such as Gap®, JC Penney®,Kmart®, Old Navy®, Target® and Wal-Mart®. Several of these competitors,including Gap and Old Navy, also sell maternity apparel on their websites. Webelieve there has been increased competition in the maternity apparel industry,from both new and existing competitors. For example, the maternity apparelindustry experienced oversupply conditions in fiscal 2004 and 2005, whichresulted in a greater level of industry-wide markdowns and markdowns recognizedby us on sales from our retail locations. However, we believe the oversupplyconditions that have affected the maternity apparel business over our 2004 and2005 fiscal years have eased.

**Employees**

As of September 30,2006, we had 2,520 full-time and 2,467 part-time employees. None ofour employees are covered by a collective bargaining agreement. We consider ouremployee relations to be good.

**Executive Officersof the Company**

Thefollowing table sets forth the name, age and position of each of our executiveofficers: 
| Name                | ** ** | ** ** | ** ** | **Age**                                                   | ** ** | **Position** |
|---------------------|------------|------------|------------|-----------------------------------------------------------|------------|--------------|
| Dan W. Matthias     |       | 63         |       | Chairman of the Board  and Chief Executive Officer        |
| Rebecca C. Matthias |       | 53         |       | President, Chief  Operating Officer and Director          |
| Edward M. Krell     |       | 44         |       | Executive Vice  President—Chief Financial Officer    |
| David Mangini       |       | 62         |       | Executive Vice President—General Merchandise Manager |

 

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*DanW. Matthias*co-founded Mothers Work in 1982 (alongwith Rebecca C. Matthias) and has served as Chairman of the Board since ourinception. From 1983 to 1993, Mr. Matthias served as our Executive VicePresident, and since January 1993, Mr. Matthias has been our ChiefExecutive Officer. Prior to Mothers Work, Mr. Matthias had been involvedin the computer and electronics industry, serving as a director ofZilog, Inc. and as the President of a division of a subsidiary of ExxonCorporation.

*RebeccaC. Matthias*co-founded Mothers Work in 1982 (alongwith Dan W. Matthias) and has served as a director and our President since ourinception. Since January 1993, Ms. Matthias has also served as ourChief Operating Officer. In 1992, Ms. Matthias was chosen as “RegionalEntrepreneur of the Year” by *Inc*. magazineand Merrill Lynch Corporation, and in September 2003, Ms. Matthiaswas recognized as a top woman entrepreneur by the United States Small BusinessAdministration. Prior to 1982, Ms. Matthias was a construction engineerfor the Gilbane Building Company. Ms. Matthias also serves as a directoron the Board of Directors of CSS Industries, Inc.

*EdwardM. Krell*has served as Executive Vice President—ChiefFinancial Officer since November 2003, having served as Senior VicePresident—Chief Financial Officer from the time he joined Mothers Work in January 2002until November 2003. Prior to joining Mothers Work, Mr. Krell servedas Executive Vice President and Chief Financial Officer of Mammoth Sports Group, Inc.,an Internet and catalog retailer of golf equipment and accessories, from December 1999to July 2000 and as an independent financial consultant from July 2000to January 2002. From 1995 to 1999, Mr. Krell served as ExecutiveVice President and Chief Financial Officer of London Fog Industries, Inc.,a wholesale and retail distributor of rainwear and outerwear. Mr. Krellbegan his career as an investment banker with Kidder, Peabody & Co.Incorporated.

*DavidMangini*has served as Executive Vice President—GeneralMerchandise Manager since August 2001. Prior to joining Mothers Work, Mr. Manginiserved in various senior merchandising and executive management positions withretailers, including as Chief Merchandising Officer of Today’s Man, ChiefOperating Officer of Gadzooks, and President and Chief Executive Officer of theStructure brand of Limited, Inc.

Our executive officers areelected annually by the Board of Directors and serve at the discretion of theBoard. Other than the husband and wife relationship between Dan and RebeccaMatthias, there are no family relationships among any of our other executiveofficers.

**Trademarks**

We own trademark andservice mark rights that we believe are sufficient to conduct our business ascurrently operated. We own several trademarks, including Mothers Work®, A Peain the Pod®, Mimi Maternity®, Motherhood®, Motherhood Maternity®, DestinationMaternityTM, Edamame The Maternity Spa®, Two Hearts® Maternity, Oh Baby! byMotherhoodTM, Motherhood Maternity Outlet®, and MaternityMall.com®. As a resultof the iMaternity acquisition, we also own the iMaternity®, Dan Howard® andiMaternity.comTM marks. Additionally, we own the marks futuretrust®, FuturetrustFamily Financial CenterTM, Real Time Retailing®, What’s Showing isYour Style®, Motherhood: It’s Hot!TM, Motherhood is Everything GoodTM, MotherhoodBaby® and Maternity Redefined®.

**Seasonality**

Our business, like that ofmany other retailers, is seasonal. Our quarterly net sales have historicallybeen highest in our third fiscal quarter, corresponding to the Spring sellingseason, followed by our first fiscal quarter, corresponding to the Fall/holidayselling season. Given the typically higher gross margin we experience in thethird fiscal quarter compared to other quarters, the relatively fixed nature ofmost of our operating expenses and interest expense, and the historicallyhigher sales level in the third quarter, we have typically generated a verysignificant percentage of our full year operating income and net income during 

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thethird quarter. Results for any quarter are not necessarily indicative of theresults that may be achieved for a full fiscal year. Quarterly results mayfluctuate materially depending upon, among other things, the timing of newstore openings, net sales and profitability contributed by new stores,increases or decreases in comparable store sales, adverse weather conditions,shifts in the timing of certain holidays and promotions, changes in inventoryand production levels and the timing of deliveries of inventory, and changes inour merchandise mix.

**Securities andExchange Commission Filings**

Our Securities and ExchangeCommission (“SEC”) filings are available free of charge on our website,www.motherswork.com*.*Our annualreports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports areposted on our website as soon as practicable after we furnish such materials tothe SEC.

**Item 1A.**                RiskFactors

*You should consider carefully all of the informationset forth or incorporated by reference in this document and, in particular, thefollowing risk factors associated with our business and forward-lookinginformation in this document (see also “Forward-Looking Statements” included in“Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations”). The risks described below are not the only ones we face. Additionalrisks not presently known to us or that we do not currently consider significantmay also have an adverse effect on us. If any of the risks below actuallyoccur, our business, results of operations, cash flows or financial conditioncould suffer.*

***We may not be successful in expanding our business andopening new stores.***

Any future growth depends significantly on our abilityto successfully establish and operate new stores (including combination storesand superstores) and our leased department and licensed relationships on aprofitable basis. This expansion, if it occurs, will place increased demands onour management, operational and administrative resources. These increaseddemands and operating complexities could cause us to operate our business lesseffectively, which, in turn, could cause a deterioration in our financialperformance and slow our growth. Our planned expansion will also require thatwe continually monitor and upgrade our management information and othersystems, as well as our distribution infrastructure.

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

·       identifyand obtain suitable store locations, including mall locations, the availabilityof which is outside of our control;

·       expandexisting and establish new leased department and licensed relationships;

·       negotiatefavorable lease terms for stores, including desired tenant improvementallowances;

·       negotiatefavorable lease terminations for existing store locations in markets where weintend to open new combination stores or superstores;

·       sourcesufficient levels of inventory to meet the needs of new stores and our leaseddepartment and licensed relationships;

·       successfullyaddress competition, merchandising and distribution challenges; and

·       hire,train and retain a sufficient number of qualified store personnel.

There can be no assurancethat we will be able to achieve our expansion goals. Even if we succeed inestablishing new stores and further developing our leased department andlicensed relationships, we 

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cannotassure you that our newly opened stores or leased department and licensed brandbusinesses will achieve planned revenue or profitability levels in the timeperiods estimated by us, or at all. If our stores or our leased department andlicensed brand businesses fail to achieve or are unable to sustain acceptablerevenue and profitability levels, we may incur significant costs associatedwith operating or closing those stores.

***Our comparablestore sales and quarterly operating results have fluctuated in the past and canbe expected to continue to fluctuate in the future and, as a result, the marketprice of our common stock may fluctuate or decline substantially.***

Our comparablestore sales and quarterly results of operations have fluctuated in the past andcan be expected to continue to fluctuate in the future and are affected by avariety of factors, including:

·       theopening of new stores and success of our leased department and licensedrelationships;

·       thetiming of new store openings and leased department and licensed brand businessopenings;

·       theextent of cannibalization of sales volume of some of our existing retail locationsby our new retail locations opened in the same geographic markets;

·       changesin our merchandise mix;

·       anyrepositioning of our brands;

·       generaleconomic conditions and, in particular, the retail sales environment;

·       calendarshifts, including shifts of holiday or seasonal periods, or shifts in thenumber of weekend days occurring in a given month;

·       changesin pregnancy rates;

·       actionsof competitors;

·       thelevel of success and/or actions of anchor tenants where we have stores orleased department and licensed relationships;

·       fashiontrends; and

·       weatherconditions and seasonality.

If, at any time, ourcomparable store sales or quarterly results of operations decline or do notmeet the expectations of Wall Street research analysts, the price of our commonstock could decline substantially.

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

We operate in a highlycompetitive environment characterized by few barriers to entry. We competeagainst department stores, specialty retail chains, discount stores,independent retail stores and catalog and Internet-based retailers. Manyof our competitors are larger and have substantially greater financial andother resources than us. Further, we do not typically advertise usingtelevision and radio media and thus do not reach customers through means ourcompetitors may use. Our mid- and luxury-priced merchandise faces ahighly fragmented competitive landscape that includes locally based, singleunit retailers, as well as a handful of multi-unit maternity operations,none of which we believe have more than 20 stores nationwide. In the value-pricedmaternity apparel business, we face competition on a nationwide basis fromretailers such as Gap, JC Penney, Kmart, Old Navy, Target and Wal-Mart. Severalof these competitors, including Gap and Old Navy, also sell maternity apparelon their websites. Over the past few 

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years,there has been increased competition in the maternity apparel industry fromboth new and existing competition. Our business, financial condition andresults of operations may be materially and adversely affected by thiscompetition, including the potential for increased competition in the future. Forexample, the maternity apparel industry experienced oversupply conditions infiscal 2004 and 2005, which resulted in a greater level of industry-widemarkdowns and markdowns recognized by us on sales from our retail locations. Therecan be no assurance that these conditions will not occur again.

***Our relationshipswith third-party retailers may not be successful.***

We cannot guaranteesuccessful results from our leased department and licensed relationships withthird-party retailers such as Sears and Kohl’s. Under our agreement withKohl’s, Kohl’s is not obligated to purchase any maternity apparel from us andwe are not obligated to sell any maternity apparel to them. Under our agreementwith Sears, Sears does not make any promises or representations as to thepotential amount of business we can expect from the sale of our Two HeartsMaternity collection. We do not control the pricing terms or the timing ordegree of the markdowns at Kohl’s. The success of our leased department andlicensed brand businesses is highly dependent on the actions and decisions ofthe third-party retailers, which are outside of our control. Theretailers could limit the merchandise carried, close stores, go out of businessor terminate their agreements with us. Our failure to properly manage ourleased department and licensed brand businesses (including any failure by us intimely delivering goods to any third-party retailer or any failure torespond to the actions of or changes in business conditions at third-partyretailers) would have a direct impact on the profitability and continuation ofthese relationships.

***We require asignificant amount of cash to service our indebtedness, which reduces the cashavailable to finance any growth and could adversely affect our financialhealth.***

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

Additionally, oursubstantial indebtedness could have important consequences. For example, itcould:

·       increaseour vulnerability to general adverse economic and industry conditions;

·       requireus to dedicate a substantial portion of our cash flow from operations to makingpayments on our indebtedness, thereby reducing the availability of our cashflow to implement our growth strategy, or to fund working capital, capitalexpenditures and other general corporate needs;

·       limitour flexibility in planning for, or reacting to, changes in our business andthe industry in which we operate;

·       resultin higher interest expense in the event of increases in interest rates as someof our debt is, and will continue to be, at variable rates of interest, and ouravailable borrowings under our credit facility, to the extent borrowed in thefuture, would be at variable rates of interest;

·       placeus at a competitive disadvantage compared to our competitors that have lessdebt, or debt at lower interest rates;

·       limitour ability to borrow additional funds;

·       makeit more difficult for us to open new stores or improve or expand existingstores;

·       restrictour ability to pay dividends or make distributions to our stockholders;

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·       requireus to pledge all or substantially all of our assets as collateral to secureindebtedness; and

·       makeit more difficult for us to pursue strategic acquisitions, alliances andpartnerships.

If we are unable to meetour expenses and debt obligations, we may need to refinance all or a portion ofour indebtedness before the scheduled maturity dates of such debt, sell assetsor raise equity. On such maturity dates, we may need to refinance ourindebtedness if our operations do not generate enough cash to pay suchindebtedness in full and if we do not raise additional capital. Our ability to refinancewill depend on the capital markets and our financial condition at such time. Wecannot 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, whichcould cause us to default on our obligations and impair our liquidity.

***We are heavilydependent on our management information systems and our ability to maintain andupgrade these systems from time to time.***

The efficient operation of our business is heavilydependent on our fully integrated, internally developed management informationsystems. In particular, we rely on point-of-sale terminals, whichprovide information to our customized TrendTrack merchandise analysis andplanning system used to track sales and inventory. The TrendTrack system helpsintegrate our design, manufacturing, distribution and financial functions, andalso provides daily financial and merchandising information. Although oursoftware programs and data are backed up and stored off-site, our servers andcomputer systems are located at our headquarters in Philadelphia, Pennsylvania.As a result, our business, financial condition and results of operations couldbe materially and adversely affected if our servers and systems were inoperableor inaccessible.

From time to time, weimprove and upgrade our management information systems. We have rolled out aproprietary, upgraded Internet-based point-of-sale system andintegrated this system with our current systems. If we are unable to maintainand upgrade our systems or to integrate new and updated systems in an efficientand timely manner, our business, financial condition and results of operationscould be materially and adversely affected.

***As an apparelretailer, we rely on numerous third parties in the supply chain to produce anddeliver the products that we sell, and our business may be negatively impactedby disruptions in the supply chain.***

If we lose the services of one or more of oursignificant suppliers or one or more of them fail to meet our product needs, wemay be unable to obtain replacement merchandise in a timely manner. If ourexisting suppliers cannot meet our increased needs and we cannot locatealternative supply sources, we may be unable to obtain sufficient quantities ofthe most popular items at attractive prices, which could negatively impact oursales, revenues and results of operations. We obtain apparel and othermerchandise from foreign sources, both purchased directly in foreign marketsand indirectly through domestic vendors with foreign sources. To the extentthat any of our vendors are located overseas or rely on overseas sources for alarge portion of their products, any event causing a disruption of imports,including the imposition of import restrictions, could harm our ability tosource product. This disruption could materially limit the merchandise that wewould have available for sale and reduce our revenues and earnings. The flow ofmerchandise from our vendors could also be adversely affected by financial orpolitical instability, or war, in or affecting any of the countries in whichthe goods we purchase are manufactured or through which they flow. Traderestrictions in the form of tariffs or quotas, embargos and customsrestrictions that are applicable to the products that we sell also could affectthe import of those products and could increase the cost and reduce the supplyof products available to us. Any material increase in tariff levels, or anymaterial decrease in quota levels or available quota allocation, couldnegatively impact our business. Further, changes in tariffs or quotas formerchandise imported from individual foreign countries could lead us to shiftour sources of supply among various countries. Any such shift we undertake inthe future could result 

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in a disruption of oursources of supply and lead to a reduction in our revenues and earnings. Supplychain security initiatives undertaken by the U.S. government that impede thenormal flow of product could also negatively impact our business. In addition,decreases in the value of the U.S. dollar against foreign currencies couldincrease the cost of products that we purchase from overseas vendors.

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

·       politicalinstability or the threat of terrorism, in particular in countries where ourvendors source merchandise;

·       enhancedsecurity measures at U.S. and foreign ports, which could delay delivery ofimports;

·       impositionof new or supplemental duties, taxes, and other charges on imports;

·       delayedreceipt or non-delivery of goods due to the failure of foreign-sourcesuppliers to comply with applicable import regulations;

·       delayedreceipt or non-delivery of goods due to organized labor strikes orunexpected or significant port congestion at U.S. ports; and

·       localbusiness practice and political issues, including issues relating to compliancewith domestic or international labor standards, which may result in adversepublicity.

The United States mayimpose new initiatives that adversely affect the trading status of countrieswhere apparel is manufactured. These initiatives may include retaliatory dutiesor other trade sanctions that, if enacted, would increase the cost of productsimported from countries where our vendors acquire merchandise. Any of thesefactors could have a material adverse effect on our business, financialcondition and results of operations.

***We could bematerially and adversely affected if our distribution operations weredisrupted.***

To support ourdistribution of product throughout the U.S. and Canada, we operate our maindistribution facility in Philadelphia, Pennsylvania and two significantlysmaller distribution facilities, one in Philadelphia, Pennsylvania and theother, serving as our Canadian distribution facility, in Mississauga, Ontario. Finishedgarments from contractors and other manufacturers are inspected and stored fordistribution to our stores. We do not have other distribution facilities tosupport our distribution needs. If our main Philadelphia distribution facilitywas to shut down or otherwise become inoperable or inaccessible for any reason,we could incur significantly higher costs and longer lead times associated withthe distribution of our products to our stores during the time it takes toreopen or replace this facility. In light of our strategic emphasis on rapidreplenishment as a competitive strength, a distribution disruption might have adisproportionately adverse effect on our operations and profitability relativeto other retailers. In addition, the loss or material disruption of servicefrom any of our shippers for any reason, whether due to freight difficulties,strikes, natural disaster or other difficulties at our principal transportproviders or otherwise, could have a material adverse impact on our business,financial condition and results of operations.

***We could bematerially and adversely affected if we are unable to obtain sufficient rawmaterials or maintain satisfactory manufacturing arrangements.***

We do not own anymanufacturing facilities and therefore depend on third parties to manufactureour products. We place our orders for production of merchandise and rawmaterials by purchase order and do not have any long-term contracts withany manufacturer or supplier. We compete with many other companies forproduction facilities and raw materials. Furthermore, we have received in thepast, and may receive in the future, shipments of products from manufacturersthat fail to conform to our quality control 

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standards.In such event, unless we are able to obtain replacement products in a timelymanner, we may lose sales. If we fail to maintain favorable relationships withthese third parties, or if we cannot obtain an adequate supply of quality rawmaterials on commercially reasonable terms, it could have a material adverseimpact on our business, financial condition and results of operations.

***Our stores areheavily dependent on the customer traffic generated by shopping malls.***

We depend heavily on locating our stores in prominentlocations within successful shopping malls in order to generate customertraffic. We cannot control the development of new shopping malls, theavailability or cost of appropriate locations within existing or new shoppingmalls or the success of existing or new mall stores.

The success of all of ourmall 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 generateconsumer traffic in the vicinity of our stores, and the continuing popularityof malls as shopping destinations. Many traditional enclosed malls areexperiencing lower levels of customer traffic than in the past. Sales volumeand mall traffic may be adversely affected by economic downturns in aparticular area, the closing of anchor tenants or competition from non-mallretailers and other malls where we do not have stores.

***Our success dependson our ability to identify and rapidly respond to fashion trends.***

The apparel industry issubject to rapidly changing fashion trends and shifting consumer demands.Accordingly, our success depends on the priority that our target customersplace on fashion and our ability to anticipate, identify and capitalize uponemerging fashion trends. Our failure to anticipate, identify or reactappropriately to changes in styles or trends could lead to, among other things,excess inventories and higher markdowns, as well as the decreased appeal of ourbrands. An inaccuracy of our forecasts regarding fashion trends could have amaterial adverse effect on our business, financial condition and results ofoperations.

***The failure toretain our existing senior management team or to attract and retain highlyskilled and qualified personnel could have a material adverse impact on ourbusiness, financial condition and results of operations.***

Our business requires disciplined execution at alllevels of our organization in order to timely deliver and display fashionablemerchandise in appropriate quantities in our stores. This execution requiresexperienced and talented management. We currently have a management team with agreat deal of experience with us and in apparel retailing. If we were to losethe benefit of this experience and, in particular, if we were to lose theservices of Dan Matthias, our Chairman and Chief Executive Officer, or RebeccaMatthias, our President and Chief Operating Officer, our business, financialcondition and results of operations could be materially and adversely affected.

In addition, as ourbusiness expands, we believe that our success will depend greatly on ourcontinued ability to attract and retain highly skilled and qualified personnel.There is a high level of competition for personnel in the retail industry. Likemost retailers, we experience significant employee turnover rates, particularlyamong store sales associates and managers, and our continued growth willrequire us to hire and train even more new personnel. We therefore must continuallyattract, hire and train new personnel to meet our staffing needs. We constantlycompete for qualified personnel with companies in our industry and in otherindustries. A significant increase in the turnover rate among our salesassociates and managers would increase our recruiting and training costs andcould decrease our operating efficiency and productivity. If we are unable toretain our employees or attract, train, assimilate or retain other skilledpersonnel in the future, we may not be able to service our customers aseffectively, thus impairing our ability to increase revenue and could otherwiseharm our business.

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***Our quarterlyoperating results and inventory levels may fluctuate significantly as a resultof seasonality in our business.***

Our business, like that ofother retailers, is seasonal. Results for any quarter are not necessarilyindicative of the results that may be achieved for a full fiscal year. Ourquarterly net sales have historically been highest in our third fiscal quarter,corresponding to the Spring selling season, followed by our first fiscalquarter, corresponding to the Fall/holiday selling season. Given the typicallyhigher gross margin we experience in our third fiscal quarter compared to otherquarters, the relatively fixed nature of most of our operating expenses andinterest expense, and the historically higher sales level in our third fiscal quarter,we have typically generated a very significant percentage of our full yearoperating income and net income during our third fiscal quarter. Thus, anyfactors which result in a material reduction of our sales for the third quartercould have a material adverse effect on our results of operations for ourfiscal year as a whole. Seasonal fluctuations in sales also affect ourinventory levels, as we usually order merchandise in advance of peak sellingperiods and sometimes before new fashion trends are confirmed by customerpurchases. We must carry a significant amount of inventory, especially beforethe Fall/holiday and Spring selling seasons. If we are not successful inselling our inventory during this period, we may be forced to rely on markdownsor promotional sales to dispose of the excess inventory or we may not be ableto sell the inventory at all, which could have a material adverse effect on ourbusiness, financial condition and results of operations.

***Our businessdepends on sustained demand for maternity clothing and is sensitive to birthrates, economic conditions and consumer spending.***

Our business depends uponsustained demand for maternity clothing. Our future performance will be subjectto a number of factors beyond our control, including demographic changes. Ifdemand for maternity clothing were to decline for any reason, such as adecrease in the number of pregnancies, our operating results could be adverselyaffected. Downturns, or the expectation of a downturn, in general economicconditions could adversely affect consumer spending patterns, our business,financial condition and results of operations. In addition, the specialtyapparel retail business historically has been subject to cyclical variations. Consumerpurchases of specialty apparel products, including maternity wear, may declineduring recessionary periods and at other times when disposable income is lower.Declines in consumer spending patterns may have a more negative effect onapparel retailers than some other retailers. Therefore, we may not be able tomaintain our historical rate of growth in revenues and earnings, or remain asprofitable, if there is a decline in consumer spending patterns. A prolongedeconomic downturn could have a material adverse impact on our business andresults of operations.

***If an independentmanufacturer violates labor or other laws, or is accused of violating any suchlaws, or if their labor practices diverge from those generally accepted asethical, it could harm our business and brand image.***

While we maintain policiesand guidelines with respect to labor practices that independent manufacturersthat produce goods for us are contractually required to follow, and while wehave an independent firm and Company employees inspect certain manufacturing sitesto monitor compliance, we cannot control the actions of such manufacturers orthe public’s perceptions of them, nor can we assure that these manufacturerswill conduct their businesses using ethical or legal labor practices. Apparelcompanies can be held jointly liable for the wrongdoings of the manufacturersof their products. While many of our independent manufacturers are routinelymonitored by buying representatives, who assist us in the areas of compliance,garment quality and delivery, we do not control the manufacturers’ businesspractices or their employees’ employment conditions, and manufacturers act intheir own interest which may be in a manner that results in negative publicperceptions of us, and/or employee allegations against us or courtdeterminations that we are jointly liable. Violations of law by our importers,buying agents, manufacturers or distributors could result in delays inshipments and receipt of goods and could subject us 

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to finesor other penalties, any of which could restrict our business activities,increase our operating expenses or cause our revenues to decline.

***Our earnings woulddecline if our goodwill becomes impaired.***

As a result of purchaseaccounting for our various acquisitions, we have accumulated $50.4 million ofgoodwill as of September 30, 2006. Following our adoption of a newaccounting standard on October 1, 2001, goodwill and other intangibleassets with indefinite lives are not amortized, but rather tested forimpairment annually. The impairment test requires us to compare the fair valueof business reporting units to their carrying value, including assignedgoodwill. The fair value of our single reporting unit is determined based onthe fair market value of our outstanding common stock on a control basis and,if necessary, an outside independent valuation is obtained to determine thefair value. The carrying value of our single reporting unit, expressed on a pershare basis, is represented by the book value per share of our outstandingcommon stock. The results of the annual impairment test performed as of September 30,2006 indicated the fair value of the reporting unit exceeded its carrying value.As of September 30, 2006, our book value was $14.35 per share ofoutstanding common stock and the closing trading price of our common stock was$48.12 per share. If the per share fair value of our single reporting unitwas less than the book value per share on September 30, 2006, our goodwillwould likely have become impaired. If the per share fair value of our singlereporting unit were to decline in the future below the then applicable bookvalue of our outstanding common stock, our goodwill would likely have been impaired.If we determine in the future that impairment has occurred, we would be requiredto write off the impaired portion of goodwill, which could substantially reduceour earnings and result in a substantial decline in the price of our commonstock.

***We may be unable toprotect our trademarks and other intellectual property.***

We believe that ourtrademarks and service marks are important to our continued success and ourcompetitive position due to their recognition with our customers. We devotesubstantial resources to the establishment and protection of our trademarks andservice marks. Although we actively protect our intellectual property, therecan be no assurance that the actions that we have taken to establish andprotect our trademarks, service marks and other intellectual property,including our rights in our management information systems, will be adequate toprevent imitation of our marks, products or services by others or to preventothers from seeking to block sales of our products as a violation of theirtrademarks, service marks or other proprietary rights. Also, others may assertrights in, or ownership of, our trademarks and other proprietary rights and wemay not be able to successfully resolve these types of conflicts. In addition,the laws of certain foreign countries may not protect our trademarks andproprietary rights to the same extent as do the laws of the U.S. We cannotassure you that these registrations will prevent imitation of our name,merchandising concept, store design or private label merchandise or theinfringement of our other intellectual property rights by others. Imitation ofour name, concept, store design or merchandise in a manner that projects lesserquality or carries a negative connotation of our brand image could have amaterial adverse effect on our business, financial condition and results ofoperations.

***War or acts ofterrorism or the threat of either may negatively impact availability ofmerchandise and otherwise adversely impact our business.***

In the event of war oracts of terrorism, or if either is threatened, our ability to obtainmerchandise available for sale may be negatively affected. A substantialportion of our merchandise is imported from other countries. If goods becomedifficult or impossible to import into the U.S., and if we cannot obtain suchmerchandise from other sources at similar costs, our sales and profit marginsmay be adversely affected. In the event that commercial transportation iscurtailed or substantially delayed, our business may 

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beadversely impacted, as we may have difficulty shipping merchandise to our maindistribution facility and retail locations, as well as fulfilling catalog andwebsite orders.

***The terms of ourdebt instruments impose financial and operating restrictions.***

Our credit facilityand the indenture governing the senior notes both contain restrictive covenantsthat limit our ability to engage in activities that may be in our long termbest interests. These covenants limit or restrict, among other things, ourability to:

·       incuradditional indebtedness;

·       paydividends or make other distributions in respect of our equity securities, orpurchase or redeem capital stock, or make certain investments;

·       haveour subsidiaries pay dividends, make loans or transfer assets to us;

·       sellassets, including the capital stock of our subsidiaries;

·       enterinto any transactions with our affiliates;

·       transferany capital stock of any subsidiary or permit any subsidiary to issue capitalstock;

·       createliens;

·       enterinto certain sale/leaseback transactions; and

·       effecta consolidation or merger or transfer of all or substantially all of ourassets.

These limitations andrestrictions may adversely affect our ability to finance our future operationsor capital needs or engage in other business activities that may be in our bestinterests. In addition, our ability to borrow under the credit facility issubject to borrowing base requirements. If we breach any of the covenants inour credit facility or our indenture, we may be in default under our creditfacility or our indenture. If we default, the holders of the senior notes or thelender under our credit facility could declare all borrowings owed to them,including accrued interest and other fees, to be due and payable.

***Our share price maybe volatile and could decline substantially.***

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

·       actualor anticipated variations in the financial results and prospects of ourbusiness or other companies in the retail business;

·       changesin financial estimates by Wall Street research analysts;

·       actualor anticipated changes in the U.S. economy or the retailing environment;

·       changesin the market valuations of other specialty apparel or retail companies;

·       announcementsby our competitors or us;

·       additionsand departures of key personnel;

·       changesin accounting principles;

·       thepassage of legislation or other developments affecting us or our industry;

·       thetrading volume of our common stock in the public market;

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·       changesin economic conditions;

·       financialmarket conditions;

·       naturaldisasters, terrorist acts, acts of war or periods of civil unrest;

·       therealization of some or all of the risks described in this section entitled “RiskFactors”; and

·       anygoodwill impairment would require a write down that would likely negatively affectour stock price.

In addition, the stockmarkets have experienced significant price and trading volume fluctuations fromtime to time, and the market prices of the equity securities of retailers havebeen extremely volatile and have recently experienced sharp price and tradingvolume changes. These broad market fluctuations may adversely affect the marketprice of our common stock.

***Our charterdocuments contain certain anti-takeover provisions, and we are entitledto certain other protective provisions under Delaware law.***

We are a Delawarecorporation and the anti-takeover provisions of Delaware law imposevarious impediments to the ability of a third party to acquire control of theCompany, even if a change of control would be beneficial to our existingstockholders. We also have adopted a stockholder rights plan, commonly known asa “poison pill,” that entitles our stockholders to acquire additional shares ofus, or a potential acquirer of us, at a substantial discount to their marketvalue in the event of an attempted takeover. In addition, our amended andrestated certificate of incorporation and by-laws contain provisions thatmay discourage, delay or prevent a merger or acquisition involving us that ourstockholders may consider favorable by, among other things:

·                    authorizingthe issuance of preferred stock, the terms of which may be determined at thediscretion of our board of directors;

·                    restrictingthe ability of stockholders to call special meetings of stockholders;

·                    providingfor a classified board of directors, with staggered three-year terms; and

·                    establishingadvance notice requirements for nominations for election to the board ofdirectors or for proposing matters that can be acted on by stockholders atmeetings.

These provisions may also reducethe market value of our common stock.

***We do not expect topay cash dividends in the foreseeable future.***

We have not paid any cashdividends on our common stock since our initial public offering and do notanticipate paying cash dividends on our common stock in the foreseeable future.In addition, the terms of our senior notes and our credit facilitysignificantly restrict our ability to declare or pay dividends on our commonstock. Even if our ability to pay dividends was not restricted under the termsof the indenture governing our senior notes or our credit facility, any futurepayment of dividends would still be at the discretion of our board of directorsand would be based upon any applicable restrictive financial covenants,earnings, capital requirements and our financial condition, among otherfactors, at the time any such dividend is considered.

***Any increase in oursales and marketing efforts that target markets outside the U.S. would exposeus to additional risks associated with international operations.***

We believe that in thefuture, an opportunity for sales growth may come from the development ofinternational sales. We may not be successful in these efforts, and other thanour existing operations in 

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Canada,we presently have no commitment, agreement or plans relating to any productdistribution or the development of selling operations outside of North America.International operations and sales subject us to risks and challenges that wewould otherwise not face if we conducted our business only in the U.S. Forexample, we may depend on third parties to market our products through foreignsales channels, and we may be challenged by laws and business practicesfavoring local competitors. In addition, our ability to succeed in foreignmarkets will depend on our ability to protect our intellectual property. Wemust also adopt our pricing structure to address different pricing environmentsand may face difficulty in enforcing revenue collection internationally. To theextent we achieve significant sales outside of the U.S. in the future, we mayhave significant exposure to fluctuating foreign currency exchange rates.

***We could havefailures in our system of internal controls.***

We maintain a documentedsystem of internal controls which is reviewed and monitored by management, whomeet regularly with our audit committee of the board of directors. We believewe have a well-designed system to maintain adequate internal controls onthe business. We cannot assure you that there will not be any controldeficiencies in the future. Should we become aware of any control deficiencies,we would report them to the audit committee and recommend prompt remediation. Wehave devoted significant resources to document, test, monitor and improve ourinternal controls and will continue to do so; however, we cannot be certainthat these measures will ensure that our controls are adequate in the future orthat adequate controls will be effective in preventing fraud. If we fail tomaintain an effective system of internal controls, we may not be able toaccurately report our financial results or prevent fraud. Any failures in theeffectiveness of our internal controls could have a material adverse effect onour financial condition or operating results or cause us to fail to meetreporting obligations.

**Item 1B.**               UnresolvedStaff Comments

Not applicable.

**Item 2.**                        Properties

We own our principal executive offices anddistribution facility, which is located at 456 North Fifth Street,Philadelphia, Pennsylvania, subject to a mortgage under the terms of which weowe approximately $2.8 million as of September 30, 2006. Thisfacility consists of approximately 318,000 square feet, of which approximately45,000 square feet is dedicated to office space and the remaining square footageis used for finished goods warehousing and distribution. On August 26,2002, we entered into a ten-year lease for a facility located at 2001Kitty Hawk Avenue, Philadelphia, Pennsylvania in the Philadelphia NavalBusiness Center. The area leased at this facility, which we use for rawmaterial cutting, warehousing and distribution, consists of approximately64,000 square feet of space. To facilitate our store growth in Canada, weentered into a three-year lease commencing November 1, 2002 forapproximately 12,000 square feet of finished goods warehouse and distributionspace in Mississauga, Ontario in Canada. We renewed the lease in Canada throughOctober 31, 2007. We believe that these facilities will be adequate tosupport our anticipated distribution needs for the near term and, potentially,longer. In the event we need additional space to meet our future distributionneeds, we believe that such space would be readily available. Our facilitiesare subject to state and local regulations that range from building codes tohealth and safety.

We lease our store premises for terms averaging fromseven to ten years. Certain leases allow us to terminate or reduce ourobligations at specified points in time in the event that the applicable storedoes not achieve a specified sales volume. Some of our store leases alsoprovide for contingent payments based on sales volume, escalations of the baserent, as well as increases in operating costs, marketing costs and real estatetaxes.

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As of September 30,2006, the following number of store leases are set to expire as listed in thetable below. We do not expect the expiration of any leases to have a materialadverse impact on our business or operations.

| **Fiscal Year Leases Expire** | ** ** | ** ** | ** ** | **Number  of Stores** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------|------------|
| 2007                                         |       |       | 88         |                       |       |
| 2008                                         |       |       | 100        |                       |       |
| 2009                                         |       |       | 121        |                       |       |
| 2010                                         |       |       | 110        |                       |       |
| 2011                                         |       |       | 69         |                       |       |
| 2012 and later                               |       |       | 322        |                       |       |
| Total                                        |       |       | 810        |                       |       |

 

In addition to the storeswe operate, we have arrangements with department and specialty stores,including Babies ”R” Us, Bloomingdale’s, Macy’s and Sears, to operatematernity departments in their stores. These leased departments typicallyinvolve the lease partner collecting all of the revenue from the leaseddepartment. The revenue is remitted to us, less a fixed percentage of the volumeearned by the lease partner as stipulated in the agreement. We provide at leastsome amount of staffing for each of the leased departments, with the amountvarying depending on the specific arrangement.

**Item 3.**                        LegalProceedings

On January 12, 2005, a purported class action wasfiled against us in the U.S. District Court for the District of Connecticut. Thecomplaint alleged that, under applicable federal and state law, certain formerand current employees should have received overtime compensation. The plaintiffsin this case sought unspecified actual damages, penalties and attorneys’ fees. Weunderstand that similar proceedings have been brought against other retailcompanies. In July 2006, the parties settled the outstanding claims andentered into a confidential settlement agreement, and on August 1, 2006,the District Court approved the settlement and dismissed the case. The terms ofthe settlement did not and will not have a material adverse effect on ourresults of operation or financial position.

In addition, from time totime, we are named as a defendant in legal actions arising from our normalbusiness activities. Litigation is inherently unpredictable and although theamount of any liability that could arise with respect to currently pending actionscannot be accurately predicted, we do not believe that the resolution of anypending action will have a material adverse effect on our financial position,results of operations or liquidity.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

Not applicable.

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**PART II.**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Ourcommon stock is traded on the Nasdaq Global Market under the symbol “MWRK.” Thefollowing table sets forth for the periods indicated below the reported highand low sales prices of our common stock as reported on the Nasdaq GlobalMarket:

| ** **                                      | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
| **Fiscal Year Ended  September 30, 2005:** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Quarter ended  December 31, 2004           |       | $          | 18.66      |       | $          | 11.75 |   |
| Quarter ended March 31,  2005              |       | 15.59      |       | 12.43      |       |
| Quarter ended  June 30, 2005               |       | 15.00      |       | 11.58      |       |
| Quarter ended  September 30, 2005          |       | 13.66      |       | 10.00      |       |
| **Fiscal  Year Ended September 30, 2006:** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Quarter ended  December 31, 2005           |       | $          | 13.19      |       | $          | 6.72 |   |
| Quarter ended  March 31, 2006              |       | 26.21      |       | 12.79      |       |
| Quarter ended  June 30, 2006               |       | 35.20      |       | 20.12      |       |
| Quarter ended  September 30, 2006          |       | 50.83      |       | 30.26      |       |

 

As of December 4, 2006, there were 917 holders ofrecord and 2,695 estimated beneficial holders of our common stock.

We have not paid any cash dividends on our commonstock since our initial public offering and do not anticipate paying cashdividends on our common stock in the foreseeable future. In addition, the termsof our 111¤4%senior notes due 2010 (the “Senior Notes”) and our credit facility significantlyrestrict our ability to declare or pay dividends on our common stock. Even ifwe were not restricted under the terms of our Senior Notes or our creditfacility from being able to pay dividends, any future payment of dividendswould still be at the discretion of our Board of Directors and would be basedupon certain restrictive financial covenants, earnings, capital requirementsand our financial condition, among other factors, at the time any such dividendis considered.

Up to a total of 1,975,000options may be issued under our 1987 Stock Option Plan. Under our 2005 EquityIncentive Plan (the “2005 Plan”), awards may be granted in the form of options,stock appreciation rights, restricted stock or restricted stock units. Up to500,000 shares of our common stock may be issued in respect of awards under our2005 Plan, with no more than 250,000 of those shares permitted to be issued inrespect of restricted stock or restricted stock units granted under the 2005Plan.

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**Item 6.**                        SelectedConsolidated Financial and Operating Data

Thefollowing tables set forth selected data pertaining to the consolidatedstatement of operations, operating, cash flow and other, and balance sheet asof and for the periods indicated. The selected consolidated statement of operationsand balance sheet data for each of the five fiscal years presented below arederived from our consolidated financial statements. You should read thisinformation in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our consolidated financialstatements and the related notes included elsewhere in this report.

| ** **                                            | ** ** | **Year Ended September 30,**                           | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002 (1)** | ** ** |
| ** **                                            | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Statement of Operations Data:**                     | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                             |       | $                                                                     | 602,744    |   | $ | 561,627 |   | $ | 518,051 |   | $ | 492,447 |   | $ | 453,159 |   |
| Cost of goods sold (2)                           |       | 288,082                                                               |       | 277,453 |   | 242,751 |   | 227,961 |   | 214,659 |   |
| Gross profit                                          |       | 314,662                                                               |       | 284,174 |   | 275,300 |   | 264,486 |   | 238,500 |   |
| Selling, general and administrative expenses (2) |       | 284,334                                                               |       | 269,936 |   | 252,030 |   | 228,466 |   | 205,355 |   |
| Operating income                                      |       | 30,328                                                                |       | 14,238 |   | 23,270 |   | 36,020 |   | 33,145 |   |
| Interest expense, net (2)                        |       | 14,534                                                                |       | 15,293 |   | 14,765 |   | 14,469 |   | 13,961 |   |
| Loss on extinguishment of debt (1)(2)            |       | 873                                                                   |       | — |   | — |   | — |   | 2,515 |   |
| Income (loss) before income taxes                     |       | 14,921                                                                |       | (1,055 | ) | 8,505 |   | 21,551 |   | 16,669 |   |
| Income tax provision (benefit)                   |       | 5,819                                                                 |       | (880 | ) | 3,466 |   | 8,337 |   | 6,269 |   |
| Net income (loss)                                     |       | 9,102                                                                 |       | (175 | ) | 5,039 |   | 13,214 |   | 10,400 |   |
| Dividends on preferred stock (1)                 |       | —                                                                |       | — |   | — |   | — |   | 3,942 |   |
| Net income (loss) available to common stockholders    |       | $                                                                     | 9,102      |   | $ | (175 | ) | $ | 5,039 |   | $ | 13,214 |   | $ | 6,458 |   |
| Net income (loss) per share—Basic                |       | $                                                                     | 1.70       |   | $ | (0.03 | ) | $ | 0.97 |   | $ | 2.52 |   | $ | 1.65 |   |
| Average shares outstanding—Basic                 |       | 5,348                                                                 |       | 5,242 |   | 5,212 |   | 5,236 |   | 3,914 |   |
| Net income (loss) per share—Diluted              |       | $                                                                     | 1.63       |   | $ | (0.03 | ) | $ | 0.92 |   | $ | 2.34 |   | $ | 1.52 |   |
| Average shares  outstanding—Diluted              |       | 5,591                                                                 |       | 5,242 |   | 5,501 |   | 5,646 |   | 4,261 |   |

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(1)          In August 2002, aspart of a refinancing, we repurchased our existing 125¤8% senior notesand Series A and Series C Preferred Stock and, in connectiontherewith, incurred $3.0 million of after-tax one-time charges, includingapproximately $2.6 million of non-cash charges.

(2)          Fiscal2002 has been reclassified from amounts previously reported to conform to thecurrent year presentation.

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| ** **                                                   | ** ** | **Year Ended September 30,**                                                        | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                   | ** ** | **(unaudited; in thousands, except operating data and ratios)** | ** ** |
| **Operating Data:**                                          | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Comparable store sales  increase (decrease) (1)         |       | 4.3                                                                                                | %          | (2.5 | )% | (4.9 | )% | 0.3 | % | 2.2 | % |
| Average net sales per gross  square foot (2)            |       | $                                                                                                  | 305        |   | $ | 295 |   | $ | 311 |   | $ | 345 |   | $ | 362 |   |
| Average net sales per store (2)                         |       | $                                                                                                  | 570,000    |   | $ | 534,000 |   | $ | 537,000 |   | $ | 572,000 |   | $ | 589,000 |   |
| Gross store square footage  at period  end (3)          |       | 1,532,000                                                                                          |       | 1,579,000 |   | 1,569,000 |   | 1,451,000 |   | 1,231,000 |   |
| Gross retail location  square footage at period end (4) |       | 1,819,000                                                                                          |       | 1,874,000 |   | 1,693,000 |   | 1,541,000 |   | 1,313,000 |   |
| Number of retail locations  at period end:                   |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Motherhood Maternity stores                                  |       | 659                                                                                                |       | 690 |   | 717 |   | 688 |   | 616 |   |
| Mimi Maternity stores                                        |       | 106                                                                                                |       | 117 |   | 121 |   | 119 |   | 104 |   |
| A Pea in the Pod stores                                      |       | 33                                                                                                 |       | 37 |   | 41 |   | 44 |   | 43 |   |
| Destination Maternity  superstores                           |       | 12                                                                                                 |       | 8 |   | 4 |   | — |   | — |   |
| Total stores                                                 |       | 810                                                                                                |       | 852 |   | 883 |   | 851 |   | 763 |   |
| Leased departments                                           |       | 731                                                                                                |       | 739 |   | 232 |   | 155 |   | 146 |   |
| Total retail locations                                       |       | 1,541                                                                                              |       | 1,591 |   | 1,115 |   | 1,006 |   | 909 |   |
| **Other Financial Data:**                                    | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Adjusted EBITDA (5)                                     |       | $                                                                                                  | 51,715     |   | $ | 33,906 |   | $ | 40,579 |   | $ | 50,213 |   | $ | 45,422 |   |
| Ratio of total debt to  Adjusted EBITDA                      |       | 2.3x                                                                                               |       | 3.8x |   | 3.2x |   | 2.6x |   | 2.8x |   |
| Ratio of Adjusted EBITDA to  interest expense                |       | 3.6x                                                                                               |       | 2.2x |   | 2.7x |   | 3.5x |   | 3.3x |   |
| Cash flows provided by  operating activities                 |       | 42,413                                                                                             |       | 7,324 |   | 18,256 |   | 36,139 |   | 31,056 |   |
| Cash flows used in  investing activities                     |       | (23,166                                                                                            | )          | (11,414 | ) | (23,020 | ) | (22,169 | ) | (20,219 | ) |
| Cash flows used in financing  activities                     |       | (3,380                                                                                             | )          | (1,340 | ) | (2,500 | ) | (4,648 | ) | (14,786 | ) |
| Capital expenditures                                         |       | 13,933                                                                                             |       | 17,644 |   | 21,540 |   | 25,344 |   | 12,242 |   |
| **Balance Sheet Data (at end of  period):**                  | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital                                              |       | $                                                                                                  | 83,772     |   | $ | 71,228 |   | $ | 67,833 |   | $ | 62,708 |   | $ | 55,214 |   |
| Total assets                                                 |       | 287,736                                                                                            |       | 273,317 |   | 271,370 |   | 263,536 |   | 247,139 |   |
| Total debt                                                   |       | 118,349                                                                                            |       | 128,856 |   | 127,917 |   | 128,047 |   | 128,282 |   |
| Stockholders’ equity                                    |       | 80,700                                                                                             |       | 63,328 |   | 62,903 |   | 58,858 |   | 45,708 |   |

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(1)    Comparablestore sales figures represent sales at retail locations that have been inoperation by Mothers Work for at least twelve full months at the beginning ofthe period for which such data is presented. As used in this Form 10-K,“retail locations” include stores and leased departments, and exclude locationswhere Kohl’s sells our products under an exclusive product and licenseagreement.

(2)    Based onstores in operation by Mothers Work during the entire twelve-month period(which does not include leased department or licensed relationships).

(3)    Based onstores in operation by Mothers Work at the end of the period.

(4)    Based onall retail locations in operation at the end of the period.

(5)    AdjustedEBITDA represents operating income before deduction for the following non-cashcharges: (i) depreciation and amortization expense; (ii) loss onimpairment of long-lived assets; (iii) (gain) loss on disposal of assets;and (iv) stock-based compensation expense. We have presented AdjustedEBITDA to enhance your understanding of our operating results. Adjusted EBITDAis provided because management believes it is an important measure of financialperformance used in the retail industry to measure operating results, todetermine the value of companies within the industry and to define standardsfor borrowing from institutional lenders. We use Adjusted EBITDA as a measureof the performance of the Company. We provide Adjusted EBITDA to investors toassist them in performing their analysis of our historical operating results. AdjustedEBITDA reflects a measure of our operating results before consideration ofcertain non-cash charges and consequently, you should not construe AdjustedEBITDA as an alternative to net income (loss) or operating income as anindicator of our 

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operating performance, oras an alternative to cash flows from operating activities as a measure of ourliquidity, as determined in accordance with generally accepted accountingprinciples. We may calculate Adjusted EBITDA differently than other companies. Presentedbelow is a reconciliation of net income (loss) and operating income (the mostdirectly comparable financial measures calculated and presented in accordancewith GAAP) to Adjusted EBITDA.

**Reconciliation ofNet Income (Loss) to Adjusted EBITDA(in thousands)(unaudited)**

| ** **                                    | ** ** | **Year Ended September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income (loss)                             |       | $                                           | 9,102      |   | $ | (175 | ) | $ | 5,039 |   | $ | 13,214 |   | $ | 10,400 |   |
| Add: income tax  provision (benefit)          |       | 5,819                                       |       | (880 | ) | 3,466 |   | 8,337 |   | 6,269 |   |
| Add: interest  expense, net                   |       | 14,534                                      |       | 15,293 |   | 14,765 |   | 14,469 |   | 13,961 |   |
| Add: loss on  extinguishment of debt          |       | 873                                         |       | — |   | — |   | — |   | 2,515 |   |
| Operating income                              |       | 30,328                                      |       | 14,238 |   | 23,270 |   | 36,020 |   | 33,145 |   |
| Add: depreciation  and amortization expense   |       | 16,118                                      |       | 15,502 |   | 14,270 |   | 12,930 |   | 11,789 |   |
| Add: loss on  impairment of long-lived assets |       | 2,612                                       |       | 3,440 |   | 1,816 |   | 616 |   | 303 |   |
| Add: (gain) loss  on disposal of assets       |       | (139                                        | )          | 726 |   | 1,223 |   | 647 |   | 185 |   |
| Add: stock-based  compensation expense        |       | 2,796                                       |       | — |   | — |   | — |   | — |   |
| Adjusted EBITDA                               |       | $                                           | 51,715     |   | $ | 33,906 |   | $ | 40,579 |   | $ | 50,213 |   | $ | 45,422 |   |

 

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**Item7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**Overview**

The following discussionshould be read in conjunction with the consolidated financial statements andtheir related notes included elsewhere in this report.

We are the leadingdesigner and retailer of maternity apparel in the United States with 1,541retail locations, including 810 stores in all 50 states, Puerto Rico and Canadaand 731 leased departments. We operate our stores under the Motherhood Maternity,Mimi Maternity, A Pea in the Pod and Destination Maternity retail concepts andalso sell our merchandise on the Internet at our MaternityMall.com and ourbrand-specific websites, as well as through an exclusive product andlicense agreement with Kohl’s. In addition to our 810 stores, our retaillocations include 731 leased departments within department and specialty stores.We design and contract manufacture approximately 90% of the merchandise wesell.

**Critical Accounting Policies and Estimates**

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

Our significant accountingpolicies are described in Note 2 of “Notes to Consolidated FinancialStatements.” We believe that the following discussion addresses our criticalaccounting policies, which are those that are most important to the portrayalof our financial condition and results of operations and require management’smost difficult, subjective and complex judgments, often as a result of the needto make estimates about the effect of matters that are inherently uncertain. Ifactual results were to differ significantly from estimates made, futurereported results could be materially affected. However, we are not currentlyaware of any reasonably likely events or circumstances that would result inmaterially different results.

Our senior management hasreviewed these critical accounting policies and estimates and the relatedManagement’s Discussion and Analysis of Financial Condition and Results ofOperations with the Audit Committee of our Board of Directors.

*Inventories.  *Wevalue our inventories, which consist primarily of maternity apparel, at thelower of cost or market. Cost is determined on the first-in, first-out method(FIFO) and includes the cost of merchandise, freight, duty and broker fees. Aperiodic review of inventory quantities on hand is performed in order todetermine if inventory is properly valued at the lower of cost or market. Factorsrelated to current inventories such as future consumer demand and fashiontrends, current aging, current analysis of merchandise based on receipt date,current and anticipated retail markdowns or wholesale discounts, and class ortype of inventory are analyzed to determine estimated net realizable values. Criteriautilized by us to quantify aging trends include factors such as the amount ofmerchandise received within the past twelve months, merchandise received morethan one year before with quantities on-hand in excess of 12 months ofsales, and merchandise currently selling below cost. A provision is recorded toreduce the cost of inventories to its estimated net realizable value, ifrequired. Inventories as of September 30, 2006 and 2005 totaled$94.3 million and $105.9 million, respectively, representing 32.8%and 38.8% of total assets, respectively. Given the significance of inventoriesto our consolidated financial statements, the determination of net realizablevalues is considered to be a critical accounting estimate. Any significantunanticipated changes in the factors noted above could have a significantimpact on the value of our inventories and our reported operating results.

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*Long-Lived Assets.**  *Our long-lived assets consist principally of storeleasehold improvements (included in the “Property, plant and equipment, net”line item in our consolidated balance sheets) and, to a much lesser extent,lease acquisition costs (included in the “Other intangible assets, net” lineitem in our consolidated balance sheets). These long-lived assets are recordedat cost and are amortized using the straight-line method over the shorter ofthe lease term or their useful life. Net long-lived assets as of September 30,2006 and 2005 totaled $72.2 million and $77.1 million, respectively,representing 25.1% and 28.2% of total assets, respectively.

In assessing potentialimpairment of these assets, we periodically evaluate the historical andforecasted operating results and cash flows on a store-by-store basis. Newlyopened stores may take time to generate positive operating and cash flowresults. Factors such as (i) store type, that is, company store or leaseddepartment, (ii) store concept, that is, Motherhood, Mimi, A Pea in thePod or Destination Maternity, (iii) store location, for example, urbanarea versus suburb, (iv) current marketplace awareness of our brands, (v) localcustomer demographic data, (vi) anchor stores within the mall in which ourstore is located and (vii) current fashion trends are all considered indetermining the time frame required for a store to achieve positive financialresults, which is assumed to be within two years from the date a store locationis opened. If economic conditions are substantially different from ourexpectations, the carrying value of certain of our long-lived assets may becomeimpaired. As a result of our impairment assessment, we recorded write-downsof long-lived assets of $2.6 million and $3.4 million during fiscal2006 and fiscal 2005, respectively.

*Goodwill.**  *The purchase method of accounting for businesscombinations requires the use of estimates and judgments to allocate thepurchase price paid for acquisitions to the fair value of the net tangible andidentifiable intangible assets. Goodwill represents the excess of the aggregatepurchase price over the fair value of net assets acquired in businesscombinations and is separately disclosed in our consolidated balance sheets. Asof both September 30, 2006 and 2005, goodwill totaled $50.4 million,representing 17.5% and 18.4% of total assets, respectively. In June 2001,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets.” SFAS No. 142 requires that goodwill no longer be amortized,but instead be tested for impairment at least annually or as impairmentindicators arise.

The impairment testrequires us to compare the fair value of business reporting units to theircarrying value, including assigned goodwill. In assessing potential impairmentof goodwill, we have determined that we have one reporting unit for purposes ofapplying SFAS No. 142 based on our reporting structure. The fairvalue of our single reporting unit is determined based on the fair market valueof our outstanding common stock on a control basis and, if necessary, anoutside independent valuation is obtained to determine the fair value. Thecarrying value of our single reporting unit, expressed on a per share basis, isrepresented by the book value per share of our outstanding common stock. Theresults of the annual impairment tests performed as of September 30, 2006,2005 and 2004 indicated the fair value of the reporting unit exceeded itscarrying value. As part of the Company’s impairment analysis as of September 30,2005, an outside independent valuation was obtained and the fair value of theCompany’s single reporting unit exceeded the carrying value. As of September 30,2006, our book value was $14.35 per share of outstanding common stock and theclosing trading price of our common stock was $48.12 per share. If the pershare fair value of our single reporting unit was less than the book value pershare on September 30, 2006, our goodwill would likely have been impaired.

*Accounting for IncomeTaxes.**  *As partof the process of preparing our consolidated financial statements, we arerequired to estimate our income taxes in each of the jurisdictions in which weoperate. This process requires us to estimate our actual current tax exposuretogether with assessing temporary differences resulting from differingtreatment of items, such as depreciation of property and equipment andvaluation of inventories, for tax and accounting purposes. We determine ourprovision for income 

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taxes based onfederal and state tax laws and regulations currently in effect, some of whichhave been recently revised. Legislation changes currently proposed by certainof the states in which we operate, if enacted, could increase our transactionsor activities subject to tax. Any such legislation that becomes law couldresult in an increase in our state income tax expense and our state incometaxes paid, which could have a material and adverse effect on our net income orcash flow.

The temporary differencesbetween the book and tax treatment of income and expenses result in deferredtax assets and liabilities, which are included within our consolidated balancesheets. We must then assess the likelihood that our deferred tax assets will berecovered from future taxable income. As of September 30, 2005, wedetermined that the deferred tax assets should reflect the state tax benefitsfor several of the states in which we are operating. This determination wasmade in accordance with the provisions of SFAS No. 109, “Accounting forIncome Taxes.” Actual results could differ from our assessments if adequatetaxable income is not generated in future periods. Net deferred tax assets asof September 30, 2006 and 2005 totaled $18.6 million and$19.3 million, respectively, representing 6.5% and 7.1% of total assets,respectively. To the extent we believe that recovery is not more likely thannot, we must establish a valuation allowance. To the extent we establish avaluation allowance or change the allowance in a future period, income taxexpense will be impacted.

*Accounting for Contingencies.**  *From time to time, we are named as a defendant inlegal actions arising from our normal business activities. We account forcontingencies such as these in accordance with SFAS No. 5, “Accounting forContingencies.” SFAS No. 5 requires us to record an estimated losscontingency when information available prior to issuance of our financialstatements indicates that it is probable that an asset has been impaired or aliability has been incurred at the date of the financial statements and the amountof the loss can be reasonably estimated. An interpretation of SFAS No. 5further states that when there is a range of loss and no amount within thatrange is a better estimate than any other, then the minimum amount of the rangeshall be accrued. Accounting for contingencies arising from contractual orlegal proceedings requires management, after consultation with outside legalcounsel, to use its best judgment when estimating an accrual related to suchcontingencies. As additional information becomes known, our accrual for a losscontingency could fluctuate, thereby creating variability in our results ofoperations from period to period. Likewise, an actual loss arising from a losscontingency which significantly exceeds the amount accrued for in our financialstatements could have a material adverse impact on our operating results forthe period in which such actual loss becomes known.

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**Results ofOperations**

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

| ** **                                             | ** ** | **% of Net Sales (1)** | ** ** | **% Increase (Decrease)**     | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **Year Ended  September 30,**    | ** ** | **Year Ended  September 30,** | ** ** |
| ** **                                             | ** ** | **2006**                                   | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2006 vs. 2005** | ** ** | **2005 vs. 2004** | ** ** |
| Net sales                                              |       | 100.0                                      | %          | 100.0                                   | %          | 100.0 | % |   | 7.3 | % |   |   | 8.4 | % |   |
| Cost of goods sold (2)                            |       | 47.8                                       |       | 49.4                                    |       | 46.9 |   |   | 3.8 |   |   |   | 14.3 |   |   |
| Gross profit                                           |       | 52.2                                       |       | 50.6                                    |       | 53.1 |   |   | 10.7 |   |   |   | 3.2 |   |   |
| Selling, general and  administrative expenses (3) |       | 47.2                                       |       | 48.1                                    |       | 48.6 |   |   | 5.3 |   |   |   | 7.1 |   |   |
| Operating income                                       |       | 5.0                                        |       | 2.5                                     |       | 4.5 |   |   | 113.0 |   |   |   | (38.8 | ) |   |
| Interest expense, net                                  |       | 2.4                                        |       | 2.7                                     |       | 2.9 |   |   | (5.0 | ) |   |   | 3.6 |   |   |
| Loss on extinguishment  of debt                        |       | 0.1                                        |       | —                                  |       | — |   |   | N.M. |   |   |   | 0.0 |   |   |
| Income (loss) before  income taxes                     |       | 2.5                                        |       | (0.2                                    | )          | 1.6 |   |   | N.M. |   |   |   | (112.4 | ) |   |
| Income tax provision  (benefit)                        |       | 1.0                                        |       | (0.2                                    | )          | 0.7 |   |   | N.M. |   |   |   | (125.4 | ) |   |
| Net income (loss)                                      |       | 1.5                                        | %          | (0.0                                    | )%         | 1.0 | % |   | N.M. |   |   |   | (103.5 | ) |   |

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N.M.—Not meaningful

(1)          Componentsmay not add to total due to rounding.

(2)          The“Cost of goods sold” line item includes: merchandise costs (including customsduty expenses), expenses related to inventory shrinkage, product relatedcorporate expenses (including expenses related to our payroll, benefit costsand 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, internaltransfer costs, and the other costs of our distribution network.

(3)          The“Selling, general and administrative expenses” line item includes:**advertising and marketing expenses, corporateadministrative expenses, store expenses (including store payroll and storeoccupancy expenses), store opening and store closing expenses, and store assetimpairment charges.

The following table setsforth certain information regarding the number of our retail locations,including stores and leased maternity departments for the fiscal yearsindicated:

| ** **                | ** ** | **Year Ended September 30,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Retail Locations** | ** ** | ** **                                  | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total  Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total  Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total  Retail  Locations** | ** ** |
| Beginning of period       |       |                                        | 852        |   |   |   | 739 |   |   |   | 1,591 |   |   |   | 883 |   |   |   | 232 |   |   |   | 1,115 |   |   |   | 851 |   |   |   | 155 |   |   |   | 1,006 |   |   |
| Opened                    |       |                                        | 17         |   |   |   | 39 |   |   |   | 56 |   |   |   | 27 |   |   |   | 517 |   |   |   | 544 |   |   |   | 93 |   |   |   | 81 |   |   |   | 174 |   |   |
| Closed                    |       |                                        | (59        | ) |   |   | (47 | ) |   |   | (106 | ) |   |   | (58 | ) |   |   | (10 | ) |   |   | (68 | ) |   |   | (61 | ) |   |   | (4 | ) |   |   | (65 | ) |   |
| End of period             |       |                                        | 810        |   |   |   | 731 |   |   |   | 1,541 |   |   |   | 852 |   |   |   | 739 |   |   |   | 1,591 |   |   |   | 883 |   |   |   | 232 |   |   |   | 1,115 |   |   |
|                           |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Years Ended September 30,2006 and 2005**

*Net Sales.  *Ournet sales for fiscal 2006 increased by 7.3%, or $41.1 million, to$602.7 million from $561.6 million for fiscal 2005. The increase innet sales for the fiscal year was primarily driven by increased comparablestore sales, as well as increased sales from our proprietary Two HeartsMaternity collection, which expanded to an additional 497 Sears locationsduring late March 2005. We also realized sales increases from the fullyear contribution of our Oh Baby! by Motherhood licensed arrangement with Kohl’s,which launched during the second quarter of fiscal 2005, as well as from ourinternet sales and our marketing partnerships. Comparable store sales increasedby 4.3% during fiscal 2006, based on 932 retail locations, versus a comparablestore sales decrease of 2.5% during fiscal 2005, based on 832 retail locations.

As of September 30,2006, we operated a total of 810 stores and 1,541 total retail locations: 659 MotherhoodMaternity stores (including 97 Motherhood Maternity Outlet stores), 106 MimiMaternity stores, 33 A Pea in the Pod stores, 12 DestinationMaternity superstores, and 731 leased maternity departments, of which 549 werein Sears stores and the balance were primarily under the Motherhood brand. Inaddition, our Oh Baby! by Motherhood collection is available at Kohl’s storesthroughout the United States. In comparison, as of September 30, 2005, wehad 1,591 total retail locations: 690 Motherhood Maternity stores(including 99 Motherhood Maternity Outlet stores), 117 Mimi Maternity stores,37 A Pea in the Pod stores, eight Destination Maternity superstores,and 739 leased departments. As of September 30, 2006, our store totalincluded 48 multi-brand stores, including 12 Destination Maternitysuperstores, with the remaining multi-brand stores under the Mimi Maternitybrand. In comparison, as of September 30, 2005, we operated 47 multi-brandstores, including eight Destination Maternity superstores. These multi-brandstore figures for fiscal 2006 and fiscal 2005 exclude our A Pea in the Podstores, which have traditionally carried a full line of both A Pea in the Podand Mimi branded merchandise. During fiscal 2006, we opened 17 stores,including four multi-brand stores, and closed 59 stores, with 15 of thesestore closings related to multi-brand store openings. In addition, duringfiscal 2006, the Company opened 39 leased department locations and closed 47leased department locations.

*Gross Profit.  *Ourgross profit for fiscal 2006 increased by 10.7%, or $30.5 million, to$314.7 million compared to $284.2 million for fiscal 2005, reflectingthe increase in net sales as well as an increase in gross profit margin. Grossprofit as a percentage of net sales (gross margin) was 52.2% for fiscal 2006,compared to 50.6% for fiscal 2005. The increase in gross margin of 1.6percentage points compared to the prior year resulted primarily from a highermaintained gross margin in our stores, largely due to lower markdowns comparedto last year, as well as the benefit of spreading product overhead costs over alarger sales volume, slightly offset by the lower gross margin associated withsales from our licensed arrangement with Kohl’s.

*Selling,General and Administrative Expenses.  *Ourselling, general and administrative expenses for fiscal 2006 increased by 5.3%,or $14.4 million, to $284.3 million from $269.9 million forfiscal 2005. This increase in expense resultedprimarily from increases in accrued incentive compensation expense related toimprovements in our operating performance compared to fiscal 2005, stock-basedcompensation expense, rent and related expenses for our retail locations, and employeewages and benefits for our retail locations. As a percentage of netsales, selling, general and administrative expenses decreased to 47.2% forfiscal 2006 compared to 48.1% for fiscal 2005. This decrease in the expense percentage for the fiscal year resultedprimarily from the favorable expense leverage from our comparable store salesincrease, the additional sales from our Sears and Kohl’s relationships for thefull year, and a continued sharp focus on expense control. This favorableexpense leverage offset increases as a percentage of net sales in accruedincentive compensation expense and stock-based compensation expense. Weincurred charges relating to store closings of $1.9 million for fiscal 2006(primarily lease termination fees) as compared to $1.6 million for fiscal 2005.The majority of the store closing charges for fiscal 2006 and fiscal2005 were for stores 

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closed in connection withmulti-brand store openings, with most of the store closing charges for fiscal2006 related to the opening of our world flagship Destination Maternity storein New York City in February 2006. Weincurred impairment charges for write-downs of long-lived assets of $2.6 millionfor fiscal 2006, as compared to $3.4 million for fiscal 2005. We also incurred$2.8 million of non-cash expenses related to stock-based compensation expense,including $2.5 million in selling, general and administrative expense, infiscal 2006 versus none in fiscal 2005, since we adopted the provisions of SFAS No. 123(R),“Share-Based Payment,” as of the beginning of fiscal 2006.

*OperatingIncome.  *Our operating income for fiscal 2006increased by 113.0%, or $16.1 million, to $30.3 million from$14.2 million for fiscal 2005, due to our increased sales volume andhigher gross margin, which more than offset the impact of increased selling,general and administrative expenses. Operating income as a percentage of netsales (operating income margin) for fiscal 2006 increased to 5.0% from 2.5% forfiscal 2005. Excluding non-cash stock-basedcompensation expense, our operating income for fiscal 2006 was $33.1 million,which represents a 5.5% adjusted operating income margin. We were not requiredto recognize, and therefore did not recognize, any non-cash stock-basedcompensation expense in fiscal 2005. The increase in operating income marginwas primarily due to our increased gross margin and, to a lesser extent, due tofavorable leverage of operating expenses resulting from increased sales.

*InterestExpense, Net.  *Our net interest expense forfiscal 2006 decreased by 5.0%, or $0.8 million, to $14.5 million from$15.3 million in fiscal 2005. Thedecrease in interest expense resulted primarily from our increased balance ofcash and short-term investments and the resulting increased interest income. Duringfiscal 2006, our average level of direct borrowings under our credit facilitywas $0.3 million, but we did not have any direct borrowings under our creditfacility as of September 30, 2006. During fiscal 2005, our average levelof direct borrowings under our credit facility was $3.1 million.

*Losson Extinguishment of Debt.  *In August and September 2006, werepurchased $10.0 million principal amount of our outstanding Senior Notes. The$10.0 million Senior Note repurchase resulted in a fourth quarter pre-taxcharge of $0.9 million, representing the premium paid plus the write-offof unamortized debt issuance discount and deferred financing costs.

*IncomeTaxes.  *Our effective tax rate was a provision of39.0% in fiscal 2006, compared to a benefit of 83.4% in fiscal 2005, whichreflected the recognition of certain state deferred tax assets in fiscal 2005. SeeNote 13 of the Notes to Consolidated Financial Statements for thereconciliation of the statutory federal income tax rate to our effective taxrate.

*NetIncome (Loss).  *Net income for fiscal 2006 was$9.1 million, or $1.63 per share (diluted), compared to a net loss of$0.2 million for fiscal 2005, or $(0.03) per share (diluted). Excluding the debt extinguishment charge, netincome for fiscal 2006 was $9.6 million, or $1.72 per share (diluted). Excludingthe debt extinguishment charge and non-cash stock-based compensation expense,net income for fiscal 2006 was $11.3 million, or $2.03 per share (diluted). Wehad no debt extinguishment charges in fiscal 2005 and we did not recognize anynon-cash stock-based compensation expense in fiscal 2005.

The average diluted sharesoutstanding of 5,591,000 shares for fiscal 2006 was 6.7% higher than the5,242,000 shares outstanding for fiscal 2005. The increase in average dilutedshares outstanding primarily reflects the dilutive impact of outstanding stockoptions in fiscal 2006 due to the net income for fiscal 2006, compared to nodilutive impact from outstanding stock options in fiscal 2005 due to the netloss for fiscal 2005.

**Years Ended September 30, 2005 and 2004**

*NetSales.  *Our net sales for fiscal 2005 increasedby 8.4%, or approximately $43.5 million, to $561.6 million from$518.1 million for fiscal 2004. Net sales increased primarily due to salesfrom our new Oh Baby! by Motherhood licensed arrangement with Kohl’s, whichbegan during the second quarter of 

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fiscal 2005, and salesfrom the expansion of our proprietary Two Hearts Maternity collection to anadditional 497 Sears locations during late March 2005, partially offset bya decrease in comparable store sales. Comparable store sales decreased by 2.5%during fiscal 2005, based on 832 retail locations, versus a comparable storesales decrease of 4.9% during fiscal 2004, based on 765 retail locations. Thedecrease in comparable store sales in fiscal 2005 reflected continued strongcompetitive pressures in the maternity apparel market. We believe thisincreased competition caused an oversupply of maternity apparel in the marketand that the increasingly deep markdowns taken by our competitors to stimulatesales and clear seasonal inventories further adversely affected our net salesfor fiscal 2005.

As of September 30, 2005, we operated a total of852 stores and 1,591 total retail locations: 690 Motherhood Maternitystores (including 99 Motherhood Maternity Outlet stores), 117 Mimi Maternitystores, 37 A Pea in the Pod stores, eight Destination Maternitysuperstores, and 739 leased maternity departments, of which 574 were in Searsstores and the balance were primarily under the Motherhood brand. In comparison,as of September 30, 2004, we had 1,115 total retail locations: 717 MotherhoodMaternity stores (including 106 Motherhood Maternity Outlet stores), 121 MimiMaternity stores, 41 A Pea in the Pod stores, four DestinationMaternity superstores, and 232 leased departments. As of September 30,2005, our store total included 47 multi-brand stores, including eightDestination Maternity superstores, with the remaining multi-brand storespredominantly under the Mimi Maternity brand. In comparison, as of September 30,2004, we operated 35 multi-brand stores, including four Destination Maternitysuperstores. These multi-brand store figures for fiscal 2005 and fiscal 2004exclude our A Pea in the Pod stores, which have traditionally carried afull line of both A Pea in the Pod and Mimi branded merchandise. During fiscal2005, we opened 27 stores, including 11 multi-brand stores, and closed 58 stores,with 22 of these store closings related to multi-brand store openings. Inaddition, during fiscal 2005, the Company opened 517 leased departmentlocations and closed ten leased department locations, with the openingspredominantly coming from the expansion of our new Two Hearts Maternitycollection at Sears, bringing the total number of our Sears leased departmentsto 574 locations.

*GrossProfit.  *Our gross profit for fiscal 2005increased by 3.2%, or $8.9 million, to $284.2 million compared to$275.3 million for fiscal 2004, reflecting the increase in net sales,partially offset by a decrease in gross profit margin. Gross profit as apercentage of net sales (gross margin) was 50.6% for fiscal 2005, compared to53.1% for fiscal 2004. The decrease in gross margin of 2.5 percentage pointscompared to the prior year primarily reflects the planned lower gross marginassociated with sales from our new Kohl’s licensed arrangement, as well asmarket oversupply conditions and the resulting greater level of markdowns werecognized on sales from our own retail locations in fiscal 2005 compared tofiscal 2004.

*Selling,General and Administrative Expenses.  *Ourselling, general and administrative expenses for fiscal 2005 increased by 7.1%,or $17.9 million, to $269.9 million from $252.0 million forfiscal 2004. Compared to fiscal 2004, rent and related expenses for our retail locations, including sales-basedpayments for our leased departments, increased by $6.0 million andemployee wages and benefits for our retail locations increased by$3.3 million, primarily resulting from our new store openings. As apercentage of net sales, selling, general and administrative expenses decreasedto 48.1% for fiscal 2005 compared to 48.6% for fiscal 2004. This decrease inthe expense percentage for the full year resulted primarily from the favorableexpense leverage from the addition of our licensed business, which was offsetby the negative expense leverage resulting from our 2.5% decrease in comparablestore sales, as well as increased charges for store asset impairments,increased professional fees related to our Sarbanes-Oxley Section 404compliance program, and higher legal expenses. We incurred impairment chargesfor write-downs of long-lived assets of $3.4 million for fiscal 2005 ascompared to $1.8 million for fiscal 2004. In addition, we incurred chargesrelating to store closings of $1.6 million for fiscal 2005 (of which $0.5million represented non-cash long-lived asset write-offs) ascompared to $1.8 million for fiscal 2004 (of which $1.2 million representednon-cash long-lived asset write-offs). Most of these fiscal 2005store closing charges related to multi-brand store openings. Professionalfees related to our Sarbanes-Oxley Section 404 compliance 

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program totaled $1.6million for fiscal 2005. During fiscal 2005, we also recorded a charge of $0.3million to reduce the carrying values of facilities in Costa Rica, which arebeing marketed for sale, to their estimated realizable values.

*OperatingIncome.  *Our operating income for fiscal 2005decreased by 38.8%, or approximately $9.1 million, to $14.2 millionfrom $23.3 million for fiscal 2004, due to our higher selling, general andadministrative expenses, and lower gross margin, which more than offset theimpact of increased sales volume. Operating income as a percentage of net sales(operating income margin) for fiscal 2005 decreased to 2.5% from 4.5% forfiscal 2004, primarily due to the adverseimpact on operating income margin of our 2.5% decrease in comparable storesales, our increased markdowns, and increased operating expenses for storeasset impairment and closing charges, legal expenses, and professional fees relatedto our Sarbanes-Oxley Section 404 compliance program.

*InterestExpense, Net.  *Our net interest expense forfiscal 2005 increased by 3.6%, or $0.5 million, to $15.3 million from$14.8 million in fiscal 2004. Theincrease in interest expense resulted from having borrowings under our creditfacility during a portion of fiscal 2005, the increased amortization expense ofdeferred financing costs related to our new credit facility entered into in October 2004and having lower invested balances of cash and short-term investments comparedto fiscal 2004. During fiscal 2005, our average level of direct borrowingsunder our credit facility was $3.1 million, but we did not have any directborrowings under our credit facility as of September 30, 2005. We did nothave any direct borrowings under our credit facility during fiscal 2004.

*IncomeTaxes.  *Our effective tax rate was a benefit of83.4% in fiscal 2005, compared to a provision of 40.8% in fiscal 2004,reflecting the recognition of certain state deferred tax assets in fiscal 2005.See Note 13 of the Notes to Consolidated Financial Statements for thereconciliation of the statutory federal income tax rate to our effective taxrate.

*NetIncome (Loss).  *Net loss for fiscal 2005 was$0.2 million, or $(0.03) per share (diluted), compared to net income of$5.0 million for fiscal 2004, or $0.92 per share (diluted).

The average diluted sharesoutstanding of 5,242,000 shares for fiscal 2005 was 4.7% lower than the5,501,000 shares outstanding for fiscal 2004. The decrease in average dilutedshares outstanding reflects no dilutive impact from outstanding stock optionsin fiscal 2005 due to the net loss for fiscal 2005, compared to the dilutiveimpact in fiscal 2004, when we generated net income.

**Liquidity and Capital Resources**

Our cash needs have primarily been for: (i) debtservice, (ii) capital expenditures, including leasehold improvements,fixtures and equipment for new stores, store relocations and expansions of ourexisting stores, as well as improvements and new equipment for our distributionand corporate facilities and information systems, and (iii) workingcapital, including inventory to support our new business initiatives and ournew and existing retail locations. We have historically financed these capitalrequirements from cash flows from operations, borrowings under our credit facilityor available cash balances.

In August 2002, we issued $125.0 million of 111¤4%senior notes due 2010 (the “Senior Notes”). The Senior Notes were issued at98.719% of their face amount, resulting in an annual effective interest rate of11.50%. Interest on the Senior Notes is payable semi-annually in cash on February 1and August 1, commencing on February 1, 2003. The Senior Notes wereissued by Mothers Work, are senior unsecured obligations of Mothers Work andare unconditionally guaranteed on a senior basis by all of our domesticsubsidiaries (see Note 15 of the Notes to Consolidated FinancialStatements). The Senior Notes are redeemable at our option, in whole or inpart, at any time on or after August 1, 2006 at 105.625% of their faceamount, plus accrued and unpaid interest, declining ratably to 100% of theirface amount, plus accrued and unpaid interest, on or after August 1, 2009.The Senior Notes impose certain restrictions on 

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our ability to, amongother things, incur additional indebtedness, pay dividends, repurchase stock,and enter into other various types of transactions. In August 2006, ourBoard of Directors authorized the repurchase of up to $10.0 million principalamount of the Senior Notes. During August and September 2006, wecompleted the repurchase of the authorized amount in two transactions at anaggregate of 105.832% of the $10.0 million principal amount, plus accrued andunpaid interest. In November 2006, our Board of Directors authorized therepurchase of an additional $25.0 million principal amount of the Senior Notes.On December 8, 2006, we completed the repurchase of the authorized amountat 105.625% of the $25.0 million principal amount, plus accrued and unpaidinterest. After giving effect to both the $10.0 million repurchase in fiscal2006 and the $25.0 million redemption completed on December 8, 2006, wehave $90.0 million remaining outstanding principal amount of the original$125.0 million principal amount of our Senior Notes.

Cash and cash equivalents increased by $15.9 millionduring fiscal 2006 compared to a decrease of $5.4 million during fiscal2005. Cash and cash equivalents plus short-term investments increased by $25.3 millionduring fiscal 2006 compared to a decrease of $11.8 million during fiscal 2005.Cash provided by operations of $42.4 million for fiscal 2006 increased by $35.1 millionfrom $7.3 million for fiscal 2005. This increase in cash provided byoperations versus the prior year was primarily the result of cash generated byreducing inventories in fiscal 2006 compared to an increase in inventoriesduring fiscal 2005. Total inventories as of September 30, 2006 were $94.3million, a decrease of approximately $11.6 million or 11.0% below the $105.9million inventories balance as of September 30, 2005. During fiscal 2006,we used our cash provided by operations primarily to increase our cash and cash equivalents, to pay for capitalexpenditures, and to increase ourshort-term investments. Cash provided by operations of $7.3 million forfiscal 2005 decreased by approximately $11.0 million from$18.3 million for fiscal 2004. This decrease was primarily the result ofdecreased net income, as well as a larger use of cash for operating capitalcompared to fiscal 2004, primarily related to inventories and, to a lesserextent, trade receivables. Total inventories as of September 30, 2005 were$105.9 million, an increase of $13.2 million or 14.2% over the $92.7 millioninventory balance as of September 30, 2004. This increase in inventorieswas driven largely by inventory for our new initiatives with Kohl’s and Sears,as well as intentionally bringing in Fall merchandise earlier than in fiscal2004 to enable earlier positioning of Fall merchandise in our stores. During fiscal 2005, we funded our capitalexpenditures through cash provided by operations, as well as the utilization ofnet proceeds from the sales (net of purchases) of short-term investments andthe utilization of a portion of our balance of cash and cash equivalents. Forfiscal 2006, we spent $13.9 million on capital expenditures, including$11.5 million for leasehold improvements, fixtures and equipmentprincipally for new store facilities, as well as improvements to existingstores, and $2.4 million for our distribution and corporate facilities andinformation systems. This compares to $17.6 million in capitalexpenditures for fiscal 2005, of which $13.4 million was spent for newstore facilities and improvements to existing stores and retail locations, and$4.2 million for our distribution and corporate facilities and informationsystems. The decrease in capitalexpenditures was primarily due to decreased expenditures for new stores anddecreased expenditures for distribution facilities and information systemscompared to last year.

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On October 15, 2004, we entered into a newfive-year $60.0 million senior secured revolving credit facility (the “CreditFacility”) which replaced our former $60 million credit facility. The CreditFacility will mature on October 15, 2009. Upon our request and with theconsent of the lender, permitted borrowings under the Credit Facility may beincreased up to an additional $15.0 million, in increments of $2.5 million,****up to a maximum limit of $75.0 million. Proceeds fromadvances under the Credit Facility, with certain restrictions, may be used toprovide financing for working capital, letters of credit, capital expenditures,debt prepayments, dividends, share repurchases and other general corporatepurposes. We paid certain closing fees in connection with the negotiation andexecution of the Credit Facility. We also pay an unused line fee under theCredit Facility and certain early termination fees would be owed if the CreditFacility is terminated prior to its third anniversary. The Credit Facilitycontains various affirmative and negative covenants and representations andwarranties. There are no financial covenantrequirements under the Credit Facility unless either (i) Excess Availability (as defined in the agreement)falls below $10 million, or (ii) average Financial Covenant AdjustedAvailability (as defined in the agreement) for any calendar month is less than$15 million. If either of the events in item (i) or (ii) aboveoccurs, we would be required to meet a certain minimum fixed charge coverageratio (which increases from 1.00x during the first two years of the CreditFacility to 1.10x during the fifth year of the Credit Facility). During all of fiscal 2006 and 2005, weexceeded the requirements for the Excess Availability and average FinancialCovenant Adjusted Availability. The Credit Facility is secured by a security interest in our accountsreceivable, inventory, real estate interests, letter of credit rights, cash,intangibles and certain other assets. The interest rate on outstandingborrowings is equal to, at our election, either the lender’s prime rate or thelender’s LIBOR rate plus the applicable margin. The applicable margin for LIBORrate borrowings is variable, ranging from 1.25% to 1.75%, based upon theavailability calculation made in accordance with the agreement. The applicablemargin for LIBOR rate borrowings, based upon the availability calculation madein accordance with the agreement, has been 1.25% since the inception of theCredit Facility. Any amounts outstanding under the Credit Facility maybe accelerated and become due and payable immediately and all loan and letterof credit commitments thereunder may be terminated upon an event of default andexpiration of any applicable cure period. Events of default include: (i) nonpaymentof obligations due under the Credit Facility, (ii) failure to perform anycovenant or agreement contained in the Credit Facility, (iii) materialmisrepresentations, (iv) failure to pay, or certain other defaults underother material indebtedness, (v) certain bankruptcy or insolvency events, (vi) achange of control, (vii) material uninsured losses, (viii) indictmentsof us or senior management in a material forfeiture action, and (ix) customaryERISA defaults, among others.

As of September 30, 2006, outstanding borrowingsunder the Credit Facility consisted of no direct borrowings and$8.5 million in letters of credit with $51.5 million of availability underthe credit line, compared to no direct borrowings and $8.4 million in lettersof credit with $51.6 million of availability under the credit line as of September 30,2005. Borrowings under the Credit Facility as of September 30, 2006 wouldhave borne interest at a rate of between approximately 6.57% and 8.25% perannum. During fiscal 2006 and 2005, our averagelevel of direct borrowings under the Credit Facility was $0.3 million and $3.1million, respectively. We expect that we may have borrowings under ourCredit Facility during certain periods of fiscal 2007, reflecting seasonal and other timing variations in cash flow.

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

**ContractualObligations and Commercial Commitments**

We have entered intoagreements that create contractual obligations and commercial commitments. Theseobligations and commitments will have an impact on future liquidity and theavailability of capital 

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resources.The tables below set forth a summary of these obligations and commitments as ofSeptember 30, 2006 (in thousands):

*Contractual Obligations:*

| ** **                                   | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| **Description**                              | ** ** | ** ** | ** ** | **Total  Obligations (1)**           | ** ** | **Less  Than One  Year** | ** ** | **One  to Three  Years** | ** ** | **Three  to Five  Years** | ** ** | **After  Five  Years** | ** ** |
| Long-term  debt                              |       |       | $          | 118,630                                   |       |   | $ | 312 |   | $ | 660 |   | $ | 115,643 |   | $ | 2,015 |   |
| Interest related  to long-term debt (2) |       |       | 51,807     |                                      |       | 12,959 |   | 25,903 |   | 12,945 |   | — |   |
| Operating leases (3)                    |       |       | 292,703    |                                      |       | 55,195 |   | 95,699 |   | 71,465 |   | 70,344 |   |
| Capital lease  obligations                   |       |       | 612        |                                      |       | 524 |   | 88 |   | — |   | — |   |
| Purchase  obligations (4)               |       |       | 80,677     |                                      |       | 80,677 |   | — |   | — |   | — |   |
| Total contractual cash  obligations          |       |       | $          | 544,429                                   |       |   | $ | 149,667 |   | $ | 122,350 |   | $ | 200,053 |   | $ | 72,359 |   |
|                                              |            |            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          The amountsin this table exclude obligations under employment agreements. For a discussionof the employment agreements with certain of our executive officers, see theinformation contained under the caption “Employment Agreements” in our ProxyStatement, which will be filed with the Securities and Exchange Commission inconnection with the Annual Meeting of Stockholders scheduled to be held onJanuary 19, 2007.

(2)          Excludes interest under long-termdebt obligations where such interest is calculated on a variable basis. TheCompany had $2.8 million principal amount of such variable interest long-termdebt obligations as of September 30, 2006.

(3)          Includes store operatingleases, which generally provide for payment of direct operating costs inaddition to rent. The amounts reflected include future minimum lease paymentsand exclude such direct operating costs.

(4)          Ourpurchase orders with contract manufacturers are cancelable by us at any timeprior to our acceptance of the merchandise. Excludes purchase orders forsupplies in the normal course of business.

*Commercial Commitments:*

| ** **                       | ** ** | ** ** | ** ** | **Amount of Commitment Per Period** | ** ** |
|----------------------------------|------------|------------|------------|---------------------------------------------------------|------------|
| **Description**                  | ** ** | ** ** | ** ** | **Total  Obligations**                                  | ** ** | **Less  Than One  Year** | ** ** | **One  to Three  Years** | ** ** | **Three  to Five  Years** | ** ** | **After  Five  Years** | ** ** |
| Credit facility (1)         |       |       | $          | 8,460                                                   |       |   |   | $ | 8,460 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Other standby  letters of credit |       |       | —     |                                                    |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total commercial  commitments    |       |       | $          | 8,460                                                   |       |   |   | $ | 8,460 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
|                                  |            |            |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Consistsof outstanding letter of credit commitments.

**New AccountingPronouncements**

*SFAS No. 154*

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No.154provides guidance on the accounting for and reporting of accounting changes anderror corrections. This statement is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. Early adoption is permitted. We will adopt SFAS No. 154effective as of October 1, 2006.

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*FASB InterpretationNo. 48*

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes.” FASB Interpretation No. 48 provides guidance for therecognition and measurement of uncertain tax positions in an enterprise’sfinancial statements. Recognition involves a determination of whether it ismore likely than not that a tax position will be sustained upon examinationwith the presumption that the tax position will be examined by the appropriatetaxing authority that would have full knowledge of all relevant information. Thisinterpretation is effective for fiscal years beginning after December 15,2006. Early adoption is permitted if the enterprise has not issued financialstatements, including interim financial statements, in the period of adoption. Theimpact from adoption of FASB Interpretation No. 48, if any, on ourconsolidated financial position or results of operations has not yet beendetermined.

*EITF Issue 06-3*

In June 2006, theEmerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “How TaxesCollected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That Is, Gross versus Net Presentation).” EITFIssue 06-3 provides guidance related to the presentation in financialstatements of any tax assessed by a governmental authority that is directlyimposed on a revenue-producing transaction between a seller and a customer,including, but not limited to, sales, use, value added, and some excise taxes. TheEITF concluded that the presentation of taxes within the scope of EITF Issue 06-3on either a gross (included in revenues and costs) or a net (excluded fromrevenues) basis is an accounting policy decision that should be disclosed. Inaddition, the aggregate amount of any such taxes that are reported on a grossbasis should be disclosed in interim and annual financial statements. Theguidance in EITF Issue 06-3 is effective for interim and annual reportingperiods beginning after December 15, 2006. We presently report taxeswithin the scope of EITF Issue 06-3 on a net basis and adoption is notexpected to have an impact on our consolidated financial statements.

**Inflation**

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

**Forward-LookingStatements**

Some of the information in this report, including theinformation incorporated by reference (as well as information included in oralstatements or other written statements made or to be made by us), containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). The forward-lookingstatements involve a number of risks and uncertainties. A number of factorscould cause our actual results, performance, achievements or industry resultsto be materially different from any future results, performance or achievementsexpressed or implied by these forward-looking statements. These factorsinclude, but are not limited to: the level of success of our new businessinitiatives, future sales trends in our existing retail locations, changes inconsumer spending patterns, raw material price increases, overall economicconditions, our ability to anticipate and respond to fashion trends andconsumer preferences, anticipated fluctuations in our operating results, theimpact of competition and pricing, availability of suitable store locations,continued availability of capital and financing, ability to hire and developsenior management and sales associates, ability to develop and sourcemerchandise, ability to receive production from foreign sources on a timelybasis, potential stock repurchases, potential debt repurchases, war or acts ofterrorism and other factors referenced in this report, including those set forthunder the caption “Item 1A. Risk Factors.”

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In addition, these forward-lookingstatements necessarily depend upon assumptions, estimates and dates that may beincorrect or imprecise and involve known and unknown risks, uncertainties andother factors. Accordingly, any forward-looking statements included inthis report do not purport to be predictions of future events or circumstancesand 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,” orthe negative of any of these terms, or comparable terminology, or bydiscussions of our outlook, plans, goals, strategy or intentions. Forward-lookingstatements speak only as of the date made. Except as required by applicablelaw, including the securities laws of the United States and the rules andregulations of the Securities and Exchange Commission, we assume no obligationto update any of these forward-looking statements to reflect actualresults, changes in assumptions or changes in other factors affecting theseforward-looking statements.

**Item 7A.**                Quantitativeand Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interestrates. We have not entered into any market risk sensitive instruments fortrading purposes. The analysis below presents the sensitivity of the marketvalue of our financial instruments to selected changes in market interest rates.The range of changes presented reflects our view of changes that are reasonablypossible over a one-year period.

As of September 30, 2006, we had cash, cashequivalents and short-term investments of $28.3 million, which include moneymarket accounts and auction rate securities that bear interest at variablerates. A change in market interest ratesearned on the cash, cash equivalents and short-term investments impacts the interest income and cash flows, butdoes not significantly impact the fair market value of the financialinstruments. Due to the average maturity and conservative nature of ourinvestment portfolio, we believe a sudden change in interest rates would nothave a material effect on the value of our investment portfolio.

As of September 30, 2006, the principalcomponents of our debt portfolio were the $115.0 million principal amountof Senior Notes due 2010 and the $60.0 million Credit Facility, both of whichare denominated in U.S. dollars. The fair value of the debt portfolio isreferred to as the “debt value.” The Senior Notes bear interest at a fixed rateof 111¤4%.Although a change in market interest rates would not affect the interestincurred or cash flow related to this fixed rate portion of the debt portfolio,the debt value would be affected.

Our Credit Facility carries a variable interest ratethat is tied to market indices. As of September 30, 2006, we had no directborrowings and $8.5 million of letters of credit outstanding under ourCredit Facility. Borrowings under the Credit Facility would have borne interestat a rate of between approximately 6.57% and 8.25% per annum, as of September 30,2006. Any future borrowings under the Credit Facility would, to the extent ofoutstanding borrowings, be affected by changes in market interest rates. Achange in market interest rates on the variable portion of the debt portfolioimpacts the interest incurred and cash flows, but does not impact the value ofthe financial instrument.

The sensitivity analysis as it relates to the fixed rateportion of our debt portfolio assumes an instantaneous 100 basis point move ininterest rates from their levels as of September 30, 2006, with all othervariables held constant. A 100 basis point increase in market interest rateswould result in a decrease in the value of the debt by approximately$3.5 million as of September 30, 2006. A 100 basis point decline inmarket interest rates would cause the debt value to increase by approximately$3.5 million as of September 30, 2006.

Based on the variable rate debt included in our debtportfolio as of September 30, 2006, a 100 basis point increase in interestrates would result in additional interest incurred for the year of less than$0.1 million. A 100 basis point decrease in interest rates wouldcorrespondingly lower our interest expense for the year by less than$0.1 million.

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Other than as describedabove, we do not believe that the market risk exposure on other financial instrumentsis material.

**Item 8.**                        FinancialStatements and Supplementary Data

Our Consolidated FinancialStatements appear on pages F-1 through F-36, as set forth inItem 15.

**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

None.

**Item 9A.**                Controlsand Procedures

***Disclosure Controls and Procedures***

Our disclosure controlsand procedures are designed to ensure that information required to be disclosedby us in the reports that are filed or submitted under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. Thesedisclosure controls and procedures include controls and procedures designed toensure that information required to be disclosed under the Exchange Act isaccumulated and communicated to our management on a timely basis to allowdecisions regarding required disclosure. We evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures as of September 30,2006. Based on this evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer have concluded that as of September 30, 2006, thesecontrols and procedures were effective.

***Internal Control over Financial Reporting***

*(a)*   Management’sAnnual Report on Internal Control over Financial Reporting

The Company’s management is responsible forestablishing and maintaining adequate internal control over financial reportingto provide reasonable assurance regarding the reliability of the Company’sfinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Internalcontrol over financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the Company, (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company, and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Company’s assets that could have a material effect on the financialstatements.

Management assessed the Company’s internal controlover financial reporting as of September 30, 2006, the end of the Company’sfiscal year. Management based its assessment on criteria established inInternal Control—Integrated Framework**issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Management’sassessment included evaluation of such elements as the design and operatingeffectiveness of key financial reporting controls, process documentation,accounting policies, and the Company’s overall control environment.

Based on its assessment, management has concluded thatthe Company’s internal control over financial reporting was effective as of theend of the fiscal year to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external reporting purposes in accordance with generally acceptedaccounting principles. The results of management’s assessment were reviewedwith the Audit Committee of the Company’s Board of Directors.

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KPMG LLP auditedmanagement’s assessment and independently assessed the effectiveness of theCompany’s internal control over financial reporting. KPMG LLP has issued anattestation report concurring with management’s assessment, which is includedbelow.

*(b)*   Reportof Independent Registered Public Accounting Firm

The Board of Directors and StockholdersMothers Work, Inc.:

We have audited management’s assessment, included inManagement’s Annual Report on Internal Control over Financial Reportingpresented above, that Mothers Work, Inc. maintained effective internalcontrol over financial reporting as of September 30, 2006, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).Mothers Work, Inc.’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

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

In our opinion, management’s assessment that MothersWork, Inc. maintained effective internal control over financial reportingas of September 30, 2006, is fairly stated, in all material respects,based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in our opinion, Mothers Work, Inc. maintained, in all materialrespects, effective internal control over financial reporting as of September 30,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofMothers Work, Inc. and subsidiaries as of 

45

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September 30, 2006 and 2005, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the years in the three-year period ended September 30, 2006 andthe related financial statement schedule, and our report dated December 13,2006 expressed an unqualified opinion on those consolidated financialstatements and the related financial statement schedule.
| /s/ KPMG LLP                |   |
|-----------------------------|--------|
| Philadelphia,  Pennsylvania |   |
| December 13,  2006     |   |
|                             |        |  |

 

*(c)*   Changein Internal Control over Financial Reporting

There have been no changesin internal control over financial reporting identified in connection with management’sevaluation that occurred during the last fiscal quarter ended September 30,2006, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

**Item 9B.**               OtherInformation

None.

**PART III.**

**Item 10.**                 Directorsand Executive Officers of the Registrant

Information concerning directors, appearing under thecaptions “Election of Directors” and “Section 16(a) Beneficial OwnershipReporting Compliance” in our Proxy Statement (the “Proxy Statement”) will befiled with the Securities and Exchange Commission in connection with the AnnualMeeting of Stockholders scheduled to be held on January 19, 2007, andinformation 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 hasadopted a Code of Business Conduct and Ethics, which was filed as an exhibit tothe fiscal 2003 Form 10-K. We intend to satisfy the amendment andwaiver disclosure requirements under applicable securities regulations byposting any amendments of, or waivers to, the Code of Business Conduct andEthics on our web site.

**Item 11.**                 ExecutiveCompensation

The information containedin the Proxy Statement from the section titled “Compensation Committee Reporton Executive Compensation” up to, but not including, the section titled “SecurityOwnership of Certain Beneficial Owners and Management,” with respect to executivecompensation, and in the section titled “Compensation of Directors” withrespect to director compensation, is incorporated herein by reference inresponse to this Item 11.

 

46

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**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information containedin the section titled “Security Ownership of Certain Beneficial Owners andManagement” in the Proxy Statement, with respect to security ownership ofcertain beneficial owners and management, and in the section titled “Summary ofAll Existing Equity Compensation Plans,” with respect to securities authorizedfor issuance under equity compensation plans, is incorporated herein by referencein response to this Item 12.

**Item 13.**                 CertainRelationships and Related Transactions

Not applicable.

**Item 14.**                 PrincipalAccountant Fees and Services

The information containedin the Proxy Statement in the section titled “Auditor Fees and Services” isincorporated herein by reference in response to this Item 14.

**PART IV.**

**Item 15.**                 Exhibits,Financial Statement Schedules

(a)           (1)   Financial Statements

The financialstatements listed in the accompanying Index to Consolidated FinancialStatements are filed as part of this Form 10-K, commencing on page F-1.

(2)         Financial StatementSchedules

Schedule II—Valuation and Qualifying Accounts.

All other schedules are omitted because they are notapplicable or not required, or because the required information is included inthe consolidated financial statements or notes thereto.

(3)         Exhibits

See following Index of Exhibits.

47

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**INDEXOF EXHIBITS**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *3.1             |       | Amended and Restated Certificate of Incorporation of  the Company (effective March 10, 1993) (Exhibit 3.3 to the  Company’s Registration Statement on Form S-1, Registration  No. 33-57912, dated February 4, 1993).                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *3.2             |       | By-Laws of the  Company (as amended through October 9, 2005) (Exhibit 3.2 to the  Company’s Current Report on Form 8-K dated October 9, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *3.3             |       | Amendment to the Amended  and Restated Certificate of Incorporation of the Company dated  February 11, 2003 (Exhibit 3.3 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2003 (the  “March 2003 Form 10-Q”)).                                                                                                                                                                                                                                                                                                                                                                                             |
| *3.4             |       | Amendment to the  Certificate of Designation of the Series B Junior Participating  Preferred Stock of the Company dated February 11, 2003 (Exhibit 3.4  to the Company’s March 2003 10-Q).                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| *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 Mothers  Work, Inc. 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). |
| *4.3             |       | Indenture dated as of  August 5, 2002, among the Company and Cave Springs, Inc.,  eSpecialty Brands, LLC, Dan Howard Industries, Inc., and Mother’s  Stores, Inc., as guarantors, and J.P. Morgan Trust Company,  National Association, a national banking association, as Trustee  (Exhibit 4.11 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2002).                                                                                                                                                                                                                                              |
| †*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  (the “1996 Form 10-K”)).                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.6            |       | Installment Sale  Agreement dated as of April 4, 1996 by and between PIDC Financing  Corporation and the Company (Exhibit 10.30 to the 1996 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

48

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| *10.7        |   | Open-ended Mortgage dated as of April 4,  1996 between PIDC Financing Corporation and the Pennsylvania Industrial  Development Authority (“PIDA”) (Exhibit 10.31 to the 1996 Form 10-K).                                                                                                               |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.8        |   | Loan Agreement dated as of April 4, 1996 by and  between PIDC Financing Corporation and PIDA (Exhibit 10.32 to the 1996  Form 10- K).                                                                                                                                                                            |
| *10.9        |   | Amended and Restated  Loan and Security Agreement dated as of October 15, 2004 by and among  Mothers Work, Inc., Cave Springs, Inc., Mothers Work  Canada, Inc., and Fleet Retail Group, Inc. (Exhibit 10.1 to  the Company’s Current Report on Form 8-K dated October 15,  2004). |
| †*10.10 |   | 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).                                                                                                                                |
| †*10.11 |   | 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 March 2003 Form 10-Q).                                                                                                                            |
| †*10.12 |   | 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”)).                                                               |
| †*10.13 |   | 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).                                                                                                                                                                   |
| †*10.14 |   | Amended and Restated  Employment Agreement dated as of April 28, 2005, between Mothers  Work, Inc. and Dan W. Matthias (Exhibit 10.20 to the Company’s  Current Report on Form 8-K dated April 26, 2005 (the  “April 26, 2005 Form 8-K”)).                                    |
| †*10.15 |   | Amended and Restated  Employment Agreement dated as of April 28, 2005, between Mothers  Work, Inc. and Rebecca C. Matthias (Exhibit 10.21 to the  April 26, 2005 Form 8-K).                                                                                                                            |
| †*10.16 |   | Amended and Restated  Employment Agreement dated as of April 26, 2005, between Mothers Work, Inc.  and Edward M. Krell (Exhibit 10.22 to the April 26, 2005  Form 8-K).                                                                                                                                |
| †*10.17 |   | Description of the  Company’s Non-Employee Directors Compensation Policy (Exhibit 10.1 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2005).                                                                                                                         |
| *10.18       |   | First Modification  Agreement dated as of September 26, 2005 by and among Mothers  Work, Inc., Cave Springs, Inc., Mothers Work Canada, Inc., and  Fleet Retail Group, LLC. (Exhibit 10.18 to the Company’s Annual Report  on Form 10-K for the year ended September 30, 2005).         |
| †*10.19 |   | Amendment to Amended and  Restated Employment Agreement dated as of December 29, 2005, between  Mothers Work, Inc. and Dan W. Matthias (Exhibit 10.19 to the  Company’s Current Report on Form 8-K dated December 29, 2005  (the “December 29, 2005 Form 8-K”)).              |
| †*10.20 |   | Amendment to Amended and  Restated Employment Agreement dated as of December 29, 2005, between  Mothers Work, Inc. and Rebecca C. Matthias (Exhibit 10.20 to the  December 29, 2005 Form 8-K).                                                                                                         |
| †*10.21 |   | 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 December 29, 2005 Form 8-K).                                                                              |
| †*10.22 |   | 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).                                                                                                                     |

49

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| †*10.23 |   | Second Amendment to Amended and Restated Employment  Agreement dated as of May 8, 2006, between Mothers Work, Inc. and  Dan W. Matthias (Exhibit 10.4 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2006 (the  “March 2006 Form 10-Q”)). |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †*10.24 |   | Second Amendment to Amended and Restated Employment  Agreement dated as of May 8, 2006, between Mothers Work, Inc. and  Rebecca C. Matthias (Exhibit 10.5 to the March 2006 Form 10-Q).                                                                                                             |
| †*10.25 |   | Letter Agreement dated  as of November 14, 2006 between Mothers Work, Inc. and Dan W.  Matthias (Exhibit 10.19 to the Company’s Current Report on Form 8-K  dated November 14, 2006 (the “November 14, 2006 Form 8-K”)).                                                   |
| †*10.26 |   | Letter Agreement dated  as of November 14, 2006 between Mothers Work, Inc. and Rebecca C.  Matthias (Exhibit 10.20 to the November 14, 2006 Form 8-K).                                                                                                                                         |
| †10.27  |   | Company’s 2005 Equity  Incentive Plan (as amended through October 9, 2006)                                                                                                                                                                                                                                         |
| †10.28  |   | Form of Restricted  Stock Award Agreement under the Company’s 2005 Equity Incentive Plan.                                                                                                                                                                                                                          |
| †10.29  |   | Form of  Non-Qualified Stock Option Agreement under the Company’s 2005 Equity  Incentive Plan.                                                                                                                                                                                                                     |
| *14          |   | Code of Business Conduct  and Ethics (Exhibit 14 to the Company’s Annual Report on Form 10-K  for the year ended September 30, 2003 (the “2003 Form 10-K”)).                                                                                                                              |
| *21          |   | Subsidiaries of the  Company (Exhibit 21 to the 2003 Form 10-K).                                                                                                                                                                                                                                                   |
| 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  Executive Vice President—Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                 |
| 32.1         |   | Certification of the  Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                      |
| 32.2         |   | Certification of the  Executive Vice President—Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                       |

----

*                    Incorporatedby reference.

†                    Managementcontract or compensatory plan or arrangement.

50

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City ofPhiladelphia, Commonwealth of Pennsylvania, on December 13, 2006.

|        | MOTHERS  WORK, INC. |
|--------|--------------------------|
|   | By:                      | /s/  DAN W. MATTHIAS |
|   |                     | **Dan W.  Matthias** |
|   |                     | *Chairman  of the Board and Chief Executive Officer (Principal Executive Officer)* |
|   | By:                      | /s/  EDWARD M. KRELL |
|   |                     | **Edward  M. Krell** |
|   |                     | *Executive  Vice President—Chief Financial Officer (Principal Financial and Accounting  Officer)* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed by the following persons on December 13, 2006, in thecapacities indicated:
| /s/ DAN W. MATTHIAS                |   | Chairman of the Board, Chief Executive Officer and  Director |
|------------------------------------|--------|--------------------------------------------------------------|
| **Dan W.  Matthias**               |   | (Principal Executive Officer)                                |
| /s/  REBECCA C. MATTHIAS           |   | President, Chief  Operating Officer and Director             |
| **Rebecca  C. Matthias**           |   |                                                         |
| /s/  EDWARD M. KRELL               |   | Executive Vice  President—Chief Financial Officer       |
| **Edward  M. Krell**               |   | (Principal Financial and Accounting Officer)                 |
| /s/  JOSEPH A. GOLDBLUM            |   | Director                                                     |
| **Joseph  A. Goldblum**            |   |                                                         |
| /s/  ELAM M. HITCHNER, III    |   | Director                                                     |
| **Elam M.  Hitchner, III**    |   |                                                         |
| /s/  ANNE T. KAVANAGH              |   | Director                                                     |
| **Anne T.  Kavanagh**              |   |                                                         |
| /s/  DAVID SCHLESSINGER            |   | Director                                                     |
| **David  Schlessinger**            |   |                                                         |
| /s/  WILLIAM A. SCHWARTZ, JR. |   | Director                                                     |
| **William  A. Schwartz, Jr.** |   |                                                         |

 

51

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**MOTHERSWORK, INC. AND SUBSIDIARIES**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTSAND 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       |   | F-5         |
| Consolidated Statements of  Cash Flows                      |   | F-6         |
| Notes to Consolidated Financial  Statements                 |   | F-7 to F-36 |
| Schedule  Supporting the Consolidated Financial Statements: |   |        |
| Valuation  and Qualifying Accounts                          |   | F-37        |

 

F-1

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and StockholdersMothers Work, Inc.:

We have audited the accompanying consolidated balancesheets of Mothers Work, Inc. and subsidiaries as of September 30,2006 and 2005, and the related consolidated statements of operations,stockholders’ equity and cash flows for each of the years in the three-yearperiod ended September 30, 2006. In connection with our audits of theconsolidated financial statements, we also have audited the related financialstatement schedule, Valuation and Qualifying Accounts. These consolidatedfinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedule based on ouraudits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 statementsreferred to above present fairly, in all material respects, the financialposition of Mothers Work, Inc. and subsidiaries as of September 30,2006 and 2005, and the results of their operations and their cash flows foreach of the years in the three-year period ended September 30, 2006, inconformity with U.S generally accepted accounting principles. Also in ouropinion, the related financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

As discussed in Note 2, the Company adopted SFAS No. 123(R),“Share-Based Payment,” effective October 1, 2005 using the modifiedprospective method.

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of Mothers Work, Inc.’sinternal control over financial reporting as of September 30, 2006, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated December 13, 2006 expressed an unqualified opinion onmanagement’s assessment of, and the effective operation of, internal controlover financial reporting.
| /s/ KPMG LLP                |   |   |
|-----------------------------|--------|--------|
|                        |   |   |
|                        |   |   |
| Philadelphia,  Pennsylvania |   |
| December 13,  2006     |   |

 

F-2

----

**MOTHERS WORK, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share and per share amounts)**

| ** **                                                                                                                        | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                        | ** ** | **2006**               | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                        |       |                   |       |   |   |
| Current assets                                                                                                                    |       |                   |       |   |   |
| Cash and cash  equivalents                                                                                                        |       | $                      | 18,904     |   | $ | 3,037 |   |
| Short-term investments                                                                                                            |       | 9,425                  |       | — |   |
| Trade receivables                                                                                                                 |       | 11,631                 |       | 7,681 |   |
| Inventories                                                                                                                       |       | 94,259                 |       | 105,911 |   |
| Deferred income taxes                                                                                                             |       | 6,018                  |       | 6,015 |   |
| Prepaid expenses and  other current assets                                                                                        |       | 8,395                  |       | 4,816 |   |
| Total current assets                                                                                                              |       | 148,632                |       | 127,460 |   |
| Property, plant and  equipment, net                                                                                               |       | 71,430                 |       | 76,173 |   |
| Assets held for sale                                                                                                              |       | 700                    |       | 925 |   |
| Other assets                                                                                                                      |       |                   |       |   |   |
| Goodwill                                                                                                                          |       | 50,389                 |       | 50,389 |   |
| Deferred financing  costs, net of accumulated amortization of $1,927 and $1,379                                                   |       | 2,795                  |       | 3,697 |   |
| Other intangible assets,  net of accumulated amortization of $2,413 and $2,481                                                    |       | 726                    |       | 878 |   |
| Deferred income taxes                                                                                                             |       | 12,543                 |       | 13,261 |   |
| Other non-current  assets                                                                                                         |       | 521                    |       | 534 |   |
| Total other assets                                                                                                                |       | 66,974                 |       | 68,759 |   |
| Total assets                                                                                                                      |       | $                      | 287,736    |   | $ | 273,317 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                     |       |                   |       |   |   |
| Current liabilities                                                                                                               |       |                   |       |   |   |
| Line of credit  borrowings                                                                                                        |       | $                      | —     |   | $ | — |   |
| Current portion of long-term  debt                                                                                                |       | 814                    |       | 769 |   |
| Accounts payable                                                                                                                  |       | 19,593                 |       | 19,900 |   |
| Accrued expenses and  other current liabilities                                                                                   |       | 44,453                 |       | 35,563 |   |
| Total current  liabilities                                                                                                        |       | 64,860                 |       | 56,232 |   |
| Long-term debt                                                                                                                    |       | 117,535                |       | 128,087 |   |
| Deferred rent and other  non-current liabilities                                                                                  |       | 24,641                 |       | 25,670 |   |
| Total liabilities                                                                                                                 |       | 207,036                |       | 209,989 |   |
| Commitments and  contingencies (Note 14)                                                                                          |       |                   |       |   |   |
| Stockholders’ equity                                                                                                         |       |                   |       |   |   |
| Preferred stock,  2,000,000 shares authorized                                                                                     |       |                   |       |   |   |
| Series A cumulative  convertible preferred stock, $.01 par value, 41,000 shares authorized,  none outstanding           |       | —                 |       | — |   |
| Series B junior  participating preferred stock, $.01 par value; 300,000 shares authorized,  none outstanding                 |       | —                 |       | — |   |
| Common stock, $.01 par  value; 20,000,000 shares authorized, 5,624,374 and 5,268,535 shares issued  and outstanding, respectively |       | 56                     |       | 53 |   |
| Additional paid-in  capital                                                                                                       |       | 71,431                 |       | 63,164 |   |
| Retained earnings                                                                                                                 |       | 9,213                  |       | 111 |   |
| Total stockholders’  equity                                                                                                  |       | 80,700                 |       | 63,328 |   |
| Total liabilities and stockholders’ equity                                                                                   |       | $                      | 287,736    |   | $ | 273,317 |   |

 

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

F-3

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**MOTHERS WORK, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)**

| ** **                                    | ** ** | **Year Ended September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                     |       | $                                           | 602,744    |   | $ | 561,627 |   | $ | 518,051 |   |
| Cost of goods  sold                           |       | 288,082                                     |       | 277,453 |   | 242,751 |   |
| Gross profit                                  |       | 314,662                                     |       | 284,174 |   | 275,300 |   |
| Selling, general  and administrative expenses |       | 284,334                                     |       | 269,936 |   | 252,030 |   |
| Operating income                              |       | 30,328                                      |       | 14,238 |   | 23,270 |   |
| Interest expense,  net                        |       | 14,534                                      |       | 15,293 |   | 14,765 |   |
| Loss on  extinguishment of debt               |       | 873                                         |       | — |   | — |   |
| Income (loss) before income taxes             |       | 14,921                                      |       | (1,055 | ) | 8,505 |   |
| Income tax  provision (benefit)               |       | 5,819                                       |       | (880 | ) | 3,466 |   |
| Net income (loss)                             |       | $                                           | 9,102      |   | $ | (175 | ) | $ | 5,039 |   |
| Net income (loss) per share—Basic        |       | $                                           | 1.70       |   | $ | (0.03 | ) | $ | 0.97 |   |
| Average shares outstanding—Basic         |       | 5,348                                       |       | 5,242 |   | 5,212 |   |
| Net income (loss) per share—Diluted      |       | $                                           | 1.63       |   | $ | (0.03 | ) | $ | 0.92 |   |
| Average shares  outstanding—Diluted      |       | 5,591                                       |       | 5,242 |   | 5,501 |   |

 

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

F-4

----

**MOTHERS WORK, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands)**

| ** **                                 | ** ** | **Common Stock**  | ** ** | ** ** | ** ** | **Retained**                     | ** ** | ** **                           | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------|------------|----------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **Number  of  Shares** | ** ** | **Amount** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Earnings  (Accumulated  Deficit)** | ** ** | **Total** | ** ** |
| Balance as of  September 30, 2003     |       |                   | 5,231      |       |       |                             | $          | 52                                   |       |   |   | $ | 63,559 |   |   |   | $ | (4,753 | ) |   | $ | 58,858 |   |
| Exercise of stock options                  |       |                   | 51         |       |       |                             | 1          |                                 |       |   | 275 |   |   |   | — |   |   | 276 |   |
| Repurchase and retirement of common shares |       |                   | (75        | )          |       |                             | (1         | )                                    |       |   | (1,774 | ) |   |   | — |   |   | (1,775 | ) |
| Tax benefit from stock option exercises    |       |                   | —     |       |       |                             | —     |                                 |       |   | 311 |   |   |   | — |   |   | 311 |   |
| Non-cash compensation                      |       |                   | —     |       |       |                             | —     |                                 |       |   | 194 |   |   |   | — |   |   | 194 |   |
| Net income                                 |       |                   | —     |       |       |                             | —     |                                 |       |   | — |   |   |   | 5,039 |   |   | 5,039 |   |
| Balance as of  September 30, 2004     |       |                   | 5,207      |       |       |                             | 52         |                                 |       |   | 62,565 |   |   |   | 286 |   |   | 62,903 |   |
| Exercise of stock options                  |       |                   | 62         |       |       |                             | 1          |                                 |       |   | 484 |   |   |   | — |   |   | 485 |   |
| Tax benefit from stock option exercises    |       |                   | —     |       |       |                             | —     |                                 |       |   | 115 |   |   |   | — |   |   | 115 |   |
| Net loss                                   |       |                   | —     |       |       |                             | —     |                                 |       |   | — |   |   |   | (175 | ) |   | (175 | ) |
| Balance as of  September 30, 2005     |       |                   | 5,269      |       |       |                             | 53         |                                 |       |   | 63,164 |   |   |   | 111 |   |   | 63,328 |   |
| Stock-based compensation                   |       |                   | —     |       |       |                             | —     |                                 |       |   | 1,374 |   |   |   | — |   |   | 1,374 |   |
| Exercise of stock options and warrants     |       |                   | 355        |       |       |                             | 3          |                                 |       |   | 4,910 |   |   |   | — |   |   | 4,913 |   |
| Tax benefit from stock option exercises    |       |                   | —     |       |       |                             | —     |                                 |       |   | 1,983 |   |   |   | — |   |   | 1,983 |   |
| Net income                                 |       |                   | —     |       |       |                             | —     |                                 |       |   | — |   |   |   | 9,102 |   |   | 9,102 |   |
| Balance as of  September 30, 2006     |       |                   | 5,624      |       |       |                             | $          | 56                                   |       |   |   | $ | 71,431 |   |   |   | $ | 9,213 |   |   | $ | 80,700 |   |

 

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

F-5

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**MOTHERS WORK, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**

| ** **                                                                                | ** ** | **Year Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash Flows from Operating Activities**                                                  |       |                                        |       |   |   |   |   |
| Net income (loss)                                                                         |       | $                                           | 9,102      |   | $ | (175 | ) | $ | 5,039 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and  amortization                                                            |       | 16,118                                      |       | 15,502 |   | 14,270 |   |
| Stock-based compensation  expense                                                         |       | 2,796                                       |       | — |   | — |   |
| Loss on impairment of  long-lived assets                                                  |       | 2,612                                       |       | 3,440 |   | 1,816 |   |
| (Gain) loss on disposal  of assets                                                        |       | (139                                        | )          | 726 |   | 1,223 |   |
| Loss on extinguishment  of debt                                                           |       | 873                                         |       | — |   | — |   |
| Accretion of discount on  notes                                                           |       | 186                                         |       | 167 |   | 149 |   |
| Deferred income tax  provision (benefit)                                                  |       | 715                                         |       | (1,299 | ) | 2,329 |   |
| Tax benefit from stock  option exercises                                                  |       | —                                      |       | 115 |   | 311 |   |
| Amortization of deferred  financing costs                                                 |       | 689                                         |       | 588 |   | 415 |   |
| Other                                                                                     |       | —                                      |       | — |   | 224 |   |
| Changes in assets and liabilities:                                                        |       |                                        |       |   |   |   |   |
| Decrease (increase) in—                                                              |       |                                        |       |   |   |   |   |
| Trade receivables                                                                         |       | (3,950                                      | )          | (3,299 | ) | (526 | ) |
| Inventories                                                                               |       | 11,652                                      |       | (13,168 | ) | (8,238 | ) |
| Prepaid expenses and  other assets                                                        |       | (3,566                                      | )          | 1,389 |   | (2,031 | ) |
| Increase (decrease) in—                                                              |       |                                        |       |   |   |   |   |
| Accounts payable,  accrued expenses and other current liabilities                         |       | 7,226                                       |       | 3,943 |   | (824 | ) |
| Deferred rent and other  non-current liabilities                                          |       | (1,901                                      | )          | (605 | ) | 4,099 |   |
| Net cash provided by  operating activities                                                |       | 42,413                                      |       | 7,324 |   | 18,256 |   |
| **Cash Flows from Investing Activities**                                                  |       |                                        |       |   |   |   |   |
| Purchase of short-term  investments                                                       |       | (97,555                                     | )          | (7,000 | ) | (54,075 | ) |
| Proceeds from sale of  short-term investments                                             |       | 88,130                                      |       | 13,400 |   | 52,675 |   |
| Capital expenditures                                                                      |       | (13,933                                     | )          | (17,644 | ) | (21,540 | ) |
| Proceeds  from sale of assets held for sale                                               |       | 225                                         |       | — |   | — |   |
| Purchase of intangible  assets                                                            |       | (33                                         | )          | (170 | ) | (80 | ) |
| Net cash used in  investing activities                                                    |       | (23,166                                     | )          | (11,414 | ) | (23,020 | ) |
| **Cash Flows from Financing Activities**                                                  |       |                                        |       |   |   |   |   |
| Increase (decrease) in  cash overdrafts                                                   |       | 1,077                                       |       | (166 | ) | 684 |   |
| Repayment of long-term  debt                                                              |       | (10,770                                     | )          | (666 | ) | (279 | ) |
| Premium on repurchase of  long-term debt                                                  |       | (583                                        | )          | — |   | — |   |
| Repurchase of common  stock                                                               |       | —                                      |       | — |   | (1,775 | ) |
| Payout for redeemed  Series A preferred stock                                        |       | —                                      |       | (373 | ) | (1,362 | ) |
| Deferred financing costs                                                                  |       | —                                      |       | (620 | ) | (44 | ) |
| Proceeds from exercise  of stock options                                                  |       | 4,913                                       |       | 485 |   | 276 |   |
| Excess  tax benefit from exercise of stock options                                        |       | 1,983                                       |       | — |   | — |   |
| Net cash used in  financing activities                                                    |       | (3,380                                      | )          | (1,340 | ) | (2,500 | ) |
| **Net Increase (Decrease) in Cash  and Cash Equivalents**                                 |       | 15,867                                      |       | (5,430 | ) | (7,264 | ) |
| **Cash and Cash Equivalents,  Beginning of Year**                                         |       | 3,037                                       |       | 8,467 |   | 15,731 |   |
| **Cash and Cash Equivalents, End of Year**                                                |       | $                                           | 18,904     |   | $ | 3,037 |   | $ | 8,467 |   |

 

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

F-6

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**                 NATURE OFBUSINESS

Mothers Work, Inc.and subsidiaries (“Mothers Work” or the “Company”) is a specialty designer andretailer of maternity clothing. The Company operated 1,541 retail locations asof September 30, 2006, including 810 stores and 731 leased departments,throughout the United States and Canada. In addition, the Company marketsmaternity apparel at Kohl’s® stores throughout the United States under anexclusive product and license agreement. Mothers Work, Inc. wasincorporated in Delaware in 1982.

**2.**                 SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

***a.***                Principlesof Consolidation

The accompanyingconsolidated financial statements include the accounts of Mothers Work, Inc.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.) andConfecciones Acona S.A. All significant intercompany transactions and accountshave been eliminated in consolidation.

***b.***                 FiscalYear-End

The Company operates on afiscal year ending September 30 of each year. All references to fiscalyears of the Company refer to the fiscal years ended on September 30 inthose years. For example, the Company’s “fiscal 2006” ended on September 30,2006.

***c.***                  Useof Estimates

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make certain estimates andassumptions that may affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

***d.***                 Cashand Cash Equivalents

Cash and cash equivalents include cash on hand, cashin the bank and short-term investments with an original maturity of threemonths or less when purchased. Cash overdrafts of $3,890,000 and $2,813,000were included in accounts payable as of September 30, 2006 and 2005,respectively.

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

***e.***                  Short-TermInvestments

The Company’s short-term investments may be classifiedas either held-to-maturity or available-for-sale. Held-to-maturity securitiesrepresent those securities that the Company has both the intent and ability tohold to maturity and are carried at amortized cost. Interest on thesesecurities, as well as amortization of discounts and premiums, is included ininterest income. Available-for-sale securities represent those securities thatdo not meet the classification of held-to-maturity, are not actively traded andare carried at fair value, which approximates amortized cost. Unrealized gainsand losses on these 

F-7

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)

securities are excludedfrom earnings and are reported as a separate component of stockholders’ equityuntil realized. When available-for-sale securities are sold, the cost of thesecurities is specifically identified and is used to determine the realizedgain or loss.

The Company’s short-terminvestments as of September 30, 2006 were classified as available-for-saleand consisted exclusively of auction rate securities with the cost equal to thefair value. These securities had liquidity provisions at specified interestrate reset dates, typically every 7, 28 or 35 days, and the original maturityof the securities was beyond three months. There were no realized gains orlosses associated with available-for-sale investments in fiscal 2006, 2005 or2004.

***f.***                   Inventories

Inventories are valued atthe lower of cost or market. Cost is determined by the “first-in, first-out”(FIFO) method. Inventories of goods manufactured by the Company include thecost of materials, freight, direct labor, and manufacturing and distributionoverhead.

***g.***                 Property,Plant and Equipment

Property, plant and equipment are stated at cost. Depreciationand amortization are computed for financial reporting purposes on astraight-line basis, using service lives ranging principally from five to tenyears for furniture and equipment and forty years for the building. Leaseholdimprovements are amortized using the straight-line method over the shorter ofthe lease term or their useful life. The cost of assets sold or retired and therelated accumulated depreciation or amortization are removed from the accountswith any resulting gain or loss included in net income (loss). Maintenance andrepairs are expensed as incurred except for the capitalization of majorrenewals and betterments that extend the life of the asset. Long-lived assetsare reviewed for impairment whenever adverse events or changes in circumstancesor business climate indicate that the carrying value may not be recoverable. Factorsused in the evaluation include, but are not limited to, management’s plans forfuture operations, brand initiatives, recent operating results and projectedcash flows. If the associated undiscounted cash flows are insufficient tosupport the recorded asset, an impairment loss is recognized to reduce thecarrying value of the asset. The amount of the impairment loss is determined bycomparing the discounted expected future cash flows with the carrying value.

During fiscal 2006, 2005and 2004, the Company recorded impairment write downs of property, plant andequipment totaling $2,578,000, $3,151,000 and $1,816,000, respectively, on apre-tax basis.

***h.***                Goodwilland Intangible Assets

Goodwill represents the excess of cost over the fairvalue of net assets acquired in business combinations. Prior to fiscal 2002,goodwill was amortized using the straight-line method over a period of20 years. Effective October 1, 2001, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and OtherIntangible Assets,” and no longer amortizes goodwill. Management determinedthat the Company has one reporting unit for purposes of applyingSFAS No.142 based on its reporting structure. The Company makes itsassessment of impairment as of September 30 of each fiscal year. The fairvalue of the Company’s single reporting unit at each measurement date isdetermined based on the fair market value of the Company’s outstanding commonstock on a control basis and, if necessary, an outside independent valuation isobtained to determine the fair value.

F-8

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Based on theseassessments, no impairment loss was required to be recognized at any of the measurementdates. The Company plans to perform an annual assessment for goodwillimpairment at the end of each fiscal year or as impairment indicators arise. Ifthe fair market value of the Company’s outstanding common stock on a controlbasis were to significantly decline in the future, the goodwill would likelybecome impaired.

Intangible assets withdefinite useful lives, which primarily consist of lease acquisition costs, areamortized over the lease term. Management reviews the carrying amount of theseintangible assets as impairment indicators arise, to assess the continuedrecoverability based on future undiscounted cash flows and operating resultsfrom the related asset, future asset utilization and changes in marketconditions. During fiscal 2006 and 2005, the Company recorded write-downs ofintangible assets totaling $34,000 and $14,000, respectively, on a pre-taxbasis. During fiscal 2004, there was no impairment to the carrying value ofintangible assets. The Company has not identified any unamortizable intangibleassets. Aggregate amortization expense of intangible assets in fiscal 2006,2005 and 2004 was $199,000, $209,000 and $224,000, respectively.

Estimatedamortization expense for the next five fiscal years is as follows (inthousands):

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2007                 |       | $          | 153        |       |
| 2008                 |       | 131        |       |
| 2009                 |       | 116        |       |
| 2010                 |       | 99         |       |
| 2011                 |       | 74         |       |
|                      |            |            |            |            |            |  |

 

***i.***                   DeferredFinancing Costs

Deferred financing costs(see Note 9) are amortized to interest expense over the term of therelated debt using the effective interest method. Amortization expense ofdeferred financing costs in fiscal 2006, 2005 and 2004 was $689,000, $588,000and $415,000, respectively. In connection with a debt extinguishment, in fiscal2006 the Company wrote off $213,000 of unamortized deferred financing costs(see Note 9).

Estimatedamortization expense of deferred financing costs for the next five fiscal yearsis as follows (in thousands):

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2007                 |       | $          | 662        |       |
| 2008                 |       | 722        |       |
| 2009                 |       | 794        |       |
| 2010                 |       | 617        |       |
| 2011                 |       | —     |       |
|                      |            |            |            |            |            |  |

 

***j.***                    DeferredRent

Rent expense on operatingleases, including rent holidays and scheduled rent increases, is recorded on astraight-line basis over the term of the lease commencing on the date theCompany takes possession of the leased property, which is generally four to sixweeks prior to a store’s opening date. The net excess of 

F-9

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)

rentexpense over the actual cash paid has been recorded as deferred rent in theaccompanying Consolidated Balance Sheets. Tenant improvement allowances are alsoincluded in the accompanying Consolidated Balance Sheets as deferred rentliabilities and are amortized as a reduction of rent expense over the term ofthe lease from the possession date.

***k.***                 Treasury(Reacquired) Shares

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

***l.***                    FairValue of Financial Instruments

The carrying values ofcash and cash equivalents, short-term investments, trade receivables andaccounts payable approximate fair value due to the short-term nature of thoseinstruments. Based upon a valuation of the Senior Notes (see Note 9) by a thirdparty, the fair value of the long-term debt as of September 30, 2006is approximately $124,812,000, which is slightly higher than its carryingvalue.

***m.***             RevenueRecognition, Sales Returns and Allowances

Revenue is recognized atthe point of sale for retail store sales, including leased department sales, orwhen merchandise is shipped to customers for licensed product, Internet andmail order sales. Allowances for returns are recorded as a reduction ofrevenue, based on the Company’s historical experience.

***n.***                OtherRevenues

Included in net sales arerevenues earned by the Company through a variety of marketing partnershipprograms utilizing the Company’s opt-in customer database and various in-storemarketing initiatives, focused on baby and parent-related product andservices.

***o.***                 Costof Goods Sold

Cost of goods sold in theaccompanying 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), inboundfreight charges, purchasing and receiving costs, inspection costs, warehousingcosts, internal transfer costs, and the other costs of the Company’sdistribution network.

***p.***                 Shippingand Handling Fees and Costs

The Company includesshipping and handling revenue earned from its catalog and e-commerce activitiesin net sales. Shipping and handling costs, which are included in cost of goodssold in the accompanying Consolidated Statements of Operations, include shippingsupplies, related labor costs and third-party shipping costs.

F-10

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)

***q.***                 Selling,General and Administrative Expenses

Selling, general andadministrative expenses in the accompanying Consolidated Statements ofOperations includes:**advertisingand marketing expenses, corporate administrative expenses, store expenses(including store payroll and store occupancy expenses), store opening and storeclosing expenses, and store asset impairment charges.

***r.***                  AdvertisingCosts

The Company expenses thecosts of advertising when the advertising occurs. Advertising expenses were$9,908,000, $10,591,000 and $9,922,000 in fiscal 2006, 2005 and 2004,respectively.

***s.***                  IncomeTaxes

The Company utilizes theasset and liability method of accounting for income taxes as prescribed by SFASNo. 109, “Accounting for Income Taxes.” Under this method, deferred taxassets and liabilities are recognized for the expected future tax consequencesof temporary differences between the carrying amounts and the tax bases ofassets and liabilities as well as from net operating loss carryforwards. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in operations in the period that includes the enactment date.

***t.***                   Accountingfor Stock-Based Compensation

Effective October 1, 2005,the Company adopted SFAS No. 123(R), “Share-Based Payment,” using themodified prospective application method. Prior to adopting SFAS No. 123(R),the Company followed the intrinsic value method of accounting for stock-basedemployee compensation in accordance with Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations. On September 27, 2005, the Compensation Committeeof the Company’s Board of Directors approved, and the Board ratified, theacceleration of the vesting of all outstanding stock options having per share exerciseprices of $23.50 or more. Options to purchase 133,500 shares, having exerciseprices ranging from $23.62 to $37.05 per share, were affected by the vestingacceleration. The closing price of the Company’s common stock on September 26,2005 (the trading day prior to the vesting acceleration) was $11.31 per share. Theprimary purpose of this accelerated vesting program was to eliminate thecompensation expense associated with these stock options that the Company wouldotherwise have been required to recognize in future financial statementspursuant to SFAS No. 123(R). The amount of future compensation expensethat was avoided in connection with this acceleration was approximately $1.3 million,net of tax.

Forthe year ended September 30, 2006, the Company recognized stock-basedcompensation expense of $2,796,000, less related income tax benefit of$1,090,000, under the provisions of SFAS No. 123(R). For the years ended September 30,2005 and 2004, no compensation expense was recognized for stock optionawards granted at fair market value under the provisions of APB Opinion No. 25.The following table illustrates the proforma effect on net income (loss) and earnings per share if the Companyhad accounted for its stock option plans prior to October 1, 2005, usingthe fair value method of accounting under

F-11

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)

SFAS No. 123, “Accountingfor Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure”:

| ** **                                                                                                          | ** ** | **Year Ended  September 30,**                           | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2005**                                                          | ** ** | **2004** | ** ** |
| ** **                                                                                                          | ** ** | **(in thousands, except  per share amounts)** | ** ** |
| Net income  (loss):                                                                                                 |       |                                                              |       |   |   |
| As reported                                                                                                         |       | $                                                                 | (175       | ) | $ | 5,039 |   |
| Add stock-based compensation expense included  in the determination of net income as reported, net of tax |       | —                                                            |       | 116 |   |
| Deduct total stock-based compensation expense  determined under fair value-based method for all awards, net of tax  |       | (2,949                                                            | )          | (1,525 | ) |
| Pro forma net income (loss)                                                                                         |       | $                                                                 | (3,124     | ) | $ | 3,630 |   |
| Net income (loss) per share—Basic:                                                                             |       |                                                              |       |   |   |
| As reported                                                                                                         |       | $                                                                 | (0.03      | ) | $ | 0.97 |   |
| Pro forma                                                                                                           |       | (0.60                                                             | )          | 0.70 |   |
| Net income (loss)  per share—Diluted:                                                                          |       |                                                              |       |   |   |
| As reported                                                                                                         |       | $                                                                 | (0.03      | ) | $ | 0.92 |   |
| Pro forma                                                                                                           |       | (0.60                                                             | )          | 0.66 |   |

 

***u.***                Earningsper Share

Basic earnings per share is computed by dividing netincome (loss) by the weighted average number of outstanding common shares. Dilutedearnings per share is computed based upon the weighted average number ofoutstanding common shares, after giving effect to the potential dilutive effectfrom the assumed exercise of the common stock equivalents, including stockoptions and warrants (see Note 12).

Thefollowing summarizes those effects for the diluted earnings per sharecalculation (in thousands):

| ** **                                                                              | ** ** | **Year Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Average number of  shares outstanding—Basic                                        |       | 5,348                                       |       | 5,242 |   | 5,212 |   |
| Incremental  shares from the assumed exercise of outstanding stock options and warrants |       | 243                                         |       | — |   | 289 |   |
| Average number of shares  outstanding—Diluted                                      |       | 5,591                                       |       | 5,242 |   | 5,501 |   |

 

Options and warrants topurchase 35,030, 1,355,050 and 467,170 shares of the Company’s common stockwere outstanding as of September 30, 2006, 2005 and 2004, respectively,but were not included in the computation of diluted earnings per share forfiscal 2006, 2005 and 2004, respectively, as their effect would have been antidilutive.

F-12

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**                 SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES (Continued)

***v.***                  Statementsof Cash Flows

In fiscal 2006, 2005 and2004, the Company paid interest of $14,748,000, $14,470,000 and $14,415,000,respectively, and made income tax payments of $5,352,000, $708,000 and$3,258,000, respectively. In fiscal 2005, the Company acquired equipment with acost of $1,438,000 under a capital lease obligation.

***w.***               Businessand Credit Risk

Financial instruments,primarily cash and cash equivalents, short-term investments and accountsreceivable, potentially subject the Company to concentrations of credit risk. TheCompany limits its credit risk associated with cash and cash equivalents andshort-term investments by placing such investments in highly liquid funds andinstruments. Receivables associated with third-party credit cards are processedby financial institutions, which are monitored for financial stability. TheCompany is dependent on key suppliers to provide sufficient quantities ofinventory at competitive prices. No single supplier represented 10% or more ofnet purchases in fiscal 2006, 2005 or 2004. A majority of the Company’spurchases during fiscal 2006 were imported. Management believes that any eventcausing a disruption of imports from any specific country could be mitigated bymoving production to readily available alternative sources.

***x.***                 Insurance

The Company isself-insured for workers’ compensation and employee-related health carebenefits, up to certain stop-loss limits. Such costs are accrued based on knownclaims and an estimate of incurred but not reported claims. Further, theCompany utilizes a cooperative arrangement with a number of other companies toassist in managing certain insurance risks. The Company’s expenses associatedwith this relationship could be impacted by the loss history associated withthe cooperative as a whole. Liabilities associated with these risks areestimated by considering historical claims experience and other actuarialassumptions.

***y.***                  StorePreopening Costs

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

***z.***                  NewAccounting Pronouncements

In May 2005, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 154, “Accounting Changes and ErrorCorrections.”  SFAS No. 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. This statement is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005 and early adoption is permitted. The Company will adopt SFAS No. 154effective as of October 1, 2006.

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes.” FASB Interpretation No. 48provides guidance for the recognition and measurement of uncertain taxpositions in an enterprise’s financial statements. Recognition involves adetermination of whether it is more likely than not that a tax position will besustained upon examination with the presumption that the tax position will beexamined by the appropriate taxing authority that would have full knowledge ofall relevant information. This interpretation is effective for fiscal yearsbeginning after December 15, 2006. 

F-13

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Early adoption ispermitted if the enterprise has not issued financial statements, includinginterim financial statements, in the period of adoption. The impact fromadoption of FASB Interpretation No. 48, if any, on the Company’sconsolidated financial position or results of operations has not yet beendetermined.

In June 2006, theEmerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “How Taxes Collectedfrom Customers and Remitted to Governmental Authorities Should Be Presented inthe Income Statement (That Is, Gross versus Net Presentation).” EITF Issue 06-3provides guidance related to the presentation in financial statements of anytax assessed by a governmental authority that is directly imposed on arevenue-producing transaction between a seller and a customer, including, butnot limited to, sales, use, value added, and some excise taxes. The EITFconcluded that the presentation of taxes within the scope of EITF Issue 06-3on either a gross (included in revenues and costs) or a net (excluded fromrevenues) basis is an accounting policy decision that should disclosed. Inaddition, the aggregate amount of any such taxes that are reported on a grossbasis should be disclosed in interim and annual financial statements. Theguidance in EITF Issue 06-3 is effective for interim and annual reportingperiods beginning after December 15, 2006. The Company presently reportstaxes within the scope of EITF Issue 06-3 on a net basis and adoption isnot expected to have an impact on the Company’s consolidated financialstatements.

**3.**                 INVENTORIES

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

| ** **       | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| Finished goods   |       | $        | 86,937     |     | $          | 97,056 |   |
| Work-in-progress |       | 2,736    |       | 3,283    |       |
| Raw materials    |       | 4,586    |       | 5,572    |       |
|             |       | $        | 94,259     |     | $          | 105,911 |   |

 

**4.**                 PROPERTY, PLANTAND EQUIPMENT, NET

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

| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Land                                             |       | $        | 1,400      |     | $          | 1,400 |   |
| Building and  improvements                       |       | 12,762   |       | 12,474   |       |
| Furniture and  equipment                         |       | 56,608   |       | 53,917   |       |
| Leasehold  improvements                          |       | 103,160  |       | 102,149  |       |
|                                             |       | 173,930  |       | 169,940  |       |
| Less: accumulated  depreciation and amortization |       | (102,500 | )          | (93,767  | )          |
|                                             |       | $        | 71,430     |     | $          | 76,173 |   |

 

Furniture and equipment includes equipment acquiredunder a capital lease obligation on December 1, 2004. As of September 30,2006, the equipment had a cost of $1,438,000 and accumulated amortization of$546,000 (see Note 9).

F-14

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

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

During fiscal 2006, 2005 and 2004, the Companyrecorded pre-tax charges under SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” of $2,578,000, $3,151,000 and$1,816,000, respectively, related to the impairment of leasehold improvementsand furniture and equipment at certain of its retail locations.

As of September 30, 2006, $700,000 of assets heldfor sale (not included above) relate to the manufacturing and warehousefacilities located in Costa Rica that were acquired in the purchase ofiMaternity (see Note 5).

These facilities, shutdown during fiscal 2002, are being marketed for sale, are not being depreciatedand are separately reflected in the accompanying Consolidated Balance Sheets as“Assets held for sale.”  One of thesefacilities was sold in fiscal 2006 for $225,000. The two remaining Costa Ricamanufacturing and warehousing facilities are expected to be sold during fiscal2007. The carrying values of the Costa Rican facilities were reduced by$275,000 during fiscal 2005 to their estimated realizable values, which weredetermined based on purchase offers from interested parties, less estimatedselling costs.

**5.**                 EXIT/RESTRUCTURINGACTIVITIES RELATED TO ACQUISITION

Asummary of the charges incurred and reserves recorded in connection with theeSpecialty Brands, LLC (“iMaternity”) acquisition on October 17, 2001 forexit/restructuring activities during fiscal 2006, 2005 and 2004 is as follows(in thousands):

| ** **                                | ** ** | **Lease  Termination  Fees** | ** ** | **Severance** | ** ** | **Exit and  Other  Costs** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|---------------|------------|---------------------------------|------------|-----------|------------|
| Reserves recorded  in purchase accounting |       |                         | $          | 4,200         |       |                            |       | $         | 2,587      |   |   |   | $ | 2,150 |   |   | $ | 8,937 |   |   |
| Balance—September 30, 2003      |       |                         | $          | 668           |       |                            |       | $         | 600        |   |   |   | $ | 325 |   |   | $ | 1,593 |   |   |
| Charges during  fiscal 2004               |       |                         | (419       | )             |       |                            | (200       | )         |       |   | (124 | ) |   | (743 | ) |   |
| Balance—September 30,  2004     |       |                         | 249        |          |       |                            | 400        |      |       |   | 201 |   |   | 850 |   |   |
| Charges during  fiscal 2005               |       |                         | (249       | )             |       |                            | (200       | )         |       |   | (169 | ) |   | (618 | ) |   |
| Balance—September 30,  2005     |       |                         | —     |          |       |                            | 200        |      |       |   | 32 |   |   | 232 |   |   |
| Charges during  fiscal 2006               |       |                         | —     |          |       |                            | (200       | )         |       |   | (32 | ) |   | (232 | ) |   |
| Balance—September 30,  2006     |       |                         | $          | —        |       |                            |       | $         | —     |   |   |   | $ | — |   |   | $ | — |   |   |

 

F-15

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**6.**                 ACCRUED EXPENSESAND OTHER CURRENT LIABILITIES

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

| ** **                                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Salaries, wages  and employee benefits                       |       | $        | 14,657     |     | $          | 8,846 |   |
| Income taxes  payable                                        |       | 1,565    |       | 1,161    |       |
| Interest                                                     |       | 2,273    |       | 2,483    |       |
| Deferred rent                                                |       | 4,192    |       | 3,790    |       |
| Sales taxes                                                  |       | 3,170    |       | 2,456    |       |
| Insurance                                                    |       | 1,892    |       | 2.671    |       |
| Audit and legal                                              |       | 4,137    |       | 3,400    |       |
| Remaining payout  for redeemed Series A Preferred Stock |       | 679      |       | 679      |       |
| Accrued store  construction costs                            |       | 681      |       | 152      |       |
| Gift certificates  and store credits                         |       | 3,895    |       | 3,233    |       |
| Other                                                        |       | 7,312    |       | 6,692    |       |
|                                                         |       | $        | 44,453     |     | $          | 35,563 |   |

 

**7.**                 DEFERRED RENT ANDOTHER NON-CURRENT LIABILITIES

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

| ** **                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred rent                                                                     |       | $        | 27,410     |     | $          | 29,169 |   |
| Less: current  portion included in accrued expenses and other current liabilities |       | (4,192   | )          | (3,790   | )          |
| Non-current  deferred rent                                                        |       | 23,218   |       | 25,379   |       |
| Other                                                                             |       | 1,423    |       | 291      |       |
|                                                                              |       | $        | 24,641     |     | $          | 25,670 |   |

 

**8.**                 LINEOF CREDIT

On October 15, 2004, the Company entered into anew five-year $60,000,000 senior secured revolving credit facility (the “CreditFacility”), which replaced the former $60 million credit facility that includeda $56,000,000 borrowing base revolving line of credit. The Credit Facility willmature on October 15, 2009. Upon the Company’s request and with theconsent of the lender, permitted borrowings under the Credit Facility may beincreased up to an additional $15,000,000, in increments of $2,500,000,****up to a maximum limit of $75,000,000. Proceeds fromadvances under the Credit Facility, with certain restrictions, may be used toprovide financing for working capital, letters of credit, capital expenditures,debt prepayments, dividends, share repurchases and other general corporatepurposes. The Company paid certain closing fees in connection with thenegotiation and execution of the Credit Facility. The Company also pays anunused line fee under the Credit Facility and certain early termination feeswould be owed if the Credit Facility is terminated prior to its thirdanniversary. The Credit Facility contains various affirmative and negative covenantsand representations and warranties. Thereare no financial covenant requirements under the Credit Facility unless either (i) Excess Availability (asdefined in the agreement) fallsbelow $10,000,000, or 

F-16

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**8.      LINEOF CREDIT (Continued)**

(ii) averageFinancial Covenant Adjusted Availability (as defined in the agreement) for any calendar month is less than $15,000,000.If either of the events in item (i) or (ii) above occurs, the Companywould be required to meet a certain minimum fixed charge coverage ratio (whichincreases from 1.00x during the first two years of the Credit Facility to 1.10xduring the fifth year of the Credit Facility). During all of fiscal 2006 and 2005, the Company exceeded the requirementsfor the Excess Availability and average Financial Covenant AdjustedAvailability. The Credit Facility issecured by a security interest in the Company’s accounts receivable, inventory,real estate interests, letter of credit rights, cash, intangibles and certainother assets. The interest rate on outstanding borrowings is equal to, at theCompany’s election, either the lender’s prime rate or the lender’s LIBOR rateplus the applicable margin. The applicable margin for LIBOR rate borrowings isvariable, ranging from 1.25% to 1.75%, based upon the availability calculationmade in accordance with the Credit Facility. The applicable margin for LIBOR rate borrowings, based upon theavailability calculation made in accordance with the agreement, has been 1.25%since the inception of the Credit Facility. Any amounts outstandingunder the Credit Facility may be accelerated and become due and payableimmediately and all loan and letter of credit commitments thereunder may beterminated upon an event of default and expiration of any applicable cureperiod. Events of default include: (i) nonpayment of obligations due underthe Credit Facility, (ii) failure to perform any covenant or agreementcontained in the Credit Facility, (iii) material misrepresentations, (iv) failureto pay, or certain other defaults under, other material indebtedness of theCompany, (v) certain bankruptcy or insolvency events, (vi) a changeof control, (vii) material uninsured losses, (viii) indictments ofthe Company or senior management in a material forfeiture action, and (ix) customaryERISA defaults, among others.

As of September 30,2006, outstanding borrowings under the Credit Facility consisted of no directborrowings and $8,460,000 in letters of credit with $51,540,000 of availabilityunder the credit line, compared to no direct borrowings and $8,445,000 inletters of credit with $51,555,000 of availability under the credit line as of September 30,2005. Borrowings under the Credit Facility as of September 30, 2006 wouldhave borne interest at a rate of between approximately 6.57% and 8.25% perannum. During fiscal 2006 and 2005, theCompany’s average level of direct borrowings under the Credit Facility was $0.3million and $3.1 million, respectively.

F-17

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**9.**                 LONG-TERM DEBT

The followingtable summarizes the Company’s long-term debt as of September 30 (inthousands):

| ** **                                                                                                                                                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| 111¤4%  senior notes due August 1, 2010 (net of unamortized discount)                                                                                                                        |       | $        | 114,130    |     | $          | 123,868 |   |
| Industrial Revenue Bond, interest is variable (5.3%  as of September 30, 2006), principal due annually until  September 1, 2020 (collateralized in full by a standby letter of  credit) |       | 2,810    |       | 2,945    |       |
| *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)                       |       | 721      |       | 863      |       |
| Interest at 2.0%,  principal due monthly until March 1, 2011 (collateralized by certain  equipment at the Company’s headquarters)                                                            |       | 100      |       | 120      |       |
| *Capital Lease Obligation:*                                                                                                                                                                            |       |     |       |     |       |
| Equipment lease,  interest at 6.75%, payments due monthly until November 30, 2007  (collateralized by certain equipment at the Company’s headquarters)                                  |       | 588      |       | 1,060    |       |
|                                                                                                                                                                                                   |       | 118,349  |       | 128,856  |       |
| Less: current  portion                                                                                                                                                                                 |       | (814     | )          | (769     | )          |
|                                                                                                                                                                                                   |       | $        | 117,535    |     | $          | 128,087 |   |

 

Long-term debt maturitiesas of September 30, 2006 are as follows (in thousands): 

| **Fiscal Year**                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                                            |       | $          | 836        |       |
| 2008                                                            |       | 410        |       |
| 2009                                                            |       | 338        |       |
| 2010                                                            |       | 115,347    |       |
| 2011                                                            |       | 296        |       |
| 2012 and  thereafter                                            |       | 2,015      |       |
|                                                            |       | 119,242    |       |
| Less: unamortized  discount                                     |       | (870       | )          |
| Less: amount  representing interest on capital lease obligation |       | (23        | )          |
|                                                            |       | $          | 118,349    |       |

 

In August 2002, the Company issued $125,000,000of 111¤4%senior notes (the “Senior Notes”). The Senior Notes are due August 1, 2010and were issued at 98.719% of their face amount, resulting in an annualeffective interest rate of 11.50%. Interest on the Senior Notes is payablesemi-annually in cash on February 1 and August 1, commencing on February 1,2003. The Senior Notes were issued by Mothers Work, are senior unsecuredobligations of Mothers Work, and are unconditionally guaranteed on a seniorbasis by all of the Company’s domestic subsidiaries (see Note 15). TheSenior Notes are redeemable at the Company’s option, in whole or in part at anytime on or after August 1, 2006, at 105.625% of their face amount, plusaccrued and unpaid interest, declining ratably to 100% of their face amount,plus accrued 

F-18

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**9.      LONG-TERMDEBT (Continued)**

and unpaid interest, on orafter August 1, 2009. The indenture to the Senior Notes contains covenantsthat impose certain restrictions on the Company’s ability to, among otherthings, incur additional indebtedness, pay dividends, repurchase stock, andenter into other various types of transactions. Subject to the foregoingrestrictions, the Senior Notes also limit the amount of dividends and otherrestricted payments that may be paid by the Company under a formula thatincludes a $10 million fixed amount, plus approximately 50% of the Company’snet income since issuance of the Senior Notes and allowable proceeds fromcertain other debt or equity transactions. During all of fiscal 2006, 2005 and2004, the Company was in compliance with the required covenants. Any amountsoutstanding under the Senior Notes may be accelerated and become due andpayable immediately upon an event of default and expiration of any applicablecure period. Events of default include: (i) nonpayment of obligations dueunder the Senior Notes, (ii) failure to perform any covenant or agreementcontained in the Senior Notes, (iii) material misrepresentations, (iv) failureto pay, or certain other defaults under, other material indebtedness of theCompany, (v) certain bankruptcy or insolvency events, and (vi) materialuninsured losses. Upon the occurrence of a Change in Control, as defined in theindenture to the Senior Notes, Holders of the Senior Notes have the right torequire that the Company repurchase each Holder’s Notes at 101% of theprincipal amount, plus accrued and unpaid interest.

In connection with the issuance of the Senior Notes,the Company incurred deferred financing costs of $4,497,000. These deferredfinancing costs, along with the debt discount, are being amortized and includedin interest expense over the term of the Senior Notes, using the effectiveinterest method.

In August 2006, the Company’s Board of Directorsauthorized the repurchase of up to $10.0 million principal amount of the SeniorNotes. During August and September 2006, the Company completed therepurchase of the authorized amount in two transactions at an aggregate of105.832% of the $10.0 million principal amount, plus accrued and unpaidinterest. In connection with the repurchases, the Company recorded pre-taxcharges totaling $873,000, representing the premium paid plus the write-off ofunamortized debt issuance discount and deferred financing costs. On December 8,2006, the Company completed the repurchase of $25.0 million of the Senior Notes (see Note 22).

On December 1, 2004,the Company amended an existing operating lease for certain equipment in itsmain distribution facility, extending the remaining lease term to November 30,2007 (the “Primary Term Expiration Date”). The amended lease was determined tobe a capital lease in accordance with the provisions of SFAS No. 13, “Accountingfor Leases.”  The lease provides formonthly rental payments through the Primary Term Expiration Date with a finalinstallment of one dollar to purchase the equipment.

**10.**          COMMONAND PREFERRED STOCK

The Company has authorization to issue up to 2,000,000shares of preferred stock, par value $0.01 with 41,000 shares authorized Series ACumulative Convertible Preferred Stock and 300,000 shares authorized Series BJunior Participating Preferred Stock (“Series B Preferred Stock”). Therewas no preferred stock issued or outstanding as of September 30, 2006 or2005.

The Series B Preferred Stock can be purchased inunits equal to one one-thousandth of a share (the “Series B Units”) underthe terms of the Rights Agreement (see Note 11). The holders of the Series BUnits are entitled to receive dividends when and if declared on common stock. Series BUnits are junior to 

F-19

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**10.   COMMONAND PREFERRED STOCK (Continued)**

the common stock for bothdividends and liquidations. Each Series B Unit votes as one share ofcommon stock.

During fiscal 2003, theBoard of Directors approved a share repurchase program under which the Companywas authorized to repurchase up to $10,000,000 of its outstanding common stockfrom time to time in private transactions or on the open market through March 4, 2005.As of September 30, 2005, the Company had purchased and retired 142,269shares in the aggregate under the repurchase program at a total cost of$3,242,000, or an average cost of $22.79 per share, of which 75,715 shares wererepurchased in fiscal 2004, at an average cost of $23.44 per share. There wereno repurchases under the repurchase program during fiscal 2005. The indenturegoverning the Senior Notes and the terms of the Company’s Credit Facilitycontain restrictions that place limits on certain payments by the Company,including payments to repurchase shares of its common stock. The Company’srepurchases of common stock have been made in compliance with all restrictionsunder the indenture governing the Senior Notes and the terms of its CreditFacility.

**11.**          RIGHTSAGREEMENT

On October 9, 2005, the Company entered into anAmended and Restated Rights Agreement to renew its then existing Rights Agreement(collectively referred to as the “Rights Agreement”) that would otherwise haveexpired on October 9, 2005. Under the Rights Agreement, the Companyprovided and will provide one Right (the “Right”) for each share of MothersWork common stock now or hereafter outstanding. Under certain limitedconditions, as defined in the Rights Agreement, each Right entitles theregistered holder to purchase from the Company one Series B Unit at $85per share, subject to adjustment. The Rights expire on October 9, 2015(the “Final Expiration Date”).

The Rights Agreement provides the independentdirectors of the Company with some discretion in determining when theDistribution Date (as defined in the Rights Agreement) shall occur and the dateuntil which the Rights may be redeemed. In addition, the Rights Agreementexempts from its operation any person that acquires, obtains the right toacquire, or otherwise obtains beneficial ownership of 15.0% or more of the thenoutstanding shares of the Company’s common stock (an “Acquiring Person”)without any intention of changing or influencing control of the Companyprovided that such person, as promptly as practicable, divests himself oritself of a sufficient number of shares of common stock so that such personwould no longer be an Acquiring Person.

The Rights are not exercisable until the DistributionDate, which will occur upon the earlier of (i) ten business days followinga public announcement that an Acquiring Person has acquired beneficialownership of 15.0% or more of the Company’s outstanding common stock, and tenbusiness days following the commencement of a tender offer or exchange offerthat would result in a person or group owning 15.0% or more of the Company’soutstanding common stock, or (ii) such later date as may be determined byaction of a majority of the independent directors. The Rights have certainanti-takeover effects. The Rights will cause substantial dilution to a personor group that attempts to acquire the Company without conditioning the offer onthe redemption of the Rights.

F-20

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**11.**          RIGHTSAGREEMENT (Continued)

The Rights can bemandatorily redeemed by action of a majority of the independent directors atany time prior to the earlier of the Final Expiration Date and the DistributionDate 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 theAcquiring Person, will have the right to receive Series B Units, or commonstock of the acquiring company, in each case having a value equal to two timesthe exercise price of the Right.

**12.**          STOCKOPTION PLANS AND WARRANTS

The Company has three stock option plans: the DirectorStock Option Plan (the “Director Plan”), the Amended and Restated 1987 StockOption Plan (the “1987 Plan”) and the 2005 Equity Incentive Plan (the “2005Plan”). The Director Plan expired on December 31, 2004 and no furtheroptions may be granted under that plan. Options issued under the Director Planwill remain outstanding until they have expired, been exercised or haveotherwise terminated. Under the 1987 Plan, officers and certain employees,including outside directors, may be granted options to purchase the Company’scommon stock with exercise prices as determined by the Compensation Committeeof the Board of Directors that are no lower than the fair market value of thestock on the date of grant. In February 2003, the stockholders of theCompany approved an amendment to increase the number of shares of common stockavailable for issuance upon the exercise of options granted under the 1987 Planby 500,000, such that a total of 2,175,000 options could be issued under the1987 Plan and the Director Plan (including up to a total of 200,000 optionswhich were issuable under the Director Plan). In January 2006, thestockholders of the Company approved the adoption of the 2005 Plan. Under the2005 Plan, employees, directors, consultants and other individuals who provideservices to the Company, may be granted awards in the form of options, stockappreciation rights, restricted stock or restricted stock units. Up to 500,000shares of the Company’s common stock may be issued in respect of awards underthe 2005 Plan, with no more than 250,000 of those shares permitted to be issuedin respect of restricted stock or restricted stock units granted under the 2005Plan, and awards of options to purchase the Company’s common stock will haveexercise prices as determined by the Compensation Committee of the Board ofDirectors that are no lower than the fair market value of the stock on the dateof grant.

Effective October 1, 2004, each outside directoris granted 5,000 fully vested options on an annual basis, with an exerciseprice equal to the fair market value of the stock on the grant date. No optionshave been granted by the Company with an exercise price less than the fairmarket value of the Company’s common stock on the date of grant for any of theperiods presented. The majority of the options issued under the plans vestratably over a five-year period, although some options vest immediately, andoptions issued under the plans generally expire ten years from the date ofgrant. The Company issues new shares upon exercise of vested options. As of September 30,2006, there were 564,127 options available for grant under the plans.

F-21

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**12.   STOCKOPTION PLANS AND WARRANTS (Continued)**

Stock option activity forall plans was as follows: 

| ** **                               | ** ** | ** **              | ** ** | **Weighted**            | ** ** | **Weighted**            | ** ** | ** **               | ** ** |
|------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **Outstanding**         | ** ** | **Average**             | ** ** | **Average**             | ** ** | **Aggregate**            | ** ** |
| ** **                               | ** ** | **Options**             | ** ** | **Exercise Price** | ** ** | **Remaining Life** | ** ** | **Intrinsic Value** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** | ** **              | ** ** | **(years)**             | ** ** | **(in thousands)**  | ** ** |
| Balance—September  30, 2003         | ** ** |                    | 1,094      |                    |       |                    | $          | 16.36                    | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Granted                                  | ** ** |                    | 233        |                    |       |                    | 23.41      | ** **               |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Exercised                                | ** ** |                    | (80        | )                       |       |                    | 11.14      | ** **               |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Forfeited                                | ** ** |                    | (50        | )                       |       |                    | 24.97      | ** **               |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Expired                                  | ** ** |                    | (6         | )                       |       |                    | 28.07      | ** **               |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Balance—September 30,  2004    | ** ** |                    | 1,191      |                    |       |                    | 17.67      | ** **               |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Granted                                  |       |                    | 368        |                    |       |                    | 13.04      | ** **               |       |   |   | ** ** |   |   |   | ** ** |   |
| Exercised                                |       |                    | (82        | )                       |       |                    | 9.74       | ** **               |       |   |   | ** ** |   |   |   | ** ** |   |
| Forfeited                                |       |                    | (236       | )                       |       |                    | 29.26      | ** **               |       |   |   | ** ** |   |   |   | ** ** |   |
| Expired                                  |       |                    | (11        | )                       |       |                    | 25.92      | ** **               |       |   |   | ** ** |   |   |   | ** ** |   |
| Balance—September 30,  2005    |       |                    | 1,230      |                    |       |                    | 14.50      | ** **               |       |   |   | ** ** |   |   |   | ** ** |   |
| Granted                                  |       |                    | 282        |                    |       |                    | 14.35      | ** **               |       |   |   | ** ** |   |   |   | ** ** |   |
| Exercised                                |       |                    | (302       | )                       |       |                    | 16.38      | ** **               |       |   |   | ** ** |   |   |   | ** ** |   |
| Forfeited                                |       |                    | (36        | )                       |       |                    | 11.10      | ** **               |       |   |   | ** ** |   |   |   | ** ** |   |
| Expired                                  |       |                    | (86        | )                       |       |                    | 15.46      | ** **               |       |   |   | ** ** |   |   |   | ** ** |   |
| Balance—September 30,  2006    |       |                    | 1,088      |                    |       |                    | 13.99      | ** **               |       |   | 6.7 | ** ** |   |   | $ | 37,138 | ** ** |   |
| Exercisable—September 30, 2006 |       |                    | 634        |                    |       |                    | $          | 14.08                    | ** ** |   |   | 5.3 | ** ** |   |   | $ | 21,596 | ** ** |   |

 

As of September 30, 2006,$4,556,000 of total unrecognized compensation cost related to non-vested awardsis expected to be recognized over a weighted-average period of 1.5 years. Duringthe years ended September 30, 2006, 2005 and 2004, the total intrinsicvalue of options exercised was $5,085,000, $364,000 and $914,000, respectively.The total cash received from these option exercises was $4,913,000, $485,000and $276,000, respectively, and the actual tax benefit realized for the taxdeductions from these option exercises was $1,983,000, $115,000 and $311,000,respectively. During fiscal 2005, options to purchase 27,270 shares ofcommon stock with an aggregate exercise price of $307,000 were exercised by theoption holders tendering 20,286 shares of the Company’s common stock, whichwere held by the option holders. During fiscal 2004, options to purchase 54,540shares of common stock with an aggregate exercise price of $614,000 wereexercised by the option holders tendering 28,438 shares of the Company’s commonstock, which were held by the option holders.

On September 27, 2005, the Company acceleratedthe vesting of all outstanding stock options having per share exercise pricesof $23.50 or more. Options to purchase 133,500 shares, having exercise pricesranging from $23.62 to $37.05 per share, were affected by the vestingacceleration.

F-22

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**12.   STOCKOPTION PLANS AND WARRANTS (Continued)**

The weighted average fairvalue of the stock options granted during fiscal 2006, 2005 and 2004 wasestimated to be $8.60, $8.74 and $15.85, respectively. The weighted averagefair value of each option granted is calculated on the date of grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions:

| ** **                 | ** ** | **Year Ended September 30,** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Dividend yield             |       | none                                        |       | none |   | none |   |
| Expected price  volatility |       | 58                                          | %          | 61 | % | 62 | % |
| Risk-free  interest rates  |       | 4.5                                         | %          | 4.0 | % | 3.9 | % |
| Expected lives             |       | 6.4 years                                   |       | 8.0 years |   | 8.1 years |   |

 

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

Thefollowing table summarizes information about stock options outstanding as of September 30,2006:

| ** **                                                             | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                             | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                             | ** ** | **Number**                   | ** ** | **Average**                  | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Range of Exercise Prices**                            | ** ** | ** **                   | ** ** | **Outstanding**              | ** ** | **Remaining Life** | ** ** | **Exercise Price** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**      | ** ** | ** **                   | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| $  7.40 to $  8.00                       |       |                         | 66         |                         |       |   | 5.1 |   |   |   | $ | 7.67 |   |   |   | 51 |   |   |   | $ | 7.68 |   |   |   |
|     8.01 to     9.00 |       |                         | 77         |                         |       |   | 2.7 |   |   |   | 8.94 |   |   |   | 76 |   |   |   | 8.95 |   |   |   |
|     9.01 to   10.00            |       |                         | 174        |                         |       |   | 3.2 |   |   |   | 9.39 |   |   |   | 174 |   |   |   | 9.39 |   |   |   |
|   10.01 to   12.00                       |       |                         | 232        |                         |       |   | 8.0 |   |   |   | 10.11 |   |   |   | 54 |   |   |   | 10.35 |   |   |   |
|   12.01 to   13.00                       |       |                         | 272        |                         |       |   | 8.1 |   |   |   | 12.84 |   |   |   | 116 |   |   |   | 12.85 |   |   |   |
|   13.01 to   15.00                       |       |                         | 47         |                         |       |   | 8.4 |   |   |   | 14.11 |   |   |   | 26 |   |   |   | 13.76 |   |   |   |
|   15.01 to   23.50                       |       |                         | 48         |                         |       |   | 9.0 |   |   |   | 21.45 |   |   |   | 2 |   |   |   | 18.63 |   |   |   |
|   23.51 to   24.00                       |       |                         | 66         |                         |       |   | 7.2 |   |   |   | 23.62 |   |   |   | 66 |   |   |   | 23.62 |   |   |   |
|   24.01 to   37.00                       |       |                         | 78         |                         |       |   | 8.1 |   |   |   | 29.10 |   |   |   | 41 |   |   |   | 28.61 |   |   |   |
|   37.01 to   37.05                       |       |                         | 28         |                         |       |   | 6.2 |   |   |   | 37.05 |   |   |   | 28 |   |   |   | 37.05 |   |   |   |
| $  7.40 to $37.05                                  |       |                         | 1,088      |                         |       |   | 6.7 |   |   |   | $ | 13.99 |   |   |   | 634 |   |   |   | $ | 14.08 |   |   |   |
|                                                                        |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In connection with theacquisition of iMaternity on October 17, 2001 (see Note 5), theCompany issued to the sellers warrants to purchase 350,000 shares of theCompany’s common stock at an exercise price of $22.50 per share (the “Warrants”).The Warrants were immediately vested upon grant and were exercisable for sevenyears from the date of grant. In the fourth quarter of fiscal 2006, certainholders of the Warrants turned in Warrants to purchase 125,000 shares of theCompany’s common stock and were issued 53,873 shares of the Company’s commonstock pursuant to cashless exercise net issuance elections. As of September 30,2006, there were no remaining Warrants outstanding.

F-23

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13.**          INCOME TAXES

Forthe years ended September 30, the income tax provision (benefit) wascomprised of the following (in thousands):

| ** **                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current provision             |       | $        | 5,104      |     | $          | 419      |       | $ | 1,137 |   |
| Deferred  provision (benefit) |       | 715      |       | (1,299   | )          | 2,329    |       |
|                          |       | $        | 5,819      |     | $          | (880     | )          | $ | 3,466 |   |
| Federal provision (benefit)   |       | $        | 4,988      |     | $          | (704     | )          | $ | 2,945 |   |
| State provision  (benefit)    |       | 831      |       | (176     | )          | 521      |       |
|                          |       | $        | 5,819      |     | $          | (880     | )          | $ | 3,466 |   |

 

Thereconciliations of the statutory federal rate to the Company’s effective incometax rates for the years ended September 30 were as follows:

| ** **                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory federal  tax rate                     |       | 35.0     | %          | (34.0    | )%         | 34.0     | %          |
| State taxes, net  of federal benefit            |       | 4.0      |       | (36.9    | )          | 4.2      |       |
| Federal rate  adjustment on deferred tax assets |       | —   |       | (14.6    | )          | —   |       |
| Other                                           |       | —   |       | 2.1      |       | 2.6      |       |
|                                            |       | 39.0     | %          | (83.4    | )%         | 40.8     | %          |

 

Thedeferred tax effects of temporary differences giving rise to the Company’s netdeferred tax assets as of September 30 were as follows (in thousands):

| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| *Deferred tax assets:*                       |       |     |       |     |       |
| Net operating  loss carryforwards            |       | $        | 1,273      |     | $          | 1,596 |   |
| Depreciation                                 |       | 1,903    |       | 2,527    |       |
| Deferred rent                                |       | 10,210   |       | 10,874   |       |
| Inventory  reserves                          |       | 986      |       | 980      |       |
| Employee benefit  accruals                   |       | 1,990    |       | 2,268    |       |
| Reserves recorded  in iMaternity acquisition |       | —   |       | 86       |       |
| Stock-based  compensation                    |       | 1,042    |       | —   |       |
| Other accruals                               |       | 929      |       | 870      |       |
| Other                                        |       | 1,000    |       | 900      |       |
|                                         |       | 19,333   |       | 20,101   |       |
| *Deferred tax liability:*                    |       |     |       |     |       |
| Prepaid expenses                             |       | (772     | )          | (825     | )          |
|                                         |       | $        | 18,561     |     | $          | 19,276 |   |

 

As of September 30, 2006, the Company has netoperating loss carryforwards for federal tax purposes of $3,637,000, which wereacquired in the acquisition of iMaternity and begin to expire in 2021. Whilethe acquired net operating loss carryforwards are subject to certain annuallimitations due to the change in ownership, the Company does not expect thelimitations to reduce its ability to ultimately use such 

F-24

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13.   INCOMETAXES (Continued)**

carryforwards. The taxbenefit of the acquired net operating loss carryforwards was recorded under thepurchase method of accounting.

As of September 30, 2006 and 2005, managementdetermined that the deferred tax assets should reflect the state tax benefitsfor several of the states in which the Company is operating. This determinationwas made in accordance with the provisions of SFAS No. 109. Managementdetermined that no state tax benefits associated with the temporary differencesshould be reflected for the remaining states in which it is operating, giventhe continued historical uncertainty related to realizing state tax benefits. Hadthe state tax benefits been reflected for the remaining states, the deferredtax assets as of September 30, 2006 would be approximately $1,100,000higher.

No valuation allowance hasbeen provided for the net deferred tax assets. Based on the Company’shistorical levels of taxable income, management believes it is more likely thannot that the Company will realize the net deferred tax assets as of September 30,2006. There can be no assurance that the Company will generate taxable earningsor any specific level of earnings in the future.

**14.**          COMMITMENTS ANDCONTINGENCIES

The Company leases its retail facilities and certainequipment under various non-cancelable operating leases. Certain of theseleases have renewal options. Total rent expense under operating leases amountedto $74,682,000, $75,634,000 and $73,690,000 in fiscal 2006, 2005 and 2004,respectively. Such amounts include contingent rentals based upon a percentageof sales totaling $103,000, $28,000 and $388,000 in fiscal 2006, 2005 and 2004,respectively.

Storeoperating leases and warehouse leases generally provide for payment of directoperating costs in addition to rent. Future annual minimum operating leasepayments, excluding such direct operating costs, as well as leases forequipment rental as of September 30, 2006 are as follows (in thousands):

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2007                 |       | $          | 55,195     |       |
| 2008                 |       | 50,079     |       |
| 2009                 |       | 45,620     |       |
| 2010                 |       | 37,852     |       |
| 2011                 |       | 33,613     |       |
| 2012 and  thereafter |       | 70,344     |       |
|                 |       | $          | 292,703    |       |

 

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

F-25

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15.**          GUARANTORSUBSIDIARIES

Pursuant to theterms of the indenture relating to the Senior Notes, each of the domesticsubsidiaries of Mothers Work, Inc. (the “Guarantor Subsidiaries”) hasjointly and severally provided an unconditional guarantee of the obligations ofMothers Work with respect to the Senior Notes. There are no restrictions on anyof the assets of the Guarantor Subsidiaries which would limit their ability totransfer funds to Mothers Work in the form of loans, advances or cashdividends, except as provided by applicable law. None of the Company’s foreignsubsidiaries (the “Non-Guarantor Subsidiaries”) have guaranteed the SeniorNotes. The condensed consolidating financial information for the Company, theGuarantor Subsidiaries, and the Company’s Non-Guarantor Subsidiaries as of September 30,2006 and 2005 and for the fiscal years ended September 30, 2006, 2005 and2004 as presented below has been prepared from the books and records maintainedby the Guarantor Subsidiaries and the Company. The condensed consolidatingfinancial information may not necessarily be indicative of the results ofoperations or financial position had the Guarantor Subsidiaries operated asindependent entities. Certain intercompany revenues and expenses included inthe subsidiary records are eliminated in consolidation. As a result of thisactivity, an amount due to/due from parent will exist at any time.

F-26

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15.**          GUARANTOR SUBSIDIARIES(Continued)

**Mothers Work, Inc.Condensed Consolidating Balance Sheet September 30, 2006(in thousands)**

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

** **

F-27

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15.   GUARANTOR SUBSIDIARIES(Continued)**

**Mothers Work, Inc.Condensed Consolidating Balance Sheet September 30, 2005(in thousands)**

| ** **                                             | ** ** | **Mothers  Work (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| **ASSETS**                                             |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                        |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                              |       |                                     | $          | 2,901                       |       |                                                   |       | $                               | 37         |                                |       |   | $ | 99 |   |   |   | $ | — |   |   |   | $ | 3,037 |   |   |
| Trade receivables                                      |       |                                     | 7,604      |                        |       |                                                   | —     |                            |       |                                | 77         |   |   |   | — |   |   |   | 7,681 |   |   |
| Inventories                                            |       |                                     | 103,236    |                        |       |                                                   | —     |                            |       |                                | 2,675      |   |   |   | — |   |   |   | 105,911 |   |   |
| Deferred income taxes                                  |       |                                     | 6,015      |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 6,015 |   |   |
| Prepaid expenses and other current assets         |       |                                     | 4,816      |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 4,816 |   |   |
| Total current assets                                   |       |                                     | 124,572    |                        |       |                                                   | 37         |                            |       |                                | 2,851      |   |   |   | — |   |   |   | 127,460 |   |   |
| Property, plant  and equipment, net                    |       |                                     | 73,672     |                        |       |                                                   | —     |                            |       |                                | 2,501      |   |   |   | — |   |   |   | 76,173 |   |   |
| Assets held for  sale                                  |       |                                     | —     |                        |       |                                                   | —     |                            |       |                                | 925        |   |   |   | — |   |   |   | 925 |   |   |
| Other assets                                           |       |                                     | 68,598     |                        |       |                                                   | 4          |                            |       |                                | 157        |   |   |   | — |   |   |   | 68,759 |   |   |
| Investments in  and advances to (from) affiliates |       |                                     | (6,877     | )                           |       |                                                   | 248,075    |                            |       |                                | (3,405     | ) |   |   | (237,793 | ) |   |   | — |   |   |
| Total assets                                           |       |                                     | $          | 259,965                     |       |                                                   |       | $                               | 248,116    |                                |       |   | $ | 3,029 |   |   |   | $ | (237,793 | ) |   |   | $ | 273,317 |   |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**         |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                                   |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Line of credit borrowings                              |       |                                     | $          | —                      |       |                                                   |       | $                               | —     |                                |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Current portion of long-term debt                      |       |                                     | 769        |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 769 |   |   |
| Accounts payable                                       |       |                                     | 19,885     |                        |       |                                                   | 15         |                            |       |                                | —     |   |   |   | — |   |   |   | 19,900 |   |   |
| Accrued expenses and other current liabilities    |       |                                     | 23,227     |                        |       |                                                   | 11,469     |                            |       |                                | 867        |   |   |   | — |   |   |   | 35,563 |   |   |
| Total current liabilities                              |       |                                     | 43,881     |                        |       |                                                   | 11,484     |                            |       |                                | 867        |   |   |   | — |   |   |   | 56,232 |   |   |
| Long-term  debt                                        |       |                                     | 128,087    |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 128,087 |   |   |
| Deferred rent and  other non-current liabilities       |       |                                     | 24,669     |                        |       |                                                   | —     |                            |       |                                | 1,001      |   |   |   | — |   |   |   | 25,670 |   |   |
| Total liabilities                                      |       |                                     | 196,637    |                        |       |                                                   | 11,484     |                            |       |                                | 1,868      |   |   |   | — |   |   |   | 209,989 |   |   |
| Total  stockholders’ equity                       |       |                                     | 63,328     |                        |       |                                                   | 236,632    |                            |       |                                | 1,161      |   |   |   | (237,793 | ) |   |   | 63,328 |   |   |
| Total liabilities  and stockholders’ equity       |       |                                     | $          | 259,965                     |       |                                                   |       | $                               | 248,116    |                                |       |   | $ | 3,029 |   |   |   | $ | (237,793 | ) |   |   | $ | 273,317 |   |   |

 

F-28

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15.**          GUARANTORSUBSIDIARIES (Continued)

**Mothers Work, Inc.Condensed Consolidating Statements of Operations (in thousands)**

| ** **                                     | ** ** | **Mothers  Work (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| For the Year Ended  September 30, 2006    |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                                      |       |                                     | $          | 585,272                     |       |                                                   |       | $                               | 31,035     |                                |       |   | $ | 17,472 |   |   |   | $ | (31,035 | ) |   |   | $ | 602,744 |   |   |
| Cost of goods sold                             |       |                                     | 280,693    |                        |       |                                                   | —     |                            |       |                                | 7,389      |   |   |   | — |   |   |   | 288,082 |   |   |
| Gross profit                                   |       |                                     | 304,579    |                        |       |                                                   | 31,035     |                            |       |                                | 10,083     |   |   |   | (31,035 | ) |   |   | 314,662 |   |   |
| Selling, general  and administrative  expenses |       |                                     | 306,613    |                        |       |                                                   | 451        |                            |       |                                | 8,305      |   |   |   | (31,035 | ) |   |   | 284,334 |   |   |
| Operating income (loss)                        |       |                                     | (2,034     | )                           |       |                                                   | 30,584     |                            |       |                                | 1,778      |   |   |   | — |   |   |   | 30,328 |   |   |
| Interest income  (expense), net                |       |                                     | (35,375    | )                           |       |                                                   | 20,841     |                            |       |                                | —     |   |   |   | — |   |   |   | (14,534 | ) |   |
| Loss on  extinguishment of debt                |       |                                     | (873       | )                           |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | (873 | ) |   |
| Equity in earnings  of subsidiaries            |       |                                     | 53,203     |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | (53,203 | ) |   |   | — |   |   |
| Income before income taxes                     |       |                                     | 14,921     |                        |       |                                                   | 51,425     |                            |       |                                | 1,778      |   |   |   | (53,203 | ) |   |   | 14,921 |   |   |
| Income tax  provision                          |       |                                     | 5,819      |                        |       |                                                   | 17,999     |                            |       |                                | 693        |   |   |   | (18,692 | ) |   |   | 5,819 |   |   |
| Net income                                     |       |                                     | $          | 9,102                       |       |                                                   |       | $                               | 33,426     |                                |       |   | $ | 1,085 |   |   |   | $ | (34,511 | ) |   |   | $ | 9,102 |   |   |
| For the Year Ended  September 30, 2005    |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                                      |       |                                     | $          | 547,924                     |       |                                                   |       | $                               | 29,218     |                                |       |   | $ | 13,703 |   |   |   | $ | (29,218 | ) |   |   | $ | 561,627 |   |   |
| Cost of goods sold                             |       |                                     | 271,283    |                        |       |                                                   | —     |                            |       |                                | 6,170      |   |   |   | — |   |   |   | 277,453 |   |   |
| Gross profit                                   |       |                                     | 276,641    |                        |       |                                                   | 29,218     |                            |       |                                | 7,533      |   |   |   | (29,218 | ) |   |   | 284,174 |   |   |
| Selling, general  and administrative expenses  |       |                                     | 292,394    |                        |       |                                                   | 257        |                            |       |                                | 6,503      |   |   |   | (29,218 | ) |   |   | 269,936 |   |   |
| Operating income (loss)                        |       |                                     | (15,753    | )                           |       |                                                   | 28,961     |                            |       |                                | 1,030      |   |   |   | — |   |   |   | 14,238 |   |   |
| Interest income  (expense), net                |       |                                     | (29,060    | )                           |       |                                                   | 13,767     |                            |       |                                | —     |   |   |   | — |   |   |   | (15,293 | ) |   |
| Equity in earnings  of subsidiaries            |       |                                     | 43,758     |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | (43,758 | ) |   |   | — |   |   |
| Income (loss) before income taxes              |       |                                     | (1,055     | )                           |       |                                                   | 42,728     |                            |       |                                | 1,030      |   |   |   | (43,758 | ) |   |   | (1,055 | ) |   |
| Income tax  provision (benefit)                |       |                                     | (880       | )                           |       |                                                   | 14,955     |                            |       |                                | 431        |   |   |   | (15,386 | ) |   |   | (880 | ) |   |
| Net income (loss)                              |       |                                     | $          | (175                        | )          |                                                   |       | $                               | 27,773     |                                |       |   | $ | 599 |   |   |   | $ | (28,372 | ) |   |   | $ | (175 | ) |   |

 

F-29

----

**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15.   GUARANTORSUBSIDIARIES (Continued)**

**Mothers Work, Inc.Condensed Consolidating Statements of Operations (Continued)(in thousands)**

| ** **                                    | ** ** | **Mothers  Work (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| For the Year Ended  September 30, 2004   |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                                     |       |                                     | $          | 510,751                     |       |                                                   |       | $                               | 27,245     |                                |       |   | $ | 7,300 |   |   |   | $ | (27,245 | ) |   |   | $ | 518,051 |   |   |
| Cost of goods sold                            |       |                                     | 239,251    |                        |       |                                                   | —     |                            |       |                                | 3,500      |   |   |   | — |   |   |   | 242,751 |   |   |
| Gross profit                                  |       |                                     | 271,500    |                        |       |                                                   | 27,245     |                            |       |                                | 3,800      |   |   |   | (27,245 | ) |   |   | 275,300 |   |   |
| Selling, general  and administrative expenses |       |                                     | 275,618    |                        |       |                                                   | 165        |                            |       |                                | 3,492      |   |   |   | (27,245 | ) |   |   | 252,030 |   |   |
| Operating income (loss)                       |       |                                     | (4,118     | )                           |       |                                                   | 27,080     |                            |       |                                | 308        |   |   |   | — |   |   |   | 23,270 |   |   |
| Interest income  (expense), net               |       |                                     | (24,564    | )                           |       |                                                   | 9,799      |                            |       |                                | —     |   |   |   | — |   |   |   | (14,765 | ) |   |
| Equity in earnings  of subsidiaries           |       |                                     | 37,187     |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | (37,187 | ) |   |   | — |   |   |
| Income before income taxes                    |       |                                     | 8,505      |                        |       |                                                   | 36,879     |                            |       |                                | 308        |   |   |   | (37,187 | ) |   |   | 8,505 |   |   |
| Income tax  provision                         |       |                                     | 3,466      |                        |       |                                                   | 12,908     |                            |       |                                | 128        |   |   |   | (13,036 | ) |   |   | 3,466 |   |   |
| Net income                                    |       |                                     | $          | 5,039                       |       |                                                   |       | $                               | 23,971     |                                |       |   | $ | 180 |   |   |   | $ | (24,151 | ) |   |   | $ | 5,039 |   |   |

 

F-30

----

**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15.**          GUARANTORSUBSIDIARIES (Continued)

**Mothers Work, Inc.Condensed Consolidating Statement of Cash FlowsFor the Year Ended September 30, 2006(in thousands)**

| ** **                                                                              | ** ** | **Mothers  Work (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| **Cash Flows from Operating  Activities**                                               | ** ** |                                     | ** ** | ** **                  |       |                                                   | ** ** | ** **                      |       |                                | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                                              |       |                                     | $          | 9,102                       |       |                                                   |       | $                               | 33,426     |                                |       |   | $ | 1,085 |   |   |   | $ | (34,511 | ) |   |   | $ | 9,102 |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                          |       |                                     | 15,648     |                        |       |                                                   | 8          |                            |       |                                | 462        |   |   |   | — |   |   |   | 16,118 |   |   |
| Stock-based  compensation expense                                                       |       |                                     | 2,796      |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 2,796 |   |   |
| Loss on impairment  of long-lived assets                                                |       |                                     | 2,466      |                        |       |                                                   | —     |                            |       |                                | 146        |   |   |   | — |   |   |   | 2,612 |   |   |
| (Gain) loss on  disposal of assets                                                      |       |                                     | (156       | )                           |       |                                                   | —     |                            |       |                                | 17         |   |   |   | — |   |   |   | (139 | ) |   |
| Loss on  extinguishment of debt                                                         |       |                                     | 873        |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 873 |   |   |
| Accretion of  discount on notes                                                         |       |                                     | 186        |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 186 |   |   |
| Deferred income  tax provision                                                          |       |                                     | 715        |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 715 |   |   |
| Amortization of  deferred financing costs                                               |       |                                     | 689        |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 689 |   |   |
| Changes in assets  and liabilities:                                                     |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Decrease  (increase) in—                                                           |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Trade receivables                                                                       |       |                                     | (4,027     | )                           |       |                                                   | —     |                            |       |                                | 77         |   |   |   | — |   |   |   | (3,950 | ) |   |
| Inventories                                                                             |       |                                     | 11,583     |                        |       |                                                   | —     |                            |       |                                | 69         |   |   |   | — |   |   |   | 11,652 |   |   |
| Prepaid expenses  and other assets                                                      |       |                                     | (3,401     | )                           |       |                                                   | 4          |                            |       |                                | (169       | ) |   |   | — |   |   |   | (3,566 | ) |   |
| Investments in and  advances to (from)  affiliates                                      |       |                                     | (8,076     | )                           |       |                                                   | (26,651    | )                               |       |                                | 216        |   |   |   | 34,511 |   |   |   | — |   |   |
| Increase  (decrease) in—                                                           |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable,  accrued expenses and other current liabilities                  |       |                                     | 13,815     |                        |       |                                                   | (6,728     | )                               |       |                                | 139        |   |   |   | — |   |   |   | 7,226 |   |   |
| Deferred rent and  other non-current liabilities                                        |       |                                     | (1,994     | )                           |       |                                                   | —     |                            |       |                                | 93         |   |   |   | — |   |   |   | (1,901 | ) |   |
| Net cash provided  by operating activities                                              |       |                                     | 40,219     |                        |       |                                                   | 59         |                            |       |                                | 2,135      |   |   |   | — |   |   |   | 42,413 |   |   |
| **Cash  Flows from Investing Activities**                                               | ** ** |                                     | ** ** | ** **                  |       |                                                   | ** ** | ** **                      |       |                                | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Purchase of  short-term investments                                                     |       |                                     | (97,555    | )                           |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | (97,555 | ) |   |
| Proceeds from sale  of short-term investments                                           |       |                                     | 88,130     |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 88,130 |   |   |
| Capital  expenditures                                                                   |       |                                     | (13,433    | )                           |       |                                                   | —     |                            |       |                                | (500       | ) |   |   | — |   |   |   | (13,933 | ) |   |
| Proceeds from sale  of assets held for sale                                             |       |                                     | —     |                        |       |                                                   | —     |                            |       |                                | 225        |   |   |   | — |   |   |   | 225 |   |   |
| Purchase of  intangible assets                                                          |       |                                     | (4         | )                           |       |                                                   | —     |                            |       |                                | (29        | ) |   |   | — |   |   |   | (33 | ) |   |
| Net cash used in  investing activities                                                  |       |                                     | (22,862    | )                           |       |                                                   | —     |                            |       |                                | (304       | ) |   |   | — |   |   |   | (23,166 | ) |   |
| **Cash  Flows from Financing Activities**                                               | ** ** |                                     | ** ** | ** **                  |       |                                                   | ** ** | ** **                      |       |                                | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Increase in cash  overdrafts                                                            |       |                                     | 1,077      |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 1,077 |   |   |
| Repayment of long-term  debt                                                            |       |                                     | (10,770    | )                           |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | (10,770 | ) |   |
| Premium on  repurchase of long-term debt                                                |       |                                     | (583       | )                           |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | (583 | ) |   |
| Proceeds from  exercise of stock options                                                |       |                                     | 4,913      |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 4,913 |   |   |
| Excess tax benefit  from exercise of stock  options                                     |       |                                     | 1,983      |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 1,983 |   |   |
| Net cash used in financing  activities                                                  |       |                                     | (3,380     | )                           |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | (3,380 | ) |   |
| **Net  Increase in Cash and Cash Equivalents**                                          |       |                                     | 13,977     |                        |       |                                                   | 59         |                            |       |                                | 1,831      |   |   |   | — |   |   |   | 15,867 |   |   |
| **Cash and  Cash Equivalents, Beginning of  Year**                                      |       |                                     | 2,901      |                        |       |                                                   | 37         |                            |       |                                | 99         |   |   |   | — |   |   |   | 3,037 |   |   |
| **Cash and  Cash Equivalents, End of Year**                                             |       |                                     | $          | 16,878                      |       |                                                   |       | $                               | 96         |                                |       |   | $ | 1,930 |   |   |   | $ | — |   |   |   | $ | 18,904 |   |   |

 

F-31

----

**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15.**          GUARANTOR SUBSIDIARIES(Continued)

**Mothers Work, Inc.Condensed Consolidating Statement of Cash FlowsFor the Year Ended September 30, 2005(in thousands)**

| ** **                                                                                     | ** ** | **Mothers**           | ** ** | ** **       | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | ** **        | ** ** | ** **            | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|---------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **Work (Parent** | ** ** | **Guarantor**    | ** ** | **(Foreign**                    | ** ** | **Consolidating** | ** ** | **Mothers Work** | ** ** |
| ** **                                                                                     | ** ** | **Company)**          | ** ** | **Subsidiaries** | ** ** | **Operations)**                 | ** ** | **Eliminations**  | ** ** | **Consolidated**      | ** ** |
| **Cash Flows from Operating Activities**                                                       | ** ** |                  | ** ** | ** **       |       |                            | ** ** | ** **        |       |                  | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income (loss)                                                                              |       |                  | $          | (175             | )          |                            |       | $                 | 27,773     |                  |       |   | $ | 599 |   |   |   | $ | (28,372 | ) |   |   | $ | (175 | ) |   |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities: |       |                  |       |             |       |                            |       |              |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                                 |       |                  | 15,099     |             |       |                            | —     |              |       |                  | 403        |   |   |   | — |   |   |   | 15,502 |   |   |
| Loss on impairment  of long-lived assets                                                       |       |                  | 3,165      |             |       |                            | —     |              |       |                  | 275        |   |   |   | — |   |   |   | 3,440 |   |   |
| Loss on disposal  of assets                                                                    |       |                  | 726        |             |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | 726 |   |   |
| Accretion of  discount on notes                                                                |       |                  | 167        |             |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | 167 |   |   |
| Deferred income  tax benefit                                                                   |       |                  | (1,299     | )                |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | (1,299 | ) |   |
| Tax benefit from stock  option exercises                                                       |       |                  | 115        |             |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | 115 |   |   |
| Amortization of  deferred financing costs                                                      |       |                  | 588        |             |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | 588 |   |   |
| Changes in assets and liabilities:                                                             |       |                  |       |             |       |                            |       |              |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in—                                                                   |       |                  |       |             |       |                            |       |              |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Trade receivables                                                                              |       |                  | (3,267     | )                |       |                            | —     |              |       |                  | (32        | ) |   |   | — |   |   |   | (3,299 | ) |   |
| Inventories                                                                                    |       |                  | (12,207    | )                |       |                            | —     |              |       |                  | (961       | ) |   |   | — |   |   |   | (13,168 | ) |   |
| Prepaid expenses  and other assets                                                             |       |                  | 1,175      |             |       |                            | —     |              |       |                  | 214        |   |   |   | — |   |   |   | 1,389 |   |   |
| Investments in and  advances to (from) affiliates                                              |       |                  | 5,793      |             |       |                            | (32,926    | )                 |       |                  | (1,239     | ) |   |   | 28,372 |   |   |   | — |   |   |
| Increase (decrease) in—                                                                   |       |                  |       |             |       |                            |       |              |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable,  accrued expenses and other current liabilities                              |       |                  | (1,707     | )                |       |                            | 5,146      |              |       |                  | 504        |   |   |   | — |   |   |   | 3,943 |   |   |
| Deferred rent and  other non-current liabilities                                               |       |                  | (890       | )                |       |                            | —     |              |       |                  | 285        |   |   |   | — |   |   |   | (605 | ) |   |
| Net cash provided  by operating activities                                                     |       |                  | 7,283      |             |       |                            | (7         | )                 |       |                  | 48         |   |   |   | — |   |   |   | 7,324 |   |   |
| **Cash Flows from Investing Activities**                                                       | ** ** |                  | ** ** | ** **       |       |                            | ** ** | ** **        |       |                  | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Purchase of  short-term investments                                                            |       |                  | (7,000     | )                |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | (7,000 | ) |   |
| Proceeds from sale  of short-term investments                                                  |       |                  | 13,400     |             |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | 13,400 |   |   |
| Capital  expenditures                                                                          |       |                  | (16,719    | )                |       |                            | —     |              |       |                  | (925       | ) |   |   | — |   |   |   | (17,644 | ) |   |
| Purchase of  intangible assets                                                                 |       |                  | (149       | )                |       |                            | —     |              |       |                  | (21        | ) |   |   | — |   |   |   | (170 | ) |   |
| Net cash used in  investing activities                                                         |       |                  | (10,468    | )                |       |                            | —     |              |       |                  | (946       | ) |   |   | — |   |   |   | (11,414 | ) |   |
| **Cash Flows from Financing Activities**                                                       | ** ** |                  | ** ** | ** **       |       |                            | ** ** | ** **        |       |                  | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Decrease in cash  overdrafts                                                                   |       |                  | (166       | )                |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | (166 | ) |   |
| Repayment of long-term  debt                                                                   |       |                  | (666       | )                |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | (666 | ) |   |
| Payout for  redeemed Series A Preferred  Stock                                            |       |                  | (373       | )                |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | (373 | ) |   |
| Deferred financing  costs                                                                      |       |                  | (620       | )                |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | (620 | ) |   |
| Proceeds from  exercise of stock options                                                       |       |                  | 485        |             |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | 485 |   |   |
| Net cash used in  financing activities                                                         |       |                  | (1,340     | )                |       |                            | —     |              |       |                  | —     |   |   |   | — |   |   |   | (1,340 | ) |   |
| **Net  Decrease in Cash and Cash Equivalents**                                                 |       |                  | (4,525     | )                |       |                            | (7         | )                 |       |                  | (898       | ) |   |   | — |   |   |   | (5,430 | ) |   |
| **Cash and  Cash Equivalents, Beginning of  Year**                                             |       |                  | 7,426      |             |       |                            | 44         |              |       |                  | 997        |   |   |   | — |   |   |   | 8,467 |   |   |
| **Cash and  Cash Equivalents, End of Year**                                                    |       |                  | $          | 2,901            |       |                            |       | $                 | 37         |                  |       |   | $ | 99 |   |   |   | $ | — |   |   |   | $ | 3,037 |   |   |

 

F-32

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15.**          GUARANTOR SUBSIDIARIES(Continued)

**Mothers Work, Inc.Condensed Consolidating Statement of Cash FlowsFor the Year Ended September 30, 2004(in thousands)**

| ** **                                                                              | ** ** | **Mothers  Work (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| **Cash Flows from Operating Activities**                                                | ** ** |                                     | ** ** | ** **                  |       |                                                   | ** ** | ** **                      |       |                                | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                                              |       |                                     | $          | 5,039                       |       |                                                   |       | $                               | 23,971     |                                |       |   | $ | 180 |   |   |   | $ | (24,151 | ) |   |   | $ | 5,039 |   |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                          |       |                                     | 14,067     |                        |       |                                                   | —     |                            |       |                                | 203        |   |   |   | — |   |   |   | 14,270 |   |   |
| Loss on impairment of  long-lived assets                                                |       |                                     | 1,816      |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 1,816 |   |   |
| Loss on disposal of  assets                                                             |       |                                     | 1,223      |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 1,223 |   |   |
| Accretion of discount on  notes                                                         |       |                                     | 149        |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 149 |   |   |
| Deferred income tax  provision                                                          |       |                                     | 2,329      |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 2,329 |   |   |
| Tax benefit from stock  option exercises                                                |       |                                     | 311        |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 311 |   |   |
| Amortization of deferred  financing costs                                               |       |                                     | 415        |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 415 |   |   |
| Other                                                                                   |       |                                     | 224        |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 224 |   |   |
| Changes in assets and liabilities:                                                      |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in—                                                            |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Trade receivables                                                                       |       |                                     | (489       | )                           |       |                                                   | —     |                            |       |                                | (37        | ) |   |   | — |   |   |   | (526 | ) |   |
| Inventories                                                                             |       |                                     | (7,808     | )                           |       |                                                   | —     |                            |       |                                | (430       | ) |   |   | — |   |   |   | (8,238 | ) |   |
| Prepaid expenses and  other assets                                                      |       |                                     | (1,817     | )                           |       |                                                   | —     |                            |       |                                | (214       | ) |   |   | — |   |   |   | (2,031 | ) |   |
| Investments in and  advances to (from) affiliates                                       |       |                                     | (9,417     | )                           |       |                                                   | (16,173    | )                               |       |                                | 1,439      |   |   |   | 24,151 |   |   |   | — |   |   |
| Increase (decrease) in—                                                            |       |                                     |       |                        |       |                                                   |       |                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable, accrued  expenses and other current liabilities                       |       |                                     | 6,857      |                        |       |                                                   | (7,787     | )                               |       |                                | 106        |   |   |   | — |   |   |   | (824 | ) |   |
| Deferred rent and other  non-current liabilities                                        |       |                                     | 3,539      |                        |       |                                                   | —     |                            |       |                                | 560        |   |   |   | — |   |   |   | 4,099 |   |   |
| Net cash provided  by operating activities                                              |       |                                     | 16,438     |                        |       |                                                   | 11         |                            |       |                                | 1,807      |   |   |   | — |   |   |   | 18,256 |   |   |
| **Cash Flows from Investing Activities**                                                | ** ** |                                     | ** ** | ** **                  |       |                                                   | ** ** | ** **                      |       |                                | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Purchase of  short-term investments                                                     |       |                                     | (54,075    | )                           |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | (54,075 | ) |   |
| Proceeds from sale  of short-term investments                                           |       |                                     | 52,675     |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 52,675 |   |   |
| Capital expenditures                                                                    |       |                                     | (20,317    | )                           |       |                                                   | —     |                            |       |                                | (1,223     | ) |   |   | — |   |   |   | (21,540 | ) |   |
| Purchase of  intangible assets                                                          |       |                                     | (30        | )                           |       |                                                   | —     |                            |       |                                | (50        | ) |   |   | — |   |   |   | (80 | ) |   |
| Net cash used in  investing activities                                                  |       |                                     | (21,747    | )                           |       |                                                   | —     |                            |       |                                | (1,273     | ) |   |   | — |   |   |   | (23,020 | ) |   |
| **Cash Flows from Financing Activities**                                                | ** ** |                                     | ** ** | ** **                  |       |                                                   | ** ** | ** **                      |       |                                | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Increase in cash  overdrafts                                                            |       |                                     | 684        |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 684 |   |   |
| Repayment of long-term  debt                                                            |       |                                     | (279       | )                           |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | (279 | ) |   |
| Repurchase of  common stock                                                             |       |                                     | (1,775     | )                           |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | (1,775 | ) |   |
| Payout for  redeemed Series A Preferred Stock                                      |       |                                     | (1,362     | )                           |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | (1,362 | ) |   |
| Deferred financing  costs                                                               |       |                                     | (44        | )                           |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | (44 | ) |   |
| Proceeds from  exercise of stock options                                                |       |                                     | 276        |                        |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | 276 |   |   |
| Net cash used in  financing activities                                                  |       |                                     | (2,500     | )                           |       |                                                   | —     |                            |       |                                | —     |   |   |   | — |   |   |   | (2,500 | ) |   |
| **Net Increase  (Decrease) in Cash and Cash Equivalents**                               |       |                                     | (7,809     | )                           |       |                                                   | 11         |                            |       |                                | 534        |   |   |   | — |   |   |   | (7,264 | ) |   |
| **Cash and  Cash Equivalents, Beginning of Year**                                       |       |                                     | 15,235     |                        |       |                                                   | 33         |                            |       |                                | 463        |   |   |   | — |   |   |   | 15,731 |   |   |
| **Cash and  Cash Equivalents, End of Year**                                             |       |                                     | $          | 7,426                       |       |                                                   |       | $                               | 44         |                                |       |   | $ | 997 |   |   |   | $ | — |   |   |   | $ | 8,467 |   |   |

 

F-33

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**16.**          EMPLOYMENTAGREEMENTS

The Company has employment agreements with itsChairman of the Board and Chief Executive Officer (“CEO”) and its President andChief Operating Officer (“COO”). These agreements, as amended, provided forbase compensation of approximately $506,000, $492,000 and $477,000 for fiscal2006, 2005 and 2004, respectively, increasing annually thereafter in an amountto be determined by the Compensation Committee of the Board of Directors, andsalary continuation and severance payments should employment of the executivesbe terminated under specified conditions, as defined therein. The agreementscontinue in effect until terminated by either the Company or the executive inaccordance with the termination provisions of the agreements. Additionally, theCEO and COO are eligible for an annual cash bonus and stock options based onperformance, as specified by the Compensation Committee. On November 14,2006, as a result of the Compensation Committee’s reconsideration of itsapproach to equity-based compensation for executive officers and other keyemployees, the Company and both its CEO and COO entered into amendments to theEmployment Agreements to change the form of equity incentive awards that theCEO and COO will be entitled to receive with respect to the Company’s fiscalyear ended September 30, 2006, from a grant of stock options to a grant ofshares of restricted stock.

The Company also has anemployment agreement, as amended, with its Executive Vice President—ChiefFinancial Officer. This agreement provided for base compensation ofapproximately $425,000, $382,000 and $360,000 for fiscal 2006, 2005 and 2004,respectively, which is subject to potential increase in the future by theCompany. The agreement also provides for salary continuation and severancepayments should employment of the executive be terminated under specifiedconditions, as defined therein. The agreement continues in effect untilterminated by either the Company or the executive in accordance with thetermination provisions of the agreement.

**17.**          EMPLOYEEBENEFIT PLANS

The Company has a 401(k) savingsplan for all employees who have at least six months of service and are at least18 years of age. Employees can contribute up to 20% of their annual salary.Employees who meet certain criteria are eligible for a matching contributionfrom the Company based on a sliding scale. Company matches are made in thefirst quarter of the succeeding calendar year. Company matches vest over aperiod of approximately six years from each employee’s commencement ofemployment with the Company. Company matching contributions totaling $130,000,$116,000 and $82,000 were made in fiscal 2006, 2005 and 2004, respectively. Inaddition, the Company may make discretionary contributions to the plan, which vestover a period of approximately six years from each employee’s commencement ofemployment with the Company. The Company has not made any discretionarycontributions.

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**18.**          QUARTERLYFINANCIAL INFORMATION (UNAUDITED)

Quarterlyfinancial results for the years ended September 30, 2006 and 2005 were asfollows (in thousands, except per share amounts): 

| ** **                                | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| **Fiscal 2006**                      | ** ** | ** **             | ** ** | **9/30/06** | ** ** | **6/30/06** | ** ** | **3/31/06** | ** ** | **12/31/05** | ** ** |
| Net sales                                 |       | $                      | 142,825    |   | $ | 163,883 |   | $ | 144,643 |   | $ | 151,393 |   |
| Gross profit                              |       | 72,596                 |       | 89,860 |   | 76,023 |   | 76,183 |   |
| Net income (loss)                         |       | (602                   | )          | 8,774 |   | 502 |   | 428 |   |
| Net income (loss)  per share—Basic   |       | (0.11                  | )          | 1.64 |   | 0.09 |   | 0.08 |   |
| Net income (loss) per  share—Diluted |       | (0.11                  | )          | 1.54 |   | 0.09 |   | 0.08 |   |
|                                           |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| **Fiscal 2005**                      | ** ** | ** **             | ** ** | **9/30/05** | ** ** | **6/30/05** | ** ** | **3/31/05** | ** ** | **12/31/04** | ** ** |
| Net sales                                 |       | $                      | 135,237    |   | $ | 152,740 |   | $ | 140,031 |   | $ | 133,619 |   |
| Gross profit                              |       | 63,839                 |       | 81,367 |   | 69,353 |   | 69,615 |   |
| Net income (loss)                         |       | (5,340                 | )          | 5,509 |   | (97 | ) | (247 | ) |
| Net income (loss)  per share—Basic   |       | (1.01                  | )          | 1.05 |   | (0.02 | ) | (0.05 | ) |
| Net income (loss) per  share—Diluted |       | (1.01                  | )          | 1.03 |   | (0.02 | ) | (0.05 | ) |
|                                           |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company’s business,like that of other retailers, is seasonal. The Company’s quarterly net saleshave historically been highest in its third fiscal quarter, corresponding tothe Spring selling season, followed by its first fiscal quarter, correspondingto the Fall/holiday selling season. Given the typically higher gross marginexperienced in the third fiscal quarter compared to other quarters, therelatively fixed nature of most of the Company’s operating expenses andinterest expense, and the historically higher sales level in the third quarter,the Company has typically generated a very significant percentage of its fullyear operating income and net income during the third quarter.

**19.**          SEGMENTAND ENTERPRISE WIDE DISCLOSURES

***Operating Segment.****  *Under SFAS No. 131, “Disclosures about Segmentsof an Enterprise and Related Information,” a company may be required to reportsegmented information about separately identifiable parts of its business,which both (i) meet the definition of an “operating segment” under SFAS No. 131,and (ii) exceed certain quantitative thresholds established in SFAS No. 131.The Company has determined that its business is comprised of one operatingsegment: the design, manufacture and sale of maternity apparel and relatedaccessories. While the Company offers a wide range of products for sale, thesubstantial portion of its products are initially distributed through the samedistribution facilities, many of the Company’s products are manufactured atcommon contract manufacturer production facilities, the Company’s products aremarketed through a common marketing department, and these products are sold toa similar customer base, consisting of expectant mothers.

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**MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**19.**          SEGMENT AND ENTERPRISE WIDE DISCLOSURES (Continued)

***GeographicInformation.****  *Informationconcerning the Company’s operations by geographic area are as follows (inthousands): 

| ** **                               | ** ** | **Year Ended September 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net Sales to Unaffiliated  Customers** |       |                                        |       |   |   |   |   |
| United States                            |       | $                                           | 585,272    |   | $ | 547,924 |   | $ | 510,751 |   |
| Canada                                   |       | 17,472                                      |       | 13,703 |   | 7,300 |   |
|                                          |            |                                             |            |  |  |  |  |  |  |  |

 

| ** **            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|-----------------------|------------|------------------------|------------|------------------------|------------|
| ** **            | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| **Long-Lived Assets** |       |                   |       |                   |       |   |   |   |   |
| United States         |       |                   | $          | 69,621                 |       |   |   | $ | 74,393 |   |   |
| Canada                |       |                   | 2,535      |                   |       |   | 2,658 |   |   |
| Costa Rica            |       |                   | 700        |                   |       |   | 925 |   |   |
|                       |            |                        |            |                        |            |  |  |  |  |  |  |

*** ***

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

**20.**          INTERESTEXPENSE, NET

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

| ** **            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest expense      |       | $        | 15,419     |     | $          | 15,360   |       | $ | 14,955 |   |
| Interest income       |       | (885     | )          | (67      | )          | (190     | )          |
| Interest expense, net |       | $        | 14,534     |     | $          | 15,293   |       | $ | 14,765 |   |

 

**21.**          RELATEDPARTY TRANSACTIONS

Other than the husband andwife relationship between the CEO and COO, there are no other familyrelationships among any other executive officers of the Company.

A director of the Company currentlyprovides consulting services to Pepper Hamilton LLP, which provides legalservices to the Company. The Company paid legal fees to this law firm of$278,000, $315,000 and $147,000 in fiscal 2006, 2005 and 2004, respectively. Asof September 30, 2006, the Company had amounts outstanding to this lawfirm of $527,000, which are included in accrued expenses and other currentliabilities in the accompanying Consolidated Balance Sheets.

During fiscal 2004, theCompany repurchased an aggregate of 14,954 shares of common stock from both theCompany’s CEO and COO as part of the share repurchase program.

**22.**          SUBSEQUENTEVENT

In November 2006, the Company’s Board ofDirectors authorized the repurchase of $25.0 million principal amount ofthe Company’s Senior Notes (see Note 9). On December 8, 2006, the Companycompleted the repurchase of the authorized amount at 105.625% of the $25.0 millionprincipal amount, plus accrued and unpaid interest. In connection with therepurchase, the Company recorded a pre-tax charge totalling $2,093,000, representingthe premium paid plus the write-off of unamortized debt issuance discount anddeferred financing costs.

F-36

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**MOTHERSWORK, INC. AND SUBSIDIARIESSCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS(in thousands)**

| ** **                          | ** ** | **Balance at  beginning  of period** | ** ** | **Additions  charged to  costs and  expenses** | ** ** | **Deductions** | ** ** | **Balance at  end of  period** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------|------------|----------------|------------|------------------------------------------|------------|
| Year Ended  September 30, 2006 |       |                                           |       |                                                     |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Product return  reserve             |       |                                           | $          | 361                                                      |       |           |       | $                                        | 14         |   |   |   | $ | — |   |   |   | $ | 375 |   |   |
| Year Ended September 30, 2005  |       |                                           |       |                                                     |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Product return  reserve             |       |                                           | 438        |                                                     |       |           | —     |                                     |       |   | (77 | ) |   |   | 361 |   |   |
| Year Ended September 30, 2004  |       |                                           |       |                                                     |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Product return reserve              |       |                                           | 400        |                                                     |       |           | 38         |                                     |       |   | — |   |   |   | 438 |   |   |
|                                     |            |                                                |            |                                                          |            |                |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-37

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