**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

**(Mark One)**

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

**For the fiscal year endedSeptember 30, 2005**

**or**

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

**For the transition periodfrom *               * to *                  ***

**Commission file number 0-21196**

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**Mothers Work, Inc.**

(Exact name of Registrantas specified in its charter)

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

 

**(215) 873-2200**

(Registrant’s telephonenumber, including area code)

Securities registeredpursuant to Section 12(b) of the Act:

| Title of each class | ** ** | **Name of each exchange on which registered** |
|---------------------|------------|-----------------------------------------------|
| None                |       | N/A                                           |

 

Securities registered pursuant to Section 12(g) ofthe Act:

**Common Stock, par value$.01 per shareSeries B Junior Participating Preferred Stock Purchase Rights**

(Title of class)

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. x

Indicateby check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2of the Act). Yes x No 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 by reference to $13.89, the price at which the commonequity was last sold as of March 31, 2005 (the last business day of theRegistrant’s most recently completed second fiscal quarter), was approximately$65,000,000.

On December 9,2005, there were 5,268,535 shares of the Registrant’s common stock, $.01 parvalue, outstanding.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portionsof the Registrant’s Proxy Statement to be filed with the Commission inconnection with the Annual Meeting of Stockholders scheduled to be held on January 20,2006 are incorporated by reference into Part III of this Form 10-K.

 

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**PART I.**

**Item 1.**                        Business

**General**

We are the leading designer and retailer of maternityapparel in the United States, operating 1,591 retail locations, including 852stores in all 50 states, Puerto Rico and Canada, and 739 leased departments. Wedesign and contract manufacture approximately 90% of the merchandise we sellunder the Motherhood Maternity® (“Motherhood”), Mimi Maternity® (“Mimi”), A Peain the Pod®, Two HeartsTM Maternity and Oh Baby! by MotherhoodTM brands. Weoperate stores under four different retail concepts: Motherhood Maternity, MimiMaternity, A Pea in the Pod and Destination MaternityTM and also sell ourmerchandise on the Internet at our MaternityMall.comTM and our chain-specificwebsites. Our strategy is to fulfill, in a high-service store environment, allof an expectant mother’s clothing needs, including casual and career wear,formal attire, lingerie, sportswear and outerwear. We use a verticallyintegrated business model to ensure that we offer the broadest assortment ofin-stock, fashionable merchandise. Our five merchandise brands collectivelytarget all of the price points in maternity apparel, ranging from Motherhood atvalue prices to A Pea in the Pod at luxury prices. In addition to our 852stores, our retail locations include 739 leased departments located withindepartment and specialty stores, which sell primarily Motherhood and Two HeartsMaternity branded apparel. Our Oh Baby! by Motherhood collection is availableat Kohl’s® stores throughout the United States and on Kohls.com. We haveachieved 8.9% compounded annual sales growth over the past five years,resulting in sales of $561.6 million for fiscal 2005. Our fiscal year endson September 30. All references in this discussion to our fiscal yearsrefer to the fiscal year ended on September 30 in the year mentioned. Forexample, our fiscal 2005 ended on September 30, 2005.

We plan to open approximately 20 - 30 new retailstores during fiscal 2006, of which approximately 8 - 14 willbe new multi-brand stores that carry more than one of our merchandise brands,with the balance primarily under the Motherhood brand. We expect ourmulti-brand store openings to include at least four new Destination Maternitysuperstores. We may open a small number of additional superstores in fiscal2006 as we find and evaluate additional potential locations for these large,well-assorted stores and obtain additional results and insights from ourexisting superstores. We plan to close approximately 65  - 75 stores, withapproximately 25 - 30 of these planned store closings related to theopening of new multi-brand stores.

Based on the success of the initial launch in April 2004of our Two Hearts Maternity collection, which is available exclusively atselected Sears® locations, we expanded the distribution of our Two HeartsMaternity collection from the initial 71 Sears locations to an additional 497Sears stores in March 2005 under a leased department arrangement, bringingthe total number of our Sears maternity leased departments to 574 locations asof the end of fiscal 2005. This proprietary brand replaced the existingmaternity apparel lines in those locations and is now the exclusive maternityapparel offering in Sears stores.

In February 2005, we launched our Oh Baby! byMotherhood collection at Kohl’s stores throughout the United States and on Kohls.com.The Oh Baby! by Motherhood collection is available at all Kohl’s stores underan exclusive product and license agreement, replacing the existing maternityapparel lines at Kohl’s. Kohl’s currently operates approximately 732 stores in41 states.

Mothers Work was foundedby Dan and Rebecca Matthias in 1982 as a mail-order maternity apparel catalog. Webegan operating retail stores in 1985 and completed our initial public offeringin 1993. To address multiple price points in maternity apparel and improveoperating productivity, we acquired Motherhood and A Pea in the Pod in 1995 andeSpecialty Brands, LLC (“iMaternity”) in October 2001. Since the acquisitionsof Motherhood and A Pea in the Pod, we have developed and grown these brands 

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alongwith our Mimi brand. In connection with each of our acquisitions, we haveconsolidated some overlapping locations and closed under-performingstores, resulting in increased operating efficiency through reductions ofacquired store expenses and improved inventory utilization.

**RetailConcepts and Product Distribution**

***MotherhoodMaternity.  ***Motherhood Maternity serves thevalue-priced portion of the maternity apparel industry with the greatestnumber of customers and is our largest chain with 690 stores as of September 30,2005. Motherhood is positioned with everyday low prices, broad assortment,fashion and quality. We believe that the Motherhood customer shops at moderate-priceddepartment stores and discount stores when she is not expecting. Motherhoodstores average approximately 1,700 square feet and are located primarily inenclosed malls, strip and power centers and central city business districts. Motherhoodstores include 99 outlet locations that carry predominantly Motherhood-brandedproduct, including some closeout merchandise. In addition, as of September 30,2005, we operate 124 Motherhood leased departments in department and specialtystores such as Macy’s® and Babies “R” Us®. Between 1998 and 2000, wesuccessfully broadened Motherhood’s customer base by lowering price pointsapproximately 40% to 45%. This new price position significantly expanded thebrand’s target market, increased revenues per store and increased unit volumesduring this period. In fiscal 2005, we opened 14 new Motherhood stores andoutlets, excluding leased departments, and closed 41 Motherhood stores andoutlets, with 12 of these store closings related to multi-brand store openings.As of September 30, 2005, we operate 32 Motherhood stores in Canada andbelieve that market opportunities may permit us to open additional stores inCanada in the future. We may also have the opportunity to grow the number ofour Motherhood leased departments in the United States.

***Mimi Maternity.  ***Asof September 30, 2005, we had 117 Mimi Maternity stores that serve themiddle market priced portion of the maternity apparel industry. The brand ispositioned as trendy, contemporary, fun and affordable. We believe that theMimi customer shops at department stores and specialty apparel chains when sheis not expecting. Mimi stores average approximately 2,400 square feet and arelocated primarily in regional malls, lifestyle centers and central businessdistricts.

*Single-Brand Mimi Stores.*   Asof September 30, 2005, 79 of our Mimi stores predominantly carryMimi-branded product, as well as a small selection of maternity merchandisedeveloped by contemporary vendors for Mimi, and average approximately1,700 square feet. As of September 30, 2005, we also operate 40 Mimileased departments in Macy’s®, Marshall Field’s® and Bloomingdale’s®. Mimi washistorically price positioned just below A Pea in the Pod. When Motherhood’sprices were lowered, there was an opportunity for Mimi to broaden its customerbase by including lower price points. Mimi was, therefore, repositioned duringfiscal 2002 and its merchandise price points now range from just aboveMotherhood to the lower end of A Pea in the Pod. This repositioning resulted inan expansion of Mimi’s target customer base, and provided us the opportunity toincrease the number of Mimi stores over time.

*Multi-Brand Mimi Stores.*   Weare continuing to test, develop and expand our multi-brand store concepts. Ourcurrent multi-brand store concepts operated under the Mimi name includetwo-brand stores (which carry both the Mimi and Motherhood brands) and triplexstores (which carry the Mimi, Motherhood and A Pea in the Pod brands). Thesemulti-brand stores are larger (average of approximately 2,700 square feet)and have higher average sales volume than our average store, and provide theopportunity to lower our store operating expense percentage and improve storeoperating profit margins over time. Opening these multi-brand stores willtypically involve closing two smaller stores and consolidating their businessinto one store, and frequently will involve one-time store closing costs resultingprimarily from early lease terminations. As of September 30, 2005, 38 ofour stores are multi-brand stores using the Mimi name, consisting of 36two-brand Mimi combo stores and 

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two Mimi triplex stores. Weplan to continue to open additional multi-brand stores carrying both Mimiand Motherhood product, using the Mimi store name.

In fiscal 2005, at Mimi Maternity, we opened twosingle-brand stores, seven two-brand combo stores and one additional store as aresult of a store conversion from Motherhood to Mimi, excluding leaseddepartments, and closed 14 stores.

***A Pea in the Pod.  ***APea in the Pod is the leading luxury maternity brand in the United States, with37 store locations as of September 30, 2005. The brand is positioned asexclusive, designer and luxury. A Pea in the Pod stores average approximately2,400 square feet and are located in upscale venues, including Madison Avenue,Oak Street, Beverly Hills, South Coast Plaza and Bal Harbor. We also operateone A Pea in the Pod leased department in Macy’s flagship Herald Square storein New York City. During fiscal 2005, we closed four A Pea in the Pod storesthat were related to Destination Maternity superstore openings. 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. Publicity, including celebrities wearingour clothes, is an important part of the marketing and positioning of the brand.As scarcity is part of the concept’s luxury image, we have chosen to furtherdevelop the brand primarily by optimizing our customers’ in-store experiencerather than by opening new stores. We therefore continuously upgrade thequality of the locations, our store designs, the product styling and ourpublicity to enhance our brand image.

***DestinationMaternity superstores.  ***On March 4,2004, we opened our first Destination Maternity superstore in Danbury,Connecticut, a nearly 4,000 square foot test store carrying all three of ourbrands plus a greatly expanded line of nursing accessories, fertility-relatedproducts and maternity-related exercise gear, books, and body and nutritionalproducts. This store also has a dedicated “learning center” area formaternity-related classes, as well as a “relax area” for husbands and shoppersalike, and an inside play area for the pregnant mom’s toddlers and youngchildren. These elements combine to give our Destination Maternity superstorenot only by far the largest assortment of maternity apparel and accessoriesavailable, but also a new and engaging atmosphere and experience for thematernity customer. Our superstore format is highly differentiated from thestores of our maternity competitors, which do not even carry the breadth ofselection we carry in one of our three brands presented in the superstore. Openingthese superstores will typically involve closing two or more smaller stores andconsolidating their business into one store, and frequently will involveone-time store closing costs resulting primarily from early lease terminations.We believe the superstore model will improve store profitability margins byreducing store operating expense percentages and may increase overall sales inthe geographical markets they serve. We opened three additional DestinationMaternity superstores during fiscal 2004 and four additional stores duringfiscal 2005, for a total of eight stores open as of September 30, 2005. DestinationMaternity superstores range from nearly 4,000 square feet to approximately11,000 square feet, with an average of approximately 6,800 square feet for theeight stores open as of September 30, 2005. We have four new DestinationMaternity superstores scheduled to open during fiscal 2006, including the grandopening this coming February of our Destination Maternity store on the cornerof 57th Street and Madison Avenue in Manhattan. This will be the largestmaternity store in the world, spanning three floors and including our EdamameTMMaternity Spa, all three of our primary apparel brands, maternity yoga classes,juice bar, relax area, and children’s play area. We continue to evaluate andlook for additional potential superstore locations for fiscal 2006 and beyond. Asthe only national retailer that is solely focused on maternity, we are furtherdifferentiating ourselves as the ultimate maternity destination with theselarge, well-assorted, “must visit” superstores.

***Two HeartsMaternity.  ***Two Hearts Maternity launched in71 selected Sears stores in April 2004 and in March 2005 was expandedto an additional 497 stores. As of September 30, 2005, the Two HeartsMaternity collection is carried in leased departments in 574 Sears stores. Thisproprietary brand has 

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become the exclusivematernity apparel offering in Sears stores. Two Hearts Maternity is a newfashionable collection including career and casual sportswear as well asdresses, lingerie, swimwear and nursing sleepwear, with most items priced under$40. The average Two Hearts Maternity leased department retail space coversapproximately 300 square feet.

***Oh Baby! by Motherhood.***   OhBaby! by Motherhood collection was launched in February 2005 at Kohl’sstores throughout the United States and on Kohls.com. The Oh Baby! byMotherhood collection is available at all Kohl’s stores under an exclusiveproduct and license agreement. The collection features a modern and completeassortment of sportswear, intimate apparel and sleepwear, with most itemspriced under $40. Kohl’s currently operates approximately 732 stores in 41states.

**Our Competitive Strengths**

***We are the leaderin maternity apparel.  ***We are the leadingdesigner and retailer of maternity apparel in the United States and are theonly nationwide chain of maternity specialty stores in the United States. Webelieve that our brands are the most recognized in maternity apparel. We haveestablished a broad distribution network, with stores in a wide range ofgeographic areas and retailing venues. In addition, we have a leading positionat every price point of maternity apparel through our five distinct brands. Ourleadership position enables us to gain a unique understanding of the needs ofour maternity customers, as well as keep abreast of fashion and productdevelopments. We enhance our leadership position, increase market penetrationand further build our brands by operating leased departments in department andbaby specialty stores.

***We offer a wideproduct assortment.  ***A primary considerationfor expectant mothers shopping for maternity clothes is product assortment, aspregnant women need to replace almost their entire wardrobe. We believe that weoffer the widest selection of merchandise in the maternity apparel industry. Wealso offer product for multiple seasons, as pregnant women’s clothing needsvary depending on their due date. Our ability to offer a broad assortment ofproduct is due, in large part, to our vertically integrated business model,which includes our extensive in-house design and contract manufacturingcapabilities, as well as our rapid inventory replenishment system.

***We are verticallyintegrated.  ***We design and contractmanufacture approximately 90% of the merchandise we sell. We believe thatvertical integration enables us to offer the widest product selection inmaternity apparel, to respond quickly to fashion trends and to ensure industry-leadingin-stock levels. 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.  ***Sincematernity apparel is a niche industry, store profitability is usually optimizedin smaller store formats. We are able to offer a wide selection of merchandisein our stores, which average approximately 1,900 square feet, due, in largepart, to our rapid inventory replenishment system. Our proprietary systemenables us to offer more than 3,000 stock keeping units, or SKUs, per storewithout dedicating retail space to storage. We coordinate the rapidreplenishment of inventory for all of our stores through our Philadelphia andCanadian distribution centers, which send selections that meet individual storeneeds to specific locations between two and six times per week.

***We have proprietarysystems that support our business.******  ***In order to support ourvertically integrated business model, we have developed a fully integrated,proprietary enterprise resource planning (ERP) system. This system includespoint-of-sale (POS) systems, our TrendTrackTM merchandise analysis and planningsystem, our materials requirement planning (MRP) system and our web-based,global sourcing and logistics systems. These systems also support our automatedpicking and sorting systems and other aspects of our logistics infrastructure. Webelieve that our proprietary systems are critical to our 

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competitive strengths ofoffering a broad product assortment, responding quickly to fashion trends,helping to reduce product costs and rapidly replenishing inventory in ourstores.

***We are able toobtain prime real estate locations.  ***Webelieve that we are able to obtain attractive real estate locations due to thebrand awareness of our concepts, our multiple price point approach and oursought after maternity customer. 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 to offertheir maternity customers a range of price alternatives. In addition, in thecase of multi-mall operators, we have the flexibility to provide several storesacross multiple malls. As a result, we have been able to locate stores in manyof what we believe are the most desirable shopping malls in the country and areable to obtain attractive locations within these malls.

***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. In recent years, we haveadded to our management team and have a management team with significantexperience in all aspects of the retail and apparel business.

**The Maternity Apparel Industry**

We are unaware of any reliable data on the size of thematernity apparel industry. However, based on our own analysis, we believethere are approximately $1.2 billion of maternity clothes sold each yearin the United States. In addition, we believe that there is an opportunity togrow the market by selling maternity clothes to pregnant women who currentlypurchase loose-fitting or larger-sized non-maternity clothing as asubstitute for maternity wear. We also believe that the market can grow byreducing the amount of “hand-me-down” and “borrowing” associatedwith maternity apparel, particularly in the value-priced market wherelow-priced, fashionable newly-purchased maternity apparel could providean economical alternative to secondhand maternity wear. Further, we believethat the demand for maternity apparel is relatively stable when compared tonon-maternity apparel. Expectant mothers continue to need to replace theirclothes and the current steady rate of approximately four million U.S. birthsper year has remained stable over the last decade. We believe that maternityapparel is also less fashion sensitive than specialty apparel in general, asdemand is driven by the need to replace wardrobe basics as opposed to currentfashion trends.

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**Brands**

Weoperate our maternity stores under four retail concepts offering a full rangeof casual and career wear, formal attire, lingerie and outerwear under threeprimary apparel brands. We have positioned our four retail concepts and threeprimary apparel brands to target the entire spectrum of pregnant women, servinga smaller customer base at the highest price points and broadening the marketas the price points are reduced. The following table sets forth certaininformation regarding our portfolio of stores as of September 30, 2005,including each store concept’s target location, brand positioning, price rangefor dresses and approximate average store size:

| **Brand**             | ** ** | ** **                                                          | ** ** | **Description of  Target Location**                | ** ** | **Brand Positioning** | ** **                     | **Dress  Price  Range** | ** ** | **Average  Store Size  (square feet)** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------|--------------------------------|-------------------------|------------|--------------------------------------------------|------------|
| Motherhood  Maternity |       | Moderate  regional malls,  strip centers and power  centers         |       | Broad  assortment,  fashion, quality and  everyday low price |       | $                          | 20  -  $50 |                    |       | 1,700                                            |       |   |
| Mimi Maternity        |       | Mid-priced regional  malls and lifestyle centers                    |       | Contemporary, fun,  trendy and affordable                    |       | $                          | 58 - $188            |                    |       | 2,400                                            | (1)        |   |
| A Pea in the Pod      |       | Exclusive, high-end  regional malls and  affluent residential areas |       | Exclusive,  designer and  luxury                             |       | $                          | 125 - $395           |                    |       | 2,400                                            |       |   |

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(1)          Our single-brand Mimistores average 1,700 square feet and our multi-brand Mimi stores average 2,700square feet.

We also have eight Destination Maternity superstoresopen as of September 30, 2005. These superstores are located in or nearregional malls and shopping centers, generally include the brands ofMotherhood, Mimi and A Pea in the Pod, as well as products unique to thesuperstore, with dress price ranges indicative of the brands represented. Theseeight Destination Maternity superstores range from nearly 4,000 square feet toapproximately 11,000 square feet, with an average of approximately 6,800 squarefeet. We expect future superstores will typically be 7,000 square feet or more.

Major regional malls withseveral department stores and a wide range of price points may be able toaccommodate a multi-brand store, or more than one maternity store. We have theability to address multiple price alternatives at a given mall, with Motherhoodas our value-oriented brand, Mimi as our mid-priced brand and A Peain the Pod as our luxury brand. As of September 30, 2005, we had at leasttwo of our store concepts in 46 major regional malls. In addition, almostall 37 of our A Pea in the Pod stores and 13 of our Motherhood stores carryMimi-branded merchandise, and 46 of our Mimi stores carry Motherhood-brandedmerchandise.

**Internet Operations**

We believe that manypregnant women turn to the Internet for maternity-related information andproducts, including on-line purchases of maternity clothes. Our websites aretherefore important tools for educating existing and potential customers aboutour brands and driving traffic to our stores. Our websites sell merchandise andprovide store location information. Each of our concepts has its own dedicatedwebsite that is reached primarily through the brand name, for exampleMotherhood.com. Our content site and portal, MaternityMall.com, is anotherlikely way for a consumer to reach one of our brand-specific websites. Inaddition to providing links to all of our websites, MaternityMall.com containsmaternity advice and information, related baby product information andeditorial content. We also operate the iMaternity.com website, which sellsMotherhood merchandise. Our marketing and technology capabilities, 

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and thereplenishment capabilities of our distribution center and stores enable us toincorporate Internet design, operations and fulfillment into our existingoperations.

**Marketing Partnerships**

We 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, focused on babyand parent-related products and services. One such program is ourfuturetrust® college savings program (“futuretrust”). Futuretrust is aMasterCard® based college savings program that enables members to get an easyheadstart on college savings when they link their futuretrust MasterCard to atax advantaged 529 College Savings account. Members earn a 1% rebate on allpurchases with their futuretrust MasterCard that is automatically contributedto their 529 College Savings account. Members also earn additional collegesavings when they use the futuretrust MasterCard at merchants in the futuretrustPreferred Merchant Network, consisting of major retail chains, catalogs andon-line merchants.

**Brand-Specific Operations 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**

The typical maternity customer, especially thefirst-time mother, seeks more advice and assistance than the typical non-maternitycustomer does. Therefore, we aim to employ skilled, motivated store teammembers who are trained to provide the high level of service and reassuranceneeded by our customers. We attempt to provide a boutique level of attentiveservice that differentiates us from our competitors, particularly so frommoderate and discount stores. Our centralized merchandising and storeoperations also enable our store team members to focus primarily on selling andmaintaining the appearance of the stores. In addition, visual merchantscoordinate with the merchandising department to develop floor-sets, designstore display windows and define and enhance the product presentation.

Each of our three primarystore brands has a director of stores. At Motherhood and Mimi, the managementreporting chain consists of regional managers, district managers and storemanagers. At A Pea in the Pod, due to its smaller number of stores, thedistrict managers report to the director of stores. Our store, district andregional managers are eligible to receive incentive-based compensationrelated to store, district and regional-level performance.

**Merchandising,Design and Inventory Planning**

***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.

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***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 market.

***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. Our proprietarycapabilities enable us to continually monitor and respond quickly to consumerdemand and are integral to our inventory management program. These capabilitiesare facilitated by our TrendTrack system, which provides daily productsell-through data and merchandising information.

**Production and Distribution**

We design and contract for the production ofapproximately 90% of our merchandise. We contract our sewing to factoriesthroughout the world, including domestic facilities, and we continue to seekadditional 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, thereby increasing gross margins. However, our most recent fiscal year’sgross margin decreased by about 2.5 percent, primarily driven by the plannedlower gross margin associated with sales from our new Kohl’s licensedarrangement, as well as market oversupply conditions and the resulting greaterlevel of markdowns we recognized on sales from our own retail locations.

Our production and quality assurance personnel monitorproduction at contractor facilities in the United States and work with ouragents abroad to ensure quality control, compliance with our designspecifications and timely delivery of finished goods. This quality controleffort is enhanced by our worldwide Internet-based contracting andlogistics systems, which include advanced features such as measurementspecifications and digital photography. We also use a third party consultingfirm to help monitor working conditions at our contractors’ facilities on aworldwide basis.

Finished garments from contractors and othermanufacturers are received at our United States distribution facility inPhiladelphia, Pennsylvania, and our Canadian distribution center. Garments areinspected using statistical sampling methods and stored for picking. Ourdistribution facility utilizes the latest fulfillment technology to serve as areplenishment center, as opposed to solely a distribution center. The facilitysends a selection that meets individual store needs from our approximately17,000 SKUs to our store locations two to six times per week. Storereplenishment decisions are made automatically based upon target inventoriesestablished by the allocation department and individual store sales data. Thedistribution facility uses several automated systems, including ourpick-to-light system for flat-packed goods and our hanging garment sortationsystem, which speed up deliveries to our stores and reduce costs.

Shipments to stores are tracked by our proprietarydelivery tracking software. Freight is routed through zone-skipping,over-the-road carriers running 24 hours per day and delivered locally by avariety of carriers, and is supplemented by a small percentage of second-dayair, providing one to three-day delivery to our store locations.

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In November 2003, wewere certified to participate in Customs-Trade Partnership AgainstTerrorism, or C-TPAT, a United States Department of Homeland Security sponsoredprogram that enhances our standing with United States Customs and BorderProtection through our implementation and monitoring of procedures to managethe security of our supply chain as part of the effort to protect the UnitedStates against potential acts of terrorism.

**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-house teamof programmers. Our stores have point-of-sale terminals that provideinformation used in our customized TrendTrack merchandise analysis and planningsystem. This system provides daily financial and merchandising information thatis integral to monitoring trends and making merchandising decisions. TheTrendTrack system has numerous features designed to integrate our retailoperations with our design, manufacturing and financial functions. These featuresinclude custom merchandise profiles for each store, rapid inventoryreplenishment, item-tracking providing daily updated selling information forevery style, classification open-to-buy and inventory control, as well as thedaily collection of customer payment data, including cash, check and creditcard sales data.

As part of our proprietary ERP system, we employ acomprehensive MRP system to manage our production inventories, documentation,work orders and scheduling. This system provides a perpetual inventory of rawmaterials, 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 stores, 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 with our existingsystems. This Internet-based system provides real-time access tofinancial and merchandising information in addition to rapid creditauthorization. This upgraded point-of-sale system has significantly reduced theamount of training required for new sales associates and store managers. Inaddition, we plan to continue to add new features and functionality to thesystem, and anticipate that the system will improve our customer relationshipmanagement capabilities by enhancing our ability to create customizedpromotional 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,Mimi employs middle-market pricing and A Pea in the Pod employs luxurypricing. None of our concepts relies on point-of-sale high/lowpromotional strategies to drive traffic into the stores. Our price reductionsare done at the individual style level and are used to accelerate the sale ofslower selling merchandise. Merchandise 

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that isselling slowly is quickly marked down, moved to another store where the item isselling faster, or moved to a Motherhood Outlet store.

**Advertising and Marketing**

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 brands inpregnancy-targeted publications, as well as prenatal issues of leadingbaby and parenting magazines. We advertise in several key prenatal magazines,including *American Baby, Pregnancy, ePregnancy, HealthyPregnancy* and *Shape Fit Pregnancy*.A Pea in the Pod, Mimi and Motherhood are also advertised in fashion and broad-reachmagazines, such as *Vogue*, *In Style, Lucky, People* and *Glamour*.We also utilize our publicity efforts to generate free editorial coverage inbroadcast television, magazines, radio and selected newspapers for all of ourbrands.

**Competition**

Our business is highlycompetitive, characterized by low barriers to entry. The following are severalimportant factors in competing successfully in the retail apparel industry:breadth of selection in sizes; colors and styles of merchandise; productprocurement and pricing; ability to anticipate fashion trends and customerpreferences; inventory control; reputation; quality of merchandise; storedesign and location; visual presentation and advertising and customer service. Weface competition in our maternity apparel lines from various sources, includingdepartment stores, specialty retail chains, discount stores, independent retailstores and catalog and Internet-based retailers, from both new andexisting competitors. Many of our competitors are larger and have substantiallygreater financial and other resources than us. Further, we do not typicallyadvertise using television and radio media and thus do not reach customersthrough means our competitors may use. Our mid- and luxury-pricedmerchandise faces a highly fragmented competitive landscape that includeslocally based, single unit retailers, as well as a handful of multi-unitmaternity operations, none of which we believe has more than 15 storesnationwide. In the value-priced maternity apparel business, we currentlyface competition on a nationwide basis from retailers such as Fashion Bug®, Gap®,JC Penney®, Kmart®, Old Navy®, Target® and Wal-Mart®. Several of thesecompetitors, including Gap and Old Navy, also sell maternity apparel on theirwebsites. We believe there has been increased competition in the maternityapparel industry, from both new and existing competitors, although there areindications the oversupply conditions that have affected the maternity apparelbusiness over the past two years are starting to ease somewhat. Our marketshare and results of operations may be materially and adversely affected bythis competition, including the potential for increased competition in thefuture. While we have competed with both Sears and Kohl’s in the past, ourrelationship with both of them has now changed. We expanded our Two HeartsMaternity collection to an additional 497 Sears stores in March 2005 undera leased department arrangement, bringing the total number of our Searsmaternity leased departments to 574 Sears stores as of September 30, 2005.In February 2005, we launched our Oh Baby! by Motherhood collection atKohl’s stores throughout the United States and on Kohls.com. The Oh Baby! byMotherhood collection is available at all Kohl’s stores under an exclusiveproduct and license agreement. Kohl’s currently operates approximately 732stores in 41 states. 

**Employees**

As of September 30, 2005, we had 2,637 full-timeand 2,467 part-time employees. None of our employees are covered by acollective bargaining agreement. We consider our employee relations to be good.

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**Executive Officers of the Company**

Thefollowing table sets forth the name, age and position of each of our executiveofficers: 

| **Name**            | ** ** | ** ** | ** ** | **Age**                                                   | ** ** | **Position** |
|---------------------|------------|------------|------------|-----------------------------------------------------------|------------|--------------|
| Dan W. Matthias     |       | 62         |       | Chairman of the Board  and Chief Executive Officer        |
| Rebecca C. Matthias |       | 52         |       | President, Chief  Operating Officer and Director          |
| Edward M. Krell     |       | 43         |       | Executive Vice  President—Chief Financial Officer    |
| David Mangini       |       | 61         |       | Executive Vice President—General Merchandise Manager |

* *

*Dan W. Matthias***co-founded Mothers Work in 1982 (along with Rebecca C.Matthias) and has served as Chairman of the Board since our inception. From1983 to 1993, Mr. Matthias served as our Executive Vice President, andsince January 1993, Mr. Matthias has been our Chief Executive Officer.Prior to Mothers Work, Mr. Matthias had been involved in the computer andelectronics industry, serving as a director of Zilog, Inc. and as thePresident of a division of a subsidiary of Exxon Corporation.

*Rebecca C. Matthias***co-founded Mothers Work in 1982 (along with Dan W.Matthias) and has served as a director and our President since our inception. SinceJanuary 1993, Ms. Matthias has also served as our Chief OperatingOfficer. In 1992, Ms. Matthias was chosen as “Regional Entrepreneur of theYear” by *Inc*. magazine and Merrill Lynch Corporation,and in September 2003, Ms. Matthias was recognized as a top womanentrepreneur by the United States Small Business Administration. Prior to 1982,Ms. Matthias was a construction engineer for the Gilbane Building Company.Ms. Matthias also serves as a director on the Board of Directors of CSSIndustries, Inc. and a director on the Board of Directors of RussellCorporation.

*Edward M. Krell***has served as Executive Vice President—Chief FinancialOfficer since November 2003, having served as Senior Vice President-ChiefFinancial 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.

*David Mangini***has served as Executive Vice President—General MerchandiseManager since August 2001. Prior to joining Mothers Work, Mr. Manginiserved as Today’s Man’s Chief Merchandising Officer from 1999 to 2000. From1998 to 1999, Mr. Mangini served as Chief Operating Officer of Gadzooks. From1987 to 1997, Mr. Mangini was an officer at Limited, Inc., includingPresident and Chief Executive Officer of its Structure brand.

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, Two HeartsTM Maternity, Oh Baby!TM, Oh Baby! by MotherhoodTM,Motherhood Maternity Outlet®, Steena® and MaternityMall.com®. As a result ofthe iMaternity acquisition, we also own the iMaternity®, Dan Howard® andiMaternity.comTM marks. Additionally, we own the marks futuretrust®, 

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Real Time Retailing®,What’s Showing is Your Style®, Motherhood: It’s Hot!TM, Motherhood is EverythingGoodTM, Motherhood Baby® and Maternity Redefined®. We are not aware of anymaterial pending claims of infringement or other challenges to our rights or tothe use of our marks in the United States or Canada.

**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 duringthe third quarter. Results for any quarter are not necessarily indicative ofthe results 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.

**Securitiesand Exchange Commission Filings**

Securities and ExchangeCommission (“SEC”) filings are available free of charge on our website, www.motherswork.com*.* Our annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K andamendments to those reports are posted on our website as soon as practicableafter we furnish such materials to the SEC.

**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 $2.9 million as of September 30, 2005. Thisfacility consists of approximately 318,000 square feet, of which 45,000 squarefeet is dedicated to office space and the remaining square footage is used forfinished goods warehousing and distribution. On August 26, 2002, weentered into a 10-year lease for a facility located at 2001 Kitty HawkAvenue, Philadelphia, Pennsylvania in the Philadelphia Naval Business Center. Thearea leased at this facility, which we use for raw material cutting,warehousing and distribution, consists of 64,000 square feet of space. Tofacilitate our store growth in Canada, we entered into a three-year leasecommencing November 1, 2002 for 12,000 square feet of finished goodswarehouse and distribution space in Mississauga, Ontario in Canada. We haverenewed the lease in Canada for a one-year term commencing November 1,2005. We believe that these facilities will be adequate to support ouranticipated distribution needs for the near term and, potentially, longer. Inthe event we need additional space to meet our future distribution needs, webelieve that such space would be readily available. Our facilities are subjectto state and local regulations that range from building codes to health andsafety.

We lease our store premises for terms averaging fromseven to ten years. Certain leases allow us to terminate our obligations atspecified points in time in the event that the applicable store does notachieve a specified sales volume. Some of our store leases also provide forcontingent payments based on sales volume, escalations of the base rent, aswell as increases in operating costs, marketing costs and real estate taxes.

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As of September 30,2005, 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** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------|------------|
| 2006                                         |       |       | 112        |                       |       |
| 2007                                         |       |       | 87         |                       |       |
| 2008                                         |       |       | 81         |                       |       |
| 2009                                         |       |       | 130        |                       |       |
| 2010                                         |       |       | 95         |                       |       |
| 2011 and later                               |       |       | 347        |                       |       |
| Total                                        |       |       | 852        |                       |       |

 

In addition, we havearrangements with department and specialty stores, including Babies “R” Us®,Bloomingdale’s®, Macy’s®, Marshall Field’s® and Sears® to operate maternitydepartments in their stores. These leased departments typically involve thelease partner collecting all of the revenue from the leased department. Therevenue is remitted to us, less a fix percentage of the volume earned by thelease partner as stipulated in the agreement. We provide at least some amountof staffing for each of the leased departments, with the amount varyingdepending on the specific arrangement.

**Item 3.**                        LegalProceedings

On January 12, 2005, a purported class action wasfiled against us in the United States District Court for the District ofConnecticut. The complaint alleges that, under applicable federal and statelaw, certain former and current employees should have received overtimecompensation. The plaintiffs in this case are seeking unspecified actualdamages, penalties and attorneys’ fees. We are engaged in efforts to resolvethese claims. We understand that similar proceedings have been brought againstother retail companies.

In addition, from time totime, we are named as a defendant in legal actions arising from our normalbusiness activities. Although the amount of any liability that could arise withrespect to currently pending actions cannot be accurately predicted, we do notbelieve that the resolution of any pending action will have a material adverseeffect 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 IssuerPurchases of Equity Securities

Ourcommon stock is traded on the Nasdaq National Market under the symbol “MWRK.”The following table sets forth for the periods indicated below the reportedhigh and low sales prices of our common stock as reported on the NasdaqNational Market:

| ** **                                      | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------------------------------|------------|----------|------------|---------|------------|
| **Fiscal Year Ended  September 30, 2004:** |       |     |       |    |       |
| Quarter ended  December 31, 2003           |       | $        | 30.76      |    | $          | 22.30 |   |
| Quarter ended  March 31, 2004              |       | 28.07    |       | 22.70   |       |
| Quarter ended  June 30, 2004               |       | 27.57    |       | 20.00   |       |
| Quarter ended  September 30, 2004          |       | 20.74    |       | 14.34   |       |
| **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   |       |

 

As of December 1, 2005, there were 744 holders ofrecord and 1,328 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 senior notes and our credit facility significantly restrict our abilityto declare or pay dividends on our common stock. Even if we were not restrictedunder the terms of our $125.0 million of 111¤4% senior notesdue 2010 (the “Senior Notes”) or our credit facility from being able to paydividends, any future payment of dividends would still be at the discretion ofour Board of Directors and would be based upon certain restrictive financialcovenants, earnings, capital requirements and our financial condition, amongother factors, at the time any such dividend is considered.

Up to a total of 1,975,000 options may be issued underour 1987 Stock Option Plan.

In March 2003, ourBoard of Directors approved a share repurchase program under which we wereauthorized to repurchase up to $10.0 million of our outstanding common stockfrom time to time in private transactions or on the open market through March 4, 2005.As of September 30, 2005, we had repurchased and retired 142,269 shares inthe aggregate under the share repurchase program, at a total cost of $3.2million, for an average cost of $22.79 per share. There were no repurchasesunder the repurchase program during fiscal 2005. The indenture governing ourSenior Notes and the terms of our credit facility contain restrictions thatplace limits on certain payments by us, including payments to repurchase sharesof our common stock. Our repurchases of common stock have been made incompliance with all restrictions under the indenture governing the Senior Notesand the terms of our credit facility.

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

The following tables setforth selected data pertaining to the consolidated statement of operations, proforma statement of operations, operating, cash flow and other, and balancesheet as of and for the periods indicated. The selected consolidated statementof operations and balance sheet data for each of the five fiscal yearspresented below are derived from our audited consolidated financial statements.You should read this information in conjunction with the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour consolidated financial statements and the related notes included elsewherein this report.

| ** **                                         | ** ** | **Year Ended September 30,**                           | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002(1)** | ** ** | **2001** | ** ** |
| ** **                                         | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Statement of Operations Data:**                  |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net sales                                          |       | $                                                                     | 561,627    |   | $ | 518,051 |   | $ | 492,447 |   | $ | 453,159 |   | $ | 388,306 |   |
| Cost of goods sold(2)                              |       | 277,453                                                               |       | 242,751 |   | 227,961 |   | 214,659 |   | 197,038 |   |
| Gross profit                                       |       | 284,174                                                               |       | 275,300 |   | 264,486 |   | 238,500 |   | 191,268 |   |
| Selling, general and administrative  expenses(2)   |       | 269,936                                                               |       | 252,030 |   | 228,466 |   | 205,355 |   | 170,672 |   |
| Operating income                                   |       | 14,238                                                                |       | 23,270 |   | 36,020 |   | 33,145 |   | 20,596 |   |
| Interest expense, net(3)                           |       | 15,293                                                                |       | 14,765 |   | 14,469 |   | 16,476 |   | 14,867 |   |
| Other income                                       |       | —                                                                |       | — |   | — |   | — |   | 594 |   |
| Income (loss) before income taxes                  |       | (1,055                                                                | )          | 8,505 |   | 21,551 |   | 16,669 |   | 6,323 |   |
| Income tax provision (benefit)(3)             |       | (880                                                                  | )          | 3,466 |   | 8,337 |   | 6,269 |   | 3,248 |   |
| Net income (loss)                                  |       | (175                                                                  | )          | 5,039 |   | 13,214 |   | 10,400 |   | 3,075 |   |
| Dividends on preferred stock                       |       | —                                                                |       | — |   | — |   | 3,942 |   | 1,491 |   |
| Net income (loss) available to common stockholders |       | $                                                                     | (175       | ) | $ | 5,039 |   | $ | 13,214 |   | $ | 6,458 |   | $ | 1,584 |   |
| Net income (loss) per share—Basic             |       | $                                                                     | (0.03      | ) | $ | 0.97 |   | $ | 2.52 |   | $ | 1.65 |   | $ | 0.46 |   |
| Average shares outstanding—Basic              |       | 5,242                                                                 |       | 5,212 |   | 5,236 |   | 3,914 |   | 3,456 |   |
| Net income (loss) per share—Diluted           |       | $                                                                     | (0.03      | ) | $ | 0.92 |   | $ | 2.34 |   | $ | 1.52 |   | $ | 0.44 |   |
| Average shares  outstanding—Diluted           |       | 5,242                                                                 |       | 5,501 |   | 5,646 |   | 4,261 |   | 3,605 |   |

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| ** **                                                                                     | ** ** | **Year Ended September 30,**                           | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002(1)** | ** ** | **2001** | ** ** |
| ** **                                                                                     | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Pro Forma Statement of  Operations Data(4):**                                                |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net income (loss) available to common stockholders                                             |       | $                                                                     | (175       | ) | $ | 5,039 |   | $ | 13,214 |   | $ | 6,458 |   | $ | 1,584 |   |
| Add back goodwill amortization                                                                 |       | —                                                                |       | — |   | — |   | — |   | 2,207 |   |
| Pro forma net income (loss) available to common  stockholders, excluding goodwill amortization |       | $                                                                     | (175       | ) | $ | 5,039 |   | $ | 13,214 |   | $ | 6,458 |   | $ | 3,791 |   |
| Pro forma net income (loss) per share—Basic                                               |       | $                                                                     | (0.03      | ) | $ | 0.97 |   | $ | 2.52 |   | $ | 1.65 |   | $ | 1.10 |   |
| Pro forma net  income (loss) per share—Diluted                                            |       | $                                                                     | (0.03      | ) | $ | 0.92 |   | $ | 2.34 |   | $ | 1.52 |   | $ | 1.05 |   |

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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 one-time charges, includingapproximately $2.6 million of non-cash charges. Excluding the impact ofthe $3.0 million of one-time charges, fiscal 2002 net income available tocommon stockholders would have been approximately $9.5 million, or $2.23per share (diluted). We have presented this adjusted earnings figure becausemanagement believes it enhances the reader’s understanding of our operatingresults by adjusting for the one-time charges related to the refinancing. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

(2)          Fiscal 2001 to 2004 havebeen reclassified from amounts previously reported to conform to the currentyear presentation.

(3)          In fiscal 2003, weadopted the provisions of Financial Accounting Standards Board (“FASB”)Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,and Technical Corrections.” The provisions of this statement require, effectivein fiscal years beginning after May 15, 2002, the reclassification ofcertain gains or losses on extinguishment of debt that were previouslyclassified as an extraordinary item in prior periods. Accordingly, we havereclassified the $1.6 million extraordinary loss on early extinguishmentof debt, net of tax, as reported for fiscal 2002 related to our fourth quarterfiscal 2002 refinancing, to a $2.5 million increase in interest expenseand a related $0.9 million reduction in our income tax provision, whichhad no impact on reported net income. In fiscal 2002, prior to the adoption ofSFAS No. 145, we had reported interest expense for fiscal 2002 of$14.0 million.

(4)          As a result of ouradoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” on October 1,2001, we no longer amortize goodwill. The pro forma statement of operationsdata reflects an adjustment to exclude amortization expense recognized in theprior period as presented.

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| ** **                                                  | ** ** | **Year Ended September 30,**                                                        | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                                                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                  | ** ** | **(unaudited; in thousands, except operating data and ratios)** | ** ** |
| **Operating Data:**                                         |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Same store sales increase (decrease)(1)                     |       | (2.5                                                                                               | )%         | (4.9 | )% | 0.3 | % | 2.2 | % | (2.4 | )% |
| Average net sales per gross square foot(2)                  |       | $                                                                                                  | 295        |   | $ | 311 |   | $ | 345 |   | $ | 362 |   | $ | 369 |   |
| Average net sales per store(2)                              |       | $                                                                                                  | 534,000    |   | $ | 537,000 |   | $ | 572,000 |   | $ | 589,000 |   | $ | 583,000 |   |
| Gross store square footage at period end(3)                 |       | 1,579,000                                                                                          |       | 1,569,000 |   | 1,451,000 |   | 1,231,000 |   | 1,030,000 |   |
| Gross retail location square footage at period end(4)  |       | 1,874,000                                                                                          |       | 1,693,000 |   | 1,541,000 |   | 1,313,000 |   | 1,100,000 |   |
| Number  of retail locations at period end:                  |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Motherhood Maternity stores                                 |       | 690                                                                                                |       | 717 |   | 688 |   | 616 |   | 523 |   |
| Mimi Maternity stores                                       |       | 117                                                                                                |       | 121 |   | 119 |   | 104 |   | 74 |   |
| A Pea in the Pod stores                                     |       | 37                                                                                                 |       | 41 |   | 44 |   | 43 |   | 42 |   |
| Destination Maternity superstores                           |       | 8                                                                                                  |       | 4 |   | — |   | — |   | — |   |
| Total stores                                                |       | 852                                                                                                |       | 883 |   | 851 |   | 763 |   | 639 |   |
| Leased departments                                          |       | 739                                                                                                |       | 232 |   | 155 |   | 146 |   | 132 |   |
| Total retail locations                                      |       | 1,591                                                                                              |       | 1,115 |   | 1,006 |   | 909 |   | 771 |   |
| **Other Financial  Data:**                                  |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA(5)                                          |       | $                                                                                                  | 33,906     |   | $ | 40,579 |   | $ | 50,213 |   | $ | 45,422 |   | $ | 34,934 |   |
| Ratio of total debt to Adjusted EBITDA                      |       | 3.8                                                                                                | x          | 3.2 | x | 2.6 | x | 2.8 | x | 3.7 | x |
| Ratio of Adjusted EBITDA to interest expense(6)             |       | 2.2                                                                                                | x          | 2.7 | x | 3.5 | x | 2.8 | x | 2.3 | x |
| Cash flows provided by operating activities                 |       | 7,324                                                                                              |       | 18,256 |   | 36,139 |   | 31,056 |   | 23,467 |   |
| Cash flows used in investing activities                     |       | (11,414                                                                                            | )          | (23,020 | ) | (22,169 | ) | (20,219 | ) | (16,087 | ) |
| Cash flows used in financing activities                     |       | (1,340                                                                                             | )          | (2,500 | ) | (4,648 | ) | (14,786 | ) | (98 | ) |
| Capital expenditures                                        |       | 17,644                                                                                             |       | 21,540 |   | 25,344 |   | 12,242 |   | 15,533 |   |
| **Balance  Sheet Data (at end of period):**                 |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Working capital                                             |       | $                                                                                                  | 71,228     |   | $ | 67,833 |   | $ | 62,708 |   | $ | 55,214 |   | $ | 30,223 |   |
| Total assets                                                |       | 273,317                                                                                            |       | 271,370 |   | 263,536 |   | 247,139 |   | 197,382 |   |
| Total debt                                                  |       | 128,856                                                                                            |       | 127,917 |   | 128,047 |   | 128,282 |   | 128,842 |   |
| Accrued dividends on Series A Preferred Stock          |       | —                                                                                             |       | — |   | — |   | — |   | 7,055 |   |
| Stockholders’  equity:                                 |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Series A Preferred Stock(7)                            |       | $                                                                                                  | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 10,773 |   |
| Common stockholders’ equity                            |       | 63,328                                                                                             |       | 62,903 |   | 58,858 |   | 45,708 |   | 2,559 |   |
| Total  stockholders’ equity                            |       | $                                                                                                  | 63,328     |   | $ | 62,903 |   | $ | 58,858 |   | $ | 45,708 |   | $ | 13,332 |   |

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(1)             Same store salesfigures represent sales at retail locations that have been in operation byMothers Work for at least twelve full months at the beginning of the period forwhich such data is presented. As used in this Form 10-K, “retaillocations” include stores and leased departments, and exclude sales to Kohl’sunder an exclusive product and license agreement.

(2)             Based on storesin operation by Mothers Work during the entire twelve-month period.

(3)             Based on storesin operation by Mothers Work at the end of the period.

(4)             Based on allretail locations in operation at the end of the period.

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(5)             Adjusted EBITDArepresents operating income before deduction for the following non-cashcharges: (i) depreciation and amortization expense; (ii) loss onimpairment of long-lived assets; and (iii) loss on disposal of assets. Wehave presented Adjusted EBITDA to enhance your understanding of our operatingresults. Adjusted EBITDA is provided because management believes it is animportant measure of financial performance used in the retail industry tomeasure operating results, to determine the value of companies within theindustry and to define standards for borrowing from institutional lenders. Weuse Adjusted EBITDA as a measure of the performance of the Company. We provideAdjusted EBITDA to investors to assist them in performing their analysis of ourhistorical operating results. Adjusted EBITDA reflects a measure of ouroperating results before consideration of certain non-cash charges andconsequently, you should not construe Adjusted EBITDA as an alternative to netincome (loss) or operating income as an indicator of our operating performance,or as an alternative to cash flows from operating activities as a measure ofour liquidity, as determined in accordance with generally accepted accountingprinciples. We may calculate Adjusted EBITDA differently than other companies.Presented below is a reconciliation of net income (loss) and operating income(the most directly comparable financial measures calculated and presented inaccordance with GAAP) to Adjusted EBITDA.

(6)             Ratio ofAdjusted EBITDA to interest expense for fiscal 2002 reflects the inclusion ininterest expense of an approximately $2.5 million loss on early extinguishmentof debt related to our fiscal 2002 refinancing.

(7)             We have redeemedall of the outstanding Series A Preferred Stock for $13.4 million,including accrued and unpaid dividends, of which $12.7 million has beenpaid as of September 30, 2005 and $0.7 million will be paid out uponsubmission of proper documentation from the remaining holders of the Series APreferred Stock. The $0.7 million is reflected in our consolidated balancesheet as of September 30, 2005 in accrued expenses and other currentliabilities.

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

| ** **                                    | ** ** | **Year Ended September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Net income (loss)                             |       | $                                           | (175       | ) | $ | 5,039 |   | $ | 13,214 |   | $ | 10,400 |   | $ | 3,075 |   |
| Add: income tax  provision (benefit)          |       | (880                                        | )          | 3,466 |   | 8,337 |   | 6,269 |   | 3,248 |   |
| Less: other  income                           |       | —                                      |       | — |   | — |   | — |   | (594 | ) |
| Add: interest  expense, net                   |       | 15,293                                      |       | 14,765 |   | 14,469 |   | 16,476 |   | 14,867 |   |
| Operating income                              |       | 14,238                                      |       | 23,270 |   | 36,020 |   | 33,145 |   | 20,596 |   |
| Add: depreciation  and amortization expense   |       | 15,502                                      |       | 14,270 |   | 12,930 |   | 11,789 |   | 13,650 |   |
| Add: loss on  impairment of long-lived assets |       | 3,440                                       |       | 1,816 |   | 616 |   | 303 |   | 64 |   |
| Add: loss on  disposal of assets              |       | 726                                         |       | 1,223 |   | 647 |   | 185 |   | 624 |   |
| Adjusted EBITDA                               |       | $                                           | 33,906     |   | $ | 40,579 |   | $ | 50,213 |   | $ | 45,422 |   | $ | 34,934 |   |

yc

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**Overview**

The following discussion should be read in conjunctionwith the consolidated financial statements and their related notes includedelsewhere in this report.

We are the leadingdesigner and retailer of maternity apparel in the United States with 1,591retail locations, including 852 stores in all 50 states, Puerto Rico and Canadaand 739 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 852 stores, our retaillocations include 739 leased departments, within department and specialtystores. We design and contract manufacture approximately 90% of the merchandisewe sell.

**CriticalAccounting Policies and Estimates**

Our consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States. These generally accepted accounting principles requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of our consolidated financial statements and the reported amountsof net sales and expenses during the reporting period.

Our significant accounting policies are described inNote 2 of “Notes to Consolidated Financial Statements.” We believe thatthe following discussion addresses our critical accounting policies, which arethose that are most important to the portrayal of our financial condition andresults of operations and require management’s most difficult, subjective andcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain. If actual results were todiffer significantly from estimates made, future reported results could bematerially affected. However, we are not currently aware of any reasonablylikely events or circumstances that would result in materially differentresults.

Our senior management has reviewed these criticalaccounting policies and estimates and the related Management’s Discussion andAnalysis of Financial Condition and Results of Operations with the AuditCommittee 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, 2005 and 2004 totaled$105.9 million and $92.7 million, respectively, representingapproximately 38.7% and 34.2% of total assets, respectively. Given thesignificance of inventories to our consolidated financial statements, thedetermination of net realizable values is considered to be a criticalaccounting estimate. Any significant unanticipated changes in the factors notedabove could have a significant impact on the value of our inventories and ourreported operating results.

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*Long-LivedAssets.**  *Ourlong-lived assets consist principally of store leasehold improvements (includedin the “Property, Plant and Equipment, net” line item in our consolidatedbalance sheets) and, to a much lesser extent, lease acquisition costs (includedin the “Other intangible assets, net” line item in our consolidated balancesheets). These long-lived assets are recorded at cost and are amortized usingthe straight-line method over the shorter of the lease term or their usefullife. Net long-lived assets as of September 30, 2005 and 2004 totaled$77.1 million and $79.4 million, respectively, representingapproximately 28.2% and 29.3% of total assets, respectively.

In assessing potential impairment of these assets, weperiodically evaluate the historical and forecasted operating results and cashflows on a store-by-store basis. Newly opened stores may take time to generatepositive operating and cash flow results. Factors such as (i) store type,that is, company store or leased department, (ii) store concept, that is,Motherhood, Mimi, A Pea in the Pod or Destination Maternity (iii) storelocation, for example, urban area versus suburb, (iv) current marketplaceawareness of our brands, (v) local customer demographic data, (vi) anchorstores within the mall in which our store is located and (vii) currentfashion trends are all considered in determining the time frame required for astore to achieve positive financial results, which is assumed to be within twoyears from the date a store location is opened. If economic conditions aresubstantially different from our expectations, the carrying value of certain ofour long-lived assets may become impaired. As a result of our impairmentassessment, we recorded write-downs of store long-lived assets of$3.2 million and $1.8 million during fiscal 2005 and fiscal 2004,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, 2005 and 2004, goodwill totaled $50.4 million,representing 18.4% and 18.6% of total assets, respectively. In June 2001,the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”SFAS No. 142 requires that goodwill no longer be amortized, but insteadbe tested for impairment at least annually or as impairment indicators arise. Priorto our adoption of SFAS No. 142 on October 1, 2001, goodwill wasamortized using the straight-line method over a period of 20 years.

The impairment test requires us to compare the fairvalue of business reporting units to their carrying value, including assignedgoodwill. In assessing potential impairment of goodwill, we have determinedthat we have one reporting unit for purposes of applying SFAS No. 142based on our reporting structure. The fair value of our single reporting unitis determined based on the fair market value of our outstanding common stock ona control basis and, if necessary, an outside independent valuation is obtainedto determine the fair value. The carrying value of our single reporting unit,expressed on a per share basis, is represented by our book value per share ofoutstanding common stock. The results of the annual impairment tests performedas of September 30, 2005, 2004 and 2003 indicated the fair value of thereporting unit exceeded its carrying value. As of September 30, 2005, ourbook value was $12.02 per share of outstanding common stock and the closingtrading price of our common stock was $10.00 per share. As part of the Company’simpairment analysis as of September 30, 2005, an outside independentvaluation was obtained and the fair value of the Company’s single reportingunit exceeded the carrying value. If the per share fair value of our singlereporting unit was less than the book value per share on September 30,2005, our goodwill would likely have become impaired.

*Accountingfor Income Taxes.**  *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 on federal andstate tax laws and regulations currently in effect, some of which have beenrecently revised. Legislation changes currently proposed by certain of thestates in which we operate, if enacted, could increase our transactions oractivities subject to tax. Any such legislation that becomes law could resultin an increase in our state income tax expense and our state income taxes paid,which could have a material and adverse effect on our net income.

The temporary differences between the book and taxtreatment of income and expenses result in deferred tax assets and liabilities,which are included within our consolidated balance sheets. We must then assess thelikelihood that our deferred tax assets will be recovered from future taxableincome. As of September 30, 2005, we determined that the deferred taxassets should reflect the state tax benefits for several of the states in whichwe are operating. This determination was made in accordance with the provisionsof SFAS No. 109. Actual results could differ from our assessments ifadequate taxable income is not generated in future periods. Net deferred taxassets as of September 30, 2005 and 2004 totaled $19.3 million and$18.0 million, respectively, representing approximately 7.1% and 6.6% oftotal assets, respectively. To the extent we believe that recovery is not morelikely than not, we must establish a valuation allowance. To the extent weestablish a valuation allowance or change the allowance in a future period,income tax expense will be impacted.

*Accountingfor Contingencies.**  *Fromtime to time, we are named as a defendant in legal actions arising from ournormal business activities. We account for contingencies such as these inaccordance with SFAS No. 5, “Accounting for Contingencies.” SFAS No. 5requires us to record an estimated loss contingency when information availableprior to issuance of our financial statements indicates that it is probablethat an asset has been impaired or a liability has been incurred at the date ofthe financial statements and the amount of the loss can be reasonably estimated.An interpretation of SFAS No. 5 further states that when there is a rangeof loss and no amount within that range is a better estimate than any other,then the minimum amount of the range shall be accrued. Accounting for contingenciesarising from contractual or legal proceedings requires management, afterconsultation with outside legal counsel, to use its best judgment whenestimating an accrual related to such contingencies. As additional informationbecomes known, our accrual for a loss contingency could fluctuate, therebycreating variability in our results of operations from period to period. Likewise,an actual loss arising from a loss contingency which significantly exceeds theamount accrued for in our financial statements could have a material adverseimpact on our operating results for the period in which such actual lossbecomes known.

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**Results of Operations**

Thefollowing table sets forth certain operating data from our consolidatedstatements of operations as a percentage of net sales and as a percentagechange for the periods indicated:

| ** **                                       | ** ** | **% of Net Sales(1)**    | ** ** | **% Increase (Decrease)**     | ** ** |
|--------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                       | ** ** | **Year Ended  September 30,** | ** ** | **Year Ended  September 30,** | ** ** |
| ** **                                       | ** ** | **2005**                                | ** ** | **2004**                                | ** ** | **2003** | ** ** | **2005 vs. 2004** | ** ** | **2004 vs. 2003** | ** ** |
| Net sales                                        |       | 100.0                                   | %          | 100.0                                   | %          | 100.0 | % |   | 8.4 | % |   |   | 5.2 | % |   |
| Cost of goods  sold(2)                           |       | 49.4                                    |       | 46.9                                    |       | 46.3 |   |   | 14.3 |   |   |   | 6.5 |   |   |
| Gross profit                                     |       | 50.6                                    |       | 53.1                                    |       | 53.7 |   |   | 3.2 |   |   |   | 4.1 |   |   |
| Selling, general  and administrative expenses(3) |       | 48.1                                    |       | 48.6                                    |       | 46.4 |   |   | 7.1 |   |   |   | 10.3 |   |   |
| Operating income                                 |       | 2.5                                     |       | 4.5                                     |       | 7.3 |   |   | (38.8 | ) |   |   | (35.4 | ) |   |
| Interest expense,  net                           |       | 2.7                                     |       | 2.9                                     |       | 2.9 |   |   | 3.6 |   |   |   | 2.0 |   |   |
| Income (loss) before income taxes                |       | (0.2                                    | )          | 1.6                                     |       | 4.4 |   |   | (112.4 | ) |   |   | (60.5 | ) |   |
| Income tax  provision (benefit)                  |       | (0.2                                    | )          | 0.7                                     |       | 1.7 |   |   | (125.4 | ) |   |   | (58.4 | ) |   |
| Net income (loss)                                |       | (0.0                                    | )%         | 1.0                                     | %          | 2.7 | % |   | (103.5 | )% |   |   | (61.9 | )% |   |

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

(2)          The “Cost of goods sold”line item includes: merchandise costs (including customs duty expenses),expenses related to inventory shrinkage, product related corporate expenses(including expenses related to our payroll, benefit costs and operatingexpenses of our buying departments), inventory reserves (including lower ofcost or market reserves), inbound freight charges, purchasing and receivingcosts, inspection costs, warehousing costs, internal transfer costs, and theother costs of our distribution network.

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

Thefollowing table sets forth certain information regarding the number of ourretail locations, including stores and leased maternity departments for thefiscal years indicated:

| ** **                | ** ** | **Year Ended September 30,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Retail Locations** | ** ** | ** **                                  | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total  Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total  Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total  Retail  Locations** | ** ** |
| Beginning of period       |       |                                        | 883        |   |   |   | 232 |   |   |   | 1,115 |   |   |   | 851 |   |   |   | 155 |   |   |   | 1,006 |   |   |   | 763 |   |   |   | 146 |   |   |   | 909 |   |   |
| Opened                    |       |                                        | 27         |   |   |   | 517 |   |   |   | 544 |   |   |   | 93 |   |   |   | 81 |   |   |   | 174 |   |   |   | 108 |   |   |   | 13 |   |   |   | 121 |   |   |
| Closed                    |       |                                        | (58        | ) |   |   | (10 | ) |   |   | (68 | ) |   |   | (61 | ) |   |   | (4 | ) |   |   | (65 | ) |   |   | (20 | ) |   |   | (4 | ) |   |   | (24 | ) |   |
| End of period             |       |                                        | 852        |   |   |   | 739 |   |   |   | 1,591 |   |   |   | 883 |   |   |   | 232 |   |   |   | 1,115 |   |   |   | 851 |   |   |   | 155 |   |   |   | 1,006 |   |   |
|                           |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**YearsEnded 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 MotherhoodTM licensed arrangement with Kohl’s®, whichbegan during the second quarter of fiscal 2005, and sales from the expansion ofour proprietary Two HeartsTM Maternity collection to an additional 497 Sears® locationsduring late March 2005, partially offset by a decrease in comparable storesales. Comparable store sales decreased by 2.5% during fiscal 2005, based on832 retail locations, versus a comparable store sales decrease of 4.9% duringfiscal 2004, based on 765 retail locations. The decrease in 

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comparable store sales infiscal 2005 reflected continued strong competitive pressures in the maternityapparel market. We believe this increased competition caused an oversupply ofmaternity apparel in the market and that the increasingly deep markdowns takenby our competitors to stimulate sales and clear seasonal inventories furtheradversely affected our net sales for fiscal 2005.

As of September 30, 2005, we operated a total of852 stores and 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 maternity departments, of which 574 were in Sears stores and thebalance were primarily under the Motherhood brand. In comparison, as of September 30,2004, we had 1,115 total retail locations: 717 Motherhood Maternity stores(including 106 Motherhood Maternity Outlet stores), 121 Mimi Maternity stores,41 A Pea in the Pod stores, four Destination Maternity superstores,and 232 leased departments. As of September 30, 2005, our store totalincluded 47 multi-brand stores, including eight Destination Maternitysuperstores, with the remaining multi-brand stores predominantly under the MimiMaternity brand. In comparison, as of September 30, 2004, we operated 35multi-brand stores, including four Destination Maternity superstores. Thesemulti-brand store figures for fiscal 2005 and fiscal 2004 exclude ourA Pea in the Pod stores, which have traditionally carried a full line ofboth A Pea in the Pod and Mimi branded merchandise. During fiscal 2005, weopened 27 stores, including 11 multi-brand stores, and closed 58 stores, with22 of these store closings related to multi-brand store openings. In addition,during fiscal 2005, the Company opened 517 leased department locations andclosed ten leased department locations, with the openings predominantly comingfrom the expansion of our new Two Hearts Maternity collection at Sears,bringing the total number of our Sears leased departments to 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 store long-lived assets of $3.2 million for fiscal2005 as compared to $1.8 million for fiscal 2004. In addition, we incurredcharges relating to store closings of $1.6 million for fiscal 2005 (of which$0.5 million 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 2005 storeclosing charges related to multi-brand store openings. Professional feesrelated to our Sarbanes-Oxley Section 404 compliance 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.

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*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 of 83.4%in fiscal 2005, compared to a provision of 40.8% in fiscal 2004, reflecting therecognition 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 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 the elimination of the dilutive impact ofoutstanding stock options in fiscal 2005 due to the net loss for fiscal 2005,compared to the dilutive impact in fiscal 2004, when we generated net income.

**YearsEnded September 30, 2004 and 2003**

*NetSales.  *Our net sales for fiscal 2004 increasedby 5.2%, or approximately $25.7 million, to $518.1 million from$492.4 million for fiscal 2003. Net sales increased primarily from theincremental sales generated by the 32 net stores added during fiscal 2004, aswell as the full year sales impact in fiscal 2004 of the 88 net stores addedduring fiscal 2003, partially offset by a decrease in comparable store sales. Comparablestore sales decreased by 4.9% during fiscal 2004, based on 765 retaillocations, versus a comparable store sales increase of 0.3% during fiscal 2003,based on 702 retail locations. The decrease in comparable store sales in fiscal2004 reflected the impact of increased competition in the maternity apparelmarket and some weakness in the fashion portion of our product line earlier inthe year. We estimate that there are over 1,000 more competitor locations atthe end of fiscal 2004 compared to the end of fiscal 2003. 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 the second half of fiscal 2004.

As of September 30, 2004, we operated a total of883 stores and 1,115 total retail locations: 717 Motherhood Maternity stores(including 106 Motherhood Maternity Outlet stores), 121 Mimi Maternity stores,41 A Pea in the Pod stores, four Destination Maternity superstores,and 232 leased maternity departments, of which 71 were in Sears stores and thebalance were primarily under the Motherhood brand. In comparison, as of September 30,2003, we had 1,006 total retail locations: 688 Motherhood Maternity stores(including 104 Motherhood Maternity Outlet stores), 113 Mimi Maternity stores,44 A Pea in the Pod stores and 155 leased departments. As of September 30,2004, our store total included 35 

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multi-brand stores,including four Destination Maternity superstores, with the remainingmulti-brand stores predominantly under the Mimi Maternity brand. In comparison,as of September 30, 2003, we operated six multi-brand stores. Thesemulti-brand store figures for fiscal 2004 and fiscal 2003 exclude ourA Pea in the Pod stores, which have traditionally carried a full line ofboth A Pea in the Pod and Mimi branded merchandise. During fiscal 2004, weopened 93 stores, including 22 multi-brand stores, and closed 61 stores, with38 of these store closings related to multi-brand store openings, including theopening of our first four Destination Maternity superstores. In addition,during fiscal 2004, the Company opened 81 leased department locations andclosed four leased department locations, with the openings predominantly comingfrom the exclusive introduction of our new Two Hearts Maternity collection in71 Sears stores to replace the existing maternity lines in these stores.

*GrossProfit.  *Our gross profit for fiscal 2004increased by 4.1%, or $10.8 million, to $275.3 million compared to$264.5 million for fiscal 2003, reflecting the increase in net sales,partially offset by a decrease in gross profit margin. Gross profit as apercentage of net sales was 53.1% for fiscal 2004, compared to 53.7% for fiscal2003. The 0.6 percentage points of net sales decrease in gross margincompared to last year primarily reflects the increased markdowns recognized infiscal 2004 compared to fiscal 2003.

*Selling,General and Administrative Expenses.  *Ourselling, general and administrative expenses for fiscal 2004 increased by10.3%, or approximately $23.5 million, to $252.0 million from$228.5 million for fiscal 2003. Compared to fiscal 2003, rent and relatedexpenses for our retail locations, includingsales-based payments for our leased departments, increased by$10.0 million and wages and benefits for our retail locations increased by$7.1 million, primarily resulting from our new store openings. As apercentage of net sales, selling, general and administrative expenses increasedto 48.6% for fiscal 2004 compared to 46.4% for fiscal 2003, primarilyreflecting an increased store occupancy expense ratio and, to a lesser extent,increased store payroll expense ratios resulting from the 4.9% decrease incomparable store sales for the year, partially offset by a lower legal expenseand employee benefits expense ratios. In addition, we incurred charges relatingto store closings of $1.8 million for fiscal 2004 versus $0.3 million forfiscal 2003.

*OperatingIncome.  *Our operating income for fiscal 2004decreased by 35.4%, or $12.7 million, to $23.3 million from$36.0 million for fiscal 2003, 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 salesfor fiscal 2004 decreased to 4.5% from 7.3% for fiscal 2003, reflecting theincreased selling, general and administrative expense ratio and, to a muchlesser extent, decreased gross margin.

*InterestExpense, Net.  *Our net interest expense forfiscal 2004 increased by 2.0%, or $0.3 million, to $14.8 million from$14.5 million in fiscal 2003. The increase in interest expense for fiscal2004 is primarily related to the impact in fiscal 2003 of a $0.3 millionnon-recurring interest expense credit related to our credit facility. Duringfiscal 2004 and fiscal 2003, we did not have any direct borrowings under ourcredit facility.

*IncomeTaxes.  *Our effective tax rate was a provision of40.8% in fiscal 2004, compared to 38.7% in fiscal 2003, reflecting an increasein our composite estimated effective state income tax rate. See Note 13 ofthe Notes to Consolidated Financial Statements for the reconciliation of thestatutory federal income tax rate to our effective tax rate.

*NetIncome.  *Net income for fiscal 2004 was$5.0 million, or $0.92 per share (diluted), compared to $13.2 millionfor fiscal 2003, or $2.34 per share (diluted), representing a 61.9% decrease innet income and a 60.7% decrease in diluted earnings per share.

The average diluted sharesoutstanding of 5,501,000 shares for fiscal 2004 was 2.6% lower than the5,646,000 shares outstanding in fiscal 2003. The decrease in average dilutedshares outstanding primarily reflects a reduction in the dilutive impact fromoutstanding stock options and our repurchase of shares of 

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ourcommon stock pursuant to our repurchase program, partially offset by the impactof stock option exercises. As of September 30, 2004, we have repurchased142,269 shares of our common stock pursuant to our share repurchase program, ofwhich 75,715 shares were repurchased during fiscal 2004.

**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 stores and our existing stores.We have historically financed these capital requirements from cash flows fromoperations, borrowings under our credit facility or 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 Financial Statements).The Senior Notes are redeemable at our option, in whole or in part, at any timeon or after August 1, 2006 at 105.625% of their face amount, plus accruedand unpaid interest, declining ratably to 100% of their face amount, plusaccrued and unpaid interest, on or after August 1, 2009. Additionally,before August 1, 2005, we had the right to redeem, at our option, up to35% of the aggregate principal amount of the Senior Notes with the proceedsfrom equity offerings at 111.25% of their principal amount, plus accrued andunpaid interest. The Senior Notes impose certain restrictions on our abilityto, among other things, incur additional indebtedness, pay dividends,repurchase stock, and enter into other various types of transactions.

Cash and cash equivalents decreased by$5.4 million during fiscal 2005 compared to a decrease of$7.3 million during fiscal 2004. Cash provided by operations of $7.3million for fiscal 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 last year toenable 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. Duringfiscal 2004, we utilized our cash flow from operations to fund the predominantportion of our capital expenditures. For fiscal 2005, we spent$17.6 million on capital expenditures, including $13.4 million forleasehold improvements, fixtures and equipment principally for new storefacilities, as well as improvements to existing stores, and $4.2 million forour distribution and corporate facilities and information systems. Thiscompares to $21.5 million in capital expenditures for fiscal 2004, ofwhich $18.1 million was spent for new store facilities and improvements toexisting stores and retail locations, and $3.4 million for ourdistribution and corporate facilities and information systems. The decrease incapital expenditures was due to reduced expenditures for new stores compared tothe prior year.

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In March 2003, our Board of Directors approved ashare repurchase program under which we were authorized to repurchase up to$10.0 million of our outstanding common stock from time to time in privatetransactions or open market purchases through March 4, 2005. As of September 30,2005, we had repurchased and retired 142,269 shares in the aggregate pursuantto this program at a total cost of approximately $3.2 million, at anaverage cost of $22.79 per share, including repurchases during fiscal 2004 of75,515 shares of common stock at a cost of $1.8 million. There were norepurchases under the repurchase program during fiscal 2005. The indenturegoverning the Senior Notes and the terms of both our new and previous creditfacilities contain restrictions that place limits on certain payments by us,including payments to repurchase shares of our common stock. Our repurchases ofcommon stock have been made in compliance with all restrictions under theindenture governing the Senior Notes and the terms of both our new and oldcredit facilities.

On October 15, 2004, we entered into a newfive-year $60.0 million senior secured revolving credit facility (the “NewCredit Facility”) which replaced our former $60 million credit facility. TheNew Credit Facility will mature on October 15, 2009. Upon our request andwith the consent of the lender, permitted borrowings under the New CreditFacility may be increased up to an additional $15.0 million, in increments of$2.5 million,****up to a maximum limit of $75.0million. Proceeds from advances under the New Credit Facility, with certainrestrictions, may be used to provide financing for working capital, letters ofcredit, capital expenditures, debt prepayments, dividends, share repurchasesand other general corporate purposes. We paid certain closing fees inconnection with the negotiation and execution of the New Credit Facility. Wealso pay an unused line fee under the New Credit Facility and certain earlytermination fees would be owed if the New Credit Facility is terminated priorto its third anniversary. The New Credit Facility contains various affirmativeand negative covenants and representations and warranties. There are no financial covenant requirementsunder the New Credit Facility unlesseither (i) Excess Availability (as defined in the agreement) falls below$10 million, or (ii) average Financial Covenant Adjusted Availability (asdefined in the agreement) for any calendar month is less than $15 million. Ifeither of the events in item (i) or (ii) above occurs, we would berequired to meet a certain minimum fixed charge coverage ratio (which increasesfrom 1.00x during the first two years of the New Credit Facility to 1.10xduring the fifth year of the New Credit Facility). During all of fiscal 2005, we exceeded the requirements for the ExcessAvailability and average Financial Covenant Adjusted Availability. The NewCredit Facility is secured by a securityinterest in our accounts receivable, inventory, real estate interests, letterof credit rights, cash, intangibles and certain other assets. The interest rateon outstanding borrowings is equal to, at our election, either the lender’sprime rate or the lender’s LIBOR rate plus the applicable margin. Theapplicable margin for LIBOR rate borrowings is variable, ranging from 1.25% to1.75%, based upon the availability calculation made in accordance with theagreement. 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 New Credit Facility. Any amounts outstandingunder the New 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 New Credit Facility; (ii) failure to perform any covenant or agreementcontained in the New Credit Facility; (iii) material misrepresentations; (iv) failureto pay, or certain other defaults under other material indebtedness; (v) certainbankruptcy or insolvency events; (vi) a change of control, (vii) materialuninsured losses; (viii) indictments of us or senior management in amaterial forfeiture action; and (ix) customary ERISA defaults, amongothers.

Prior to entering into the New Credit Facility, we hada $60 million credit facility maturing on September 15, 2005, whichincluded a $56.0 million borrowing base revolving line of credit andapproximately $4 million to support a special purpose letter of creditfacility. Amounts available for direct borrowings, net of letters of creditoutstanding, were limited to the lesser of (a) the unused portion of thecredit facility or (b) the Aggregate Adjusted Availability (“AAA”) asdefined in the agreement based on a 

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percentage of eligibleinventory, receivables and cash. The credit facility was secured by a securityinterest in our accounts receivable, inventory, equipment, fixtures, cash andother assets. There were no financial covenant requirements in the agreementunless the AAA fell below $10 million. In such event, we would have had toachieve minimum cash flow, as defined in the agreement, of not less than zero. Duringfiscal 2004 and 2003, we always exceeded the minimum required AAA.

As of September 30, 2005, outstanding borrowingsunder the New Credit Facility consisted of no direct borrowings and$8.4 million in letters of credit with available borrowings of$51.6 million, compared to no direct borrowings and $3.7 million inletters of credit with AAA and available borrowings of $52.3 million underthe prior credit facility as of September 30, 2004. In addition, pursuantto the special purpose letter of credit facility, as of September 30,2004, we had an outstanding standby letter of credit of $3.1 million tocollateralize an outstanding industrial revenue bond. Borrowings under the NewCredit Facility as of September 30, 2005 would have borne interest at arate of between approximately 5.1% and 6.8% per annum. During fiscal 2005, our average level of direct borrowings under our NewCredit Facility was $3.1 million. We had no direct borrowings under theprior credit facility during fiscal 2004 and 2003. We expect that we may haveborrowings under our New Credit Facility during certain periods of fiscal 2006,reflecting seasonal and other timingvariations in cash flow.

Our management believesthat our current cash and working capital positions, expected operating cashflows and available borrowing capacity under our New 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 resources. The tables below set forth a summary ofthese obligations and commitments as of September 30, 2005 (in thousands):

*Contractual Obligations:*

| ** **                             | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| **Description**                        | ** ** | ** ** | ** ** | **Total   Obligations**              | ** ** | **Less   Than One   Year** | ** ** | **One  to Three  Years** | ** ** | **Three  to Five  Years** | ** ** | **After  Five  Years** | ** ** |
| Long-term  debt                        |       |       | $          | 128,928                                   |       |   |   | $ | 298 |   |   | $ | 634 |   | $ | 125,685 |   | $ | 2,311 |   |
| Interest related  to long-term debt(1) |       |       | 70,396     |                                      |       |   | 14,089 |   |   | 28,163 |   | 28,143 |   | 1 |   |
| Operating  leases(2)                   |       |       | 319,700    |                                      |       |   | 55,871 |   |   | 99,164 |   | 77,830 |   | 86,835 |   |
| Capital lease  obligations             |       |       | 1,136      |                                      |       |   | 524 |   |   | 612 |   | — |   | — |   |
| Purchase  obligations(3)               |       |       | 85,540     |                                      |       |   | 85,540 |   |   | — |   | — |   | — |   |
| Total contractual cash  obligations    |       |       | $          | 605,700                                   |       |   |   | $ | 156,322 |   |   | $ | 128,573 |   | $231,658 |   | $ | 89,147 |   |
|                                        |            |            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Excludes interest underlong-term debt obligations where such interest is calculated on a variablebasis. The Company had $2.9 million principal amount of such variable interestlong-term debt obligations as of September 30, 2005.

(2)          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.

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(3)          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)              |       |       | $          | 8,445                                                   |       |   |   | $ | 8,445 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Other standby  letters of credit |       |       | —     |                                                    |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total commercial  commitments    |       |       | $          | 8,445                                                   |       |   |   | $ | 8,445 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
|                                  |            |            |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Consistsof outstanding letter of credit commitments.

**New Accounting Pronouncements**

*SFAS No. 123(R)*

In December 2004, theFASB issued SFAS No. 123(R), “Share-Based Payment”, which replaces SFAS No. 123and APB Opinion No. 25, and establishes standards for the accounting fortransactions in which an entity exchanges its equity instruments for goods andservices. SFAS No. 123(R) requires that the compensation costrelating to share-based payment transactions be recognized in financialstatements, measured by the fair value of the equity or liability instrumentsissued, and is effective as of the first reporting period of the fiscal yearthat begins after June 15, 2005 for public entities that do not file assmall business issuers. The fair value-based method of SFAS No. 123 issimilar in most respects to the fair value-based method under SFAS No. 123(R);however, certain transition rules of SFAS No. 123(R) may affectthe impact on our consolidated financial position or results of operations. SFASNo. 123(R) will be adopted in the first quarter of fiscal 2006 andthe impact may have a material adverse impact on our future results ofoperations.

*SFAS No. 151*

In November 2004, theFASB issued SFAS No. 151, “Inventory Costs.” This statement amends theguidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to require thatabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial (spoilage) be accounted for as current period charges rather than as aportion of the inventory cost. This statement is effective for fiscal yearsbeginning after June 15, 2005. The adoption of this statement is notexpected to have a material impact on our consolidated financial position orresults of operations.

*SFAS No. 154*

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections.”SFAS No.154 provides guidance on the accounting for and reporting ofaccounting changes and error corrections. This statement is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. Early adoption is permitted. We expect to adoptSFAS No. 154 effective as of October 1, 2006.

**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.

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**Forward-Looking Statements**

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 success of our new business initiatives,future sales trends in our existing store base, changes in consumer spendingpatterns, raw material price increases, consumer preferences and overalleconomic conditions, the impact of competition and pricing, availability ofsuitable store locations, continued availability of capital and financing,ability to hire and develop senior management and sales associates, ability todevelop and source merchandise, ability to receive production from foreignsources on a timely basis, potential stock repurchases, potential debtrepurchases, war or acts of terrorism and other factors referenced in thisreport, including those set forth under the caption “Risk Factors.”

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. We assume no obligation to updateany of these forward-looking statements to reflect actual results,changes in assumptions or changes in other factors affecting these forward-lookingstatements.

**Risk Factors**

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

Any future growth depends significantly on our abilityto successfully open and operate new stores (including combination stores andsuperstores) on a profitable basis. This expansion, if it occurs, will placeincreased demands on our management, operational and administrative resources. Theseincreased demands and operating complexities could cause us to operate ourbusiness less effectively, which, in turn, could cause a deterioration in thefinancial performance of our stores and slow our new store growth. Our plannedexpansion will also require that we continually monitor and upgrade ourmanagement information and other systems, as well as our distributioninfrastructure.

Our ability to openand operate new stores successfully depends on many factors, including, amongothers, our ability to:

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

·       negotiatefavorable lease terms, including desired tenant improvement allowances;

·       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;

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·       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 store expansion goals. Even if we succeedin opening new stores as planned, we cannot assure you that our newly openedstores will achieve planned revenue or profitability levels in the time periodsestimated by us, or at all. If our stores fail to achieve or are unable tosustain acceptable revenue and profitability levels, we may incur significantcosts associated with operating or closing those stores.

***Our comparable store sales and quarterly operatingresults have fluctuated in the past and can be expected to continue tofluctuate in the future.***

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, the relative proportion of new stores to mature storesand the expansion of stores;

·       thetiming of new store openings;

·       theextent of cannibalization of sales volume of some of our existing stores by ournew stores opened in the same geographic markets;

·       changesin our merchandise mix;

·       theprice repositioning of our Mimi brand to the middle market price segment;

·       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;

·       pregnancyrates;

·       actionsof competitors;

·       mallanchor tenants;

·       fashiontrends; and

·       weatherconditions.

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 market share may be adversely impacted at any timeby a significant number of competitors.***

We operate in a highlycompetitive environment characterized by low barriers to entry. We compete againstdepartment stores, specialty retail chains, discount stores, independent retailstores and catalog and Internet-based retailers, including both new andexisting competitors. Many of our competitors are larger and have substantiallygreater financial and other resources than us. Further, we do not typicallyadvertise using television and radio media and thus do not reach customersthrough means our competitors may use. Our mid- and luxury-pricedmerchandise faces a highly fragmented competitive landscape that includeslocally based, single unit retailers, as well as a handful of multi-unitmaternity operations, none of which we believe have more than 15 storesnationwide. In the value-priced maternity apparel business, we facecompetition on a nationwide basis from retailers such as Fashion Bug®, GAP®, JCPenney®, Kmart®, 

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Old Navy®,Target® and Wal-Mart®. Several of these competitors, including Gap and OldNavy, also sell maternity apparel on their websites. There has been increasedcompetition in the maternity apparel industry, from both new and existingcompetition. Our market share and results of operations may be materially andadversely affected by this competition, including the potential for increasedcompetition in the future. While we previously competed with both Sears andKohl’s in the past, our relationship with both of them has now changed. Weexpanded our Two Hearts Maternity collection to an additional 497 Searsstores in March 2005 under a leased department arrangement bringing thetotal number of our Sears maternity leased departments to 574 locations as ofthe end of fiscal 2005. In February 2005, we launched our Oh Baby!by Motherhood collection at Kohl’s stores throughout the United States andon Kohls.com. The Oh Baby! by Motherhood collection is available at all Kohl’sstores under an exclusive product and license agreement. Kohl’s currentlyoperates approximately 732 stores in 41 states.

***Our leased/licensed relationships with third-partyretailers may not be successful.***

We cannot guarantee successfulresults from our leased department and licensed brand businesses withthird-party retailers such as Sears® and Kohl’s®. Furthermore, the success ofour leased department and licensed brand businesses is highly dependent on theactions and decisions of the third-party retailers, which are outside of ourcontrol. The retailers could limit the merchandise carried, close stores or goout of business. Our failure to properly manage our leased department andlicensed brand businesses (including any failure by us in timely deliveringgoods to any third-party retailer or any failure to respond to the actions ofor changes in business conditions at third-party retailers) would have a directimpact on the profitability and continuation of these relationships.

***We require a significant amount of cash to service ourindebtedness, which reduces the cash available to finance any growth.***

We have a significant amount of indebtedness. As of September 30,2005, our total indebtedness, including current maturities, was$128.9 million, and we had the ability to borrow an additional$51.6 million under our existing credit facility. Our required interestpayments under our Senior Notes are expected to be approximately$14.1 million for each of fiscal 2006 and 2007.

Our ability to make required payments on ourindebtedness, as well as to fund our operations and future growth, depends uponour ability to generate cash. Our success in generating cash depends upon theresults of our operations, as well as upon general economic, financial,competitive and other factors beyond our control.

Our indebtednesscould, among other things:

·       makeus more vulnerable to unfavorable economic conditions;

·       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;

·       restrictour ability to incur additional indebtedness;

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

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

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·       require us to dedicate orreserve a large portion of our cash flow from operations to making payments onour indebtedness, which would prevent us from using cash flow for otherpurposes.

***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, which provideinformation to our customized TrendTrack merchandise analysis and planningsystem used to track sales and inventory. The TrendTrack system helps integrateour design, manufacturing, distribution and financial functions, and alsoprovides daily financial and merchandising information. As a result, ourbusiness and operations could be materially and adversely affected if oursystems were inoperable or inaccessible.

From time to time, weimprove and upgrade our management information systems. We have rolled out aproprietary, upgraded Internet-based point-of-sale system and integratedthis system with our current systems. If we are unable to maintain and upgradeour systems or to integrate new and updated systems in an efficient and timelymanner, our business and results of operations could be materially andadversely affected.

***We rely significantly on foreign sources ofproduction.***

We receive apparel andother merchandise from foreign sources, both purchased directly in foreignmarkets and indirectly through domestic vendors with foreign sources. To theextent that any of our vendors are located overseas or rely on overseas sourcesfor a large portion of their products, any event causing a disruption ofimports, including the imposition of import restrictions, could harm ourability to source product. This disruption could materially limit themerchandise that we would have available for sale and reduce our revenues andearnings. The flow of merchandise from our vendors could also be adversely affectedby financial or political instability, or war, in or affecting any of thecountries in which the goods we purchase are manufactured or through which theyflow. Trade restrictions in the form of tariffs or quotas, or both, that areapplicable to the products that we sell also could affect the import of thoseproducts and could increase the cost and reduce the supply of productsavailable to us. Any material increase in tariff levels, or any materialdecrease in quota levels or available quota allocation, could negatively impactour business. Further, changes in tariffs or quotas for merchandise importedfrom individual foreign countries could lead us to shift our sources of supplyamong various countries. Any such shift we undertake in the future could resultin a disruption of our sources of supply and lead to a reduction in ourrevenues and earnings. Supply chain security initiatives undertaken by the U.S.government that impede the normal flow of product could also negatively impactour business. In addition, decreases in the value of the U.S. dollar againstforeign currencies could increase the cost of products that we purchase fromoverseas vendors.

***We could be materially and adversely affected if ourdistribution operations were disrupted.***

To support ourdistribution of product throughout the United States and Canada, we operate ourmain distribution 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 key competitive advantage, a distribution 

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disruptionmight have a disproportionately adverse effect on our operations and profitabilityrelative to other retailers. In addition, the loss or material disruption ofservice from any of our shippers for any reason, whether due to freightdifficulties, strikes or other difficulties at our principal transportproviders or otherwise, could have a material adverse impact on our businessand 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 with anymanufacturer or supplier. We compete with many other companies for productionfacilities and raw materials. Furthermore, we have received in the past, andmay receive in the future, shipments of products from manufacturers that failto conform to our quality control standards. In such event, unless we are ableto obtain replacement products in a timely manner, we may lose sales. If wefail to maintain favorable relationships with these third parties, or if wecannot obtain an adequate supply of quality raw materials on commerciallyreasonable terms, it could harm our business and results of operations.

***Our stores are heavily dependent on the customertraffic 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 depends on our ability to identify andrapidly 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 customers place on fashionand our ability to anticipate, identify and capitalize upon emerging fashiontrends. Our failure to anticipate, identify or react appropriately to changesin styles or trends could lead to, among other things, excess inventories andhigher markdowns, as well as the decreased appeal of our brands.

***The failure toretain our existing senior management team or to attract and retain highlyskilled and qualified personnel could adversely affect our business.***

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 could bematerially 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 

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personnelin the retail industry. The inability to meet our staffing requirements in thefuture at costs that are favorable to us, or at all, could impair our abilityto increase revenue and could otherwise harm our business.

***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 the third fiscal quarter compared to otherquarters, the relatively fixed nature of most of our operating expenses andinterest expense, and the historically higher sales level in the third quarter,we have typically generated a very significant percentage of our full yearoperating income and net income during the third quarter. Thus, any factorswhich result in a material reduction of our sales for the third quarter couldhave a material adverse effect on our results of operations for the fiscal yearas a whole. Seasonal fluctuations in sales also affect our inventory levels, aswe usually order merchandise in advance of peak selling periods and sometimesbefore new fashion trends are confirmed by customer purchases. We must carry asignificant amount of inventory, especially before the holiday and Springselling periods. If we are not successful in selling our inventory during thisperiod, we may be forced to rely on markdowns or promotional sales to disposeof the excess inventory or we may not be able to sell the inventory at all,which could have a material adverse effect on our business and results ofoperations.

***Our business dependson sustained demand for maternity clothing and is sensitive to economicconditions 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. In addition, the specialty apparel retail business historically hasbeen subject to cyclical variations. Consumer purchases of specialty apparelproducts, including maternity wear, may decline during recessionary periods andat other times when disposable income is lower. A prolonged economic downturncould have a material adverse impact on our business and results 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 manufacturingsites to monitor compliance, we cannot control the actions of suchmanufacturers or the public’s perceptions of them, nor can we assure that thesemanufacturers will conduct their businesses using ethical or legal laborpractices. Apparel companies can be held jointly liable for the wrongdoings ofthe manufacturers of their products. While many of our independentmanufacturers are routinely monitored by buying representatives, who assist usin the areas of compliance, garment quality and delivery, we do not control themanufacturers’ business practices or their employees’ employment conditions,and manufacturers act in their own interest which may be in a manner thatresults in negative public perceptions of us, and/or employee allegationsagainst us or court determinations that we are jointly liable.

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***Our earnings would decline if our goodwill becomesimpaired.***

As a result of purchaseaccounting for our various acquisitions, we have accumulated a substantialamount of goodwill, amounting to $50.4 million as of September 30,2005. Effective October 1, 2001, goodwill and other intangible assets withindefinite lives are not amortized, but rather tested for impairment annually. Theimpairment test requires us to compare the fair value of business reportingunits to their carrying value, including assigned goodwill. The fair value ofour single reporting unit is determined based on the fair market value of ouroutstanding common stock on a control basis and, if necessary, an outsideindependent valuation is obtained to determine the fair value. The carryingvalue of our single reporting unit, expressed on a per share basis, isrepresented by our book value per share of outstanding common stock. Theresults of the annual impairment test performed as of September 30, 2005indicated the fair value of the reporting unit exceeded its carrying value. Asof September 30, 2005, our book value was $12.02 per share of outstandingcommon stock and the closing trading price of our common stock was$10.00 per share. 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. If the per sharefair value of our single reporting unit was less than the book value per shareon September 30, 2005, our goodwill would likely have become impaired. Ifthe per share single reporting unit were to decline in the future below thethen applicable book value of our outstanding common stock, our goodwill wouldlikely become impaired. If we determine in the future that an impairment hasoccurred, we would be required to write off the impaired portion of goodwill,which could substantially reduce our earnings and result in a substantialdecline in the price of our outstanding common stock.

***We may be unable to protect our trademarks and otherintellectual 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. We are not aware of any material pending claims of infringementor challenges to our right to use any of our trademarks and service marks inthe United States or Canada. Although we actively protect our intellectualproperty, there can be no assurance that the actions that we have taken toestablish and protect our trademarks, service marks and other intellectualproperty, including our rights in our management information systems, will beadequate to prevent imitation of our marks, products or services by others orto prevent others from seeking to block sales of our products as a violation oftheir trademarks, service marks or other proprietary rights. Also, others mayassert rights in, or ownership of, our trademarks and other proprietary rightsand we may not be able to successfully resolve these types of conflicts. Inaddition, the laws of certain foreign countries may not protect our trademarksand proprietary rights to the same extent as do the laws of the United States.

***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 in our stores may be negatively affected. Asubstantial portion of our merchandise is imported from other countries. Ifgoods become difficult or impossible to import into the United States, and ifwe cannot obtain such merchandise from other sources at similar costs, oursales and profit margins may be adversely affected. In the event thatcommercial transportation is curtailed or substantially delayed, our businessmay be adversely impacted, as we may have difficulty shipping merchandise toour main distribution facility and stores, as well as fulfilling catalog andwebsite orders.

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***Our substantialindebtedness could adversely affect our financial health, which would preventus from fulfilling our obligations under our senior notes.***

We have a significant amount of indebtedness and wehave the ability to incur substantial additional indebtedness in the future. Asof September 30, 2005, we had $128.9 million of debt outstanding,including $3.9 million of secured debt. We have a $60.0 millioncredit facility, under which we had no direct borrowings and approximately$8.4 million in letters of credit outstanding as of September 30,2005. As of September 30, 2005, we had $51.6 million available foradditional borrowings under the credit facility.

Our substantialindebtedness could have important consequences. For example, it could:

·       increaseour vulnerability to general adverse economic and industry conditions;

·       requireus to dedicate a substantial portion of our cash flow from operations topayments 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 New Credit Facility, to the extent borrowed inthe future, 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;

·       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 our indebtednessif our operations do not generate enough cash to pay such indebtedness in fulland if we do not raise additional capital. Our ability to refinance will dependon the capital markets and our financial condition at such time. We cannotassure you that we would be able to refinance any of our indebtedness, sellassets or raise equity on commercially reasonable terms or at all, which couldcause us to default on our obligations and impair our liquidity.

***The terms of our debt instruments impose financial andoperating restrictions.***

Each of our NewCredit Facility and the indenture governing the Senior Notes containrestrictive covenants that limit our ability to engage in activities that maybe in our long-term best interests. These covenants limit or restrict, amongother things, our ability 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;

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·       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 New Credit Facility issubject to borrowing base requirements. If we breach any of the covenants inour New Credit Facility or our indenture, we may be in default under our NewCredit Facility or our indenture. If we default, the holders of the SeniorNotes or the lender under our New Credit Facility could declare all borrowingsowed to them, including accrued interest and other fees, to be due and payable.

***Our share price may be volatile and could declinesubstantially.***

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 our businessor other companies in the retail business;

·       changesin financial estimates by Wall Street research analysts;

·       actualor anticipated changes in the United States economy or the retailingenvironment;

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

·       announcementsby our competitors or us; and

·       any goodwill impairmentwould require a write down that would likely negatively affect our stock price.

***Our charter documents contain certain anti-takeoverprovisions, and we are entitled to certain other protective provisions underDelaware law.***

We are a Delawarecorporation and the anti-takeover provisions of Delaware law impose variousimpediments to the ability of a third party to acquire control of the Company,even if a change of control would be beneficial to our existing stockholders. Wealso have adopted a stockholder rights plan, commonly known as a “poison pill,”that entitles our stockholders to acquire additional shares of us, or apotential acquirer of us, at a substantial discount to their market value inthe event of an attempted takeover. In addition, our amended and restatedcertificate of incorporation and by-laws may discourage, delay or prevent amerger or acquisition involving us that our stockholders may consider favorableby, 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;

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·       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.

The provisions, which wehave summarized above, may reduce the market value of our common stock.

***We do not expect to pay cash dividends in theforeseeable 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 New Credit Facilitysignificantly restrict our ability to declare or pay dividends on our commonstock. Even if we were not restricted under the terms of our Senior Notes orNew Credit Facility from being able to pay dividends, any future payment ofdividends would still be at the discretion of our Board of Directors and wouldbe based upon certain restrictive financial covenants, earnings, capitalrequirements and our financial condition, among other factors, at the time anysuch dividend is considered.

***We could have failures in our system of internalcontrols.***

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 on thebusiness. We cannot assure you that there will not be any control deficienciesin the future. Should we become aware of any control deficiencies, we wouldreport them to the Audit Committee and recommend prompt remediation. We havedevoted 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 affect onour operating results or cause us to fail to meet reporting obligations.

**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, 2005, the principalcomponents of our debt portfolio were the $125.0 million of Senior Notesdue 2010 and the $60.0 million credit facility, both of which are denominatedin U.S. dollars. The fair value of the debt portfolio is referred to as the “debtvalue.” The Senior Notes bear interest at a fixed rate of 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 New Credit Facility carries a variable interestrate that is tied to market indices. As of September 30, 2005, we had nodirect borrowings and $8.4 million of letters of credit outstanding underour New Credit Facility. Borrowings under the New Credit Facility would haveborne interest at the rate of between approximately 5.1% to 6.8% per annum, asof September 30, 2005. Any future borrowings under the New Credit Facilitywould, to the extent of outstanding borrowings, be affected by changes inmarket interest rates. A change in market interest rates on the variableportion of the debt portfolio impacts the interest incurred and cash flows, butdoes not impact the value of the financial instrument.

The sensitivity analysis as it relates to the fixedportion of our debt portfolio assumes an instantaneous 100 basis point move ininterest rates from their levels as of September 30, 2005, with all othervariables 

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held constant. A 100 basispoint increase in market interest rates would result in a decrease in the valueof the debt by approximately $4.5 million as of September 30, 2005. A100 basis point decline in market interest rates would cause the debt value toincrease by approximately $4.6 million as of September 30, 2005.

Based on the variable rate debt included in our debtportfolio as of September 30, 2005, 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.

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

**Item 8.**                        FinancialStatements and Supplementary Data

Our Consolidated FinancialStatements appear on pages F-1 through F-32, 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 30,2005. Based on this evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer have concluded that as of September 30, 2005, 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 external purposesin accordance with generally accepted accounting principles. Internal controlover 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, 2005, 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 

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Treadway Commission.Management’s assessment included evaluation of such elements as the design andoperating effectiveness of key financial reporting controls, processdocumentation, accounting policies, and the Company’s overall controlenvironment.

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.

KPMGLLP audited management’s assessment and independently assessed theeffectiveness of the Company’s internal control over financial reporting. KPMGLLP has issued an attestation report concurring with management’s assessment,which is included below.

*(b)   Report ofIndependent Registered Public Accounting Firm*

The Board of Directors andStockholdersMothers 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, 2005, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). MothersWork, Inc.’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on 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 an understandingof internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonablebasis 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, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial 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.

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In our opinion, management’s assessment that MothersWork, Inc. maintained effective internal control over financial reportingas of September 30, 2005, 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 30,2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Mothers Work, Inc. andsubsidiaries as of September 30, 2005 and 2004, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the years in the three-year period ended September 30, 2005 andthe related financial statement schedule, and our report dated December 13,2005 expressed an unqualified opinion on those consolidated financialstatements and the related financial statement schedule.

/s/ KPMG LLP

Philadelphia,Pennsylvania

December 13, 2005

*(c)   Change inInternal Control over Financial Reporting*

There have been no changesin internal control over financial reporting identified in connection with theforegoing evaluation that occurred during the last fiscal quarter ended September 30,2005, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

**Item 9B.**               OtherInformation

None.

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**PART III.**

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

Information concerning directors, appearing under thecaption “Election of Directors” in our Proxy Statement (the “Proxy Statement”)will be filed with the Securities and Exchange Commission in connection withthe Annual Meeting of Stockholders scheduled to be held on January 20,2006, and information concerning executive officers, appearing under thecaption “Item 1. Business—Executive Officers of the Company” in Part Iof this Form 10-K, is incorporated herein by reference in responseto 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 in the section titled “Compensation Committee Report onExecutive Compensation” up to, but not including, the section titled “SecurityOwnership of Certain Beneficial Owners and Management,” with respect toexecutive compensation, and in the section titled “Compensation of Directors”with respect to director compensation, is incorporated herein by reference inresponse to this Item 11.

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

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 byreference in response to this Item 12.

**Item 13.**                 CertainRelationships and Related Transactions

The information containedin the section titled “Certain Transactions” of the Proxy Statement, withrespect to certain relationships and related transactions, is incorporatedherein by reference in response to this Item 13.

**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.

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**PART IV.**

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

(a)           (1)   Financial Statements

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

(2)   FinancialStatement Schedules

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.

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**INDEX OF 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 (the “1993 Registration  Statement”)).                                                                                                                                                                                                                                                                                                                                                                                      |
| *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 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 (the “1994  Form 10-K”)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *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 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                  |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |

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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  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.                                                                                                                                                 |
| *14          |   | Code of Business Conduct  and Ethics (Exhibit 14 to 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.

47

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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, 2005.

|              | 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, 2005, 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/  DAVID SCHLESSINGER       |   | Director                                                     |
| **David  Schlessinger**       |   |                                                         |
| /s/  WILLIAM A. SCHWARTZ, JR. |   | Director                                                     |
| **William  A. Schwartz, Jr.** |   |                                                         |
| /s/  STANLEY C. TUTTLEMAN     |   | Director                                                     |
| **Stanley  C. Tuttleman**     |   |                                                         |

 

48

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**INDEXTO 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-32 |
| Schedule  Supporting the Consolidated Financial Statements: |   |        |
| Valuation and Qualifying Accounts                           |   | F-33        |

 

F-1

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**REPORT**OF INDEPENDENT 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 30,2005 and 2004, and the related consolidated statements of operations,stockholders’ equity and cash flows for each of the years in the three-yearperiod ended September 30, 2005. 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 30,2005 and 2004, and the results of their operations and their cash flows foreach of the years in the three-year period ended September 30, 2005, 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.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Mothers Work, Inc.’sinternal control over financial reporting as of September 30, 2005, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated December 13, 2005 expressed an unqualified opinion onmanagement’s assessment of, and the effective operation of, internal controlover financial reporting.
| /s/ KPMG LLP                |
|-----------------------------|
| Philadelphia,  Pennsylvania |
| December 13,  2005     |

 

F-2

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

| ** **                                                                                                                        | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                        | ** ** | **2005**               | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                        |       |                   |       |   |   |
| Current assets                                                                                                                    |       |                   |       |   |   |
| Cash and cash  equivalents                                                                                                        |       | $                      | 3,037      |   | $ | 8,467 |   |
| Short-term investments                                                                                                            |       | —                 |       | 6,400 |   |
| Trade receivables                                                                                                                 |       | 7,681                  |       | 4,382 |   |
| Inventories                                                                                                                       |       | 105,911                |       | 92,743 |   |
| Deferred income taxes                                                                                                             |       | 6,015                  |       | 4,660 |   |
| Prepaid expenses and  other current assets                                                                                        |       | 4,816                  |       | 5,744 |   |
| Total current assets                                                                                                              |       | 127,460                |       | 122,396 |   |
| Property, plant and equipment,  net                                                                                               |       | 76,173                 |       | 78,462 |   |
| Assets held for sale                                                                                                              |       | 925                    |       | 1,200 |   |
| Other assets                                                                                                                      |       |                   |       |   |   |
| Goodwill                                                                                                                          |       | 50,389                 |       | 50,389 |   |
| Deferred financing  costs, net of accumulated amortization of $1,855 and  $1,267                                                  |       | 3,697                  |       | 3,665 |   |
| Other intangible assets,  net of accumulated amortization of $2,481 and  $2,476                                                   |       | 878                    |       | 946 |   |
| Deferred income taxes                                                                                                             |       | 13,261                 |       | 13,317 |   |
| Other non-current  assets                                                                                                         |       | 534                    |       | 995 |   |
| Total other assets                                                                                                                |       | 68,759                 |       | 69,312 |   |
| Total assets                                                                                                                      |       | $                      | 273,317    |   | $ | 271,370 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                    |       |                   |       |   |   |
| Current liabilities                                                                                                               |       |                   |       |   |   |
| Line of credit  borrowings                                                                                                        |       | $                      | —     |   | $ | — |   |
| Current portion of long-term  debt                                                                                                |       | 769                    |       | 288 |   |
| Accounts payable                                                                                                                  |       | 19,900                 |       | 19,779 |   |
| Accrued expenses and  other current liabilities                                                                                   |       | 35,563                 |       | 34,496 |   |
| Total current liabilities                                                                                                         |       | 56,232                 |       | 54,563 |   |
| Long-term debt                                                                                                                    |       | 128,087                |       | 127,629 |   |
| Deferred rent and other non-current  liabilities                                                                                  |       | 25,670                 |       | 26,275 |   |
| Total liabilities                                                                                                                 |       | 209,989                |       | 208,467 |   |
| 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, 5,268,535 and 5,207,081 shares issued  and outstanding, respectively |       | 53                     |       | 52 |   |
| Additional paid-in  capital                                                                                                       |       | 63,164                 |       | 62,565 |   |
| Retained earnings                                                                                                                 |       | 111                    |       | 286 |   |
| Total stockholders’ equity                                                                                                   |       | 63,328                 |       | 62,903 |   |
| Total liabilities and stockholders’ equity                                                                                   |       | $                      | 273,317    |   | $ | 271,370 |   |

 

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

F-3

----

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

| ** **                                    | ** ** | **Year Ended September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                                     |       | $                                           | 561,627    |   | $ | 518,051 |   | $ | 492,447 |   |
| Cost of goods  sold                           |       | 277,453                                     |       | 242,751 |   | 227,961 |   |
| Gross profit                                  |       | 284,174                                     |       | 275,300 |   | 264,486 |   |
| Selling, general  and administrative expenses |       | 269,936                                     |       | 252,030 |   | 228,466 |   |
| Operating income                              |       | 14,238                                      |       | 23,270 |   | 36,020 |   |
| Interest expense,  net                        |       | 15,293                                      |       | 14,765 |   | 14,469 |   |
| Income (loss) before income taxes             |       | (1,055                                      | )          | 8,505 |   | 21,551 |   |
| Income tax  provision (benefit)               |       | (880                                        | )          | 3,466 |   | 8,337 |   |
| Net income (loss)                             |       | $                                           | (175       | ) | $ | 5,039 |   | $ | 13,214 |   |
| Net income (loss) per share—Basic        |       | $                                           | (0.03      | ) | $ | 0.97 |   | $ | 2.52 |   |
| Average shares  outstanding—Basic        |       | 5,242                                       |       | 5,212 |   | 5,236 |   |
| Net income (loss) per share—Diluted      |       | $                                           | (0.03      | ) | $ | 0.92 |   | $ | 2.34 |   |
| Average shares  outstanding—Diluted      |       | 5,242                                       |       | 5,501 |   | 5,646 |   |

 

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

F-4

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**MOTHERSWORK, 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, 2002            |       |                   | 5,180      |       |       |                             | $          | 52                                   |       |   |   | $ | 63,623 |   |   |   | $ | (17,967 | ) |   | $ | 45,708 |   |
| Exercise of stock options and warrants           |       |                   | 118        |       |       |                             | 1          |                                 |       |   | 726 |   |   |   | — |   |   | 727 |   |
| Repurchase and retirement of common shares  |       |                   | (67        | )          |       |                             | (1         | )                                    |       |   | (1,466 | ) |   |   | — |   |   | (1,467 | ) |
| Tax benefit of stock option exercises            |       |                   | —     |       |       |                             | —     |                                 |       |   | 676 |   |   |   | — |   |   | 676 |   |
| Net income                                       |       |                   | —     |       |       |                             | —     |                                 |       |   | — |   |   |   | 13,214 |   |   | 13,214 |   |
| 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 of 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 of stock option exercises            |       |                   | —     |       |       |                             | —     |                                 |       |   | 115 |   |   |   | — |   |   | 115 |   |
| Net loss                                         |       |                   | —     |       |       |                             | —     |                                 |       |   | — |   |   |   | (175 | ) |   | (175 | ) |
| Balance as of  September 30, 2005           |       |                   | 5,269      |       |       |                             | $          | 53                                   |       |   |   | $ | 63,164 |   |   |   | $ | 111 |   |   | $ | 63,328 |   |

 

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

F-5

----

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

| ** **                                                                                | ** ** | **Year Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash Flows from Operating  Activities**                                                 |       |                                        |       |   |   |   |   |
| Net income (loss)                                                                         |       | $                                           | (175       | ) | $ | 5,039 |   | $ | 13,214 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                             |       | 15,502                                      |       | 14,270 |   | 12,930 |   |
| Loss on impairment of long-lived assets                                                   |       | 3,440                                       |       | 1,816 |   | 616 |   |
| Loss on disposal of assets                                                                |       | 726                                         |       | 1,223 |   | 647 |   |
| Accretion of discount on notes                                                            |       | 167                                         |       | 149 |   | 134 |   |
| Deferred income tax provision (benefit)                                                   |       | (1,299                                      | )          | 2,329 |   | 2,133 |   |
| Tax benefit of stock option exercises                                                     |       | 115                                         |       | 311 |   | 676 |   |
| Amortization of deferred financing costs                                                  |       | 588                                         |       | 415 |   | 387 |   |
| Other                                                                                     |       | —                                      |       | 224 |   | — |   |
| Changes in assets  and liabilities:                                                       |       |                                        |       |   |   |   |   |
| Decrease  (increase) in—                                                             |       |                                        |       |   |   |   |   |
| Trade receivables                                                                         |       | (3,299                                      | )          | (526 | ) | 2,454 |   |
| Inventories                                                                               |       | (13,168                                     | )          | (8,238 | ) | (7,675 | ) |
| Prepaid expenses and other assets                                                         |       | 1,389                                       |       | (2,031 | ) | (2 | ) |
| Increase  (decrease) in—                                                             |       |                                        |       |   |   |   |   |
| Accounts payable, accrued expenses and other current  liabilities                         |       | 3,943                                       |       | (824 | ) | 6,739 |   |
| Deferred rent and other non-current liabilities                                           |       | (605                                        | )          | 4,099 |   | 3,886 |   |
| Net cash provided by operating activities                                                 |       | 7,324                                       |       | 18,256 |   | 36,139 |   |
| **Cash Flows from Investing  Activities**                                                 |       |                                        |       |   |   |   |   |
| Purchase of short-term investments                                                        |       | (7,000                                      | )          | (54,075 | ) | (51,200 | ) |
| Proceeds from sale of short-term investments                                              |       | 13,400                                      |       | 52,675 |   | 54,550 |   |
| Capital expenditures                                                                      |       | (17,644                                     | )          | (21,540 | ) | (25,344 | ) |
| Purchase of intangible assets                                                             |       | (170                                        | )          | (80 | ) | (175 | ) |
| Net cash used in investing activities                                                     |       | (11,414                                     | )          | (23,020 | ) | (22,169 | ) |
| **Cash Flows from Financing  Activities**                                                 |       |                                        |       |   |   |   |   |
| Increase (decrease) in cash overdrafts                                                    |       | (166                                        | )          | 684 |   | (1,777 | ) |
| Repayment of long-term debt                                                               |       | (666                                        | )          | (279 | ) | (369 | ) |
| Repurchase of common stock                                                                |       | —                                      |       | (1,775 | ) | (1,467 | ) |
| Payout for redeemed Series A Preferred Stock                                         |       | (373                                        | )          | (1,362 | ) | (1,310 | ) |
| Deferred financing costs                                                                  |       | (620                                        | )          | (44 | ) | (242 | ) |
| Payment of issuance costs of common stock                                                 |       | —                                      |       | — |   | (210 | ) |
| Proceeds from exercise of stock options                                                   |       | 485                                         |       | 276 |   | 727 |   |
| Net cash used in financing activities                                                     |       | (1,340                                      | )          | (2,500 | ) | (4,648 | ) |
| **Net Increase  (Decrease) in Cash and Cash Equivalents**                                 |       | (5,430                                      | )          | (7,264 | ) | 9,322 |   |
| **Cash  and Cash Equivalents, Beginning of Year**                                         |       | 8,467                                       |       | 15,731 |   | 6,409 |   |
| **Cash and Cash Equivalents, End  of Year**                                               |       | $                                           | 3,037      |   | $ | 8,467 |   | $ | 15,731 |   |

 

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

F-6

----

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

**1.**   NATURE OF BUSINESS

Mothers Work, Inc.and subsidiaries (“Mothers Work” or the “Company”) is a specialty designer andretailer of maternity clothing. The Company operated 1,591 retail locations asof September 30, 2005, including 852 stores and 739 leased departments,throughout the United States and Canada. In addition, the Company markets maternityapparel at Kohl’s® stores throughout the United States under an exclusiveproduct and license agreement. Mothers Work, Inc. was incorporated inDelaware in 1982.

**2.   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

***a.   Principles of 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.   Fiscal Year-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 2005” ended on September 30,2005.

***c.   Use of Estimates***

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make certainestimates and assumptions that may affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

***d.   Cash and 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 $2,813,000 and $2,979,000were included in accounts payable as of September 30, 2005 and 2004,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-Term Investments***

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 

F-7

----

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

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

and are carried at fairvalue, which approximates amortized cost. Unrealized gains and losses on thesesecurities are excluded from earnings and are reported as a separate componentof shareholders’ equity until realized. When available-for-sale securities aresold, the cost of the securities is specifically identified and is used todetermine the realized gain or loss.

The Company’s short-terminvestments as of September 30, 2004 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 2005, 2004 or2003.

***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 andequipment are stated at cost. Depreciation and amortization are computed forfinancial reporting purposes on a straight-line basis, using service livesranging principally from five to ten years for furniture and equipment andforty years for the building. Leasehold improvements are amortized using thestraight-line method over the shorter of the lease term or their useful life. Thecost of assets sold or retired and the related accumulated depreciation or amortizationare removed from the accounts with any resulting gain or loss included in netincome (loss). Maintenance and repairs are expensed as incurred except for thecapitalization of major renewals and betterments that extend the life of theasset. Long-lived assets are reviewed for impairment whenever adverse events orchanges in circumstances or business climate indicate that the carrying valuemay not be recoverable. Factors used in the evaluation include, but are notlimited to, management’s plans for future operations, brand initiatives, recentoperating results and projected cash flows. If the associated undiscounted cashflows are insufficient to support the recorded asset, an impairment isrecognized to reduce the carrying value of the asset. The amount of theimpairment loss is determined by comparing the discounted expected future cashflows with the carrying value.

During fiscal 2005, 2004and 2003, the Company recorded write downs of property, plant and equipmenttotaling $3,151,000, $1,816,000 and $616,000, respectively, on a pre-tax basis.

***h.   Goodwill, Intangible and Other 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 wasdetermined based on the then fair market value of the Company’s outstandingcommon stock on a control basis and, if necessary, an outside independentvaluation is obtained to determine the fair value. As part of 

F-8

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

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

the Company’s impairmentanalysis as of September 30, 2005, an outside independent valuation wasobtained and the fair value of the Company’s single reporting unit exceeded thecarrying value.

Based on these assessments, no impairment loss wasrequired to be recognized at any of the measurement dates. The Company plans toperform an annual assessment for goodwill impairment at the end of each fiscalyear or as impairment indicators arise. If the fair market value of the Company’soutstanding common stock on a control basis were to significantly decline inthe future, the goodwill would likely become 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 2005, the Company recorded write-downs of intangibleassets totaling $14,000 on a pre-tax basis. During fiscal 2004 and 2003, therewas no impairment to the carrying value of intangible assets. The Company hasnot identified any unamortizable intangible assets. Aggregate amortizationexpense of intangible assets in fiscal 2005, 2004 and 2003 was $209,000,$224,000 and $267,000, respectively.

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

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2006                 |       | $          | 202        |       |
| 2007                 |       | 161        |       |
| 2008                 |       | 138        |       |
| 2009                 |       | 122        |       |
| 2010                 |       | 102        |       |
|                      |            |            |            |            |            |  |

 

***i.   DeferredFinancing Costs***

Deferred financing costs (see Note 9) areamortized to interest expense over the term of the related debt using theeffective interest method. Amortization expense of deferred financing costs infiscal 2005, 2004 and 2003 was $588,000, $415,000 and $387,000, respectively.

Estimated amortizationexpense for the next five fiscal years of deferred financing costs as of September 30,2005 is as follows (in thousands):

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2006                 |       | $          | 655        |       |
| 2007                 |       | 716        |       |
| 2008                 |       | 785        |       |
| 2009                 |       | 852        |       |
| 2010                 |       | 689        |       |
|                      |            |            |            |            |            |  |

 

***j.   Deferred Rent***

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 

F-9

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

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

the leased property, which is generally four to sixweeks prior to a store’s opening date. The net excess of rent expense over theactual cash paid has been recorded as deferred rent in the accompanyingConsolidated Balance Sheets. Tenant improvement allowances are included in theaccompanying Consolidated Balance Sheets as deferred rent liabilities and areamortized as a reduction of rent expense over the term of the lease from thepossession 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.   Fair Value 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, 2005is approximately $121,491,000, which is slightly lower than its carrying value.

***m.   Revenue Recognition, Sales Returns andAllowances***

Revenueis recognized at the point of sale for retail store sales, including leaseddepartment sales, or when merchandise is shipped to customers for Internet andmail order sales. Allowances for returns are recorded as a reduction ofrevenue, based on the Company’s historical experience.

***n.   Other Revenues***

Included in net sales arerevenues earned by the Company through a variety of marketing partnershipprograms utilizing the Company’s extensive opt-in customer database and variousin-store marketing initiatives, focused on baby and parent-relatedproduct and services.

***o.   Cost of Goods Sold***

***Cost of goodssold in the accompanying Consolidated Statements of Operations includes:merchandise costs (including customs duty expenses), expenses related toinventory shrinkage, product related corporate expenses (including expensesrelated to payroll, benefit costs and operating expenses of the Company’sbuying departments), inventory reserves (including lower of cost or marketreserves), inbound freight charges, purchasing and receiving costs, inspectioncosts, warehousing costs, internal transfer costs, and the other costs of theCompany’s distribution network.***

***p.   Shipping and 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, includeshipping supplies, related labor costs and third-party shipping costs.

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

**2.**   SUMMARY OF 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.   Advertising Costs***

The Company expenses thecosts of advertising when the advertising occurs, except for the costsassociated with catalogs and brochures. The production costs for catalogs andbrochures are deferred and amortized over a three to six month periodcorresponding to the expected period in which these items will be mailed.Advertising and catalog expenses were $10,591,000, $9,922,000 and $8,651,000 infiscal 2005, 2004 and 2003, respectively.

***s.   Income Taxes***

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.   Accounting for Stock-Based Compensation***

The Company accounts forstock-based compensation under the provisions of Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”and related interpretations. The Company has adopted the disclosurerequirements of SFAS No. 123, “Accounting for Stock-BasedCompensation,” as amended by SFAS No. 148 “Accounting for Stock-BasedCompensation—Transition and Disclosure,” but has elected to continue to measurecompensation expense in accordance with APB Opinion No. 25. Accordingly,no compensation expense for stock options has been recognized for stock optionawards granted at fair market value. Had the compensation cost for the Company’sstock-based compensation plans been determined based on the fair value atthe grant dates for awards under those plans in accordance with the provisionsof SFAS No. 123, the Company’s net income (loss) and net income(loss) per share would have been reduced to the pro forma amounts indicatedbelow. The effect of applying SFAS No. 123 in this pro formadisclosure is not indicative of future amounts. SFAS No. 123 does notapply to options awarded prior to the fiscal year ended September 30, 1996.

On September 27,2005, the Compensation Committee of the Company’s Board of Directors approved,and the Board ratified, the acceleration of the vesting of all outstandingstock options having exercise prices of $23.50 or more. Options to purchase133,500 shares, having exercise prices ranging from $23.62 to $37.05 per share,were affected by the vesting acceleration. The closing price of the Company’scommon stock on September 26, 2005 (the trading day prior to the vestingacceleration) was $11.31 per share. The primary purpose of this acceleratedvesting program was to eliminate the compensation expense 

F-11

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

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

associated with these stock options that the Companywould otherwise have been required to recognize in future financial statementspursuant to SFAS No. 123(R), “Share-Based Payment”, which is effective forthe Company beginning in the first quarter of fiscal 2006, which commenced on October 1,2005. The amount of future compensation expense that will be avoided inconnection with this acceleration was approximately $1.3 million, net of tax,and is included in the fiscal 2005 pro forma net loss below.

| ** **                                                                                                                   | ** ** | **Year Ended September 30,**                       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                   | ** ** | **(in thousands, except  per share amounts)** | ** ** |
| Net income (loss):                                                                                                           |       |                                                              |       |   |   |   |   |
| As reported                                                                                                                  |       | $                                                                 | (175       | ) | $ | 5,039 |   | $ | 13,214 |   |
| Add stock-based employee compensation expense  included in the determination of net income as reported, net of tax      |       | —                                                            |       | 116 |   | — |   |
| Deduct total stock-based employee compensation  expense determined under fair value-based method for all awards, net of  tax |       | (2,949                                                            | )          | (1,525 | ) | (2,910 | ) |
| Pro forma net income (loss)                                                                                                  |       | $                                                                 | (3,124     | ) | $ | 3,630 |   | $ | 10,304 |   |
| Net income (loss)  per share—Basic:                                                                                     |       |                                                              |       |   |   |   |   |
| As reported                                                                                                                  |       | $                                                                 | (0.03      | ) | $ | 0.97 |   | $ | 2.52 |   |
| Pro forma                                                                                                                    |       | (0.60                                                             | )          | 0.70 |   | 1.97 |   |
| Net income (loss) per  share—Diluted:                                                                                   |       |                                                              |       |   |   |   |   |
| As reported                                                                                                                  |       | $                                                                 | (0.03      | ) | $ | 0.92 |   | $ | 2.34 |   |
| Pro forma                                                                                                                    |       | (0.60                                                             | )          | 0.66 |   | 1.86 |   |

 

***u.***   Earningsper Share

Basic earnings per share is computed by dividing netincome (loss) by the weighted average number of outstanding common shares.Diluted earnings per share is computed based upon the weighted average numberof outstanding common shares, after giving effect to the potential dilutiveeffect from the assumed exercise of the common stock equivalents, includingstock options and warrants (see Note 12).

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

| ** **                                                                              | ** ** | **Year Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Average number of  shares outstanding—Basic                                        |       | 5,242                                       |       | 5,212 |   | 5,236 |   |
| Incremental  shares from the assumed exercise of outstanding stock options and warrants |       | —                                      |       | 289 |   | 410 |   |
| Average number of shares  outstanding—Diluted                                      |       | 5,242                                       |       | 5,501 |   | 5,646 |   |

 

F-12

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

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

Options and warrants topurchase 1,355,050, 467,170 and 202,850 shares of the Company’s common stockwere outstanding as of September 30, 2005, 2004 and 2003, respectively,but were not included in the computation of diluted earnings per share forfiscal 2005, 2004 and 2003, respectively, as their effect would have beenantidilutive.

***v.***   Statements of CashFlows

In fiscal 2005, 2004 and2003, the Company paid interest of $14,470,000, $14,415,000 and $14,503,000,respectively, and made income tax payments of $708,000, $3,258,000 and$5,447,000, respectively. In fiscal 2005, the Company acquired equipment with acost of $1,438,000 under a capital lease obligation.

***w.***   Business and CreditRisk

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 2005, 2004 or 2003. A majority of the Company’spurchases during fiscal 2005 were imported. The Company imported from 23countries during fiscal 2005. Management believes that any event causing adisruption of imports from any specific country could be mitigated by movingproduction 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, the Companyutilizes a cooperative arrangement with a number of other companies to assistin managing certain insurance risks. The Company’s expenses associated withthis relationship could be impacted by the loss history associated with thecooperative as a whole. Liabilities associated with these risks are estimatedby considering historical claims experience and other actuarial assumptions.

***y.***   Store PreopeningCosts

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.***   Reclassifications

Certain reclassificationshave been made to the prior year consolidated financial statements to conformto the current year presentation.

***aa.***   New AccountingPronouncements

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123(R), which replaces SFAS No. 123and APB Opinion No. 25, and establishes standards for the accounting for 

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

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

transactions in which anentity exchanges its equity instruments for goods and services. SFAS No. 123(R)requires that the compensation cost relating to share-based paymenttransactions be recognized in financial statements, measured by the fair valueof the equity or liability instruments issued, and is effective as of the firstreporting period of the fiscal year that begins after June 15, 2005 forpublic entities that do not file as small business issuers. The fairvalue-based method of SFAS No. 123 is similar in most respects to the fairvalue-based method under SFAS No. 123(R); however, certain transition rules ofSFAS No. 123(R) may affect the impact on the Company’s consolidatedfinancial position or results of operations. The new standard will be adoptedin the first quarter of fiscal 2006 and the impact may have a material adverseimpact on the Company’s future results of operations. The pro forma impact ofthe application of SFAS No. 123 on the Company’s historical financialstatements is included in these notes to consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs.” This statement amends the guidance in ARB No. 43,Chapter 4, “Inventory Pricing,” to require that abnormal amounts of idlefacility expense, freight, handling costs and wasted material (spoilage) beaccounted for as current period charges rather than as a portion of theinventory cost. This statement is effective for fiscal years beginning after June 15,2005. The adoption of this statement is not expected to have a material impacton the Company’s consolidated financial position or results of operations.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections.”SFAS No. 154 provides guidance on the accounting for and reporting ofaccounting changes and error corrections. This statement is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005 and early adoption is permitted. The Companyexpects to adopt SFAS 154 effective as of October 1, 2006.

**3.**   INVENTORIES

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

| ** **       | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| Finished goods   |       | $        | 97,056     |     | $          | 81,428 |   |
| Work-in-progress |       | 3,283    |       | 3,317    |       |
| Raw materials    |       | 5,572    |       | 7,998    |       |
|             |       | $        | 105,911    |     | $          | 92,743 |   |

 

F-14

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

**4.**   PROPERTY,PLANT AND EQUIPMENT, NET

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

| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Land                                             |       | $        | 1,400      |     | $          | 1,400 |   |
| Building and  improvements                       |       | 12,474   |       | 12,062   |       |
| Furniture and  equipment                         |       | 53,917   |       | 47,748   |       |
| Leasehold  improvements                          |       | 102,149  |       | 100,682  |       |
|                                             |       | 169,940  |       | 161,892  |       |
| Less: accumulated  depreciation and amortization |       | (93,767  | )          | (83,430  | )          |
|                                             |       | $        | 76,173     |     | $          | 78,462 |   |

 

Furniture and equipment includes equipment acquiredunder a capital lease obligation on December 1, 2004. As of September 30,2005, the equipment had a cost of $1,438,000 and accumulated amortization of$216,000 (see Note 9).

During fiscal 2005, 2004 and 2003, the Companyrecorded pre-tax charges under SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” of $3,151,000, $1,816,000 and$616,000, respectively, related to the impairment of leasehold improvements andfurniture and equipment at certain of its retail locations.

As of September 30,2005, $925,000 of assets held for sale (not included above) relate to themanufacturing and warehouse facilities located in Costa Rica that were acquiredin the purchase of iMaternity (see Note 5). These facilities, shut downduring fiscal 2002, are being marketed for sale, are not being depreciated andare separately reflected in the accompanying Consolidated Balance Sheets as “AssetsHeld for Sale.” The iMaternity manufacturing and warehousing facilities areexpected to be sold during fiscal 2006. The carrying values of the Costa Ricanfacilities were reduced by $275,000 during fiscal 2005 to their estimatedrealizable values, which were determined based on purchase offers frominterested parties, less estimated selling costs.

**5.**   ACQUISITION

The Company acquired eSpecialty Brands, LLC(iMaternity) on October 17, 2001 (the “Acquisition Date”), for $19.7million. The acquisition was accounted for under the purchase method ofaccounting, and the results of operations of iMaternity have been included inthe Company’s results of operations from the Acquisition Date.

F-15

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

**5.**   ACQUISITION (Continued)

A summary of the chargesincurred and reserves recorded in connection with the iMaternity acquisitionexit/restructuring activities during fiscal 2005, 2004 and 2003 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, 2002      |       |                             | $          | 2,730         |       |                                |       | $         | 900        |   |   |   | $ | 700 |   |   | $ | 4,330 |   |
| Charges during  fiscal 2003               |       |                             | (543       | )             |       |                                | (203       | )         |       |   | (207 | ) |   | (953 | ) |
| Reserves reversed  against goodwill       |       |                             | (1,519     | )             |       |                                | (97        | )         |       |   | (168 | ) |   | (1,784 | ) |
| 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 |   |

 

The balance of theseverance reserve reflects a non-compete and severance arrangement that ispayable ratably on a monthly basis through September 30, 2006.

**6.**   ACCRUEDEXPENSES AND OTHER CURRENT LIABILITIES

As ofSeptember 30, accrued expenses and other current liabilities werecomprised of the following (in thousands):

| ** **                                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Salaries, wages  and employee benefits                       |       | $        | 8,846      |     | $          | 8,944 |   |
| Income taxes  payable                                        |       | 1,161    |       | 1,344    |       |
| Interest                                                     |       | 2,483    |       | 2,358    |       |
| Deferred rent                                                |       | 3,790    |       | 3,935    |       |
| Sales taxes                                                  |       | 2,456    |       | 2,458    |       |
| Insurance                                                    |       | 2.671    |       | 2,425    |       |
| Rent                                                         |       | 328      |       | 608      |       |
| Audit and legal                                              |       | 3,400    |       | 1,671    |       |
| Reserves recorded  in iMaternity acquisition (Note 5)        |       | 232      |       | 850      |       |
| Remaining payout  for redeemed Series A Preferred Stock |       | 679      |       | 1,052    |       |
| Accrued store  construction costs                            |       | 152      |       | 1,514    |       |
| Gift certificates  and store credits                         |       | 3,233    |       | 2,586    |       |
| Other                                                        |       | 6,132    |       | 4,751    |       |
|                                                         |       | $        | 35,563     |     | $          | 34,496 |   |

 

F-16

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

**7.**   DEFERREDRENT AND OTHER NON-CURRENT LIABILITIES

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

| ** **                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred rent                                                                     |       | $        | 29,169     |     | $          | 29,943 |   |
| Less: current portion  included in accrued expenses and other current liabilities |       | (3,790   | )          | (3,935   | )          |
| Non-current deferred  rent                                                        |       | 25,379   |       | 26,008   |       |
| Other                                                                             |       | 291      |       | 267      |       |
|                                                                              |       | $        | 25,670     |     | $          | 26,275 |   |

 

**8.**   LINEOF CREDIT

On October 15, 2004,the Company entered into a new five-year $60,000,000 senior secured revolvingcredit facility (the “New Credit Facility”), which replaced the former $60million credit facility that included a $56,000,000 borrowing base revolvingline of credit. The New Credit Facility will mature on October 15, 2009. Uponthe Company’s request and with the consent of the lender, permitted borrowingsunder the New Credit Facility may be increased up to an additional $15,000,000,in increments of $2,500,000,****up to amaximum limit of $75,000,000. Proceeds from advances under the New CreditFacility, with certain restrictions, may be used to provide financing forworking capital, letters of credit, capital expenditures, debt prepayments,dividends, share repurchases and other general corporate purposes. The Companypaid certain closing fees in connection with the negotiation and execution ofthe New Credit Facility. The Company also pays an unused line fee under the NewCredit Facility and certain early termination fees would be owed if the newcredit facility is terminated prior to its third anniversary. The New CreditFacility contains various affirmative and negative covenants andrepresentations and warranties. There areno financial covenant requirements under the New Credit Facility unless either (i) Excess Availability (asdefined in the agreement) fallsbelow $10,000,000, or (ii) average Financial Covenant AdjustedAvailability (as defined in the agreement) for any calendar month is less than $15,000,000. If either of theevents in item (i) or (ii) above occurs, the Company would be requiredto meet a certain minimum fixed charge coverage ratio (which increases from1.00x during the first two years of the New Credit Facility to 1.10x during thefifth year of the New Credit Facility).During all of fiscal 2005, the Company exceeded the requirements for the ExcessAvailability and average Financial Covenant Adjusted Availability. The NewCredit Facility is secured by a securityinterest in the Company’s accounts receivable, inventory, real estateinterests, letter of credit rights, cash, intangibles and certain other assets.The interest rate on outstanding borrowings is equal to, at the Company’selection, either the lender’s prime rate or the lender’s LIBOR rate plus theapplicable margin. The applicable margin for LIBOR rate borrowings is variable,ranging from 1.25% to 1.75%, based upon the availability calculation made inaccordance with the New 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 New Credit Facility. Any amounts outstandingunder the New 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 New Credit Facility, (ii) failure to perform any covenant or agreementcontained in the New 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.

F-17

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

**8.**   LINE OF CREDIT (Continued)

Prior to entering into theNew Credit Facility, the Company had a $60 million credit facility maturing on September 15,2005, which included a $56 million borrowing base revolving line of credit andapproximately $4 million to support a special purpose letter of credit facility.Amounts available for direct borrowings, net of letters of credit outstanding,were limited to the lesser of (a) the unused portion of the creditfacility or (b) the Aggregate Adjusted Availability (“AAA”) as defined inthe agreement based on a percentage of eligible inventory, receivables and cash.The credit facility was secured by a security interest in the Company’saccounts receivable, inventory, equipment, fixtures, cash and other assets. Therewere no financial covenant requirements in the agreement unless the AAA fellbelow $10 million. In such event, the Company would have had to achieve minimumcash flow, as defined in the agreement, of not less than zero. During fiscal2004 and 2003, the Company always exceeded the minimum required AAA.

As of September 30,2005, outstanding borrowings under the New Credit Facility consisted of nodirect borrowings and $8,400,000 in letters of credit with available borrowingsof $51,600,000, compared to no direct borrowings and $3,700,000 in letters ofcredit with AAA and available borrowings of $52,300,000 under the prior creditfacility as of September 30, 2004. In addition, pursuant to the specialpurpose letter of credit facility, as of September 30, 2004, the Companyhad an outstanding standby letter of credit of $3,149,000, to collateralize anoutstanding industrial revenue bond. Borrowings under the New Credit Facilityas of September 30, 2005 would have borne interest at the rate of betweenapproximately 5.11% and 6.75% per annum. Duringfiscal 2005, the Company’s average level of direct borrowings under the NewCredit Facility was $3.1 million. The Company had no direct borrowingsunder the prior credit facility during fiscal 2004 and 2003.

**9.**   LONG-TERMDEBT

The following tablesummarizes the Company’s long-term debt as of September 30 (in thousands):

| ** **                                                                                                                                                                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| 111¤4% senior  notes due August 1, 2010 (net of unamortized discount)                                                                                                                    |       | $        | 123,868    |     | $          | 123,701 |   |
| Industrial Revenue Bond, interest is variable (3.3%  as of September 30, 2005), principal due annually through  September 1, 2020 (collateralized in full by a standby letter of credit) |       | 2,945    |       | 3,075    |       |
| *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)                        |       | 863      |       | 1,000    |       |
| Interest at 2.0%, principal due monthly until  March 1, 2011 (collateralized by certain equipment at the Company’s  headquarters)                                                        |       | 120      |       | 141      |       |
| *Capital Lease Obligation:*                                                                                                                                                                        |       |     |       |     |       |
| Equipment lease, interest at 6.75%, payments due  monthly through November 30, 2007 (collateralized by certain  equipment at the Company’s headquarters)                            |       | 1,060    |       | —   |       |
|                                                                                                                                                                                               |       | 128,856  |       | 127,917  |       |
| Less: current portion                                                                                                                                                                              |       | (769     | )          | (288     | )          |
|                                                                                                                                                                                               |       | $        | 128,087    |     | $          | 127,629 |   |

 

F-18

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

**9.**   LONG-TERM DEBT (Continued)

Long-term debt maturitiesas of September 30, 2005 are as follows (in thousands): 

| **Fiscal Year**                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                                            |       | $          | 822        |       |
| 2007                                                            |       | 836        |       |
| 2008                                                            |       | 410        |       |
| 2009                                                            |       | 337        |       |
| 2010                                                            |       | 125,348    |       |
| 2011 and  thereafter                                            |       | 2,311      |       |
|                                                            |       | 130,064    |       |
| Less: unamortized  discount                                     |       | (1,132     | )          |
| Less: amount  representing interest on capital lease obligation |       | (76        | )          |
|                                                            |       | $          | 128,856    |       |

 

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 and unpaid interest, on or after August 1, 2009. Additionally,prior to August 1, 2005, the Company had the right to redeem, at itsoption, up to 35% of the aggregate principal amount of the Senior Notes withthe proceeds from equity offerings at 111.25% of their principal amount, plusaccrued and unpaid interest, in accordance with the terms of the indenture ofthe Senior Notes. The indenture to the Senior Notes contains covenants thatimpose certain restrictions on the Company’s ability to, among other things,incur additional indebtedness, pay dividends, repurchase stock, and enter intoother various types of transactions. Subject to the foregoing restrictions, theSenior Notes also limit the amount of dividends and other restricted paymentsthat may be paid by the Company under a formula that includes a $10 millionfixed amount, plus approximately 50% of the Company’s net income since issuanceof the Senior Notes and allowable proceeds from certain other debt or equitytransactions. During all of fiscal 2005, 2004 and 2003, the Company was incompliance with the required covenants. Any amounts outstanding under theSenior Notes may be accelerated and become due and payable immediately upon anevent of default and expiration of any applicable cure period. Events ofdefault include: (i) nonpayment of obligations due under the Senior Notes, (ii)failure to perform any covenant or agreement contained in the Senior Notes,(iii) material misrepresentations, (iv) failure to pay, or certain otherdefaults under, other material indebtedness of the Company, (v) certainbankruptcy or insolvency events, and (vi) material uninsured losses. Upon theoccurrence of a Change in Control, as defined in the indenture to the SeniorNotes, Holders of the Senior Notes have the right to require that the Companyrepurchase each Holder’s Notes at 101% of the principal amount, plus accruedand unpaid interest.

F-19

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

**9.**   LONG-TERM DEBT (Continued)

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.

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 for monthly rental payments through the PrimaryTerm Expiration Date with a final installment of one dollar to purchase theequipment.

**10.   COMMONAND PREFERRED STOCK**

The Company hasauthorization to issue up to 2,000,000 shares of preferred stock, par value$0.01 with 41,000 shares authorized Series A Cumulative ConvertiblePreferred Stock and 300,000 shares authorized Series B JuniorParticipating Preferred Stock (“Series B Preferred Stock”). There was nopreferred stock issued or outstanding as of September 30, 2005 or 2004.

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 B Units are junior to the common stock for both dividends andliquidations. Each Series B Unit votes as one share of common 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, at 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 both the Company’s New CreditFacility and prior credit facility contain restrictions that place limits oncertain payments by the Company, including payments to repurchase shares of itscommon stock. The Company’s repurchases of common stock have been made incompliance with all restrictions under the indenture governing the Senior Notesand the terms of its New Credit Facility and prior credit facility.

**11.   RIGHTSAGREEMENT**

On October 9, 2005, the Company entered into anAmended and Restated Rights Agreement to renew its then existing RightsAgreement (collectively referred to as the “Rights Agreement”) that wouldotherwise have expired on October 9, 2005. Under the Rights Agreement, theCompany provided and will provide one Right outstanding for each share ofMothers Work common stock now or hereafter outstanding. Under certain limitedconditions, as defined in the Rights Agreement, each Right entitles the registeredholder to purchase from the Company one Series B Unit at $85 per share,subject to adjustment. The Rights expire on October 9, 2015 (the “FinalExpiration 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 date

F-20

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

**11.**   RIGHTS AGREEMENT (Continued)

until which the Rights maybe redeemed. In addition, the Rights Agreement exempts from its operation anyperson that acquires, obtains the right to acquire, or otherwise obtainsbeneficial ownership of 15.0% or more of the then outstanding shares of theCompany’s common stock (an “Acquiring Person”) without any intention ofchanging or influencing control of the Company provided that such person, aspromptly as practicable, divests himself or itself of a sufficient number ofshares of common stock so that such person would no longer be an AcquiringPerson.

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.

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.   STOCK OPTION PLANS AND WARRANTS**

The Company has two stock option plans: the DirectorStock Option Plan (the “Director Plan”) and the Amended and Restated 1987 StockOption Plan (the “1987 Plan”). Effective October 1, 2004, each outsidedirector is granted 5,000 fully vested options on an annual basis, at anexercise price equal to the fair market value of the stock on the grant date. TheDirector Plan expired on December 31, 2004 and no further options may begranted under the plan. Options issued under the Director Plan will remainoutstanding until they have expired, been exercised or have otherwiseterminated. Options to purchase 25,000 shares of common stock were issued in January 2005to the outside directors (5,000 options to each outside director) from the 1987Plan. Under the 1987 Plan, as amended and restated, officers and certainemployees, including outside directors, may be granted options to purchase theCompany’s common stock at exercise prices equal to the fair market value of thestock at the date of grant or at other prices as determined by the CompensationCommittee of the Board of Directors. No options have been granted by theCompany at less than the fair market value of the Company’s common stock on thedate of grant for any of the periods presented. In February 2003, thestockholders of the Company approved an amendment to increase the number ofshares of common stock available for issuance upon the exercise of optionsgranted under these plans by 500,000, up to a total of 2,175,000 options whichmay be issued (including up to a total of 200,000 options which were issuableunder the Director Plan) under the plans. The majority of the options issuedunder the plans vest ratably over a five-year period, although some optionsvest immediately, and options issued under the plans generally expire ten yearsfrom the date of grant.

F-21

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

**12.**   STOCK OPTION PLANS AND WARRANTS (Continued)

As ofSeptember 30, 2005, there were 228,217 options available for grant underthe 1987 Plan.

Stock option activity forall plans was as follows: 

| ** **                            | ** ** | **Outstanding  Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------------|------------|--------------------------|------------|------------------------------------------------|------------|
| ** **                            | ** ** | **(in thousands)**  | ** ** | ** **                                     | ** ** |
| Balance—September 30,  2002 |       |                     | 955        |                                           |       |   | $ | 10.85 |   |   |
| Granted                               |       |                     | 261        |                                           |       |   | 34.71 |   |   |
| Exercised                             |       |                     | (74        | )                                              |       |   | 10.02 |   |   |
| Canceled                              |       |                     | (48        | )                                              |       |   | 15.95 |   |   |
| Balance—September 30,  2003 |       |                     | 1,094      |                                           |       |   | 16.36 |   |   |
| Granted                               |       |                     | 233        |                                           |       |   | 23.41 |   |   |
| Exercised                             |       |                     | (80        | )                                              |       |   | 11.14 |   |   |
| Canceled                              |       |                     | (56        | )                                              |       |   | 25.29 |   |   |
| Balance—September 30,  2004 |       |                     | 1,191      |                                           |       |   | 17.67 |   |   |
| Granted                               |       |                     | 368        |                                           |       |   | 13.04 |   |   |
| Exercised                             |       |                     | (82        | )                                              |       |   | 9.74 |   |   |
| Canceled                              |       |                     | (247       | )                                              |       |   | 29.14 |   |   |
| Balance—September 30,  2005 |       |                     | 1,230      |                                           |       |   | $ | 14.50 |   |   |

 

During fiscal 2005, options to purchase 27,270 sharesof common stock with an aggregate exercise price of $307,000 were exercised bythe option 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.

Options for 905,130, 760,900 and 703,700 shares wereexercisable as of September 30, 2005, 2004 and 2003, respectively, and hada weighted-average exercise price of $15.29, $16.19 and $15.49, for thoserespective periods. On September 27, 2005, the Company accelerated thevesting of all outstanding stock options having exercise prices of $23.50 ormore. Options to purchase 133,500 shares, having exercise prices ranging from$23.62 to $37.05 per share, were affected by the vesting acceleration.

The weighted average fairvalue of the stock options granted during fiscal 2005, 2004 and 2003 wasestimated to be $8.74, $15.85 and $23.35, 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,** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|
| ** **                 | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Dividend yield             |       | none                                        |       | none |   | none |   |
| Expected price  volatility |       | 61                                          | %          | 62 | % | 61 | % |
| Risk-free  interest rates  |       | 4.0                                         | %          | 3.9 | % | 3.8 | % |
| Expected lives             |       | 8.0 years                                   |       | 8.1 years |   | 8.1 years |   |

 

 

F-22

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

**12.**   STOCK OPTION PLANSAND WARRANTS (Continued)

Thefollowing table summarizes information about stock options outstanding as of September 30,2005:

| ** **                                                             | ** ** | **Options Outstanding** | ** ** | ** **              | ** ** | **Options Exercisable**               | ** ** |
|------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
| **Range of Exercise Prices**                            | ** ** | ** **                   | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**      | ** ** | ** **              | ** ** | ** **                                 | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| $  7.40 to $  8.00                       |       |                         | 109        |                    |       |                                       | 6.1        |   |   |   | $ | 7.66 |   |   |   | 73 |   |   |   | $ | 7.67 |   |   |
|     8.01 to     9.00 |       |                         | 108        |                    |       |                                       | 3.7        |   |   |   | 8.91 |   |   |   | 106 |   |   |   | 8.92 |   |   |
|     9.01 to   10.00            |       |                         | 190        |                    |       |                                       | 4.2        |   |   |   | 9.41 |   |   |   | 188 |   |   |   | 9.41 |   |   |
|   10.01 to   12.00                       |       |                         | 136        |                    |       |                                       | 6.0        |   |   |   | 10.47 |   |   |   | 100 |   |   |   | 10.38 |   |   |
|   12.01 to   13.00                       |       |                         | 294        |                    |       |                                       | 9.1        |   |   |   | 12.82 |   |   |   | 86 |   |   |   | 12.82 |   |   |
|   13.01 to   15.00                       |       |                         | 118        |                    |       |                                       | 4.2        |   |   |   | 13.81 |   |   |   | 92 |   |   |   | 13.60 |   |   |
|   15.01 to   23.50                       |       |                         | 24         |                    |       |                                       | 8.5        |   |   |   | 19.27 |   |   |   | 9 |   |   |   | 20.20 |   |   |
|   23.51 to   24.00                       |       |                         | 110        |                    |       |                                       | 8.2        |   |   |   | 23.62 |   |   |   | 110 |   |   |   | 23.62 |   |   |
|   24.01 to   37.00                       |       |                         | 99         |                    |       |                                       | 7.7        |   |   |   | 28.43 |   |   |   | 99 |   |   |   | 28.43 |   |   |
|   37.01 to   37.05                       |       |                         | 42         |                    |       |                                       | 7.2        |   |   |   | 37.05 |   |   |   | 42 |   |   |   | 37.05 |   |   |
| $  7.40 to $37.05                                  |       |                         | 1,230      |                    |       |                                       | 6.5        |   |   |   | $ | 14.50 |   |   |   | 905 |   |   |   | $ | 15.29 |   |   |
|                                                                        |            |                              |            |                         |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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 are exercisable for sevenyears from the date of grant. During the year ended September 30, 2002,the Company repurchased Warrants to purchase 125,000 shares of the Company’scommon stock for a purchase price of $4.50 per underlying share, or a total of$562,500. In the first quarter of fiscal 2003, certain holders of the Warrantsturned in Warrants to purchase 100,000 shares of the Company’s common stock andwere issued 44,113 shares of the Company’s common stock pursuant to a cashlessexercise net issuance election. As of September 30, 2005, Warrants topurchase 125,000 shares remain outstanding.

**13.**   INCOME TAXES

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

| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current provision             |       | $        | 419        |     | $          | 1,137    |       | $ | 6,204 |   |
| Deferred  provision (benefit) |       | (1,299   | )          | 2,329    |       | 2,133    |       |
|                          |       | $        | (880       | )        | $          | 3,466    |       | $ | 8,337 |   |
| Federal provision (benefit)   |       | $        | (704       | )        | $          | 2,945    |       | $ | 7,335 |   |
| State provision  (benefit)    |       | (176     | )          | 521      |       | 1,002    |       |
|                          |       | $        | (880       | )        | $          | 3,466    |       | $ | 8,337 |   |

 

F-23

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

**13.**   INCOME TAXES (Continued)

The reconciliations of thestatutory federal rate to the Company’s effective income tax rates for theyears ended September 30 were as follows:

| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory federal  tax rate                     |       | (34.0    | )%         | 34.0     | %          | 35.0     | %          |
| State taxes, net  of federal benefit            |       | (36.9    | )          | 4.2      |       | 3.2      |       |
| Federal rate  adjustment on deferred tax assets |       | (14.6    | )          | —   |       | —   |       |
| Other                                           |       | 2.1      |       | 2.6      |       | 0.5      |       |
|                                            |       | (83.4    | )%         | 40.8     | %          | 38.7     | %          |

 

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

| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| *Deferred  tax assets:*                      |       |     |       |     |       |
| Net operating  loss carryforwards            |       | $        | 1,596      |     | $          | 1,919 |   |
| Depreciation                                 |       | 2,527    |       | 1,241    |       |
| Deferred rent                                |       | 10,874   |       | 10,480   |       |
| Inventory  reserves                          |       | 980      |       | 672      |       |
| Employee benefit  accruals                   |       | 2,268    |       | 1,823    |       |
| Reserves recorded  in iMaternity acquisition |       | 86       |       | 298      |       |
| Tax benefit on  stock option exercises       |       | —   |       | 291      |       |
| Other accruals                               |       | 870      |       | 705      |       |
| Other                                        |       | 900      |       | 561      |       |
|                                         |       | 20,101   |       | 17,990   |       |
| *Deferred  tax liability:*                   |       |     |       |     |       |
| Prepaid expenses                             |       | (825     | )          | (13      | )          |
|                                         |       | $        | 19,276     |     | $          | 17,977 |   |

 

As of September 30, 2005, the Company has netoperating loss carryforwards for federal tax purposes of $4,561,000, 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 carryforwards. The taxbenefit of the acquired net operating loss carryforwards was recorded under thepurchase method of accounting.

The above deferred tax assets as of September 30,2004 reflect only the federal tax benefit associated with the temporarydifferences given the historical uncertainty related to realizing state taxbenefits. Had the state tax benefits been reflected, the deferred tax assets asof September 30, 2004 would be approximately $1,400,000 higher. As of September 30,2005, management determined that the deferred tax assets should reflect thestate tax benefits for several of the states in which the Company is operating.This determination was made in accordance with the provisions of SFAS No. 109.Management determined that no state tax benefits associated with the temporarydifferences should be reflected for the remaining states in which it isoperating, given the continued historical uncertainty related to realizingstate tax benefits. 

F-24

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

**13.**   INCOME TAXES (Continued)

Had the state tax benefitsbeen reflected for the remaining states, the deferred tax assets as of September 30,2005 would be approximately $1,200,000 higher.

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 30,2005. 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 $75,634,000, $73,690,000 and $65,327,000 in fiscal 2005, 2004 and 2003,respectively. Such amounts include contingent rentals based upon a percentageof sales totaling $28,000, $388,000 and $740,000 in fiscal 2005, 2004 and 2003,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, 2005 are as follows (in thousands):

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2006                 |       | $          | 55,871     |       |
| 2007                 |       | 51,989     |       |
| 2008                 |       | 47,175     |       |
| 2009                 |       | 42,763     |       |
| 2010                 |       | 35,067     |       |
| 2011 and  thereafter |       | 86,835     |       |
|                 |       | $          | 319,700    |       |

 

On January 12, 2005, a purported class action wasfiled against the Company alleging that, under applicable federal and statelaw, certain former and current employees should have received overtimecompensation. The plaintiffs in this case are seeking unspecified actualdamages, penalties and attorneys’ fees. The Company is engaged in efforts toresolve these claims.

In addition, from time totime, the Company is named as a defendant in legal actions arising from itsnormal business activities. Although the amount of any liability that couldarise with respect to currently pending actions cannot be accurately predicted,the Company does not believe that the resolution of any pending action willhave a material adverse effect on its financial position, results of operationsor liquidity.

F-25

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

**15.**   GUARANTORSUBSIDIARIES

Pursuant to the terms of the indenture relating to theSenior Notes, each of the domestic subsidiaries of Mothers Work, Inc. (the“Guarantor Subsidiaries”) has jointly and severally provided an unconditionalguarantee of the obligations of Mothers Work with respect to the Senior Notes. Thereare no restrictions on any of the assets of the Guarantor Subsidiaries whichwould limit their ability to transfer funds to Mothers Work in the form ofloans, advances or cash dividends, except as provided by applicable law. Noneof the Company’s foreign subsidiaries (the “Non-Guarantor Subsidiaries”) haveguaranteed the Senior Notes. The condensed consolidating financial informationfor the Company, the Guarantor Subsidiaries, and the Company’s Non-GuarantorSubsidiaries as of and for the fiscal year ended September 30, 2005 aspresented below has been prepared from the books and records maintained by theGuarantor Subsidiaries and the Company. The condensed financial information maynot necessarily be indicative of the results of operations or financialposition had the Guarantor Subsidiaries operated as independent entities. Certainintercompany revenues and expenses included in the subsidiary records areeliminated in consolidation. As a result of this activity, an amount due to/duefrom parent will exist at any time.

F-26

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**MOTHERSWORK, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15.   GUARANTORSUBSIDIARIES (Continued)**

**MothersWork, 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-27

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

**15.**   GUARANTORSUBSIDIARIES (Continued)

**MothersWork, Inc.Condensed Consolidating Statement of Operations For the Year Ended September 30, 2005(in thousands)**

| ** **                                    | ** ** | **Mothers  Work (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| 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-28

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

**15.**   GUARANTORSUBSIDIARIES (Continued)

**Mothers Work, Inc.Condensed Consolidating Cash Flow Statement For the Year Ended September 30, 2005(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 (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 of  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:**                                                      | ** ** |                                     | ** ** |                        |       |                                                   | ** ** | ** **                      |       |                                | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Increase 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-29

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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/Chief Executive Officer (“CEO”) and its President/ChiefOperating Officer (“COO”). These agreements, as amended, provided for basecompensation of $491,727, $477,405 and $463,500 for fiscal 2005, 2004 and 2003,respectively, increasing annually thereafter in an amount to be determined bythe Compensation Committee of the Board of Directors, and salary continuationand severance payments should employment of the executives be terminated underspecified conditions, as defined therein. The agreements continue in effectuntil terminated by either the Company or the executive in accordance with thetermination provisions of the agreements. Additionally, the CEO and COO areeligible for an annual cash bonus and stock options based on performance, asspecified by the Compensation Committee.

The Company also has anemployment agreement, as amended, with its Executive Vice President—ChiefFinancial Officer. This agreement provided for base compensation of $381,600and $360,000 for fiscal 2005 and 2004, which is subject to potential increasein the future by the Company. The agreement also provides for salarycontinuation and severance payments should employment of the executive beterminated under specified conditions, as defined therein. The agreementcontinues in effect until terminated by either the Company or the executive inaccordance with the termination provisions of the agreement.

**17.**   EMPLOYEE BENEFITPLANS

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 contribution fromthe Company based on a sliding scale. Company matches are made in the firstquarter of the succeeding calendar year. Company matches vest over a period ofapproximately six years from each employee’s commencement of employment withthe Company. Company matching contributions totaling $116,000, $82,000 and$76,000 were made in fiscal 2005, 2004 and 2003, respectively. In addition theCompany may make discretionary contributions to the plan, which vest over aperiod of approximately six years from each employee’s commencement ofemployment with the Company. The Company has not made any discretionarycontributions.

**18.**   QUARTERLY FINANCIALINFORMATION (UNAUDITED)

Quarterlyfinancial results for the years ended September 30, 2005 and 2004 are asfollows (in thousands, except per share amounts): 

| ** **                                | ** ** | **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 | ) |
|                                           |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-30

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

**18.**   QUARTERLY FINANCIAL INFORMATION(UNAUDITED) (Continued)

| ** **                                | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| **Fiscal 2004**                      | ** ** | ** **             | ** ** | **9/30/04** | ** ** | **6/30/04** | ** ** | **3/31/04** | ** ** | **12/31/03** | ** ** |
| Net sales                                 |       | $                      | 120,995    |   | $ | 139,558 |   | $ | 125,803 |   | $ | 131,695 |   |
| Gross profit                              |       | 62,641                 |       | 77,941 |   | 65,432 |   | 69,286 |   |
| Net income (loss)                         |       | (3,945                 | )          | 6,818 |   | 251 |   | 1,915 |   |
| Net income (loss)  per share—Basic   |       | (0.76                  | )          | 1.31 |   | 0.05 |   | 0.37 |   |
| Net income (loss) per  share—Diluted |       | (0.76                  | )          | 1.24 |   | 0.05 |   | 0.34 |   |
|                                           |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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.**   SEGMENT ANDENTERPRISE 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.

***Geographic Information.****  *Information concerning the Company’s operations bygeographic area are as follows (in thousands): 

| ** **                               | ** ** | **Year Ended September 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Net Sales to Unaffiliated  Customers** |       |                                        |       |   |   |   |   |
| United States                            |       | $                                           | 547,924    |   | $ | 510,751 |   | $ | 487,380 |   |
| Canada                                   |       | 13,703                                      |       | 7,300 |   | 5,067 |   |
|                                          |            |                                             |            |  |  |  |  |  |  |  |

 

| ** **            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|-----------------------|------------|------------------------|------------|------------------------|------------|
| ** **            | ** ** | **2005**               | ** ** | **2004**               | ** ** |
| **Long-Lived Assets** |       |                   |       |                   |       |   |   |   |   |
| United States         |       |                   | $          | 74,393                 |       |   |   | $ | 77,293 |   |   |
| Canada                |       |                   | 2,658      |                   |       |   | 2,115 |   |   |
| Costa Rica            |       |                   | 925        |                   |       |   | 1,200 |   |   |
|                       |            |                        |            |                        |            |  |  |  |  |  |  |

 

F-31

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

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

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

**20.**   INTEREST EXPENSE,NET

Interestexpense, net for the years ended September 30 is comprised of thefollowing (in thousands):

| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest expense       |       | $        | 15,360     |     | $          | 14,955   |       | $ | 14,653 |   |
| Interest income        |       | (67      | )          | (190     | )          | (184     | )          |
| Interest  expense, net |       | $        | 15,293     |     | $          | 14,765   |       | $ | 14,469 |   |

 

**21.**   RELATED PARTYTRANSACTIONS

Other than the husband and wife relationship betweenthe CEO and COO, there are no other family relationships among any otherexecutive officers of the Company.

A director is currently an employee of Pepper HamiltonLLP, which provides legal services to the Company. The Company paid legal feesto this law firm of $315,000, $147,000 and $348,000 in fiscal 2005, 2004 and2003, respectively. As of September 30, 2005, the Company had amountsoutstanding to this law firm of $57,000, which are included in accounts payable,and in accrued expenses and other current liabilities in the accompanyingConsolidated Balance Sheets.

During fiscal 2004, the Company repurchased anaggregate of 14,954 shares of common stock from both the Company’s CEO and COOas part of the share repurchase program.

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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, 2005 |       |                                           |       |                                                     |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Product return  reserve             |       |                                           | $          | 438                                                      |       |           |       | $                                        | —     |   |   |   | $ | (77 | ) |   |   | $ | 361 |   |   |
| Year Ended  September 30, 2004 |       |                                           |       |                                                     |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Product return  reserve             |       |                                           | 400        |                                                     |       |           | 38         |                                     |       |   | — |   |   |   | 438 |   |   |
| Year Ended  September 30, 2003 |       |                                           |       |                                                     |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Product return reserve              |       |                                           | —     |                                                     |       |           | 400        |                                     |       |   | — |   |   |   | 400 |   |   |
|                                     |            |                                                |            |                                                          |            |                |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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