UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



FORM 10-KFOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended January 2, 2010oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No fee required)


Commission file number 0-10345

CACHE, INC.(Exact name of registrant as specified in its charter)

Florida(State or other jurisdiction of
incorporation or organization)

59-1588181(IRS Employer Identification No.)1440 Broadway, New York, New York(Address of principal executive offices)

10018(Zip Code)


Registrant's
telephone number, including area code:(212) 575-3200

Securities
registered pursuant to Section 12(b) of the Act: none

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

Title of ClassCommon Stock, $.01 par value


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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes o    No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company ý


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

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $39 million as of June 27, 2009,
the last business day of the registrant's most recently completed second fiscal quarter, based upon the closing sale price of $3.65 of the registrant's Common Stock as reported on the Nasdaq National
Market on such date. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes.

As
of March 1, 2010, 12,751,174 common shares were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information included in the Registrant's Proxy Statement to be filed in connection with its 2010 Annual Meeting
of Stockholders has been incorporated by reference into Part III (Items 10, 11, 12, 13, 14 and 15) of this report on Form 10-K.



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CACHE, INC.
FORM 10-K ANNUAL REPORT
JANUARY 2, 2010

TABLE OF CONTENTS



PagePART IItem 1.

Business

3Item 1A.

Risk Factors

10Item 1B.

Unresolved Staff Comments

17Item 2.

Properties

17Item 3.

Legal Proceedings

17Item 4.

Submission of Matters to a Vote of Security Holders

18PART IIItem 5.

Market for the Registrant's Common Stock and Related Stockholder Matters

19Item 6.

Selected Financial Data

21Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

23Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

37Item 8.

Financial Statements and Supplementary Data

38Item 9.

Changes in and/or Disagreements with Accountants on Accounting and Financial Disclosure

38Item 9A.

Controls and Procedures

38Item 9B.

Other Information

39PART IIIItem 10.

Directors and Executive Officers of the Registrant

40Item 11.

Executive Compensation

40Item 12.

Security Ownership of Certain Beneficial Owners and Management

40Item 13.

Certain Relationships and Related Transactions

40Item 14.

Principal Accountant Fees and Services

40PART IVItem 15.

Exhibits and Financial Statement Schedule

40


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Table of Contents

STATEMENT REGARDING FORWARD LOOKING STATEMENTS

Except for the historical information and current statements contained in this Annual Report, certain matters discussed herein,
including, without limitation, "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements within the meaning of the Securities Act of 1933,
as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements involve risks and uncertainties. Actual results and timing of certain events could differ materially from
those projected in or contemplated by forward-looking statements due to a number of important factors, including, without limitation, general economic conditions and consumer spending patterns,
industry trends, merchandise and fashion trends, competition, vendor procurement issues, the ability to obtain financing and the factors discussed under "Item 1A. Risk Factors."

PART I

ITEM 1.    BUSINESS

OVERVIEW/RECENT DEVELOPMENTS

We are a nationwide, mall-based specialty retailer of lifestyle sportswear and dresses targeting style-conscious women. Our
merchandise offerings extend from elegant eveningwear to sophisticated casual and daytime sportswear, which encompasses a variety of tops, bottoms, dresses and accessories, all of which are sold under
our Cache brand. We believe the appeal of our merchandise is enhanced through the intimate boutique-like environment we offer to our customers. This environment is achieved through a high
level of customer service combined with our smaller store format, which averages approximately 2,000 square feet. As of January 2, 2010, we operated 286 stores, primarily situated in central
locations in high traffic, upscale malls, in 43 states, Puerto Rico and the U.S. Virgin Islands.

We
target women between the ages of 25 and 45 through our differentiated merchandising mix. Our brand appeals to a woman who has a youthful attitude, is self-confident and
fashion-conscious. Our sportswear embodies a mix of lifestyle separated for both day and evening. Our stores carry a range of diverse merchandise, which includes dresses for daytime and evening. We
believe that we continue to be an important dress resource and destination for our target customers. Our accessories complement the seasonal themes and palettes of our sportswear and dresses.

Fiscal
2009 marked a year of continued economic instability and a cautious consumer environment in the U.S. and abroad. This instability in the U.S. economy has negatively affected the
entire retail sector, including Cache, Inc., which resulted in decreased sales for the Company in fiscal 2009. We were disappointed in our performance, as the economic crisis during 2009
resulted in lower than expected sales.

The
Company began to make significant strategic changes in the second half of fiscal 2009, within the design, merchandising and production areas. Key executives were added to the
organization, both in late 2009 and early 2010. By adding new personnel to the organization, we intend to improve both the merchandise and the overall results, while placing Cache in a more
competitive position with other specialty retailers.

On
January 8, 2009, the Board of Directors authorized the repurchase of an additional 1,000,000 shares, bringing the total authorization to 4,500,000 shares. As of
January 2, 2010, the Company had repurchased 3,682,199 shares. The Company plans to execute this program either through the open market or in privately negotiated transactions in accordance
with SEC requirements, in either case, at prevailing market prices. There is no expiration date governing the period over which the Company may repurchase shares.

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Table of Contents

On
July 21, 2009, the Company held its annual meeting of the shareholders at its headquarters located in New York, New York. At this meeting, shareholders approved a stock option
and performance incentive plan and also authorized an additional 20,000,000 shares, which brings the total authorized to 40,000,000 shares, of the Company's common stock.

On
September 23, 2009, the Company entered into separation agreements with two of its then executive officers. As a result of these separation agreements, the Company recorded a
pre-tax charge of approximately $2.0 million for the year ended January 2, 2010. See Item 7 and Note 11 herein for additional details.

During
the fourth quarter of fiscal 2009, the Company recorded an impairment charge of $1.9 million for 23 underperforming stores, coupled with an impairment charge of
approximately $891,000 against the carrying value of its intangible assets associated with its wholesale divisionMary L. See Item 7 and Notes 6 and 10 herein for additional
details.

During
the fourth quarter of fiscal 2009, the Company decided to discontinue its wholesale division, and as a result recorded a pre-tax charge of approximately $111,000. See
Item 7 and Note 9 herein for additional details.

During
fiscal 2009, the Company made additional infrastructure investments in information technology. This includes investing in a new Product Lifecycle Management ("PLM") software,
which the Company plans to roll out in fiscal 2010. This new software will allow the Company to manage its inventory more efficiently and enhance the frequency and timeliness of competitive bids for
products directly sourced. In addition, the Company has also started building a business intelligence data warehouse. This data warehouse will host sales, customer and marketing data. Utilizing
reporting services and marketing applications with this new system will expand the company's reporting and analysis capability. Finally, the Company completed its multi retail channel project in
fiscal 2009, which stores information on our customers and sales from both Cache stores and the Cache.com website in a central location. This will give our customers a seamless, more convenient
shopping experience.

The
Company's former credit line with Bank of America, N.A. (the "Bank") expired on March 2, 2009. Subsequently, on May 27, 2009, the Company entered into a one year credit
facility with the Bank. Under this facility, the Company may direct the Bank to issue letters of credit up to a total of $1,425,000. Any outstanding letters of credit under this facility are
collateralized by granting to the bank a security interest in various certificates of deposit held by the Company and its subsidiaries with the Bank, amounting to a total of $1,500,000. This one year
credit facility will expire on May 1, 2010. The Company is currently reviewing its future requirements for a credit facility and plans to initiate discussion with its bankers to renew this
credit line or negotiate a new credit facility.

Merchandising, Design and Production

Our merchandising focuses on providing an attractive selection of sportswear and dresses extending from casual and daytime sportswear
into elegant day and eveningwear, as well as a collection of complementary accessories. All of our merchandise is sold under our own Cache label.

During
the fourth quarter of 2009 and early 2010, the Company added new personnel to revamp the merchandise design selection and flow. With these key additions to the organization, Cache
has begun to shift from a retailer who relied heavily on a fast-track calendar, typically a three-month calendar, to a more traditional design and production calendar. The shift to a
traditional calendar will provide us with a greater ability to source higher-quality fabrics and trims, thereby adding special details to elevate the appeal of our offerings. With our earlier
planning, we also expect to reduce our sourcing costs, which we believe will lead to improved gross margins.

For
2010, we are focused on delivering cohesive collections while elevating the quality and design of our product offerings and improving our merchandising, design and sourcing processes
so that we

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can
offer our customers higher quality and more unique assortments. In addition, we are increasing the frequency of new deliveries to drive inventory turns and increase merchandise margins, as we
revamp our sale strategy and upgrade our collections.

During
the fourth quarter of 2009, we revamped our markdown strategy. Cache has begun to return to retail best practices strategy with respect to markdowns. We have reduced the
proportion of promotional coupon discounts in direct mail and e-mail campaigns in relation to permanent or hard markdowns. Our markdowns are and will be focused on slower moving items
versus our previous emphasis on coupon discount promotions. We expect this strategy to improve our merchandise margins, as we take clearance markdowns on styles with weaker performance.

Our
merchandising strategy continues to focus on sophisticated fashion apparel and day-into-evening dresses. We continue to appeal to our existing Cache customers, while broadening our
customer reach to serve more of our customers' lifestyle needs in an effort to increase shopping frequency while also attracting new customers to our stores.

Merchandise

We design and market three general categories of merchandise:

Sportswear.Sportswear consists of related tops and bottoms, versatile enough to be worn during the day or out for evening events.
Price points for
sportswear in our stores generally range from $35 to $280.

Dresses.Dresses range from shorter lengths for day-time, cocktail, as well as day-into-evening wear to special
occasion long dresses. Price points for dresses in our stores generally range from $75 to $420.

Accessories.Accessories consist primarily of jewelry, belts and handbags selected to complement our sportswear and dress selections.
Price points
for accessories in our stores generally range from $5 to $100.

While
the majority of our merchandise is the same in all of our stores of the same concept, we employ both lower price point merchandise and higher priced merchandise in select
locations.

The
following table indicates the percentage of net sales by merchandise category at our retail stores for each of the periods indicated below:

53 Weeks Ended

52 Weeks Ended

52 Weeks EndedJanuary 2,
2010

December 27,
2008

December 29,
2007Sportswear


57.3
%

60.7
%

58.7
%Dresses


32.8


30.4


32.1Accessories


9.9


8.9


9.2Total


100.0
%

100.0
%

100.0
%


The
percentage of net sales represented by dresses at our stores is typically higher in the first half of the year, due to the prom season.

Design

Our merchandise offerings are organized around the spring and fall seasons. Our design team consists of seasoned designers who have
experience in the apparel industry, and are given a significant amount of creative freedom in the design process. Following the end of a season, our merchandising team reviews data from that season's
results as well as market research, retail trends and trade shows.

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Based
on this information, our team develops seasonal themes, which influence our exclusive designs for the following year.

Prior
to each season, our design team selects specific styles that reflect seasonal themes. The design team collaborates with our merchants to adjust test garments for color and style to
ensure offerings reflect the appropriate balance between fashion content and marketability. Our team then works with our technical department, fit models and manufacturers to guarantee our fit and
high-comfort standards are met. Our direct sourcing ability and close relationships with our vendors facilitate a fluid design cycle that enables us to create fashion-forward, exclusive
styles and test merchandise in select stores before store roll-outs.

Accessories
are manufactured for us by third party vendors, a process that allows our design and merchandising team to focus on our core apparel offerings. We also maintain close
relationships with our accessory vendors so that our accessories complement our seasonal themes and palettes.

Planning and Merchandising

We conduct our planning process based on our historical point-of-sale data, economic trends, seasonality and
anticipated demand. We determine at a corporate level the composition and amount of our merchandise by product, print, color, style and size. We are then able to negotiate bulk material purchases with
suppliers, which we believe enables us to obtain better pricing.

Our
merchandising and planning teams determine the appropriate level and type of merchandise for each store. Following receipt at our stores, the merchandising staff obtains daily sales
information and
store-level inventory generated by our POS system. Based upon this data, management makes decisions with respect to re-orders, store transfers and markdowns.

In
spring 2010, we will begin to deliver to our stores a cohesive collection with focused assortments that will encompass tops, bottoms, dresses and accessories, which will allow our
customers to purchase outfits and create a full wardrobe versus the previous assortments that were item driven. We will also continue to employ a key item strategy, whereby we maintain an inventory of
core items in every store. This provides customers with a level of certainty that these items will be in stock when they visit. In certain situations, a store that is experiencing particularly strong
sell-through relays the information to our management team and merchandisers, who in turn may add or adjust new merchandise in response to this feedback.

Production, Sourcing and Distribution

Our in-house production team coordinates the sourcing and distribution of a majority of our merchandise. The
in-house production team direct sources merchandise through third party vendors, both domestic and overseas. Direct sourcing involves sourcing materials and arranging for the manufacture
of goods designed by Cache's design team, as opposed to purchasing finished goods from a vendor or agent. Merchandise direct sourced through our in-house production team is distributed to
our stores via one third party distribution facility. During fiscal 2009, the Company direct sourced approximately 48% of its merchandise.

Merchandise
that is not direct sourced is purchased as finished goods, directly from other third party vendors or agents. Merchandise purchased in this manner is usually directly drop
shipped to our stores by the vendor or agent. During fiscal 2009, the Company purchased approximately 52% of its product through this channel. Our five largest vendors accounted for 27% of our
purchases and our largest vendor accounted for 14% of our purchases during fiscal 2009.

During
fiscal 2009, the Company expanded a shipping initiative that was first implemented during fourth quarter of fiscal 2008. Under this initiative, certain finished goods purchased
from third party vendors are shipped to our third party distribution center, where these goods are consolidated with our

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directly
sourced merchandise. Merchandise consolidated in this manner is then shipped to our stores. The Company achieved significant cost savings during fiscal 2009 from this shipping initiative.
Under this initiative certain finished goods purchased from third party vendors are shipped to our third party warehouse, which are then consolidated with our directly sourced merchandise. Merchandise
consolidated in this fashion is then shipped to our stores.

Store Operations

Store Design and Environment

Most of our stores range in size from approximately 1,500 to 2,500 square feet, with our typical store averaging approximately 2,000
square feet. We believe that our relatively smaller store size enables us to create a boutique-like atmosphere by providing a more intimate shopping experience and a higher level of
customer service than department stores. Most of our stores are open during the same hours as the malls in which they are located, typically seven days and six nights a week.

We
continue to remodel our Cache stores to enhance their appeal to our customers, including increasing access to merchandise, facilitating movement throughout the store and improving our
merchandise displays. Our remodeled store design emphasizes a modern, sophisticated and well-lit atmosphere with streamlined exteriors and sleek interiors.

We
generally remodel stores as leases come up for renewal. We remodeled one Cache store in fiscal 2009, 11 stores in fiscal 2008 and expect to remodel approximately three to five stores
in fiscal 2010. By the end of fiscal 2010, we expect to have remodeled approximately 87% of our Cache stores. Most store remodels take from six to eight weeks. During this period, we typically utilize
temporary locations in the mall near our existing locations so that customers can continue to shop for our merchandise.

Store Management and Training

We organize our stores into regions and districts, which are overseen by three regional vice presidents and 30 district managers. Each
of our district managers is typically responsible for eight to ten stores. We typically staff a majority of our stores with an average of one opening employee, two mid-day employees and
two closing employees.

We
seek to provide our customers with superior customer service. To enhance this part of our strategy, our employees receive in-store training, as well as career path
developmental assistance. In addition, our store managers receive both salaries and performance-based incentive bonuses. We pay sales associates and assistant managers on an hourly basis and offer
them performance incentives. From time to time, we offer additional incentives, such as sales contests, to both management and sales associates. Additionally, we place special emphasis on the
recruitment of fashion-conscious and career-oriented sales personnel. We train most new store managers in designated training stores and train most other new store sales personnel on the job.

Store Locations

As of January 2, 2010, we operated 286 stores located in 43 states, as well as Puerto Rico and the U.S. Virgin Islands.

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The
following table indicates our stores by state as of January 2, 2010:

Alabama


7

Louisiana


5

Ohio


9Arizona


5

Maine


1

Oklahoma


2Arkansas


2

Maryland


5

Oregon


2California


29

Massachusetts


7

Pennsylvania


8Colorado


4

Michigan


6

Rhode Island


2Connecticut


4

Minnesota


3

South Carolina


5Delaware


1

Mississippi


1

Tennessee


8Florida


42

Missouri


6

Texas


23Georgia


9

Nebraska


1

Utah


1Hawaii


3

Nevada


8

Virginia


10Illinois


9

New Hampshire


3

Washington


4Indiana


4

New Jersey


14

West Virginia


1Iowa


1

New Mexico


1

Wisconsin


2Kansas


2

New York


11

Puerto Rico


1Kentucky


3

North Carolina


9

US Virgin Islands


2


The
following table indicates the number of stores opened and closed over the past five fiscal years ended January 2, 2010:

Fiscal Period

Stores Open at
Beginning of
Period

Stores Opened
During Period

Stores Closed
During Period

Stores Open at
End of Period

Total Square
FootageFY2005


291


19


4


306


614,000FY2006


306


34


44


296


600,000FY2007


296


10


9


297


601,000FY2008


297


13


14


296


598,000FY2009


296


4


14


286


576,000


New Store Development

We continually review potential new locations for stores. We locate our new stores primarily in upscale shopping malls. When selecting
a new mall site, we target high traffic locations with suitable demographics and favorable lease economics. When evaluating a new mall location, we also look at the principal and anchor stores in the
mall, location of our store within the mall and other specialty stores located in the mall.

We
currently operate four street locations and one outlet store.

During
fiscal 2010, we expect to open approximately three to five new Cache stores.

Marketing and Promotion

Our marketing program currently consists of direct marketing through direct mail and email, as well as our customer loyalty program,
"Cache Accents".

The
Company's Cache Accents program is designed to encourage repeat sales, increase per transaction spending and create customer loyalty. A customer can enroll in the Cache Accents
program without any cost and earn a lifetime discount of 5%, as long as they are a member. A customer is considered to be a "preliminary" member until the customer spends $300 over any length of time.
Once the customer spends this amount, he or she becomes a "permanent" member and is then eligible for the 5% discount. As part of the Cache Accents program, the member is also entitled to free

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shipping
and notice of private sales. Most permanent members of the program receive an average of one fashion mailer per month. The Cache Accents program improves our ability to leverage our customer
database, which contains more than 4.4 million names.

In
early 2010, we began to reduce the proportion of promotional coupon discounts in direct mail and e-mail campaigns, which allows us to use more of the discount dollars for
in-store or mall promotions and hard markdowns. Our hard markdowns will be focused on slower moving items versus our previous emphasis on promotional coupon discounts.

Our
brand is also supported by visual merchandising, which consists of window displays, front table layouts and various in-store promotions. Visual merchandising is an
important component of our marketing and promotion strategy since our mall locations provide us with significant foot traffic. We make decisions regarding store displays and signage at the corporate
level, ensuring a consistent appearance throughout all our stores. In addition, we encourage store management to become involved in community affairs, such as participating in local charity fashion
shows, to expand our brand recognition and meet potential customers.

Our
web site,http://www.cache.com, allows customers to search for Cache store locations, purchase merchandise online, view currently
available styles and schedule private fittings of merchandise at any Cache store. Over the past three years, web site sales have increased from approximately $4.7 million in fiscal 2007 to
approximately $6.2 million in fiscal 2009.

Competition

The market for women's sportswear, dresses and accessories is highly competitive. We compete primarily with specialty retailers of
women's apparel and department stores located in the same mall or a nearby location. We believe our target customers choose to purchase apparel based on the following
factors:



Information Systems

We have historically invested in information systems to improve sales, gain efficiencies and reduce operating costs. Our information
systems integrate all major aspects of our business, including merchandise planning, purchasing, inventory control, distribution, sales and finance. Our stores utilize a POS system with item
look-up capabilities for both inventory and sales transactions. During fiscal 2009, the Company made additional infrastructure investments in information technology, which includes
investing in a new Product Lifecycle Management ("PLM") software that the Company plans to roll out in fiscal 2010. This new software will allow the Company to manage its production inventory more
efficiently and enhance the frequency and timeliness of competitive bids for products directly sourced. In addition, the Company has also started building a business intelligence data warehouse, which
will host sales, customer and marketing data. Utilizing reporting services and marketing applications with this new system will expand the company's reporting and analysis capability. Finally, the
Company completed its multi retail channel project in fiscal 2009, which stores information on our customers and sales from both Cache stores and the Cache.com website in a central location. We
believe this will provide our customers a seamless, more convenient shopping experience.

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Trademarks and Service Marks

We are the owner in the United States of the "Cache", "Cache Luxe" and "Mary L." trademarks and service marks. The marks are registered
with the United States Patent and Trademark Office. Each federal registration is renewable indefinitely if the mark is still in use at the time of renewal. Our rights to the aforementioned marks are a
significant part of our business. Accordingly, we intend to maintain these marks and the related registration. We are currently unaware of any material claims of infringement or other challenges to
our right to use our marks in the United States.

Employees

As of January 2, 2010, we had approximately 2,250 employees, of whom approximately 1,072 were full-time employees
and approximately 1,178 were part-time employees. As of January 2, 2010, we had approximately 2,077 store personnel
and approximately 173 non-store personnel. None of these employees are represented by a labor union. We consider our employee relations to be satisfactory.

Available Information

We make available on our website,http://www.cache.com, under "Investor Relations,"
free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, currents reports on Form 8-K and amendments to those reports
as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission ("SEC").

Our
Code of Business Conduct and Ethics, and Board of Directors' committee charters are also available on our website, under "Corporate Governance".

ITEM 1A.    RISK FACTORS

Risks Related to Our Business

Macroeconomic conditions have adversely impacted our business and results of operations and may continue to do so.

The retail sector is affected by macroeconomic factors, including changes in international, national, regional and local economic
conditions, employment levels and consumer spending patterns. Furthermore, because our customer traffic and sales volume are largely derived from the volume of consumer traffic in the malls in which
we operate, we are adversely affected by general declines in mall traffic. Since the slowdown that began in 2008, the overall economy, financial markets
and the related reduction in consumer confidence in the economy have negatively affected results of operations throughout large segments of our industry, including our segment, and are expected to
continue to do so until economic conditions improve. Accordingly, macroeconomic conditions have adversely affected and continue to adversely affect our results of operations. Continued weakness in or
a further worsening of the economy generally or in a number of our markets could adversely affect our financial position and results of operations, cause us to reduce the number and frequency of new
store openings, slow our re-modeling of existing locations or cause us to increase store closings.

Our continued growth will depend on our ability to successfully open and operate new stores.

Our continued growth depends on our ability to open and operate new stores on a profitable basis. Opening new stores is dependent on a
variety of factors including our ability to:



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During
fiscal 2010, we expect to open approximately three to five new stores. As the economy improves, we intend to open new stores in future years and to remodel many of our existing
stores as their leases come up for renewal. Continued expansion could place demands on our operational, managerial and administrative resources, which could have a material adverse effect on our
ability to manage our business. As we open more stores, our resources may come under greater strain and may prove to be inadequate. If we are unable to open new stores or remodel our existing stores
as planned, or if our new stores are unsuccessful, it could have a negative impact on our financial performance. Even if we are able to open new stores as planned, some of our newly opened stores may
not be commercially successful, possibly resulting in their closure at a significant cost to us or a material adverse effect on our financial condition or results of operations. During fiscal 2009, we
closed 14 stores and expect to close three to four additional stores during fiscal 2010.

Our expansion into new markets could adversely affect our financial condition and results of operations.

Some of our new stores will be opened in areas of the United States in which we currently have few or no stores. The expansion into new
markets may present competitive, merchandising and administrative challenges that are different from those currently encountered in our existing markets. Any of these challenges could adversely affect
our business, financial condition and results of operations. To the extent our new store openings are in existing markets, we may experience reduced net sales volumes in existing stores in those
markets.

Our ability to attract new customers to our stores depends heavily on the success of the shopping malls in which we are located.

All but a few of our existing stores are located in shopping malls. Sales at these stores are derived in large part from the volume of
consumer traffic in these malls. Mall traffic declined significantly during fiscal 2009 due to macroeconomic factors, which has adversely affected our customer traffic and sales volume. In addition,
traffic in some of the malls in which we have stores has been adversely affected by store closures and bankruptcies by other tenants, including anchor or other large tenants. We cannot control vacancy
rates in the malls in which we have stores, continued popularity of malls as shopping destinations, the solvency of landlords and the level of maintenance and upkeep that they perform or improvements
that they make at our malls, development of new shopping malls or the availability or cost of appropriate locations within existing or new shopping malls. A further decrease in shopping mall traffic
is likely to adversely affect our results of operations.

Our comparable store sales and quarterly results of operations are affected by many factors that we cannot control.

Our quarterly results of operations for our individual stores have fluctuated significantly in the past and will continue to fluctuate
in the future. Since the beginning of fiscal 2007, our quarterly comparable sales at Cache stores have ranged from an increase of 4% to a decrease of 23%. Our comparable store sales and quarterly
results of operations are affected by a variety of factors, most of which we cannot control, including:



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Our success depends in part on the efforts of our management team.

Our success in managing our business and implementing our business and growth strategies depends on the abilities and experience of our
management team. If we were to lose the services of one or more members of this team, and in particular the services of Thomas Reinckens, our Chairman and Chief Executive Officer, we may be unable to
find a suitable replacement in a timely manner. This in turn could adversely affect our business, financial condition and results of operations.

Our manufacturers may be unable to manufacture and deliver products in a timely manner or meet our quality standards, which could result in lost sales, cancellation charges
or excessive markdowns.

We direct source a large portion of our product directly from unaffiliated third party manufacturers. During fiscal 2009, the Company
direct-sourced approximately 48% of its merchandise. We cannot guarantee that direct-sourcing will continue to result in cost savings. In addition, we may not be able to effectively manage and
cultivate direct relationships with manufacturers, which could result in additional costs and manufacturing delays. Furthermore, similar to most other specialty retailers, we have short selling
seasons for much of our inventory. Factors outside of our control, such as manufacturing or shipping delays or quality problems, could disrupt merchandise deliveries and result in lost sales,
cancellation charges or excessive markdowns, all of which could have a material adverse effect on our business, financial condition and results of operations.

We rely on a relatively small number of domestic vendors for a portion of our product, and our success depends in part on maintaining good relationships with these vendors.

During fiscal 2009, Cache purchased approximately 52% of the dollar volume of its product directly from third party vendors or agents.
The terms of our relationships with our vendors generally are not contractual and do not assure adequate supply or pricing on a long-term basis. If one or more of these vendors ceased to
sell to us or significantly alter the terms of our relationship, we may be unable to obtain merchandise in a timely manner, in the desired styles, fabrics or colors, or at the prices and volumes we
wish to purchase. This could hurt our ability to respond to changing fashion trends and thus our sales and profitability. In addition, the continued increase in our direct-sourcing of merchandise from
international vendors could cause our existing domestic vendors to reduce or eliminate their sales to us.

Substantially all of the materials used to manufacture our merchandise are produced in foreign facilities. This subjects us to the risks of international trade and other
risks generally associated with doing business in foreign markets.

We and substantially all of our vendors utilize overseas production facilities. The failure of foreign manufacturers to ship materials
or products to us in a timely manner could result in our stores lacking needed inventory. Any event causing a disruption of imports, including financial or political instability, currency
fluctuations, terrorism or heightened security, trade restrictions in the form of tariffs or quotas

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or
both, political or military conflict involving the United States, or the migration of manufacturers, could negatively affect our business, financial condition or results of operations. These
adverse impacts may include an increased cost to us, reductions in the supply of merchandise or delays in our manufacturing lead time.

We rely on our manufacturers to use acceptable ethical business practices, and if they fail to do so, the Cache brand name could suffer reputational harm and our sales could
decline or our inventory supply could be interrupted.

We do not control our manufacturers or their labor and other business practices. If one of our manufacturers violates labor or other
laws or implements labor or other business practices that are generally regarded as unethical in the United States, our reputation could be damaged and the shipment of finished products to us could be
interrupted. Either of these events could have a material adverse effect on our revenues and, consequently, our results of operations.

We rely on third parties to distribute our merchandise. If these third parties do not adequately perform this function, our business would be disrupted.

The efficient operation of our business depends on the ability of the Company and its vendors to ship merchandise through third party
carriers, such as United Parcel Service, directly to our individual stores. These carriers typically employ personnel represented by labor unions and have experienced labor difficulties in the past.
Due to our reliance on these parties for our shipments, interruptions in shipments could adversely affect our business, financial condition and results of operations. Increases in fuel prices may also
increase our shipping costs, which could adversely affect our business, financial condition and results of operations.

The raw materials used to manufacture our products and our distribution and labor costs are subject to availability constraints and price volatility, which could result in
increased costs.

The raw materials used to manufacture our products are subject to availability constraints and price volatility caused by high demand
for petroleum-based synthetic fabrics, weather, supply conditions, regulations, economic climate and other unpredictable factors. In addition, our transportation and labor costs are subject to price
volatility caused by the price of oil, supply of labor, regulations, economic climate and other unpredictable factors. Increases in demand for, or the price of, raw materials, distribution services
and labor could have a material adverse effect on our business, financial condition and results of operations.

Because our Cache brand is associated with all of our merchandise, our success depends heavily on the value associated with our brand. If the value associated with our brand
were to diminish, our sales could decrease, causing losses or lower profits.

Our success depends on our Cache brand and its value. The Cache brand could be adversely affected if our public image or reputation
were to be tarnished, which could result in a material adverse effect on our business, financial condition and results of operations.

We may be unable to protect our trademarks and other intellectual property rights.

We believe that our trademarks and service marks are important to our success and our competitive position due to their name
recognition with our customers. There can be no assurance that the actions we have taken to establish and protect our trademarks and service marks will be adequate to prevent imitation of our products
by others or to prevent others from seeking to block sales of our products as a violation of the trademarks, service marks and proprietary rights of others. Also, others

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may
assert rights in, or ownership of, our trademarks and other proprietary rights, and we may be unable to successfully resolve those types of conflicts to our satisfaction.

Any material disruption of our information systems could disrupt our business and adversely affect our results of operations.

Our information systems integrate all major aspects of our business, including merchandise planning, purchasing, inventory control,
distribution, sales and finance. Our POS system, which uses a wide area network allows us to add various functionalities, including the ability to process debit card transactions, centralize credit
authorizations, enhance labor scheduling, centralize our customer database, manage our customer loyalty program, speed up customer transaction time and analyze real-time sales data. We are
dependent on these information systems for the efficient operation of our business, including our web site, and to facilitate the enhancement of our marketing efforts.

We
may experience operational problems with our information systems as a result of system failures, viruses, computer "hackers" or other causes. Any material disruption or slowdown of
our systems, including a disruption or slowdown caused by any failure on our part to successfully maintain or perform additional upgrades to our systems, could cause information to be lost or delay
our ability to process and make use of that information in our business, which may adversely affect our results of operations. In addition, if future changes in technology cause our information
systems to become obsolete, or if our current information systems prove to be inadequate to support our growth, it could adversely affect our business and results of operations.

Our marketing efforts rely upon the effective use of customer information. Restrictions on the availability or use of customer information could adversely affect our
marketing initiatives, which could adversely affect our business and results of operations.

We use our Cache Accents loyalty program database and other customer information to market to our customers. Any limitations imposed on
the use of such consumer data, whether imposed by federal or state governments or business partners, could have an adverse effect on our future marketing activity. In addition, to the extent our
security procedures and protection of customer information prove to be insufficient or inadequate, we may become subject to litigation, which could expose us to liability and cause damage to our
reputation or brand.

We are subject to numerous regulations that could adversely affect our operations. Changes in such regulations could impact the operation of our business through delayed
shipments of our goods, fines or penalties that could affect our profitability.

We are subject to customs, truth-in-advertising, truth-in-lending and other laws,
including consumer protection regulations and zoning and occupancy ordinances, that
regulate retailers generally and/or govern the importation, promotion and sale of merchandise, the use of proprietary credit cards and the operation of retail stores and distribution facilities.
Although we undertake to monitor changes in these laws, if these laws change without our knowledge, or are violated by our employees, importers, buying agents, manufacturers or distributors, we could
experience delays in shipments and receipt of goods or be subject to fines or other penalties under the controlling regulations, any of which could have a material adverse effect on our business,
financial condition and results of operations.

Risks Related to Our Industry

Our success depends on our ability to respond rapidly to ever-changing fashion trends and customer demands.

Customer tastes and fashion trends change rapidly. Our success depends in large part on our ability to anticipate the fashion tastes of
our customers, to respond to changing fashion tastes and

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consumer
demands, and to translate market trends into fashionable merchandise on a timely basis. If we are unable to anticipate, identify or react to changing styles or trends, our sales may decline
and we may be faced with excess inventories. If this occurs, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow moving inventory. This could also cause
us to miss opportunities. Both of the foregoing could have a material adverse effect on our business, financial condition and results of operations. In addition, if we misjudge fashion tastes and our
customers come to believe that we are no longer able to offer fashions that appeal to them, our brand image may suffer.

We may be adversely impacted at any time by a significant number of competitors.

The women's apparel market is highly competitive, fragmented and characterized by low barriers to entry. We compete against a diverse
group of retailers, including traditional department stores, national and local specialty retail stores, internet-based retailers and mail order retailers. Many of our competitors, particularly
traditional department stores and national
specialty retail stores, are larger and have greater resources to expend on marketing and advertising campaigns. In addition, many of these competitors are already established in markets that we have
not yet penetrated and have greater name recognition in general. We cannot assure you that we will continue to be successful in competing against existing or future competitors. Our expansion into
markets served by our competitors or entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on our business, financial condition and
results of operations.

In
addition, as a result of macroeconomic conditions, a substantial number of retailers have increased the frequency and duration of their discount sales and other promotions and have
increased the level of merchandise discounts. This has resulted and is expected to continue to result in intense competition. Furthermore, in order to remain competitive, we have had to increase our
use of discount sales, which has reduced our gross margins.

Our sales fluctuate on a seasonal basis and are sensitive to economic conditions, consumer spending patterns and other events and conditions.

Our net sales and net income are generally highest each year during our fourth fiscal quarter (October, November and December) and
lowest in our third fiscal quarter (July, August and September). Sales during any period cannot be used as an accurate indicator of our annual results. Any significant decrease in sales during the
fourth quarter in a given year would hurt our profitability. As a result of macroeconomic conditions, we experienced a significant decrease in sales and profitability during fiscal 2009.

Our
business is also sensitive to changes in macroeconomic conditions and consumer spending patterns, as discussed in the other Risk Factors contained herein. In addition, our business,
financial condition and results of operations may be adversely affected by the timing of holidays and other local, regional, national or international events and conditions, including energy prices,
climatological events such as hurricanes, strikes and other business disruptions, or the effects of war, terrorism or the threat of either of these events.

If new legislation restricting the importation or increasing the cost of textiles and apparel produced abroad is enacted, our business could be adversely affected.

Legislation that would restrict the importation or increase the cost of textiles and apparel produced abroad has been periodically
introduced in Congress. The enactment of new legislation or international trade regulation, or executive action affecting international textile or trade agreements, could adversely affect our
business. International trade agreements that can provide for tariffs and/or quotas can increase the cost and limit the amount of product that can be imported.

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Table of Contents

In
May 2005, the United States imposed unilateral quotas on several product categories, limiting growth in imports of these categories to 7.5% a year. The safeguard quotas in several
categories have been extended by the United States government and will likely continue through 2010. These limitations apply to a limited number of products imported by us from China. We are unable to
assess the potential for additional action by the United States government with respect to these or other product categories. Limitations on the quantity of imported apparel can significantly disrupt
the apparel market in the United States, which could limit our ability to import apparel and increase our costs.

Risks Related to Our Common Stock

Our share price has fluctuated significantly and could continue to fluctuate significantly.

Between December 30, 2007 and January 2, 2010 (the Company's fiscal years 2008 and 2009), the market price of our common
stock has ranged from $1.41 to $14.86 per share. The stock market has, from time to time and especially since the fourth quarter of fiscal 2008, experienced extreme price and volume fluctuations. The
market price for our common stock may change significantly in response to various factors, including:



In
the past, companies that have experienced volatility in the market price of their shares have been the subject of securities class action litigation. If we become involved in a
securities class action litigation in the future, it could result in substantial costs and diversion of our management's attention and resources, thus harming our business.

Provisions of our governing documents and Florida law could discourage acquisition proposals or delay a change in our control, and this may adversely affect the market price
of our common stock or deny our stockholders a chance to realize a premium on their shares.

Our articles of incorporation and by-laws contain anti-takeover provisions, including those listed below, that
could make it more difficult for a third party to acquire control of us, even if that change in control would be beneficial to our stockholders:



In
addition, provisions of Florida law and our stock option plans may also discourage, delay or prevent a change in control of our company or unsolicited acquisition proposals.

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Table of Contents

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

All but a few of our 286 stores are located in shopping malls. The substantial majority of our stores contain between 1,500 and 2,500
square feet of space, with the typical store averaging 2,000 square feet. All of our stores are in leased facilities, and we typically negotiate our rental agreements based on our portfolio of store
locations with a particular landlord rather than on an individual basis. Rental terms usually include a fixed minimum rent plus a percentage rent based on sales in excess of a specified amount. In
addition, we generally are required to pay a charge for
common area maintenance, utility consumption, promotional activities and/or advertising, insurance and real estate taxes. Many leases contain fixed escalation clauses. Most leases contain leasehold
improvement reimbursements from landlords and/or rent holidays. In recognizing landlord incentives and minimum rent expenses, the Company amortizes the charges and incentives on a straight line basis
over the lease term.

Our
leases expire at various dates through 2020. In most instances, we have renewal options at increased rents. The following table indicates the periods during which our leases expire.

Fiscal YearsPresent2012


7720132015


11520162018


7720192020


17Totals


286


Our
corporate office is a 20,000 square foot facility located at 1440 Broadway in New York City. We lease this space under a 10-year lease through 2014 at a rate of
approximately $543,000 per year. In addition, we also lease a 14,500 square foot facility, which houses our design, production, sourcing and customer service departments, located at 260 West
39th Street in New York City, which runs through 2012 at a rate of approximately $345,000 per year.

ITEM 3.    LEGAL PROCEEDINGS

We are party to various lawsuits arising in the ordinary course of our business. Management does not believe it is reasonably possible
that resolution of these matters will result in a material loss.

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Table of Contents

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Cache, Inc. held its annual meeting of shareholders at its headquarters in New York, New York on July 21, 2009. Of the
12,727,837 shares outstanding as of the record date, 11,343,663 shares were represented by proxy at the meeting. Proxies were solicited by Cache pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended. At the meeting, Cache's shareholders voted on the following matters:

For

WithheldAndrew M. Saul


7,787,365


3,556,298Thomas E. Reinckens


10,444,588


899,075Gene G. Gage


8,447,548


2,896,115Arthur S. Mintz


8,447,548


2,896,115Morton J. Schrader


8,440,034


2,903,629


For

Against

Abstain

Not Voted5,567,804


3,655,796


5,485


2,114,578


For

Against

Abstain7,954,993


3,387,768


902


For

Against

Abstain11,293,134


48,192


2,337


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Table of Contents

PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Fiscal 2009

Fiscal 2008Fiscal Period

High

Low

High

LowFirst Fiscal Quarter

$
3.02

$
1.43

$
12.43

$
8.00Second Fiscal Quarter

$
5.13

$
2.15

$
14.83

$
9.77Third Fiscal Quarter

$
5.65

$
3.20

$
14.86

$
6.29Fourth Fiscal Quarter

$
5.88

$
3.66

$
6.90

$
1.41


Plan Category

Number of
securities
to be
issued
upon
exercise of
outstanding
common stock

Weighted
average
exercise
price of
outstanding
common stock

Number of
securities remaining
available for the
future issuance
under equity
compensation plans
(excluding
securities
reflected in
column(a)(a)

(b)

(c)Equity compensation plans approved by security holdersStock Options


752,675

$
12.76


Equity compensation plans approved by security holdersRestricted Stock


140,661

$
3.81


Equity compensation plans not approved by security holders








Total


893,336

$
11.35


616,002




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Table of Contents

Fiscal Period Ended

Total
number of
shares
Purchased

Average
price
paid
Per share

Total
number of
shares
purchased
as part of
publicly
announced
plans or
programs

Maximum
number
(or approximate
value) of shares
that may yet be
purchased
under the plans
or programsJanuary (12/28/081/24/09)


56,886

$
1.93


56,886


1,071,114March (2/22/093/28/09)


253,313

$
1.88


253,313


817,801Total


310,199

$
1.89


310,199


All
purchases were made pursuant to the previously announced share repurchase program approved by our Board on various dates during fiscal 2007, 2008 and 2009. Total repurchase
authorization under the 2007, 2008 and 2009 programs amounts to 4,500,000 shares. There is no expiration date for this repurchase program. All shares purchased as part of the share repurchase program
were purchased in open market transactions.

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Table of Contents

ITEM 6.    SELECTED FINANCIAL DATA

The following Selected Consolidated Financial Data should be read in conjunction with the Company's Consolidated Financial Statements
and Notes thereto.

53
WEEKS
ENDED

52
WEEKS
ENDED

52
WEEKS
ENDED

52
WEEKS
ENDED

52
WEEKS
ENDEDJAN. 2,
2010

DEC. 27,
2008

DEC. 29,
2007

DEC. 30,
2006

DEC. 31,
2005(in thousands, except per share and operating data)STATEMENT OF INCOME DATA:Net sales

$
219,775

$
265,728

$
274,458

$
278,992
(5)
$
266,345Cost of sales


131,990


156,036


147,474


145,886


144,984Gross profit


87,785


109,692


126,984


133,106


121,361Store operating expenses


79,167


95,339


97,023


94,556


85,529General and administrative expenses


18,341


21,296


22,725


21,246


15,824Exit costs


(65
)

2,757
(7)

(78
)

5,677
(6)

Impairment charges


2,744
(8)

2,137
(8)







Employee separation charge


1,987
(9)










Operating income (loss)


(14,389
)

(11,837
)

7,314


11,627


20,008Other income, (net)(1)


32


463


2,601


2,523


1,072Income (loss) before income taxes


(14,357
)

(11,374
)

9,915


14,150


21,080Income tax provision (benefit)


(5,663
)

(4,252
)

3,394


5,879


7,675Net income (loss)

$
(8,694
)
$
(7,122
)
$
6,521

$
8,271

$
13,405Earnings per share:Basic earnings (loss) per share

$
(0.68
)
$
(0.53
)
$
0.41

$
0.52

$
0.85Diluted earnings (loss) per share

$
(0.68
)
$
(0.53
)
$
0.40

$
0.51

$
0.83Weighted average shares outstanding:Basic


12,795


13,329


15,966


15,849


15,726Diluted(2)


12,795


13,329


16,200


16,218


16,150Store data:Total number of stores openAt the end of period


286


296


297


296


306Cache/Cache Luxe


286


296


297


293


267Lillie Rubin











3


39Total average sales per square foot(3)

$
353

$
424

$
449

$
463

$
450Cache/Cache Luxe

$
353

$
424

$
449

$
467

$
461Lillie Rubin

$


$


$


$
253

$
320Sales DataTotal sales increase (decrease)


(17.3
)%

(3.2
)%

(1.6
)%

4
%

4
%Comparable stores: Cache/Cache Luxe(4)


(18.0
)%

(4.3
)%

(0.6
)%

5
%

6
%Comparable stores: Lillie Rubin(4)











(17
)%

(10
)%Total square footage


576


598


601


600


614


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Table of Contents

JAN. 2,
2010

DEC. 27,
2008

DEC. 29,
2007

DEC. 30,
2006

DEC. 31,
2005(in thousands, except per share and operating data)BALANCE SHEET AND OTHER DATA:Working capital

$
41,923

$
43,461

$
59,672

$
83,391

$
63,786Total assets

$
110,997

$
119,525

$
149,125

$
159,186

$
150,884Total short and long-term debt

$
2,833

$
4,402

$
5,934

$


$
Stockholders' equity

$
70,283

$
79,163

$
100,264

$
116,463

$
98,996Ratio of current assets to current liabilities


2.79:1


3.13:1


3.11:1


4.35:1


2.92:1Inventory turnover ratio


6.78:1


5.90:1


4.51:1


4.31:1


4.46:1Capital expenditures

$
1,976

$
10,673

$
12,094

$
12,250

$
15,490Depreciation and amortization

$
11,855

$
12,774

$
12,124

$
11,026

$
9,779Book value per share

$
5.51

$
6.07

$
6.86

$
7.16

$
6.28


(1)Other
income consists of interest income, interest expense and miscellaneous income.(2)Options
and unvested restricted common shares of 893,336 and 732,675 were excluded from the computation of diluted earnings per share for fiscal 2009 and
2008, respectively, because of the net loss incurred by the Company. Diluted weighted average shares for the fiscal years ended December 29, 2007, December 30, 2006 and
December 31, 2005 include 234,000, 369,000 and 424,000, respectively, due to the potential exercise of stock options that were outstanding and exercisable during those years.(3)Average
sales per square foot are calculated by dividing net sales by the weighted average store square footage available.(4)Comparable
store sales data is calculated based on the net sales of stores open at least 12 full months at the beginning of the period for which the data
are presented.(5)Includes
recognition of $2.5 million of breakage income for previously issued gift cards and merchandise credits.(6)Includes
a charge of $5.7 million for the exit of the Lillie Rubin business.(7)Includes
a charge of $2.8 million for the closure of several Cache and Cache Luxe stores.(8)Consists
of impairment charges of approximately $1.9 million for 23 underperforming stores and $1.1 million for 12 underperforming stores for
fiscal 2009 and 2008, respectively. In addition, includes impairment charge of approximately $891,000 against the carrying value of the Company's intangible assets associated with its wholesale
divisionMary L. and $1.0 million against the carrying value of the Company's goodwill, for its AVD reporting unit, for fiscal 2009 and 2008, respectively.(9)Charges
recorded in connection with separation agreements entered into with two of its then executive officers.


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Table of Contents

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

We are a nationwide, mall-based specialty retailer of lifestyle sportswear and dresses targeting style-conscious women. Our
merchandise offerings extend from elegant eveningwear to sophisticated casual and daytime sportswear, which encompasses a variety of tops, bottoms, dresses and accessories, all of which are sold under
our Cache brand. We believe the appeal of our merchandise is enhanced through the intimate boutique-like environment we offer to our customers. This environment is achieved through a high
level of customer service combined with our smaller store format, which averages approximately 2,000 square feet. As of January 2, 2010, we operated 286 stores, primarily situated in central
locations in high traffic, upscale malls, in 43 states, Puerto Rico and the U.S. Virgin Islands.

We
target women between the ages of 25 and 45 through our differentiated merchandising mix. Our brand appeals to a woman who has a youthful attitude, is self-confident and
fashion-conscious. Our sportswear embodies a mix of lifestyle separates for both day and evening. Our stores carry a range of diverse merchandise, which includes dresses for daytime and evening. We
believe that we continue to be an important dress resource and destination for our target customers. Our accessories complement the seasonal themes and palettes of our sportswear and dresses.

For
the fiscal year ended January 2, 2010, sportswear accounted for 57.3%, dresses for 32.8% and accessories for 9.9% of Cache's net sales. Cache's price points generally range
from $35 to $280 for sportswear, $75 to $420 for dresses and $5 to $100 for accessories.

Management Overview

Fiscal 2009 marked a year of continued economic instability and a cautious consumer environment in the U.S. and abroad. This
instability in the U.S. economy has negatively affected the entire retail sector, including Cache, Inc., which resulted in decreased sales for the Company in fiscal 2009. We were disappointed
in our performance, as the economic crisis during 2009 resulted in lower than expected sales.

The
Company began to make significant strategic changes in the second half of fiscal 2009, within the design, merchandising and production areas. Key executives were added to the
organization, both in late 2009 and early 2010. By adding new personnel to the organization, we intend to improve both the merchandise and the overall results, while placing Cache in a more
competitive position with other specialty retailers.

On
January 8, 2009, the Board of Directors authorized the repurchase of an additional 1,000,000 shares, bringing the total authorization to 4,500,000 shares. As of
January 2, 2010, the Company had repurchased 3,682,199 shares. The Company plans to execute this program either through the open market or in privately negotiated transactions in accordance
with SEC requirements, in either case, at prevailing market prices. There is no expiration date governing the period over which the Company may repurchase shares.

On
July 21, 2009, the Company held its annual meeting of the shareholders at its headquarters located in New York, New York. At this meeting, shareholders approved a stock option
and performance incentive plan and also authorized an additional 20,000,000 shares, which brings the total authorized to 40,000,000 shares, of the Company's common stock.

On
September 23, 2009, the Company entered into separation agreements with two of its then executive officers. As a result of these separation agreements, the Company recorded a
pre-tax charge of approximately $2.0 million as of January 2, 2010.

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Table of Contents

During
the fourth quarter of fiscal 2009, the Company recorded an impairment charge of $1.9 million for 23 underperforming stores, coupled with an impairment charge of
approximately $891,000 against the carrying value of its intangible assets associated with its wholesale divisionMary L.

During
the fourth quarter of fiscal 2009, the Company decided to discontinue its wholesale division, and as a result recorded a pre-tax charge of approximately $111,000.

The
Company opened four Cache stores in fiscal 2009 and closed 14 stores. Operating cash flow funded all store openings. For the year ended January 2, 2010, the Company remodeled
one store, which resulted in approximately 85% of the chain now in new remodel format. In fiscal 2010, we intend to open approximately three to five new stores, also intended to be funded by operating
cash flow.

During
fiscal 2009, the Company made additional infrastructure investments in information technology. This includes investing in a new Product Lifecycle Management ("PLM") software,
which the Company plans to roll out in fiscal 2010. This new software will allow the Company to manage its inventory more efficiently and enhance the frequency and timeliness of competitive bids for
products directly sourced. In addition, the Company has also started building a business intelligence data warehouse. This data warehouse will host sales, customer and marketing data. Utilizing
reporting services and marketing applications with this new system will expand the company's reporting and analysis capability. Finally, the Company completed its multi retail channel project in
fiscal 2009, which stores information on our customers and sales from both Cache stores and the Cache.com website in a central location. This will give our customers a seamless, more convenient
shopping experience.

We
use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, some of which are set forth in the following table:

53 Weeks Ended

52 Weeks Ended

52 Weeks EndedJanuary 2, 2010

December 27, 2008

December 29, 2007Operating ResultsTotal store count, at end of period


286


296


297Net sales decrease


(17.3
)%

(3.2
)%

(1.6
)%Comparable store sales decrease


(18.0
)%

(4.3
)%

(0.6
)%Net sales per square foot

$
353

$
424

$
449Total square footage (in thousands)


576


598


601


Net sales.Net sales consist of sales from comparable stores and non-comparable stores. A store is not included in comparable store
sales
until the first day of the fiscal month following the twelfth full month of sales. Non-comparable store sales include sales generated at new stores prior to the period when they are
considered comparable stores and sales generated from stores that we have since closed.

The
products of our wholesale division are sold in upper tier department stores and the resulting sales are included under net sales. Sales from this wholesale division are recorded net
of any returns, chargebacks, discounts and allowances.

The
Company's co-branded customer credit card program, which was introduced during fiscal 2007, entitles the Company to receive from the issuing bank a
non-refundable credit card activation fee for each new account that is opened and activated. These fees are initially deferred and recognized in consolidated net sales as revenue over the
life of the contract. In addition, the Company receives from the issuing bank and Visa U.S.A Inc. a sales royalty, which is based on a percentage of net purchases made by the cardholder at
Cache or other businesses. Sales royalties earned are also recorded under net sales. The amount of fee income recorded in connection with activated credit cards was $456,000 in fiscal 2009, as
compared to $218,000 in fiscal 2008.

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Shipping and handling.Amounts billed to customers for shipping and handling fees are included in net sales at the time of shipment.
Costs incurred
for shipping and handling are included in cost of sales.

Cost of sales.Cost of sales includes the cost of merchandise, costs incurred for shipping and handling, payroll for our buying,
merchandising,
design, production and sourcing personnel and store occupancy costs.

Store operating expenses.Store operating expenses include payroll, payroll taxes, health benefits, insurance, credit card processing
fees,
depreciation, licenses and taxes, marketing and advertising expenses, as well as other store level expenses.

General and administrative expenses.General and administrative expenses include district and regional
manager payroll, other corporate personnel payroll and employee benefits, employment taxes, insurance, legal and other professional fees, as well as other corporate level expenses. Corporate level
expenses are primarily attributable to our corporate headquarters in New York.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our
financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could
be material to the financial statements.

Our
accounting policies are more fully described in Note 1 to the financial statements, located elsewhere in this document. We have identified certain critical accounting policies
which are described below.

Allowance for Doubtful Accounts.The allowance for doubtful accounts, which is regularly reviewed, is an estimate of the amount of
probable credit
losses in the existing accounts receivable. The allowance is determined based on historical write-off experience and the current retailer environment. Balances over 90 days past due
and over a specified amount are reviewed individually for collectability; other balances are considered on an aggregate basis considering the aging of balances. Account balances are written off
against the allowance when it is probable the receivable will not be recovered. There is no off-balance sheet credit exposure related to our customers. Management believes that the risk
associated with trade accounts receivable is adequately provided for in the allowance for doubtful accounts. During the 53 week period ended January 2, 2010, the Company recorded
reserves of approximately $664,000 and utilized $722,000, resulting in an aggregate reserve balance of $53,000, as of January 2, 2010. The Company reserved $111,000 for such items as of
December 27, 2008. This amount is included as part of the sales allowance reserve, which is provided in supplemental schedules on page F-37.

Inventories.Our finished goods inventories at our retail stores are valued at the lower of cost or market using the retail inventory
method. Under
the retail inventory method ("RIM"), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of
inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the
lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including,
among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. We take markdowns due to changes in
fashion and style, based on the following factors: (i) supply on hand, (ii) historical experience and (iii) our expectations as to future sales. We do not anticipate any
significant change in

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our
markdown strategy that would cause a significant change in our earnings. We believe that our RIM provides an inventory valuation, which results in a carrying value at the lower of cost or market.
Inventories other than finished goods at retail stores, called production inventory, primarily consists of piece goods, trim and work-in-process. It is the Company's policy to value the production
inventory, which makes up approximately 15% of Company's total inventory, at lower of cost or market value using first-in-first-out valuation method. The Company reviews the inventory for factors such
as age, obsolescence, potential use, or other factors that may indicate a decline in its value. The Company records a reserve against the cost of the production inventory to account for any decline in
its value.

Finite long-lived assets.The Company's judgment regarding the existence of impairment indicators is based on market and operational
performance. We assess the impairment of long-lived assets, primarily fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable and
exceeds the fair market value. Factors we consider important which could trigger an impairment review include the following:



The
Company evaluates finite-lived assets in accordance with "Impairment or Disposal of Long-Lived Assets" under Topic 360
"Property, Plant and Equipment" of the Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC"). Finite-lived assets are
evaluated for recoverability in accordance with Topic 360 of the FASB ASC whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for
recoverability, the Company estimates the future cash flows expected to result from the use and eventual disposition of the asset. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset is recognized. Various
factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from
the current estimates. The Company evaluated its finite-lived assets during fiscal 2009 and 2008 and as a result, recorded an impairment charge of $1.9 million for underperforming 23 stores and
$1.1 million for 12 underperforming stores, respectively.

Goodwill and Intangible Assets.The Company evaluates its Goodwill and Intangible assets in accordance with
"IntangiblesGoodwill and Other",Topic 350 of the FASB ASC. This guidance requires ratable amortization of goodwill be replaced with
periodic tests of the goodwill's impairment. The Company performs impairment testing, which considers the Company's fair value to determine whether an impairment charge related to the carrying value
of the Company's recorded goodwill and other intangible assets, associated with its AVD reporting unit, is necessary. This is reevaluated annually during the fourth quarter, or more frequently if
necessary. The Company considers many factors in evaluating whether the carrying value of the recorded goodwill will be recoverable. Factors used to determine this primarily include declines in stock
price and the market capitalization in relation to the book value of the Company, discounted projected cash flows of the reporting unit and valuation of companies comparable to the reporting unit.
During fiscal 2009, the Company did not incur an impairment charge against the carrying value of goodwill. In fiscal 2009, the continued instability of the United States economy resulted in the
Company experiencing decreased sales. The Company's stock price increased from its year-end 2008 level and its book value approximates its market capitalization plus a reasonable control
premium. The Company's impairment testing resulted in a fair value of equity for its AVD reporting unit that exceeded its carrying value of equity by approximately $1.2 million (or 8.2% of the
carrying value of equity). The Company's discounted projected cash flows for its AVD

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reporting
unit assumes that, the performance of fiscal 2010 is significantly improved from fiscal 2009 (with the second half of fiscal 2010 providing the majority of the expected improvement). In the
event
that the Company does not achieve its fiscal 2010 financial projections, an impairment charge to goodwill may occur. An impairment charge of $891,000 was recorded against the carrying value of
intangible assets associated with its wholesale divisionMary L., during the fourth quarter of fiscal 2009, related to the discontinuance of Mary L. Comparatively, an impairment
charge of $1.0 million was recorded against the carrying value of goodwill during the fourth quarter of fiscal 2008. Pursuant to the employee separation agreements entered into with two of the
Company's then officers (see Note 11), the Company recorded a pre-tax charge of $204,000 during the third fiscal quarter of 2009 for the remaining net book value of the
non-compete agreements contained in their employment agreements.

Self Insurance.We are self-insured for losses and liabilities related primarily to employee health and welfare claims up to certain
thresholds. Losses are accrued based upon our estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company
experience. Adjustments to earnings resulting from changes in historical loss trends have been insignificant for fiscal 2009, 2008 and 2007. Further, we do not anticipate any significant change in
loss trends, settlements or other costs that would cause a significant change in our earnings. We maintain stop loss insurance coverage which covers us for benefits paid in excess of limits as defined
in the plan.

Gift Cards, Gift Certificates and Credits.The Company sells gift cards and gift certificates ("Gift Cards") and issues credits to its
customers when
merchandise is returned ("Merchandise Credit"), which do not expire. The Company recognizes sales from Gift Cards when they are redeemed by the customer and income when the likelihood of the Gift Card
and Merchandise Credit being redeemed by the customer is remote ("Gift Card breakage"), since the Company has determined that it does not have a legal obligation to remit the unredeemed value to the
relevant jurisdiction as abandoned property. The Company determines Gift Card breakage income based upon historical redemption patterns and the remaining unredeemed percentage at the end of our
historical data of 3.5 years. Historical redemptions of Gift Cards ranged from 64% in the first quarter to 0.03% in the fourteenth quarter subsequent to the issue date, resulting in an average
of approximately 95% redeemed or 5% unredeemed Gift Cards over the historical data of 3.5 years. We have determined that redemption would be remote based on the fact that, by the fourteenth
quarter since issue date, the redemption rate approximated 0%, indicating that the probability of such cards being redeemed is remote. As such, we have recorded breakage income based upon this 5%,
which is reviewed on a quarterly basis for propriety. Breakage income represents the balance of Gift Cards and Merchandise Credit, for which the Company believes the likelihood of redemption by the
customer, is remote. At that time, the Company will recognize breakage income for those Gift Cards and Merchandise Credit.

The
Company recorded breakage income of $229,000, $287,000 and $293,000 during fiscal year ended 2009, 2008 and 2007, respectively.

Revenue Recognition.Sales are recognized at the "point of sale," which occurs when merchandise is sold in an
"over-the-counter" transaction or upon receipt by a customer. Sales of merchandise via our website are recognized at the expected time of delivery to the customer. Our
customers have the right to return merchandise. Sales are reported net of actual and estimated returns. We maintain a reserve for potential product returns and record, as a reduction to sales, a
provision for estimated product returns, which is determined based on historical experience. Charges/(credits) to earnings resulting from revisions to estimates on our sales return provision were
approximately ($80,000), ($202,000) and ($93,000) for fiscal 2009, 2008 and 2007, respectively. Amounts billed to customers for shipping and handling fees are included in net sales at the time of
shipment. Costs incurred at our stores for shipping and handling is included in cost of sales and costs incurred for the shipping and

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handling
of our wholesale products is included in general and administrative expenses. The Company records revenues net of applicable sales tax.

The
products of our wholesale division are sold in upper tier department stores and the resulting sales are included under net sales when the merchandise is shipped to department stores,
which are recorded net of any returns, chargebacks, discounts and allowances. We also maintain a reserve as a reduction to sales for potential returns, chargebacks, discounts and allowances. During
the 53 week period ended January 2, 2010, the Company recorded reserves of approximately $664,000, of which it utilized $722,000, resulting in an aggregate reserve balance of $53,000, as
of January 2, 2010. The Company reserved $111,000 for such items as of December 27, 2008. The Company decided to discontinue its wholesale division during the fourth quarter of fiscal
2009.

The
Company's co-branded customer credit card program, which was introduced during fiscal 2007, entitles the Company to receive from the issuing bank a
non-refundable credit card activation fee for each new account that is opened and activated. These fees are initially deferred and recognized in consolidated net sales as revenue over the
life of the contract. During fiscal 2009 and 2008, the Company received $1.1 million and $1.4 million, respectively, in connection with activated credit cards. The amount of fee income
recorded in connection with activated credit cards was $456,000 in fiscal 2009, as compared to $218,000 in fiscal 2008 and insignificant in fiscal 2007.

The
Company also offers its credit card holders a program whereby points can be earned on net purchases made with the co-branded credit card. Five reward points are awarded
for each dollar spent at Cache and one reward point is awarded for each dollar spent at non-Cache businesses. Cardholders whose credit card account is not delinquent, in default or closed
will be automatically eligible to receive a $25 Cache gift card upon accrual of 2,500 reward points. The issuing bank bears the cost of the reward program and is responsible for the administration and
management of the program.

The
Company also receives from the issuing bank and Visa U.S.A Inc. a sales royalty, which is based on a percentage of net purchases made by cardholders at Cache or other
businesses. Cache has determined that since it has not incurred any significant or recurring costs in relation to the co-branded credit card program the sales royalties earned in
connection to the agreement will be recorded under net sales. The fees that are incurred by the Company are cardholder incentives, which are funded from the fees paid by the issuing bank and Visa
U.S.A Inc. The amount of sales royalty income recorded was $328,000 and $248,000 in fiscal 2009 and fiscal 2008, respectively and insignificant in fiscal 2007.

Seasonality.We experience seasonal and quarterly fluctuations in net sales and operating income. Quarterly results of operations may
fluctuate
significantly as a result of a variety of factors, including macroeconomics conditions, the timing of new store openings, fashion trends and shifts in timing of certain holidays. Our business is
subject to seasonal influences, characterized in years other than fiscal 2008 by highest sales during the fourth quarter (October, November and December) and lowest sales during the third quarter
(July, August and September). We began to return to historical trends in fiscal 2009.

Income Taxes.The Company accounts for income taxes in accordance with "Income Taxes",
Topic 740 of the FASB ASC. This statement requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and
tax bases of assets and liabilities, using applicable tax rates for the years in which the differences are expected to reverse. When tax contingencies become probable, a liability for the contingent
amount is estimated based upon the Company's best estimation of the potential exposures associated with the timing and amount of deductions, as well as various tax filing positions. As of
January 2, 2010, the Company has recorded a $301,000 reserve, net of federal benefit for potential tax contingencies. As of December 27, 2008, the Company had recorded a $331,000
reserve, net of federal benefit for potential tax contingencies. No such reserves were recorded as of December 29, 2007. As of January 2, 2010, based

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upon
its evaluation of the projected utilization of state net operating loss ("NOL") carry-forwards, the Company has established a valuation allowance of $68,000. No valuation allowance
was recorded in fiscal 2008. If the Company determines that it is more likely than not that the state NOL's will be realized in the future, that portion of the valuation allowance will
be reduced and the Company will provide for an income tax benefit in its Statement of Operations, at its effective rate.

Effective
December 31, 2006, the Company adopted the provisions of "Accounting for Uncertainty in Income Taxes", within
Topic 740 of the FASB ASC. This provision prescribes a comprehensive model of how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions
that the company has taken or expects to take on a tax return. The provision also states that
a tax benefit from an uncertain tax position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying
position is the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon the ultimate settlement with a taxing authority having full knowledge of all relevant
information.

The
cumulative effect of this adoption did not result in any adjustment in the Company's liability for unrecognized income tax benefits.

Balance at December 27, 2008

$
501,000Additions based on tax positions related to the current year


Additions for tax positions for prior years


54,000Reductions for tax positions for prior years due to lapse of applicable statute of limitations


(39,000
)Settlements


(81,000
)Balance at January 2, 2010

$
435,000


Included
in the above ending balance are tax positions of $301,000, which, if recognized, would favorably affect the effective tax rate.

The
Company's continuing practice is to include estimated interest and penalties, if any, in computing the amount that is recognized within income tax expense relating to uncertain
income tax positions. As of January 2, 2010, the Company had accrued $178,000 of interest and penalties related to uncertain tax positions, which is included in the $435,000 tax contingency
noted above.

Although
the Company believes that it has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the Company's accrued position.
Accordingly, the Company's provisions on federal, state and local tax-related matters to be recorded in
the future may change, as revised estimates are made or the underlying matters are settled or otherwise resolved. As of January 2, 2010, the Company does not believe that its estimates, as
otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.

The
Company and certain of its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple state and local jurisdictions.

The
Company had previously reached agreement with the IRS and closed the audit of fiscal year 2005, with no change to the tax return. The Company is subject to federal income tax
examinations for years after 2005.

As
for state and local income taxes, with few exceptions, the Company is subject to state and local income tax examinations by taxing authorities for years after 2005.

Stock-based compensation.Stock-based compensation expense for all stock-based awards program, including grants of stock options, is
recorded in
accordance with "Compensation-Stock Compensation", Topic 718 of the FASB ASC. The grant date fair value for stock options is calculated using the
Black-Scholes option valuation model. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to

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exercise,
the associated volatility and the expected dividends. All employee stock options were granted at or above the grant date market price. Judgment is required in estimating the amount of
share-based awards expected to be forfeited prior to vesting. In accordance with the stated guidance, if actual forfeitures differ significantly from these estimates, share-based compensation expense
could be materially impacted (see Note 15). The Company recognized $400,000, $299,000 and $835,000 in stock-based compensation expense during fiscal 2009, 2008 and 2007, respectively.

Results of Operations

The following table sets forth our operating results, expressed as a percentage of net sales:

53 Weeks Ended

52 Weeks Ended

52 Weeks EndedJanuary 2, 2010

December 27, 2008

December 29, 2007Operating ResultsNet sales


100.0
%

100.0
%

100.0
%Cost of sales


60.1


58.7


53.7Gross profit


39.9


41.3


46.3Store operating expenses


36.0


35.9


35.4General and administrative expenses


8.3


8.0


8.3Exit costs


0.0


1.0


0.0Impairment charges


1.2


0.8


0.0Employee separation charge


0.9


0.0


0.0Operating income (loss)


(6.5
)

(4.4
)

2.7Other income (net)


0.0


0.2


0.9Income (loss) before income taxes


(6.5
)

(4.2
)

3.6Income tax provision (benefit)


(2.6
)

(1.6
)

1.2Net income (loss)


(3.9
)%

(2.6
)%

2.4
%


53 Weeks Ended January 2, 2010 (Fiscal 2009) Compared to 52 Weeks Ended December 27, 2008 (Fiscal 2008)

Net sales.Net sales decreased to $219.8 million from $265.7 million, a decrease of $45.9 million, or 17.3%, below the
prior
fiscal year. This reflects $46.1 million of decreased net sales, as a result of an 18.0%
decrease in comparable store sales, a decrease of $3.5 million of net sales from our wholesale division, partially offset by an increase of $3.4 million from our
non-comparable store sales. The decrease in sales is primarily due to ongoing macroeconomic events, which resulted in a dramatic reduction in mall traffic where Cache stores are located,
coupled with a shift in consumer spending pattern that favored lower priced or discounted merchandise. The decrease in net sales during fiscal 2009 reflected a 4.6% decrease in the number of sales
transactions coupled with a 14.0% decrease in average dollars per transaction, which we believe primarily resulted from macroeconomic conditions as well.

Gross profit.Gross profit decreased to $87.8 million from $109.7 million, a decrease of $21.9 million, or 20.0%, below
the
prior fiscal year. This decrease was the combined result of lower net sales, as described above and decreased gross profit margins. As a percentage of net sales, gross profit decreased to 39.9% from
41.3%. This decrease as a percentage of net sales was primarily driven by deleveraging of store occupancy costs, resulting from lower sales; an increase in markdowns (as a percentage of net sales) and
to a lesser extent, an increase in operational costs related to our design, production and sourcing departments. This decrease was partially offset by an increase in cost savings from a new shipping
initiative to stores, which was implemented during the fourth quarter of fiscal 2008. The increase in markdowns was due to the significant deterioration in the United States economic environment.

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Store operating expenses.Store operating expenses decreased to $79.2 million from $95.3 million, a decrease of
$16.2 million,
or 17.0%, below the prior fiscal year. As a percentage of net sales, store operating expenses increased to 36.0% from 35.9%. Store operating expenses decreased primarily due to the Company's
initiatives to reduce costs. Due to these initiatives, the Company achieved reductions principally in payroll ($6.3 million) and marketing ($3.8 million) expenses. Payroll expenses
decreased primarily due to lower headcount and a reduction in hours worked by store employees. The decline in advertising expense was primarily due to a reduction in spending for direct mail and
production costs, related to printed materials. Group and liability insurance ($1.7 million) expense decreased due to changes in the Company's medical plan, coupled with a reduction in premiums
for liability insurance resulting from renegotiated contracts. Depreciation expense ($1.6 million) decreased as a result of certain assets being fully depreciated prior to fiscal 2009, the
write-off of the remaining net book value of 16 underperforming stores, as indicated below, under "Exit costs" and also due to the Company's decision to reduce capital expenditures in
fiscal 2009. In addition, credit card fees ($1.2 million) were lower due to a decrease in sales coupled with renegotiated contracts. The Company also had reductions in sales supplies ($541,000)
and repair and maintenance expense ($469,000), due to the Company's cost savings initiatives.

General and administrative expenses.General and administrative expenses decreased to $18.3 million from $21.3 million, a
decrease of
$3.0 million or 13.9%, below the prior fiscal year. As a percentage of net sales, general and administrative expenses increased to 8.3% from 8.0%. The reduction in general and
administrative expenses was primarily due to the Company's initiatives to reduce costs. Decreases in general and administrative expenses were primarily in professional fees ($764,000) and travel
expense ($679,000). Professional fees were reduced due to reduced legal activity in fiscal 2009 and travel expense reduced due to a reduction in travel by corporate and regional management. Shipping
expense ($598,000) decreased due to the discontinuation of outsourced shipping services for our wholesale products, which were shipped through the Company's primary carrier, coupled with decreased
volume of wholesale products. Payroll expense ($252,000) decreased principally due to a reduction of base salaries paid to several of the Company's officers and a reduction in average headcount during
fiscal 2009.

Exit costs.During fiscal 2009, the Company reversed approximately $65,000 of severance and lease termination costs recorded during
fiscal 2008. This
reversal was primarily due to the Company's decision to keep open one of the 16 stores that the Company had planned to close. Of the remaining 15 stores, 14 were closed prior to January 2,
2010, and one subsequent to that date. This amount was net of severance and other costs for discontinuing its wholesale divisionMary L., which was determined during the fourth quarter of
fiscal 2009. During fiscal 2008, the Company recorded a pre-tax charge of $2.8 million ($1.7 million after tax or $0.13 per diluted share) for 16 underperforming stores.
Included in the store exit costs is a write down of equipment and leasehold improvements and furniture and fixtures in the amount of $2.3 million, severance accrual of $198,000 and lease
termination costs of $990,000. These costs were offset by the reversal of $750,000 of deferred rent accruals. Of the 16 underperforming stores, the Company has closed eight during fiscal 2009 and six
during fiscal 2008.

Impairment charges.The Company recorded a pre-tax impairment charge of approximately $1.9 million associated with 23
underperforming stores ($1.1 million after tax or $0.09 per diluted share) during fiscal 2009 and a pre-tax impairment charge of $1.1 million ($715,000 after tax or $0.05 per
diluted share) associated with 12 underperforming stores during fiscal 2008.

In
addition, the Company also recorded a pre-tax impairment charge of approximately $891,000 ($540,000 after tax or $0.04 per diluted share) against the carrying value of its
intangible assets associated with its wholesale divisionMary L. during fiscal 2009 and a pre-tax impairment charge of

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approximately
$1.0 million ($624,000 after tax or $0.05 per diluted share) against the carrying value of its goodwill, for its AVD reporting unit, during fiscal 2008.

Employee separation charge.During fiscal 2009, the Company recorded a pre-tax employee separation charge of approximately
$2.0 million ($1.2 million after tax or $0.09 per diluted share) in connection with separation agreements entered into with two of its then executive officers. The $2.0 million
charge also includes a charge of $204,000 for the remaining net book value of the non-compete agreements contained in their employment agreements with the Company, which were terminated
pursuant to the separation agreements. See Note 11 herein for additional information.

Other income/expense.Other income decreased to $32,000 from $463,000, a decrease of $431,000, or 93.1%, as compared to last year. This
decrease was
due to a reduction in interest income of $488,000, primarily caused by lower interest rates in fiscal 2009.

Income taxes.During fiscal 2009, income tax benefit increased to $5.7 million from $4.3 million an increase of
$1.4 million or
33.2%, as compared to the same period last year. The income tax benefit was attributable to the operating loss incurred by the Company during fiscal 2009, as discussed above. The effective rate
increased to 39.4% in fiscal 2009 from 37.4% in fiscal 2008.

Net income (loss).As a result of the factors discussed above, net loss of $8.7 million was recorded during fiscal 2009 as
compared to a net
loss of $7.1 million in the same period last year, an increase of $1.6 million.

52 Weeks Ended December 27, 2008 (Fiscal 2008) Compared to 52 Weeks Ended December 29, 2007 (Fiscal 2007)

Net sales.Net sales decreased to $265.7 million from $274.5 million, a decrease of $8.7 million, or 3.2%, below the
prior
fiscal year. This reflected $10.5 million of decreased net sales, as a result of a 4.1% decrease in comparable store sales, an increase of $2.2 million of net sales from our wholesale
division, and a decrease of $398,000 from our non-comparable store sales. During the first half of fiscal 2008, comparable store sales increased due to a strong customer response to our
sportswear
assortment and the Company's aggressive pricing strategy. This increase during the first half of fiscal 2008 was offset by a decrease during the second half of fiscal 2008, primarily due to the
economic crisis, which resulted in a dramatic reduction in mall traffic where Cache stores are located coupled with a shift in consumer spending pattern that favored lower priced or discounted
merchandise. The decrease in net sales during fiscal 2008 reflected a 2.4% increase in the number of sales transactions, which was offset by a 6.3% decrease in average dollars per transactions, we
believe primarily due to the economic crisis.

Gross profit.Gross profit decreased to $109.7 million from $127.0 million, a decrease of $17.3 million, or 13.6%, below
the
prior fiscal year. This decrease was the combined result of lower net sales, as described above, and decreased gross profit margins. As a percentage of net sales, gross profit decreased to 41.3% from
46.3%. This decrease as a percentage of net sales was primarily due to an increase in markdowns combined with the Company's implementation of a new pricing strategy, as compared to the prior fiscal
year, and partially due to an increase in operational costs related to our subsidiary AVD, which was acquired during the third quarter of fiscal 2007. The increase in markdowns was due to the
significant deterioration in the United States economic environment during the fourth quarter of fiscal 2008. These increased costs were partially offset by savings from increased direct sourcing of
merchandise through AVD and a decrease in buying expenses, as compared to the prior fiscal year.

Store operating expenses.Store operating expenses decreased to $95.3 million from $97.0 million, a decrease of
$1.7 million, or
1.7%, below the prior fiscal year. As a percentage of net sales, store operating expenses increased to 35.9% from 35.4%. Store operating expenses decreased principally due

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to
lower marketing ($1.9 million) and payroll ($1.1 million) expenses. A reduction in marketing expense was primarily caused by the Company eliminating all branding (TV and Print)
efforts in fiscal 2008, along with a reduction in direct mail advertisements mailed to customers. Payroll expenses were reduced due to a cut back in the number of hours allotted to store employees
coupled with a reduction in bonus and commission expense, as a result of decreased sales. The decrease in marketing and payroll expenses were primarily offset by an increase in self insured medical
expense ($926,000), due to an increase in claim payments made to the insurance company and depreciation expense ($168,000), due to full twelve months of depreciation and amortization on assets
purchased towards the latter part of fiscal 2007, assets purchased to enhance our customer service department and installation of second registers at a majority of our stores.

General and administrative expenses.General and administrative expenses decreased to $21.3 million from $22.7 million, a
decrease of
$1.4 million or 6.3%, below the prior fiscal year. As a percentage of net
sales, general and administrative expenses decreased to 8.0% from 8.3%. General and administrative expenses decreased, primarily due to lower professional fees ($1.5 million) and payroll
expenses ($851,000). Professional fees were reduced during fiscal 2008 primarily due to lower audit fees during the current fiscal year and the inclusion of nonrecurring legal settlement costs
($924,000) in the same period last year. Payroll expenses were reduced during fiscal 2008 due to the resignation of the Company's previous Chairman and CEO, as well as the termination of certain
employees from the corporate office due to a decline in the business, which resulted from the slowdown in the economy. These decreases were primarily offset by increases in shipping expense
($363,000), due to shipment of our wholesale products, sales commissions ($341,000), paid to an agent for the sale of our wholesale products and depreciation expense ($389,000).

Store exit costs.During fiscal 2008, the Company recorded a pre-tax charge of $2.8 million ($1.7 million after tax or
$0.13 per diluted share) for 16 underperforming stores. Of the 16 underperforming stores, the Company closed six during fiscal 2008 and closed an additional eight stores in fiscal 2009. Included in
the store exit costs is a write down of equipment and leasehold improvements and furniture and fixtures in the amount of $2.3 million, severance accrual of $198,000 and lease termination costs
of $990,000. These costs were offset by the reversal of $750,000 of deferred rent accruals. In fiscal 2007, the Company reversed $78,000 of store closing costs previously reserved in fiscal 2006.

Impairment charges.During fiscal 2008, the Company recorded a pre-tax impairment charge of $1.1 million ($715,000 after tax or
$0.05 per diluted share) for 12 underperforming stores. During fiscal 2007, the Company recorded an impairment charge of $73,000 for one store, which was closed in January 2008.

In
addition, Cache also recorded an impairment charge of approximately $1.0 million ($624,000 after tax or $0.05 per diluted share) against the carrying value of its goodwill.

Other income/expense.Other income (expense) decreased to $463,000 from $2.6 million, a decrease of $2.1 million, or 82.2%,
as compared
to the prior fiscal year. This decrease was due to a reduction in interest income of $1.7 million, caused by lower interest rates as well as lower average cash and marketable securities
balances, coupled with charges related to interest expense for the note payable recorded in connection with the acquisition of AVD. The reduction in average cash balances was primarily due to the
repurchase of the Company's common stock.

Income taxes.During fiscal 2008, an income tax benefit of $4.3 million was recorded as compared to an
income tax provision of $3.4 million in the same period last year. The income tax benefit was attributable to the operating loss incurred by the Company during fiscal 2008, as discussed above.
The effective rate increased to 37.4% in fiscal 2008 from 34.2% in fiscal 2007.

33

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Table of Contents

Net income (loss).As a result of the factors discussed above, net loss of $7.1 million was recorded during fiscal 2008 and net
income of
$6.5 million was recorded during fiscal 2007, a decrease of $13.6 million, as compared to the prior fiscal year.

Quarterly Results and Seasonality

We experience seasonal and quarterly fluctuations in our net sales and operating income. Our quarterly results of operations may
fluctuate significantly as a result of a variety of factors, including the timing of new store openings, fashion trends and shifts in timing of certain holidays. Our business is subject to seasonal
influences, characterized in years other than fiscal 2008 by highest sales during our fourth fiscal quarter (October, November and December) and lowest sales during our third fiscal quarter (July,
August and September). We began to return to historical trends in fiscal 2009.

The
following table includes our unaudited quarterly results of operations data for each of the eight quarters during the two-year period ended January 2, 2010. We
derived this data from our unaudited quarterly consolidated financial statements. We believe that we have prepared this information on the same basis as our audited consolidated financial statements
and that we have included all necessary adjustments, consisting only of normal recurring adjustments, to present fairly the selected quarterly information when read in conjunction with our audited
annual consolidated financial statements and the notes to those statements included elsewhere in this document. The operating results for any particular quarter are not necessarily indicative of the
operating results for any future period.

13 Weeks Ended

14 Weeks Ended

13 Weeks EndedMar. 28,
2009

June 27,
2009

Sept. 26,
2009

Jan. 2,
2010

Mar. 29,
2008

June 28,
2008

Sept. 27,
2008

Dec. 27,
2008(Unaudited)
(Dollars in thousands)Operating ResultsNet sales

$
53,006

$
56,866

$
44,941

$
64,962

$
67,708

$
73,973

$
58,139

$
65,908Gross profit


21,795


25,230


14,214


26,546


28,415


34,192


25,614


21,471Operating income (loss)


(2,529
)

1,318


(10,854
)(4)

(2,326
)(3)(4)

(3,480
)(1)

3,207


(2,680
)(2)

(8,884
)(3)Net income (loss)

$
(1,595
)
$
845

$
(6,783
)
$
(1,161
)
$
(2,053
)
$
2,105

$
(1,646
)
$
(5,528
)As a Percentage of Net SalesNet sales


100.0
%

100.0
%

100.0
%

100.0
%

100.0
%

100.0
%

100.0
%

100.0
%Gross profit


41.1
%

44.4
%

31.6
%

40.9
%

42.0
%

46.2
%

44.1
%

32.6
%Operating income (loss)


(4.7
)%

2.3
%

(24.2
)%

(3.6
)%

(5.1
)%

4.3
%

(4.6
)%

(13.5
)%Net income (loss)


(3.0
)%

1.5
%

(15.1
)%

(1.8
)%

(3.0
)%

2.8
%

(2.8
)%

(8.4
)%Selected Operating DataNumber of stores open at end of period


294


291


289


286


294


297


295


296Comparable store sales increase/(decrease)


(20.7
)%

(23.0
)%

(21.7
)%

(7.1
)%

3
%

3
%

(4
)%

(17
)%


---

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Table of Contents

Liquidity and Capital Resources

Our cash requirements are primarily for the construction of new stores and inventory for new stores, as well as the remodeling of
existing stores. We have historically satisfied our cash requirements principally through cash flow from operations.

As
of January 2, 2010, we had working capital of $41.9 million, which included cash and marketable securities of $37.0 million. The cash and marketable securities at
January 2, 2010 included certificates of deposit of $1.5 million, that have been placed by the Company as collateral against a one year credit facility.

The
following table sets forth our cash flows for the period indicated:

52 Weeks Ended

52 Weeks Ended53 Weeks EndedDecember 27, 2008

December 29, 2007January 2, 2010Net cash provided by operating activities

$
11,158,000

$
6,395,000

$
30,429,000Net cash provided by (used in) investing activities


(8,322,000
)

7,061,000


(18,597,000
)Net cash provided by (used in) financing activities


(2,155,000
)

(15,864,000
)

(23,952,000
)Net increase (decrease) in cash and cash equivalents

$
681,000

$
(2,408,000
)
$
(12,120,000
)


During
fiscal 2009, $11.2 million in cash provided by operating activities was primarily due to depreciation and amortization of $11.9 million, an impairment charge of
$2.7 million against the carrying value of the Company's intangible assets and assets related to 23 underperforming stores, write-off of the non-compete agreement in
connection with employee separation charge of $204,000 for separation agreements with two of its former executive officers, decrease in income tax receivable of $3.0 million and
$5.7 million due to decrease in inventories, which are offset by amortization of deferred rent of $2.1 million, deferred taxes of $2.6 million and net loss of $8.7 million.
Inventories decreased due to Company's efforts to better align inventory to the decreased sales volumes at stores. Income tax receivable decreased due to receipt of $3.0 million from federal
and state governments. These decreases were offset by an increase in prepaid expenses and other current assets of $3.3 million, principally due to prepayment of January 2010 rent for the
Company's stores.

During
fiscal 2008, $6.4 million in cash provided by operating activities was primarily due to depreciation and amortization of $12.8 million, a write-down of
equipment and leasehold improvements, net of deferred rent of $1.6 million for 16 underperforming stores, impairment charge of $2.1 million for goodwill and assets related to 12 stores
and amortization of deferred rent for $2.0 million. The following also contributed to the $6.4 million generated in cash from operating activities; a decrease in inventories of
$8.2 million, due to the Company's conscious efforts to not maintain excess inventory due to the current economic crisis, offset by increases in receivables of $4.0 million and decreases
in accounts payable of $4.1 million. The increase in receivables was primarily due to an income tax receivable of $5.9 million, due to the Company's fiscal 2008 net loss, coupled with
estimated tax payments made during fiscal 2008 and 2007.

During
fiscal 2007, $30.4 million in cash provided by operating activities was primarily due to net income, depreciation and amortization of $12.1 million; a decrease in
inventories of $5.3 million was primarily due to reduced inventory levels on hand in stores; a decrease in prepaid expenses of $3.2 million was primarily due to a reduction in prepaid
rents as compared to fiscal 2006; an increase in accrued liabilities of $6.3 million was primarily due to higher customer credits and share repurchase liability, as compared to fiscal 2006 and
$835,000 from non-cash stock-based compensation expense, which were partially offset by an decrease in accounts payable of $1.2 million, reversal of deferred rent of
$1.9 million was primarily from new store openings and a decrease in deferred income taxes of $1.9 million was primarily due to timing of depreciation.

35

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Table of Contents

Investing
activities during fiscal 2009 used $8.3 million, generated $7.1 million during fiscal 2008 and used $18.6 million during fiscal 2007. In fiscal 2009, the
Company's investment cash flows decreased approximately $4.8 million due to net purchases of marketable securities. The purchase of equipment and leasehold improvements of approximately
$2.0 million for new and remodeled stores coupled with an increase in restricted certificates of deposit of $1.5 million, also attributed to the decrease in cash flows from investing
activities during fiscal 2009. Our capital requirements depend primarily on the number of new stores we open, the number of existing stores we remodel and the timing of these expenditures. Projected
capital expenditures for fiscal 2010 to fund new store openings and remodelings are approximately $2 to $3 million.

Based
on our experience with new store openings, we estimate that the average net investment to open new stores is approximately $225,000 to $375,000, which includes new store opening
expenses and initial inventory, net of landlord contributions. We estimate that the average net investment to remodel an existing store is approximately $200,000 to $300,000, net of landlord
contributions.

Cash
used by financing activities during fiscal 2009, 2008 and 2007 was $2.2 million, $15.9 million and $24.0 million, respectively. The usage of cash by financing
activities during fiscal 2009, 2008 and 2007 was primarily for the repurchase of our common stock in amounts of $586,000, $15.0 million and
$24.2 million, respectively. Repayment of the Company's note payable of $1.6 million also contributed to the decrease during fiscal 2009; and $1.6 million and $397,000 during
fiscal 2008 and 2007, respectively.

The
Company's former credit line with Bank of America, N.A. ("the Bank") expired on March 2, 2009. Subsequently, on May 27, 2009, the Company entered into a one year credit
facility with the Bank. Under this facility, the Company may direct the Bank to issue letters of credit up to a total of $1,425,000. Any outstanding letters of credit under this facility are
collateralized by granting to the bank a security interest in various certificates of deposit held by the Company and its subsidiaries with the Bank, amounting to a total of $1,500,000. This one year
credit facility will expire on May 1, 2010. The Company is currently reviewing its future requirements for a credit facility and plans to initiate discussion with its bankers to renew this
credit line or negotiate a new credit facility.

The
Company had outstanding letters of credit of approximately $660,000 and $585,000 at January 2, 2010 and December 27, 2008, respectively.

We
believe that cash flow from operations and our current available cash will be sufficient to meet our working capital needs and contemplated new store opening expenses for at least the
next 12 months. If our cash flow from operations should decline significantly or if we should accelerate our store expansion or remodeling program, it may be necessary for us to seek additional
sources of capital in the future.

Contractual Obligations and Commercial Commitments

The following tables summarize our minimum contractual obligations and commercial commitments as of January 2, 2010:

Payments Due in PeriodTotal

Within
1 Year

23
Years

45
Years

After
5 Years(In thousands)Contractual ObligationsEmployment contracts

$
2,446

$
1,000

$
1,446

$


$
Purchase obligations


23,702


23,702








Operating leases(1)


125,136


25,612


44,913


32,409


22,202Maturities of note payable


3,000


1,525


1,475





Employee separation settlement


1,375


1,375








Total

$
155,659

$
53,214

$
47,834

$
32,409

$
22,202


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Table of Contents

Payments Due in PeriodTotal

Within
1 Year

23
Years

45
Years

After
5 Years(In thousands)Commercial CommitmentsLetters of credit(2)

$
660

$
660

$


$


$
Liability for unrecognized income tax benefits

$
435

$
435

$


$


$
Total

$
1,095

$
1,095

$


$


$



---

In
February 2009, Cache entered into a new employment agreement with the Company's current Chairman and Chief Executive OfficerThomas E. Reinckens. The agreement commenced
on February 24, 2009 for a term of three years expiring on February 2012. The previous agreement expired in February 2009.

In
October 2009, Cache entered into an employment agreement with Rabia Farhang, the Company's new Executive Vice President and General Merchandise Manager. The agreement is for a term of
three years, expiring in November 2012.

Off-Balance Sheet Arrangements

As indicated in Note 11, on September 23, 2009, the Company entered into a separation agreement with two of its then
executive officers. Pursuant to one of these separation agreements, a former executive may receive contingent payments of up to $500,000 in the aggregate, based on the achievement by the Company over
the next 4 years of certain net income targets set forth in the agreement. For the fiscal year ended January 2, 2010, no accrual was recorded for this earn-out provision. The
previous agreement with this former executive, provided for contingent payments of up to $5.5 million based on certain performance targets. Under the terms of the separation agreement, the
Company is released from the previous contingent obligation entirely. Other than the operating lease commitments set forth in the table above and the aforementioned statement regarding the
earn-out provision, we are not a party to any material off-balance sheet financing arrangements.

Recent Accounting Developments

See the section "Recent Accounting Developments" included in Note 1 in the Notes to the Consolidated Financial Statements for a
discussion of recent accounting developments and their impact on our consolidated financial statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk relates primarily to changes in interest rates. The interest rate risk involves the short-term investment
of excess cash in short-term, investment-grade interest-bearing securities. These investments are included in cash and equivalents, marketable securities, and certificates of
depositrestricted on our balance sheet. If there are changes in interest rates, those changes would affect the

37

---



Table of Contents

investment
income we earn on these investments and, therefore, impact our cash flows and results of operations.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's unaudited selected quarterly financial data is incorporated herein by reference to Note 17 to the Company's
consolidated financial statements on page F-36. The Company's consolidated financial statements and the report of the independent registered public accounting firm are listed at
Item 15 of this Report and are included in this Form 10-K on pages F-1 through F-37.

ITEM 9.    CHANGES IN AND/OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES



In
connection with the preparation of this Annual Report on Form 10-K, as of January 2, 2010, an evaluation was performed under the supervision and with the
participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act).

Based
on that evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of January 2, 2010.



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

Under
the supervision and with the participation of our management, including our CEO and CFO, we conducted an assessment of the effectiveness of our internal control over financial
reporting

38

---



Table of Contents

as
of January 2, 2010. Based on this assessment, management concluded that our internal control over financial reporting was effective as of January 2, 2010.

The
Company's independent registered public accounting firm, MHM Mahoney Cohen CPAs (The New York Practice of Mayer Hoffman McCann P.C.), has issued an attestation report on management's
assessment of the Company's internal control over financial reporting. This report appears on page F-2.



/s/ THOMAS E. REINCKENS Thomas E. Reinckens Chairman and Chief Executive Officer

March 19, 2010/s/ MARGARET FEENEY Margaret Feeney Executive Vice President and Chief Financial Officer

March 19, 2010


ITEM 9B.    OTHER INFORMATION

None.

39

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Table of Contents

PART III

The information called for by Items 10, 11, 12, 13, and 14 is incorporated herein by reference from the definitive proxy
statement to be filed by the Company in connection with its 2010 Annual Meeting of Shareholders.

PART IV

ITEM 15.    EXHIBITS and FINANCIAL STATEMENT SCHEDULE (UPDATE)

(a)

1.

The financial statements listed in the "Index To The Consolidated Financial Statements" on page F-1 are filed as a part of this report.2.

The financial statement schedule is included on page F-37. Other schedules may be omitted because they are not applicable or the required information is presented in the financial statements or notes
thereto.3.

Exhibits[7]3.1

Articles of Incorporation of the Company and all amendments thereto(2)3.2

Bylaws of the Company(1)10.1

Lease, dated July 28, 2003, between the Company, as Tenant, and New 1440 Broadway Partners, LLC, as Landlord, for the Company's offices at 1440 Broadway, New York, New York(6)10.2

2000 Stock Option Plan of the Company(3)(11)10.3

Form of Option Agreement relating to Options issued under the 2000 Stock Option Plan(4)(11)10.4

2003 Stock Option Plan of the Company(5)(11)10.5

Form of Option Agreement relating to Options issued under the 2003 Stock Option Plan(6)(11)10.6

2008 Stock Option Plan of Company(7)(11)10.13

Employment Agreement, dated February 24, 2009, between the Company and Thomas E. Reinckens(8)(11)10.14

Agreement, dated September 23, 2009, between Cache, Inc. and Robert Kantor(9)(11)10.15

Agreement, dated September 23, 2009, among Cache, Inc., Adrienne Kantor, Adrienne Victoria, Inc. and Adrienne Victoria Design, Inc.(9)(11)10.16

Employment Agreement, dated October 21, 2009, between Cache, Inc. and Rabia Farhang.(10)(11)12.1

Statements re: Computation of Ratios23.1

Consent of MHM Mahoney Cohen CPAs (The New York Practice of Mayer Hoffman McCann P.C.)23.2

Consent of 25 MAD LIQUIDATION CPA, P.C. (formerly known as Mahoney Cohen & Company, CPA, P.C.)31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


40

---



Table of Contents

32.1

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)Incorporated
by reference to the Company's Registration Statement on Form S-18, dated December 29, 1980.(2)Incorporated
by reference to the Company's Current Report on Form 8-K, dated September 15, 1993.(3)Incorporated
by reference to the Company's Definitive Proxy Statement filed on September 18, 2001.(4)Incorporated
by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001.(5)Incorporated
by reference to the Company's Definitive Proxy Statement filed on October 6, 2003.(6)Incorporated
by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 2003.(7)Incorporated
by reference to the Company's Current Report on Form 8-K, dated July 11, 2008.(8)Incorporated
by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 2008.(9)Incorporated
by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 26, 2009.(10)Filed
herewith.(11)Exhibits 10.2
through 10.6, 10.13 through 10.16 are management contracts or compensatory plans or arrangements, which are required to be filed as an
exhibit pursuant to Item 15(b) of this Annual Report on Form 10-K.A
Stockholder may obtain a copy of any of the exhibits included in the Annual Report on Form 10-K upon payment of a fee to
cover the reasonable expenses of furnishing such exhibits, by written request to Cache, Inc., at 1440 Broadway, 5th Floor, New York, New York 10018 Attention: Chief
Financial Officer.(b)Reports
on Form 8-K.
None.


41

---





Table of Contents

Signatures

Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.

CACHE, INC.Date: March 19, 2010

(Registrant)By:

/s/ THOMAS E. REINCKENS Thomas E. Reinckens Chairman of the Board and
Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

Name

Title

Date/s/ THOMAS E. REINCKENS Thomas E. Reinckens

Chairman of the Board and
Chief Executive Officer

March 19, 2010/s/ MARGARET FEENEY Margaret Feeney

Executive Vice President
(Chief Financial Officer)

March 19, 2010/s/ GENE GAGE Gene Gage

Director

March 19, 2010/s/ ARTHUR S. MINTZ Arthur S. Mintz

Director

March 19, 2010/s/ ANDREW M. SAUL Andrew M. Saul

Director

March 19, 2010/s/ MORTON J. SCHRADER Morton J. Schrader

Director

March 19, 2010


42

---





Table of Contents

CACHE, INC. AND SUBSIDIARIES  CONSOLIDATED FINANCIAL STATEMENTS  FISCAL YEARS ENDED JANUARY 2, 2010,  DECEMBER 27, 2008,  AND
DECEMBER 29, 2007

CACHE, INC. AND SUBSIDIARIES    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



INDEX

PAGEReports of Independent Registered Public Accounting Firms

F-2Consolidated Balance Sheets

F-5Consolidated Statements of Operations

F-6Consolidated Statements of Stockholders' Equity

F-7Consolidated Statements of Cash Flows

F-8Notes to Consolidated Financial Statements

F-9Valuation and Qualifying Accounts

F-37


F-1

---





Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of Cache, Inc.
New York, New York

We
have audited the accompanying consolidated balance sheets of Cache, Inc. as of January 2, 2010 and December 27, 2008, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the two-year period ended January 2, 2010. We also have audited Cache, Inc.'s internal control over
financial reporting as of January 2, 2010, based on criteria established inInternal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In addition, our audits included the financial statement schedule listed in the Index at Item 15 for each of the years
in the two-year period ended January 2, 2010. Cache, Inc.'s management is responsible for these financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting and for the financial statement
schedule. Our responsibility is to express an opinion on these consolidated financial statements and on the financial statement schedule and an opinion on the company's internal control over financial
reporting based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.

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

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cache, Inc. as of January 2,
2010 and December 27, 2008, and the results of its operations and its cash flows for each of the years in the two-year period ended January 2, 2010 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, Cache, Inc. maintained, in all material respects, effective internal control

F-2

---



Table of Contents

over
financial reporting as of January 2, 2010, based on criteria established inInternal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In addition, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/
MHM Mahoney Cohen CPAs
(The New York Practice of Mayer Hoffman McCann P.C.)
New York, New York
March 19, 2010

F-3

---



Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Cache, Inc.
New York, New York

We
have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of Cache, Inc. and subsidiaries for the year ended December 29,
2007. Our audit also included the financial statement schedule listed in the Index at Item 15 for the year ended December 29, 2007. Cache, Inc.'s management is responsible for
these consolidated financial statements and the financial statement schedule. Our responsibility is to express opinions on these consolidated financial statements and on the financial statement
schedule based on our audit.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of Cache, Inc. and Subsidiaries operations and their
cash flows for the year ended December 29, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial
statement schedule for the year ended December 29, 2007, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

/s/
25 MAD LIQUIDATION CPA, P.C. 
(formerly known as Mahoney Cohen & Company, CPA, P.C.)

New
York, New York
March 10, 2008

F-4

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Table of Contents

CACHE, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

January 2,
2010

December 27,
2008ASSETSCURRENT ASSETSCash and equivalents (Note 1)

$
5,516,000

$
4,835,000Marketable securities (Note 2)


29,999,000


25,153,000Certificates of depositrestricted (Note 8)


1,500,000


Receivables, net (Note 3)


3,411,000


3,898,000Income tax receivable (Note 3)


3,438,000


5,883,000Inventories, net (Note 4)


16,599,000


22,321,000Prepaid expenses and other current assets (Note 14)


4,943,000


1,795,000Total Current Assets


65,406,000


63,885,000EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net(Notes 5 and 10)


31,713,000


43,320,000GOODWILL(Note 6)


9,092,000


9,092,000INTANGIBLE ASSETS, net(Note 6)


102,000


1,304,000OTHER ASSETS(Note 14)


4,684,000


1,924,000Total Assets

$
110,997,000

$
119,525,000LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
7,624,000

$
6,375,000Note payable (Note 6)


1,408,000


1,259,000Accrued compensation


2,668,000


1,713,000Accrued liabilities (Notes 7 and 11)


11,783,000


11,077,000Total Current Liabilities


23,483,000


20,424,000NOTE PAYABLE(Note 6)


1,425,000


3,143,000OTHER LIABILITIES(Note 12)


15,806,000


16,795,000COMMITMENTS AND CONTINGENCIES(Note 13)STOCKHOLDERS' EQUITYCommon stock, par value $.01; authorized, 40,000,000 and 20,000,000 shares; issued 16,433,373 and 16,410,036 shares (Note 15)


164,000


164,000Additional paid-in capital


47,555,000


47,155,000Retained earnings


62,359,000


71,053,000Treasury stock, 3,682,199 and 3,372,000 shares, at cost (Note 15)


(39,795,000
)

(39,209,000
)Total Stockholders' Equity


70,283,000


79,163,000Total Liabilities and Stockholders' Equity

$
110,997,000

$
119,525,000


The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-5

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Table of Contents

CACHE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS

52 Weeks Ended

52 Weeks Ended53 Weeks EndedDecember 27, 2008

December 29, 2007January 2, 2010NET SALES

$
219,775,000

$
265,728,000

$
274,458,000COST OF SALES, including buying and occupancy


131,990,000


156,036,000


147,474,000GROSS PROFIT


87,785,000


109,692,000


126,984,000EXPENSESStore operating expenses


79,167,000


95,339,000


97,023,000General and administrative expenses


18,341,000


21,296,000


22,725,000Exit costs (Note 9)


(65,000
)

2,757,000


(78,000
)Impairment charges (Notes 6 and 10)


2,744,000


2,137,000


Employee separation charge (Note 11)


1,987,000





TOTAL EXPENSES


102,174,000


121,529,000


119,670,000OPERATING INCOME (LOSS)


(14,389,000
)

(11,837,000
)

7,314,000OTHER INCOME (EXPENSE)Interest expense


(186,000
)

(243,000
)

(151,000
)Interest income


218,000


706,000


2,453,000Miscellaneous income








299,000TOTAL OTHER INCOME


32,000


463,000


2,601,000INCOME (LOSS) BEFORE INCOME TAXES


(14,357,000
)

(11,374,000
)

9,915,000INCOME TAX PROVISION (BENEFIT)(Note 14)


(5,663,000
)

(4,252,000
)

3,394,000NET INCOME (LOSS)

$
(8,694,000
)
$
(7,122,000
)
$
6,521,000BASIC EARNINGS (LOSS) PER SHARE

$
(0.68
)
$
(0.53
)
$
0.41DILUTED EARNINGS (LOSS) PER SHARE

$
(0.68
)
$
(0.53
)
$
0.40BASIC WEIGHTED AVERAGE SHARES OUTSTANDING


12,795,000


13,329,000


15,966,000DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING


12,795,000


13,329,000


16,200,000


The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-6

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Table of Contents

CACHE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock





Treasury StockAdditional
Paid-In
Capital

Retained
EarningsShares

Amount

Shares

Amount

TotalBalance at December 30, 2006


16,275,708

$
163,000

$
44,646,000

$
71,654,000




$


$
116,463,000Net income











6,521,000








6,521,000Tax benefit from stock option exercises








92,000











92,000Issuance of common stock


43,650





563,000











563,000Stock based compensation








835,000











835,000Repurchase of common stock














1,695,032


(24,210,000
)

(24,210,000
)Balance at December 29, 2007


16,319,358


163,000


46,136,000


78,175,000


1,695,032


(24,210,000
)

100,264,000Net loss











(7,122,000
)







(7,122,000
)Tax benefit from stock option exercises








160,000











160,000Issuance of common stock


90,678


1,000


560,000











561,000Stock based compensation








299,000











299,000Repurchase of common stock














1,676,968


(14,999,000
)

(14,999,000
)Balance at December 27, 2008


16,410,036


164,000


47,155,000


71,053,000


3,372,000


(39,209,000
)

79,163,000Net loss











(8,694,000
)







(8,694,000
)Issuance of common stock


23,337

















Stock based compensation








400,000











400,000Repurchase of common stock














310,199


(586,000
)

(586,000
)Balance at January 2, 2010


16,433,373

$
164,000

$
47,555,000

$
62,359,000


3,682,199

$
(39,795,000
)
$
70,283,000


The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-7

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Table of Contents

CACHE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS

52 Weeks Ended

52 Weeks Ended53 Weeks EndedDecember 27, 2008

December 29, 2007January 2, 2010Cash flows From Operating Activities:Net income (loss)

$
(8,694,000
)
$
(7,122,000
)
$
6,521,000Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization


11,855,000


12,774,000


12,124,000Impairment charges


2,744,000


2,137,000


Write down of equipment and leasehold improvements, net of deferred rent





1,570,000


Employee separation chargewrite-off of non-compete agreements


204,000





Provision for sales allowances and doubtful accounts


(62,000
)

(123,000
)

234,000Deferred income taxes


(2,595,000
)

(1,474,000
)

(1,875,000
)Excess tax benefit from stock-based compensation





(160,000
)

(92,000
)Amortization of deferred rent


(2,116,000
)

(1,996,000
)

(1,875,000
)Amortization of deferred income for co-branded credit card


(456,000
)

(218,000
)

Gift card breakage


(229,000
)

(287,000
)

(293,000
)Other








(21,000
)Stock-based compensation


400,000


299,000


835,000Non-cash exit costs


(65,000
)




(78,000
)Non-cash interest expense on note payable





54,000


73,000Change in assets and liabilities:Decrease (increase) in receivables and income tax receivable


2,982,000


(4,019,000
)

1,259,000Decrease in inventories


5,660,000


8,226,000


5,295,000Decrease (increase) in prepaid expenses and other current assets


(3,313,000
)

(169,000
)

3,247,000Increase (decrease) in accounts payable


1,249,000


(4,135,000
)

(1,192,000
)Increase in accrued liabilities, accrued compensation and other liabilities


3,594,000


1,038,000


6,267,000Net cash provided by operating activities


11,158,000


6,395,000


30,429,000Cash Flows From Investing Activities:Purchase of marketable securities


(42,954,000
)

(42,118,000
)

(88,880,000
)Maturities of marketable securities


38,108,000


59,852,000


88,087,000Certificates of depositrestricted


(1,500,000
)




Purchase of equipment and leasehold improvements


(1,976,000
)

(10,673,000
)

(12,094,000
)Purchase of assets from Adrienne Victoria Designs








(5,710,000
)Net cash provided by (used in) investing activities


(8,322,000
)

7,061,000


(18,597,000
)Cash Flows From Financing Activities:Proceeds from the issuance of common stock





561,000


563,000Excess tax benefit from stock-based compensation





160,000


92,000Repayment of note payable


(1,569,000
)

(1,586,000
)

(397,000
)Repurchase of common stock


(586,000
)

(14,999,000
)

(24,210,000
)Net cash used in financing activities


(2,155,000
)

(15,864,000
)

(23,952,000
)Net increase (decrease) in cash and equivalents


681,000


(2,408,000
)

(12,120,000
)Cash and equivalents, at beginning of period


4,835,000


7,243,000


19,363,000Cash and equivalents, at end of period

$
5,516,000

$
4,835,000

$
7,243,000


The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-8

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Table of Contents

CACHE, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Cache, Inc. (together with its subsidiaries, the "Company") operates 286 women's apparel specialty stores, as of
January 2, 2010. The Company specializes in the sale of high fashion women's apparel and accessories in the better to expensive price range.

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All
significant intercompany balances and transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements

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

The
most significant estimates made by management include those made in the areas of inventory; impairment of long lived assets and goodwill; deferred taxes; self insurance reserves;
stock-based compensation, gift card breakage, sales returns and allowances and income tax uncertainties. Management periodically evaluates estimates used in the preparation of the consolidated
financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based on such periodic evaluations.

Fiscal Reporting Period

The Company reports its annual results of operations based on fiscal periods comprised of 52 or 53 weeks, which is in accordance
with industry practice. Results for fiscal 2009 include 53 weeks, as compared to 52 weeks each for fiscal 2008 and 2007.

Fair Value of Financial Instruments

The carrying amounts of certificates of deposit, accounts receivable, accounts payable and accrued liabilities approximate their
estimated fair values due to their short-term nature. The Company's note payable includes imputed interest at 5% as the fair market value of this note is not readily determinable because
comparable instruments do not exist. The 5% imputed interest represented the Company's average return on its investment portfolio, at the inception of the note.

Cash and Equivalents

The Company considers all highly liquid investments that mature within three months or less when purchased to be cash equivalents.

Marketable Securities

Marketable securities, at January 2, 2010 and December 27, 2008, primarily consist of short-term United
States Treasury bills and tax-exempt municipal bonds. The Company classifies its short-term

F-9

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

investments
as held-to-maturity. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the securities
until maturity. Because the Company's held-to-maturity securities mature within one year of the purchase date, the securities are classified as short-term
marketable securities. Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts and such carrying
values approximate fair value. A decline in the market value of any held-to-maturity security below cost that is deemed to be other than temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. No impairment has occurred for the fiscal periods presented herein. Premiums
and discounts are amortized or accreted over the life of the related held-to-maturity investments, as an adjustment to yield using the effective interest method. Interest
income is recognized when earned. The fair value of our marketable securities totaled approximately $30.0 million and $25.2 million, as of January 2, 2010 and December 27,
2008, respectively.

Allowance for Doubtful Accounts.

The allowance for doubtful accounts, which is regularly reviewed, is an estimate of the amount of probable credit losses in the
existing accounts receivable. The allowance is determined based on historical write-off experience and the current retailer environment. Balances over 90 days past due and over a
specified amount are reviewed individually for collectability; other balances are considered on an aggregate basis considering the aging of balances.
Account balances are written off against the allowance when it is probable the receivable will not be recovered. There is no off-balance sheet credit exposure related to the Company's
customers. Management believes that the risk associated with trade accounts receivable is adequately provided for in the allowance for doubtful accounts. During the 53 week period ended
January 2, 2010, the Company recorded reserves of approximately $664,000 and utilized $722,000, resulting in an aggregate reserve balance of $53,000, as of January 2, 2010. The Company
reserved $111,000 for such items as of December 27, 2008. This amount is included as part of the sales allowance reserve, which is provided in supplemental schedules on
page F-37.

Inventories

Our finished goods inventories at our retail stores are valued at the lower of cost or market using the retail inventory method. Under
the retail inventory method ("RIM"), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of
inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the
lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including,
among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. We take markdowns due to changes in
fashion and style, based on the following factors: (i) supply on hand, (ii) historical experience and (iii) our expectations as to future sales. We do not anticipate any
significant change in our markdown strategy that would cause a significant change in our earnings. We believe that our RIM provides an inventory valuation, which results in a carrying value at the
lower of cost or market. Inventories other than finished goods at retail stores, called production inventory, primarily consists of piece goods, trim and work-in-process. It is
the Company's policy to value the production inventory, which makes up

F-10

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

approximately
15% of Company's total inventory, at lower of cost or market value using first-in-first-out valuation method. The Company reviews the inventory for
factors such as age, obsolescence, potential use, or other factors that may indicate a decline in its value. The Company records a reserve against the cost of the production inventory to account for
any decline in its value.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost. Depreciation and amortization are computed using the straight-line
method over the estimated useful
lives of the related assets, which generally range from three to 10 years. For income tax purposes, accelerated methods are generally used. Leasehold improvements are amortized over the shorter
of their useful life or lease term.

The
Company evaluates finite-lived assets in accordance with "Impairment or Disposal of Long-Lived Assets" under Topic 360
"Property, Plant and Equipment" of the Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC"). Finite-lived assets are
evaluated for recoverability in accordance with Topic 360 of the FASB ASC whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for
recoverability, the Company estimates the future cash flows expected to result from the use and eventual disposition of the asset. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset is recognized. Various
factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from
the current estimates. The Company evaluated its finite-lived assets during fiscal 2009 and 2008 and as a result, recorded an impairment charge of $1.9 million for 23 underperforming stores
(see note 10) and $1.1 million for 12 underperforming stores, respectively.

Goodwill and Intangible Assets

The Company evaluates its Goodwill and Intangible assets in accordance with "IntangiblesGoodwill
and Other",Topic 350 of the FASB ASC. This guidance requires ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment. The Company
performs impairment testing, which considers the Company's fair value to determine whether an impairment charge related to the carrying value of the Company's recorded goodwill and other intangible
assets, associated with its AVD reporting unit, is necessary. This is reevaluated annually during the fourth quarter, or more frequently if necessary. The Company considers many factors in evaluating
whether the carrying value of the recorded goodwill will be recoverable. Factors used to determine this primarily include declines in stock price and the market capitalization in relation to the book
value of the Company, discounted projected cash flows of the reporting unit and valuation of companies comparable to the reporting unit. During fiscal 2009, the Company did not incur an impairment
charge against the carrying value of goodwill. In fiscal 2009, the continued instability of the United States economy resulted in the Company experiencing decreased sales. The Company's stock price
increased from its year-end 2008 level and its book value approximates its market capitalization plus a reasonable control premium. The Company's impairment testing resulted in a fair
value of equity for its AVD reporting unit that exceeded its carrying value of equity by approximately $1.2 million (or 8.2% of the carrying value of equity). The Company's discounted projected
cash flows for its AVD reporting unit assumes that, the performance of fiscal 2010 is significantly improved from fiscal 2009 (with the second half of

F-11

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

fiscal
2010 providing the majority of the expected improvement). In the event that the Company does not achieve its fiscal 2010 financial projections, an impairment charge to goodwill may occur. An
impairment charge of $891,000 was recorded against the carrying value of intangible assets associated with its wholesale divisionMary L., during the fourth quarter of fiscal 2009, related
to the discontinuance of Mary L. Comparatively, an impairment charge of $1.0 million was recorded against the carrying value of goodwill during the fourth quarter of fiscal 2008.
Pursuant to the employee separation agreements entered into with two of the Company's then officers (see Note 11), the Company recorded a pre-tax charge of $204,000 during the third
fiscal quarter of 2009 for the remaining net book value of the non-compete agreements contained in their employment agreements.

Self Insurance

We are self-insured for losses and liabilities related primarily to employee health and welfare claims, up to certain
thresholds. Losses are accrued based upon our estimates of the aggregate liability for claims incurred, using certain actuarial assumptions followed in the insurance industry and based on Company
experience. Adjustments to earnings resulting from changes in historical loss trends have been insignificant for fiscal 2009, 2008 and 2007.
Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings. We maintain stop loss insurance coverage, which
covers us for benefits paid in excess of limits as defined in the plan.

Gift Cards, Gift Certificates and Credits

The Company sells gift cards and gift certificates ("Gift Cards") and issues credits to its customers when merchandise is returned
("Merchandise Credits"), which do not expire. The Company recognizes sales from Gift Cards when they are redeemed by the customer and income when the likelihood of the Gift Card and Merchandise Credit
being redeemed by the customer is remote ("Gift Card breakage"), since the Company has determined that it does not have a legal obligation to remit the unredeemed value to the relevant jurisdiction as
abandoned property. The Company determines Gift Card breakage income based upon historical redemption patterns and the remaining unredeemed percentage at the end of our historical data of
3.5 years. Historical redemptions of Gift Cards ranged from 64% in the first quarter to 0.03% in the fourteenth quarter subsequent to the issue date, resulting in an average of approximately
95% redeemed or 5% unredeemed Gift Cards over the historical data of 3.5 years. We have determined that redemption would be remote based on the fact that, by the fourteenth quarter since issue
date, the redemption rate approximated 0%, indicating that the probability of such cards being redeemed is remote. As such, we have recorded breakage income based upon this 5%, which is reviewed on a
quarterly basis for propriety. Breakage income represents the balance of Gift Cards and Merchandise Credits, for which the Company believes the likelihood of redemption by the customer, is remote. At
that time, the Company will recognize breakage income for those Gift Cards and Merchandise Credits.

The
Company recorded breakage income of $229,000, $287,000 and $293,000 during fiscal year ended 2009, 2008 and 2007, respectively.

Revenue Recognition

Sales are recognized at the "point of sale," which occurs when merchandise is sold in an "over-the-counter"
transaction or upon receipt by a customer. Sales of merchandise via our website are

F-12

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

recognized
at the expected time of delivery to the customer. Our customers have the right to return merchandise. Sales are reported net of actual and estimated returns. We maintain a reserve for
potential product returns and record, as a reduction to sales, a provision for estimated product returns,
which is determined based on historical experience. Charges/(credits) to earnings resulting from revisions to estimates on our sales return provision were approximately ($80,000), ($202,000) and
($93,000) for fiscal 2009, 2008 and 2007, respectively. Amounts billed to customers for shipping and handling fees are included in net sales at the time of shipment. Costs incurred at our stores for
shipping and handling is included in cost of sales and costs incurred for the shipping and handling of our wholesale products is included in general and administrative expenses. The Company records
revenues net of applicable sales tax.

The
products of our wholesale division are sold in upper tier department stores and the resulting sales are included under net sales when the merchandise is shipped to department stores,
which are recorded net of any returns, chargebacks, discounts and allowances. We also maintain a reserve as a reduction to sales for potential returns, chargebacks, discounts and allowances. During
the 53 week period ended January 2, 2010, the Company recorded reserves of approximately $664,000, of which it utilized $722,000, resulting in an aggregate reserve balance of $53,000, as
of January 2, 2010. The Company reserved $111,000 for such items as of December 27, 2008. The Company decided to discontinue its wholesale division during the fourth quarter of fiscal
2009.

The
Company's co-branded customer credit card program, which was introduced during fiscal 2007, entitles the Company to receive from the issuing bank a
non-refundable credit card activation fee for each new account that is opened and activated. These fees are initially deferred and recognized in consolidated net sales as revenue, over the
life of the contract. During fiscal 2009 and 2008, the Company received $1.1 million and $1.4 million, respectively, in connection with activated credit cards. The amount of fee income
recorded in connection with activated credit cards was $456,000 in fiscal 2009, as compared to $218,000 in fiscal 2008 and insignificant in fiscal 2007.

The
Company also offers its credit card holders a program whereby points can be earned on net purchases made with the co-branded credit card. Five reward points are awarded
for each dollar spent at Cache and one reward point is awarded for each dollar spent at non-Cache businesses. Cardholders whose credit card account is not delinquent, in default or closed
will be automatically eligible to receive a $25 Cache gift card upon accrual of 2,500 reward points. The issuing bank bears the cost of the reward program and is responsible for the administration and
management of the program.

The
Company also receives from the issuing bank and Visa U.S.A Inc. a sales royalty, which is based on a percentage of net purchases made by cardholders at Cache or other
businesses. Cache has determined that since it has not incurred any significant or recurring costs in relation to the co-branded credit card program the sales royalties earned in
connection to the agreement will be recorded under net sales. The fees that are incurred by the Company are cardholder incentives, which are funded from the fees paid by the issuing bank and Visa
U.S.A Inc. The amount of sales royalty income recorded was $328,000 and $248,000 in fiscal 2009 and fiscal 2008, respectively and insignificant in fiscal 2007.

Seasonality.We experience seasonal and quarterly fluctuations in net sales and operating income. Quarterly results of operations may
fluctuate
significantly as a result of a variety of factors, including macroeconomics conditions, the timing of new store openings, fashion trends and shifts in timing of certain holidays. Our business is
subject to seasonal influences, characterized in years other than fiscal 2008 by highest sales during the fourth quarter (October, November and December) and lowest sales

F-13

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

during
the third quarter (July, August and September). We began to return to historical trends in fiscal 2009.

Operating Leases

The Company leases retail stores and office space under operating leases. Most leases contain construction allowance reimbursements by
landlords, rent holidays, rent escalation clauses and/or contingent rent provisions. The Company recognizes the related rental expense on a straight-line basis over the lease term and
records the difference between the amounts charged to expense and the rent paid as a deferred rent liability.

To
account for construction allowance reimbursements from landlords and rent holidays, the Company records a deferred rent liability included in other long-term liabilities
on the consolidated balance sheets and amortizes the deferred rent over the lease term, as a reduction to rent expense on the consolidated statements of operations. For leases containing rent
escalation clauses, the Company records minimum rent expense on a straight-line basis over the lease term on the consolidated statement of operations. The lease term used for lease
evaluation includes option periods only in instances in which the exercise of the option period can be reasonably assured and failure to exercise such options would result in an economic penalty.

Advertising costs

Costs associated with advertising are charged to store operating expense, when the advertising first takes place. The Company spent
$6.9 million, $10.7 million and $12.6 million on advertising costs in fiscal 2009, 2008, and 2007, respectively.

Pre-Opening Store Expenses

Expenses associated with the opening of new stores are expensed as incurred.

Cache 401(K) Savings Plan

Employees are eligible to participate in the Company's 401(k) plan if they have been employed by the Company for one year, have reached
age 21 and work at least 1,000 hours annually. Generally, employees can defer up to 25% of their gross wages up to the maximum limit allowable under the Internal Revenue Code. The Company can
make a discretionary matching contribution for the employee. Employer contributions to the plan for fiscal 2009, 2008 and 2007 were $213,000, $420,000 and $403,000, respectively. The Company reduced
its discretionary matching contribution during fiscal 2009, as part of its cost savings initiative.

Income Taxes

The Company accounts for income taxes in accordance with "Income Taxes" Topic 740 of the FASB ASC. This statement requires the
Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, using applicable tax rates
for the years in which the differences are expected to reverse. When tax contingencies become probable, a liability for the contingent amount is estimated based upon

F-14

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

the
Company's best estimation of the potential exposures associated with the timing and amount of deductions, as well as various tax filing positions. As of January 2, 2010, the Company has
recorded a $301,000 reserve, net of federal benefit for potential tax contingencies. As of December 27, 2008, the Company had recorded a $331,000 reserve, net of federal benefit for potential
tax contingencies. No such reserves were recorded as of December 29, 2007. As of January 2, 2010, based upon its evaluation of the projected utilization of state net operating loss
("NOL") carry-forwards, the Company has established a valuation allowance of $68,000. No valuation allowance was recorded in fiscal 2008. If the
Company determines that it is more likely than not that the state NOL's will be realized in the future, that portion of the valuation allowance will be reduced and the Company will
provide for an income tax benefit in its Statement of Operations, at its effective rate.

Effective
December 31, 2006, the Company adopted the provisions of "Accounting for Uncertainty in Income Taxes", within
Topic 740 of the FASB ASC. This provision prescribes a comprehensive model of how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions
that the company has taken or expects to take on a tax return. The provision also states that a tax benefit from an uncertain tax position may be recognized if it is "more likely than not" that the
position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon
the ultimate settlement with a taxing authority having full knowledge of all relevant information.

The
cumulative effect of this adoption did not result in any adjustment in the Company's liability for unrecognized income tax benefits.

Balance at December 27, 2008

$
501,000Additions based on tax positions related to the current year


Additions for tax positions for prior years


54,000Reductions for tax positions for prior years due to lapse of applicable statute of limitations


(39,000
)Settlements


(81,000
)Balance at January 2, 2010

$
435,000


Included
in the above ending balance are tax positions of $301,000, which, if recognized, would favorably affect the effective tax rate.

The
Company's continuing practice is to include estimated interest and penalties, if any, in computing the amount that is recognized within income tax expense relating to uncertain
income tax positions. As of January 2, 2010, the Company had accrued $178,000 of interest and penalties related to uncertain tax positions, which is included in the $435,000 tax contingency
noted above.

Although
the Company believes that it has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the Company's accrued position.
Accordingly, the Company's provisions on federal, state and local tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are
settled or otherwise resolved. As of January 2, 2010, the Company does not believe that its estimates, as otherwise provided for, on such tax positions will significantly increase or decrease
within the next twelve months.

The
Company and certain of its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and local jurisdictions.

F-15

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
Company had previously reached agreement with the IRS and closed the audit of fiscal year 2005, with no change to the tax return. The Company is subject to federal income tax
examinations for years after 2005.

As
for state and local income taxes, with few exceptions, the Company is subject to state and local income tax examinations by taxing authorities for years after 2005.

Stock-Based Compensation

Stock-based compensation expense for all stock-based awards program, including grants of stock options, is recorded in accordance with
"Compensation-Stock Compensation", Topic 718 of the FASB ASC. The grant date fair value for stock options is calculated using the Black-Scholes option
valuation model. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the
associated volatility and the expected dividends. All employee stock options were granted at or above the grant date market price. Judgment is required in estimating the amount of share-based awards
expected to be forfeited prior to vesting. In accordance with the stated guidance, if actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially
impacted (See Note 15). The Company recognized $400,000, $299,000 and $835,000 in stock-based compensation expense during fiscal 2009, 2008 and 2007, respectively.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share also includes the dilutive effect of potential common shares (dilutive stock options and unvested restricted common shares) outstanding during the period.

Comprehensive Income

The Company reports comprehensive income in accordance with"Comprehensive Income",
Topic 220 of the FASB ASC. This guidance provides standards for the reporting and display of comprehensive income. Components of comprehensive income could include net income, foreign currency
translation adjustments and gains or losses associated with investments available for sale. There was no difference between net income and comprehensive income for any of the periods presented.

Segment Reporting

Topic 280 "Segment Reporting", of the FASB ASC establishes standards for reporting
information about a company's operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company operates in two
segmentsthe operation of specialty retail stores and wholesale. Revenues from external customers are derived from merchandise sales and we do not rely on any major customers as a source
of revenue.

F-16

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
Company has determined that the results of operations of the Mary L. division were insignificant in fiscal 2009, 2008 and 2007. The chart below is that of our retail segment only.

53 Weeks Ended

52 Weeks Ended

52 Weeks EndedJanuary 2, 2010

December 27, 2008

December 29, 2007Sportswear


57.3
%

60.7
%

58.7
%Dresses


32.8


30.4


32.1Accessories


9.9


8.9


9.2Total


100.0
%

100.0
%

100.0
%


Concentration

The Company has five major suppliers, which accounted for approximately 27% of our purchases during fiscal 2009, and our largest
supplier accounted for 14% of our purchases during fiscal 2009. The loss of any of these suppliers could adversely affect the Company's operations.

Recent Accounting Developments

In February 2010, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-09, Subsequent Events (Topic 855) Amendments to
Certain Recognition and Disclosure Requirements, which amends disclosure requirements within Subtopic
855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic
855-10 and the SEC's requirements. ASU 2010-09 is effective upon issuance. The adoption of ASU 2010-09 did not have a material impact on the Company's consolidated
financial statements.

In
January 2010, FASB issued ASU 2010-06,Improving Disclosures about Fair Measurements, which provides amendments to subtopic
820-10 that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements and the presentation of separate information
regarding purchases, sales, issuances and settlements for Level 3 fair value measurements. Additionally, ASU 2010-06 provides amendments to subtopic 820-10 that clarify
existing disclosures about the level of disaggregation and inputs and valuation techniques. ASU 2010-06 is effective for financial statements issued for interim and annual periods ending
after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which are
effective for interim and annual periods ending after December 15, 2010. The Company does not expect the adoption of ASU 2010-06 to have a material impact on its consolidated
financial statements.

In
January 2010, FASB issued ASU 2010-02,Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope
Clarification,which addresses the accounting for noncontrolling interests and changes in ownership interests of a subsidiary. ASU 2010-02 is effective for the
interim or annual reporting periods ending on or after December 15, 2009, and must be applied retrospectively to interim or annual reporting periods beginning on or after December 15,
2008. The adoption of ASU 2010-02 did not have an impact on the Company's consolidated financial statements.

In
December 2009, FASB issued ASU 2009-17,Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities, which replaces the quantitative-

F-17

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

based
risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which
enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the
entity or (2) the right to receive
benefits from the entity. ASU 2009-17 also requires additional disclosures about an enterprise's involvement in variable interest entities. ASU 2009-17 is effective as of the
beginning of each reporting entity's first annual reporting period that begins after November 15, 2009. The Company does not expect the adoption of ASU 2009-17 to have a material
impact on its consolidated financial statements.

In
December 2009, FASB issued ASU 2009-16,Transfers and Servicing,which improves financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not
surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its
continuing involvement in transferred financial assets. ASU 2009-16 is effective as of the beginning of each reporting entity's first annual reporting period that begins after
November 15, 2009. The Company does not expect the adoption of ASU 2009-16 to have a material impact on its consolidated financial statements.

In
August 2009, FASB issued ASU 2009-05,Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair
Value,which provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of liabilities. ASU
2009-05 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value. ASU
2009-05 is effective for the first reporting (including interim periods) beginning after issuance. The adoption of ASU 2009-05 did not have a material impact on the Company's
consolidated financial statements.

In
October 2009, FASB issued ASU 2009-13,Revenue Recognition (Topic 605)Multiple-Deliverable Revenue
Arrangements. This guidance addresses accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather
than as a combined unit. It also addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. ASU 2009-13 will be
effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not
expect the adoption of ASU 2009-13 to have a material impact on its consolidated financial statements.

In
June 2009, FASB issuedAccounting Standards Codification("ASC") 105, Generally Accepted Accounting Principles, which establishes the
Codification as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. All guidance contained in the Codification carries an equal level of
authority. Following this statement, FASB will not issue new standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates, which will serve only to: (1) update the Codification; (2) provide background information about the guidance; and (3) provide the bases for conclusions on the
change(s) in the Codification. ASC 105 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing
non-SEC accounting and reporting standards. The adoption of ASC 105 did not have an impact on the Company's consolidated financial statements.

F-18

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In
June 2009, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 111,Other Than Temporary Impairment of Certain
Investments in Debt and Equity Securities.SAB No. 111 clarifies the SEC's position related to other-than-temporary impairments of debt and
equity securities and was issued in order to make the relevant interpretive SEC guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The
adoption of SAB No. 111 did not have an impact on the Company's consolidated financial statements.

In
April 2009, FASB issued amendments to ASC 320-10,InvestmentsDebt and Equity Securities, which provides
greater clarity about the credit and noncredit component of an other-than-temporary impairment event and more effectively communicates when an
other-than-temporary impairment event has occurred. ASC 320-10 amends the other-than-temporary impairment model for debt securities.
The impairment model for equity securities was not affected. Under ASC 320-10, another-than-temporary impairment must be recognized through earnings if an
investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. This
standard was effective for interim periods ending after June 15, 2009. The adoption of the amendments to ASC 320-10 did not have a material impact on the Company's
consolidated financial statements.

In
April 2009, FASB issued amendments to ASC 820-10,Fair Value Measurements and Disclosures, which provides amendments to
guidelines for making fair value measurements more consistent and provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is
distressed. The amendments are applied to all assets and liabilities (i.e., financial and non-financial) and requires enhanced disclosures. The amendments are effective for periods
ending after June 15, 2009. The adoption of the ASC 820-10 amendments did not have an impact on the Company's consolidated financial statements.

In
April 2009, FASB issued amendments to ASC 825-10,Financial Instruments, which require disclosures about fair value of
financial instruments in interim financial statements as well as in annual financial statements. The amendments are effective for interim periods ending after June 15, 2009. The adoption of
these amendments did not have an impact on the Company's consolidated financial statements.

In
June 2008, FASB issued amendments to ASC 260-10,Earnings Per Share, which requires unvested share based payment awards
that contain non-forfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.
These amendments were effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years and requires retrospective application.
The adoption of these amendments did not have an impact on the Company's financial statements.

In
September 2006, FASB issued ASC 820-10,Fair Value Measurements and disclosures.In February 2008, the FASB provided a one
year deferral for implementation of the standard for non-recurring, non-financial assets and liabilities. The adoption of this partially deferred portion of ASC
820-10 did not have an impact on the Company's consolidated financial statements.

F-19

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Supplemental Statements of Cash Flow Information

The Company accrued $180,000, $243,000 and $151,000 for interest expense on a note payable and paid $234,000, $263,000 and $78,000
during fiscal 2009, 2008 and 2007, respectively. The Company issued a note for $6.3 million during fiscal 2007 in connection with the acquisition of certain assets of AVD. During fiscal 2009,
2008 and 2007, the Company paid $253,000, $1.9 million and $3.8 million in income taxes, respectively. In addition, during fiscal 2009, 2008 and 2007, the Company accrued equipment and
leasehold improvements of $234,000, $216,000 and $752,000, respectively.

NOTE 2. FAIR VALUE MEASUREMENT

In accordance with "Fair Value Measurements and Disclosures", Topic 820 of the FASB ASC, which defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Topic 820 of the FASB ASC establishes a fair
value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:



As
of January 2, 2010, the Company's marketable securities primarily consist of short-term United States Treasury bills and tax-exempt municipal bonds. The
Company classifies its short-term investments as held-to-maturity. Held-to-maturity securities are those securities in which the Company has
the ability and intent to hold the securities until maturity. Because the Company's held-to-maturity securities mature within one year of the purchase date, the securities are
classified as short-term marketable securities. Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of
premiums or discounts and such carrying values approximate fair value. A decline in the market value of any held-to-maturity security below cost that is deemed to be other than
temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established.

"Financial Instruments", Topic 825 of the FASB ASC, provides entities the option to measure many financial instruments and certain other
items at fair value. Entities that choose the fair value option will recognize unrealized gains and losses on items for which the fair value option was elected in earnings at each subsequent reporting
date. The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with Topic 825 of the FASB ASC.

The
fair value of our marketable securities, which was determined based upon Level 1 inputs, totaled $30.0 million and $25.2 million as of January 2, 2010 and
December 27, 2008, respectively. For

F-20

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. FAIR VALUE MEASUREMENT (Continued)

the
fiscal periods ended January 2, 2010 and December 27, 2008, the aggregate amount of marketable securities (maturing greater than 90 days and less than one year) totaled
approximately $30.0 million and $25.2 million, respectively. The Company noted small variances between the book value and fair value due to the remaining unamortized premiums. As a
result, no impairment has occurred for the fiscal periods presented herein. Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity investments. Interest income is recognized when earned.

NOTE 3. RECEIVABLES

January 2,
2010

December 27,
2008Construction allowances

$
507,000

$
536,000Third party credit cards


2,142,000


2,382,000Accounts receivable, net


62,000


184,000Other


700,000


796,000$
3,411,000

$
3,898,000


Accounts
receivable, net includes sales from the wholesale division, which are recorded net of any returns, chargebacks, discounts and allowances. As of January 2, 2010 and
December 27, 2008, the Company recorded $53,000 and $111,000, respectively, for such items.

During
fiscal 2009, the Company recorded an income tax receivable of $3.4 million, which resulted from estimated tax payments of $266,000 made during fiscal 2009 and 2008 combined
with estimated refunds of $3.3 million, generated as a result of the carry back on the net loss incurred during the current fiscal year. An income tax receivable of $5.9 million was
recorded during fiscal 2008 due to overpayments on the estimated tax payments combined with a refund, generated as a result of the carry back on the net loss incurred during fiscal 2008.

NOTE 4. INVENTORIES

January 2,
2010

December 27,
2008Raw materials

$
1,253,000

$
2,136,000Work in process


1,160,000


1,614,000Finished goods


14,186,000


18,571,000$
16,599,000

$
22,321,000


F-21

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

January 2,
2010

December 27,
2008Leasehold improvements

$
51,861,000

$
54,539,000Furniture, fixtures, and equipment


33,913,000


52,752,00085,774,000


107,291,000Less: accumulated depreciation and amortization


(54,061,000
)

(63,971,000
)$
31,713,000

$
43,320,000


Store
operating and general and administrative expenses include depreciation and amortization expense of $11.7 million, $12.6 million and $12.1 million for the
fiscal years ended 2009, 2008 and 2007, respectively. The Company recorded an impairment charge during fiscal 2009 and 2008 on its long lived assets; see Note 10 herein for additional details.

NOTE 6. ACQUISITION OF ADRIENNE VICTORIA DESIGNS, INC.

On July 3, 2007, the Company, through a wholly-owned subsidiary which was created in connection with the acquisition, acquired certain assets of Adrienne Victoria
Designs, Inc. ("AVD"), our largest vendor, at that time. Under the terms of the agreement, the Company made cash payments totaling $5.7 million, including transaction costs. In addition,
the Company issued a note payable of $7.0 million ($6.3 million net of imputed interest of 5%) to be paid over 5 years. The Company acquired certain assets of AVD, a design,
sourcing and manufacturing company, in order to increase operating efficiencies and increase shareholder value. The acquisition was accounted for in the third quarter of fiscal 2007, using the
purchase method in accordance with "Business Combinations", Topic 805 of the FASB ASC. Accordingly, the assets acquired were recorded at their fair
values and operating results were included in our financial statements from the date of acquisition.

During
fiscal 2007, the Company completed its valuation of the assets acquired and calculated the value of goodwill and intangible assets to be approximately $11.5 million.
Goodwill was recognized as the excess of the purchase price paid over the fair market value of the net assets acquired. The excess payment, which resulted in goodwill, was due to the Company
purchasing the talent, experience and organization of a sourcing and production team, which it did not have prior to the acquisition. Consequently, due to the acquisition, Cache has positioned itself
to increase its gross margin. The total goodwill recorded is expected to be deducted for tax purposes over the applicable period. The Company has determined that this is not a significant subsidiary
in accordance with Regulation S-X and as such, pro-forma financial information is not required.

During
the period ended December 29, 2007, the Company recorded a note payable to Robert Kantor and Adrienne Kantor, related to the acquisition of certain assets of Adrienne
Victoria Designs, Inc. The $6.3 million note, which will be paid over five years, has an imputed five percent

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. ACQUISITION OF ADRIENNE VICTORIA DESIGNS, INC. (Continued)

interest
rate. The note maturities are payable in quarterly installments ranging from $163,000 to $475,000. As of January 2, 2010, the amounts due on the note payable are as follows:

Fiscal years ending:2010


1,408,0002011


1,105,0002012


320,000Total

$
2,833,000




In accordance with "IntangiblesGoodwill and Other",Topic 350 of the FASB
ASC, the Company's goodwill and its intangible assets are reviewed annually for impairment or more frequently, if impairment indicators arise. This annual valuation process, which is performed during
the fourth quarter of each year, did not result in an impairment charge against the carrying value of the Company's goodwill in fiscal 2009. However, an impairment charge of $891,000 was recorded
against the carrying value of intangible assets associated with its wholesale divisionMary L. during the fourth quarter of fiscal 2009. Comparatively, an impairment charge of
$1.0 million was recorded against the carrying value of the Company's goodwill during the fourth quarter of fiscal 2008. During the third quarter of fiscal 2009, the Company recorded a charge
of $204,000 for the remaining net book value of its definite-lived intangible assetNon-Compete agreements. This charge resulted from an employee
separation agreement (see Note 11) that the Company entered into with two of its former executive officers. As a result of these charges during fiscal 2009, the Company's recorded net
intangibles assets as of January 2, 2010 were reduced to $102,000 from $1.3 million as of December 27, 2008. The Company's recorded goodwill balance of $9.1 million did not
change from the prior fiscal year end. The carrying amounts of net intangible assets as of January 2, 2010 and December 27, 2008 are as follows:

January 2,
2010

December 27,
2008Indefinite-lived intangible assets:TrademarksCache

$
102,000

$
102,000TrademarksMary L.





620,000102,000


722,000Definite-lived intangible assets:Customer relationships





300,000Non-Compete agreements





300,000Favorable market lease





160,000


760,000Less: accumulated amortization





(178,000
)


582,000Total intangible assets, net

$
102,000

$
1,304,000


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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. ACQUISITION OF ADRIENNE VICTORIA DESIGNS, INC. (Continued)

General
and administrative expenses include amortization expense of $107,000, $119,000 and $59,000, for the fiscal years ended 2009, 2008 and 2007, respectively.

NOTE 7. ACCRUED LIABILITIES

January 2,
2010

December 27,
2008Gift cards, merchandise credit cards and other customer deposits and credits

$
3,817,000

$
3,644,000Taxes, including income taxes


2,807,000


2,593,000Operating expenses


2,007,000


2,469,000Employee separation settlement (Note 11)


1,375,000


Deferred income


568,000


333,000Group insurance


481,000


656,000Sales return reserve


470,000


550,000Leasehold additions


234,000


216,000Exit costs (Note 9)


24,000


616,000$
11,783,000

$
11,077,000


Leasehold
additions generally represent a liability to general contractors for a final 10% payable on construction contracts for store construction or renovations.

NOTE 8. BANK DEBT

On May 27, 2009, the Company entered into a one year credit facility with Bank of America (the "Bank"). Under this facility, the Company may direct the Bank to issue letters of
credit up to a total of $1,425,000. Any outstanding letters of credit under this facility are collateralized by granting to the Bank a security interest in various certificates of deposit held by the
Company and its subsidiaries with the Bank, amounting to a total of $1,500,000. This one year credit facility will expire on May 1, 2010. The Company is currently reviewing its future
requirements for a credit facility and plans to initiate discussion with its bankers to renew this credit line or negotiate a new credit facility.

Any
certificates of deposit collateralized against this line of credit are reported as restricted funds. Based on the expiry dates of the letters of credits issued, the restricted cash
has been reported as either Current or Non-Current. When the expiry date is within one year of the reporting period end date then the certificates of deposit are reported as Current, and
when the expiry date is beyond one year the certificates of deposit are reported as Non-Current.

The
Company had outstanding letters of credit of approximately $660,000 and $585,000 at January 2, 2010 and December 27, 2008, respectively.

NOTE 9. EXIT COSTS

During fiscal 2008, the Company recorded a pre-tax charge of $2.8 million net of deferred rent, for asset write down and store closing costs for 16 underperforming
stores. As of January 2, 2010 there was a total liability of $64,000 remaining for lease termination and severance costs. Severance costs and lease termination costs are recorded as part of
accrued compensation and accrued liabilities,

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. EXIT COSTS (Continued)

respectively,
on the accompanying consolidated balance sheets. The following table identifies the activity during fiscal 2009:

Liability
Balance
Beginning of Year

Utilization

Liability
Balance
End of PeriodSeverance

$
79,000

$
39,000

$
40,000Lease termination costs


616,000


592,000


24,000$
695,000

$
631,000

$
64,000


The
Company's utilization of the store exit cost accrual balance in the amount of $631,000, included $65,000 of severance and lease termination costs recorded during fiscal 2008. This
reversal was primarily due to the Company's decision to keep open one of the 16 stores that the Company had planned to close during fiscal 2008. Of the remaining 15 stores, 14 were closed prior to Jan
2, 2010, and one subsequent to that date. This amount was net of severance and other costs for discontinuing its wholesale divisionMary L., which was determined during the fourth quarter
of fiscal 2009.

The
following is a summary of the activity in the reserve for exit costs during fiscal 2008:

Liability
Balance
Beginning of Year

Charges

Cash
Payments

Liability
Balance
End of PeriodWrite down of equipment and leasehold improvements

$


$
2,319,000

$


$
Severance





198,000


119,000


79,000Reversal of deferred rent liability





(750,000
)




Lease termination costs





990,000


374,000


616,000$


$
2,757,000

$
493,000

$
695,000


NOTE 10. IMPAIRMENT CHARGE

In accordance with "Impairment or Disposal of Long-Lived Assets" under Topic 360 "Property, Plant and
Equipment" of the FASB ASC, impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value. An impairment loss is
recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment is based on the carrying amount of the asset at the date it is
tested for recoverability, whether in use or under development. An impairment loss is measured as the amount by which the carrying amount of long-lived assets exceeds its fair value.

Due
to the inability of the Company to assess the fair market value of the Company's assets in its retail stores, as these assets are not traded in an active market, the Company
determined its fair market value by computing the net present value of future cash flows by discounting those future cash flows using a risk free interest rate from a 10 year treasury note. To
analyze stores for impairment, the Company compared the undiscounted future cash flows against the carrying value of the long lived assets, as of January 2, 2010, for each store and as a
result, identified 23 stores where the sum of undiscounted future cash flows were less than the corresponding carrying amounts. The Company then

F-25

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10. IMPAIRMENT CHARGE (Continued)

compared
the net present value of future cash flows for these 23 stores against the carrying amount of the long lived assets and as a result of the excess carrying value over the computed net present
value, the Company recorded an impairment charge of approximately $1.9 million for the 23 underperforming stores identified. As a result of this impairment charge, which was recorded during the
fourth quarter of fiscal 2009, the Company also adjusted the cost basis of the long lived assets at the affected stores in accordance with the stated guidance mentioned above.

NOTE 11. EMPLOYEE SEPARATION CHARGE

On September 23, 2009, the Company entered into separation agreements with two of its then executive officers. Subsequently, during the fourth quarter of fiscal 2009, the Company
entered into amended agreements, whereby, the Company agreed to make early settlement payments to both of its former executives. Additionally, one of the former executives agreed to reduced settlement
payments from the original separation agreement. As a result of these amended separation agreements, the Company recorded a pre-tax charge of $2.0 million for the fiscal year ended
January 2, 2010. This charge consisted of settlement costs of approximately $1.8 million, which included a charge of $23,000 for the vested portion of stock-awards that the Company
purchased back from these former executives, and a charge of $204,000 for the remaining net book value of the non-compete agreements contained in their employment agreements (see
Note 6). The charge of $204,000 was due to the Company releasing these former executives from the non-compete clause contained in the employment agreements. As of January 2,
2010, the Company has $1.4 million of separation settlement due to one of the former executives, which is recorded under accrued liabilities (see Note 7) on the accompanying consolidated
balance sheets.

Pursuant
to one of these separation agreements, a former executive may receive contingent payments of up to $500,000 in the aggregate, based on the achievement by the Company over the
next 4 years of certain net income targets set forth in the agreement. For the fiscal year ended January 2, 2010, no accrual was recorded for this earn-out provision. The
previous agreement with this former executive, provided for contingent payments of up to $5.5 million based on certain performance targets. Under the terms of the separation agreement, the
Company is released from the previous contingent obligation entirely.

NOTE 12. OTHER LIABILITIES

Other liabilities consists of accruals of future rent escalations, unamortized landlord construction allowances and deferred income from co-branded credit card.

NOTE 13. COMMITMENTS AND CONTINGENCIES

Leases

At January 2, 2010, the Company was obligated under operating leases for the corporate office, as well as another location that
houses our design, production and customer service departments and various store locations expiring at various times through 2020. The terms of the leases generally provide for the payment of minimum
annual rentals, contingent rentals based on a percentage of sales in excess of a stipulated amount, and a portion of promotional funds, common area maintenance and heating, ventilation and air
conditioning charges. Most leases contain leasehold improvement reimbursements

F-26

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued)

from
landlords and/or rent holidays. In recognizing landlord incentives and minimum rent expenses, the Company amortizes the charges and incentives on a straight line basis over the lease term.

Store
rental expense related to these leases, included in cost of sales, consisted of the following:

53 Weeks Ended

52 Weeks Ended

52 Weeks EndedJanuary 2,
2010

December 27,
2008

December 29,
2007Net minimum rentals

$
23,647,000

$
24,726,000

$
24,432,000Contingent rentals and other occupancy costs


11,296,000


11,640,000


11,536,000$
34,943,000

$
36,366,000

$
35,968,000


F-27

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued)

Future minimum payments under non-cancelable operating leases consisted of the following at January 2, 2010:

Fiscal years ending:2010

$
25,612,0002011


23,759,0002012


21,154,0002013


18,310,0002014


14,099,000Thereafter


22,202,000Total future minimum lease payments

$
125,136,000


The
operating leases included in the table above does not include contingent rent based upon sales volume, which represented approximately less than 1% of minimum rent expense in fiscal
2009, or other occupancy costs such as promotional funds, common area maintenance and heating, ventilation and air conditioning charges, which represented approximately 47.8% of net minimum rent
expense in fiscal 2009.

Other Commitments

The following tables summarize our other commitments as of January 2, 2010:

Payments Due in PeriodTotal

2010

2011

2012

2013

2014

Thereafter(in thousands)Other ObligationsEmployment Contracts

$
2,446

$
1,000

$
1,000

$
446

$


$


$
Purchase Obligations


23,702


23,702














Letters of credit


660


660














Total

$
26,808

$
25,362

$
1,000

$
446

$


$


$



We
issue letters of credit primarily for the importation of merchandise inventories and as security deposit for our corporate office. The Company does not have any
off-balance sheet financing arrangements.

In
February 2009, Cache entered into a new employment agreement with the Company's current Chairman and Chief Executive OfficerThomas E. Reinckens. The agreement commenced
on February 24, 2009 for a term of three years expiring on February 2012. The previous agreement expired in February 2009.

In
October 2009, Cache entered into an employment agreement with Rabia Farhang, the Company's new Executive Vice President and General Merchandise Manager. The agreement is for a term of
three years, expiring in November 2012.

F-28

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued)

Contingencies

As indicated in Note 11, on September 23, 2009, the Company entered into a separation agreement with two of its then
executive officers. Pursuant to one of these separation agreements, a former executive may receive contingent payments of up to $500,000 in the aggregate, based on the achievement by the Company over
the next 4 years of certain net income targets set forth in the agreement. For the fiscal year ended January 2, 2010, no accrual was recorded for this earn-out provision. The
previous agreement with this former executive, provided for contingent payments of up to $5.5 million based on certain performance targets. Under the terms of the separation agreement, the
Company is released from the previous contingent obligation entirely.

The
Company is exposed to a number of asserted and unasserted potential claims. Management does not believe it is reasonably possible that resolution of these matters will result in a
material loss. The Company had no guarantees, subleases or assigned lease obligations as of January 2, 2010 and December 27, 2008.

NOTE 14. INCOME TAXES

The provision (benefit) for income taxes includes:

53 Weeks Ended

52 Weeks Ended

52 Weeks EndedJanuary 2,
2010

December 27,
2008

December 29,
2007Current:Federal

$
(3,148,000
)
$
(3,412,000
)
$
4,589,000State


80,000


634,000


680,000(3,068,000
)

(2,778,000
)

5,269,000Deferred:Federal


(1,934,000
)

(898,000
)

(1,609,000
)State


(661,000
)

(576,000
)

(266,000
)(2,595,000
)

(1,474,000
)

(1,875,000
)Provision (benefit) for income taxes

$
(5,663,000
)
$
(4,252,000
)
$
3,394,000


F-29

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14. INCOME TAXES (Continued)

The
Company's effective tax rate, as a percent of income before income taxes, differs from the statutory federal tax rates as follows:

53 Weeks Ended

52 Weeks Ended

52 Weeks EndedJanuary 2,
2010

December 27,
2008

December 29,
2007Effective federal tax rate


34.0
%

34.0
%

34.0
%Federal benefit on NOL carry back over 34%


1.3
%

0.7
%

0.0
%State and local income taxes, net of federal tax benefit


4.5
%

1.2
%

2.7
%Other net, primarily permanent differences


(0.4
)%

1.5
%

(2.5
)%Provision for income taxes


39.4
%

37.4
%

34.2
%


The
major components of the Company's net deferred tax assets (liabilities) at January 2, 2010 and December 27, 2008 are as follows:

Current

Janaury 2, 2010

December 27, 2008Group insurance

$
184,000

$
251,000Sales return reserve


179,000


211,000Inventory


354,000


464,000Prepaid expenses


(437,000
)

(491,000
)280,000


435,000Valuation allowance


(4,000
)

Total Current

$
276,000

$
435,000




Non-Current

January 2,
2010

December 27,
2008State tax net operating loss carryforwards

$
919,000

$
481,000Deferred rent


1,419,000


1,377,000Deferred construction allowances


(4,615,000
)

(3,768,000
)Other (principally depreciation expense)


6,620,000


3,436,0004,343,000


1,526,000Valuation allowance


(64,000
)

Total Non-current

$
4,279,000

$
1,526,000


During
fiscal 2009 and 2008, the Company generated federal net operating losses of approximately $9.0 million and $9.2 million, respectively. At January 2, 2010, the
Company had no Federal net operating loss ("NOL") carry-forwards available, since the losses generated in both fiscal 2009 and 2008 were carried back to offset net income generated in fiscal 2006 and
2005. Thus the Company believes no Federal valuation allowance is required at January 2, 2010. For state income tax purposes, the Company has established a valuation allowance in the amount of
$68,000 in fiscal 2009, primarily to

F-30

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14. INCOME TAXES (Continued)

reserve
for the possible non-utilization of state NOL carry-forwards, which may not be realized in future periods before the NOLs expire. The Company's state NOLs expire from 2013 through
2029.

The
Current portion of deferred tax assets and liabilities are included in prepaid expenses and other current assets, while the Non-current portion of deferred tax assets and
liabilities are included in other assets on the Company's accompanying consolidated balance sheets.

NOTE 15. STOCK BASED COMPENSATION

Stock-based compensation expense for all stock-based award programs, including grants of stock options and restricted stock awards, is recorded in accordance with
"CompensationStock Compensation", Topic 718 of the FASB ASC. Stock-based compensation expense, which is calculated net of estimated
forfeitures, is computed using the grant date fair-value method on a straight-line basis over the requisite service period for all stock awards that vest during the period. The
grant date fair value for stock options is calculated using the Black-Scholes option valuation model. Determining the fair value of options at the grant date requires judgment, including estimating
the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. All employee stock options were granted at or above the grant date
market price. Stock-based compensation expense is reported under general and administrative expenses on the accompanying consolidated statements of operations.

The
Company's 2008 Plan provides for the granting of various forms of awards, which has a maximum of 800,000 shares of common stock available. The shares available for issuance under the
2008 Stock Option and Performance Incentive Plan are comprised of the following: (i) unissued shares of Common Stock previously available for issuance under the Company's 2003 Stock Option and
Performance Incentive Plan, which were never granted or issued and are being carried forward into the Company's 2008 Stock Option and Performance Incentive Plan, and (ii) additional shares of
Common Stock not previously available for issuance under incentive compensation plans. As of January 2, 2010, there were a total of 616,002 shares available for future grants under the 2008
stock option plan. All of the Company's prior stock option plans have expired as to the ability to grant new options.

The
2008 plan is intended to replace the Company's 2003 Stock Option and Performance Incentive Plan (the "2003 Plan"). The Company ceased making grants under the 2003 Plan upon Board
approval of the 2008 Plan.

Awards
granted under the plan have a ten-year term and may be incentive stock options, non-qualified stock options or restricted shares. The awards are granted at
an exercise price equal to the fair market value on the date of grant and generally vest over a three or four year period. The granted awards generally become exercisable at the maximum rate of
approximately 33% per annum, to the extent the Company's earning plan, as approved by the Compensation and Plan Administration Committee is achieved. The price is payable in cash at the time of the
exercise or, at the discretion of the Administrators, through the delivery of shares of Common Stock or the Company's withholding of shares otherwise deliverable to the employee, or a combination
thereof. Effective January 1, 2006, we recognized compensation expense ratably over the vesting period, net of estimated forfeitures. As of January 2, 2010, there was approximately
$693,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the incentive plan. This cost is expected to be recognized over a
remaining weighted-average vesting period of 1.83 years. No stock

F-31

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. STOCK BASED COMPENSATION (Continued)

options
were exercised during the 53-week period ended January 2, 2010 and as such, no intrinsic value was computed. Restricted stock of 23,337 shares vested during fiscal 2009.

In
accordance with Topic 718 of the FASB ASC, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model using the assumptions
below for grants in the respective periods:

2009
Grants

2008
Grants

2007
GrantsExpected dividend rate

$
0.00

$
0.00

$
0.00Expected volatility


59.4
%

36.1
%

35.436.9
%Risk free interest rate


1.3
%

2.6
%

4.75.0
%Expected lives (years)


3.0


4.0


4.0


The
fair value of options granted during fiscal years ended January 2, 2010, December 27, 2008 and December 29, 2007 were $1.94, $3.14 and $5.06, respectively.

The
following table summarizes all stock option transactions for the three fiscal years ended January 2, 2010:

Weighted
Average Shares

Exercise
PricesShares under option as of December 30, 2006


1,139,628

$
12.26Options granted in 2007


155,000


14.38Options exercised in 2007


(43,650
)

12.91Options cancelled in 2007


(18,875
)

12.32Shares under options as of December 29, 2007


1,232,103


12.51Options granted in 2008


15,000


9.81Options exercised in 2008


(90,678
)

6.19Options canceled in 2008


(423,750
)

12.94Shares under options as of December 27, 2008


732,675


12.98Options granted in 2009


20,000


4.79Options exercised in 2009





Options canceled in 2009





Shares under option as of January 2, 2010


752,675

$
12.76




Options Exercisable at:

Number
of Shares

Weighted
Average
Exercise PriceDecember 29, 2007


1,017,853

$
12.22December 27, 2008


503,425

$
12.69January 2, 2010


562,675

$
12.67


F-32

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. STOCK BASED COMPENSATION (Continued)

Significant
option groups outstanding at January 2, 2010 and related weighted average price and life information follows:

Grant Date

Options
Outstanding

Options
Exercisable

Exercise
Price

Remaining
Life (Years)11/16/09


20,000


0

$
4.79


101/23/08


15,000


0


9.81


87/5/07


100,000


0


14.40


86/19/07


55,000


0


14.34


88/30/05


25,000


25,000


16.40


65/3/05


70,000


70,000


11.53


55/2/05


10,000


10,000


11.61


54/25/05


5,000


5,000


11.00


51/22/04


52,500


52,500


15.17


47/22/03


389,175


389,175


12.65


410/2/01


11,000


11,000

$
2.13


2


A
summary of the changes in stock options outstanding during the 53-week period ended January 2, 2010 is presented below:

Total Outstanding

Currently ExercisableNumber
of Options

Average
Price(1)

Average
Life(2)

Aggregate
Intrinsic
Value(3)

Number
of Options

Average
Price(1)

Average
Life(2)

Aggregate
Intrinsic
Value(3)December 27, 2008


732,675

$
12.98


5.86

$



503,425

$
12.69


4.84

$
Granted


20,000


4.79








Vested














59,250Canceled/forfeited














Exercised














January 2, 2010


752,675

$
12.76


4.99

$
26,840


562,675

$
12.67


4.02

$
26,840


(1)Weighted-average
exercise price.(2)Weighted-average
contractual life remaining in years.(3)The
aggregate intrinsic values in the table above are based on the Company's closing stock price as of the last business day of the periods ended
January 2, 2010 and December 27, 2008, which was $4.57 and $1.89, respectively.


F-33

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. STOCK BASED COMPENSATION (Continued)




The
following table summarizes all restricted stock transactions for the fiscal years ended January 2, 2010:

Weighted Average Shares

Weighted Average Grant-Date Fair ValueNonvested of December 27, 2008




$
Granted in 2009


239,000


3.75Vested in 2009


(23,337
)

3.65Cancelled in 2009


(75,002
)

3.65Nonvested of January 2, 2010


140,661

$
3.81


Pursuant
to the stock option and performance incentive plan approved at the annual meeting of the shareholders on July 21, 2009, the Company granted 239,000 shares of restricted
stock awards to employees who hold various positions within the Company. Two-thirds of these restricted stock awards contingently vest over a three year period, based on the Company
meeting performance goals, and one-third vest equally on an annual basis over the requisite service period. The total grant-date fair value of restricted stock that vested as
of January 2, 2010 was approximately $85,000. Topic 718"CompensationStock Compensation", of the FASB ASC, requires that
cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised ("excess tax benefits") be classified as financing cash flows. No excess tax
benefits were recorded during fiscal 2009. For the 52-week period ended December 27, 2008 and December 29, 2007, there was $160,000 and $92,000 respectively, of excess tax
benefits realized from the exercise of stock options.

As
of January 2, 2010, there was approximately $693,000 of future compensation cost related to nonvested share-based compensation awards granted under the stock option plan. That
cost is expected to be recognized over a weighted average period of 1.83 years. The total fair value of shares that vested during the year ended January 2, 2010 was $400,000. The
following table represents the share-based compensation expense to be recognized in future periods as of January 2, 2010:

Fiscal years ending:

Compensation
Expense on
Stock Options2010

$
427,0002011


235,0002012


31,000$
693,000




On January 8, 2009, the Board of Directors authorized the repurchase of an additional 1,000,000 shares, bringing the total
authorization to 4,500,000 shares. During fiscal 2009, the Company repurchased, in the open market, 310,199 shares at a cost of $586,000 or $1.89 per share. As of January 2, 2010, the Company
has cumulatively repurchased a total of 3,682,199 shares at a cost of approximately $40 million or $10.81 per share.

F-34

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. STOCK BASED COMPENSATION (Continued)

On
January 2, 2008, the Board of Directors authorized the repurchase of an additional 1,000,000 shares, and on February 5, 2008, the Board of Directors authorized the
repurchase of an additional 500,000 shares, bringing the total authorization to 3,500,000 shares. During fiscal 2008, the Company repurchased, in the open market, 1,676,968 shares at a cost of
$15.0 million or $8.94 per share. As of December 27, 2008, the Company repurchased, in the open market, 3,372,000, leaving an additional 128,000 shares available for repurchase from the
2007 and 2008 share repurchase program.

On
July 30, 2007, the Company's Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to 1,000,000 shares of Company common
stock, either through the open market or in privately negotiated transactions in accordance with SEC requirements, in either case, at the prevailing market rate. The program began in August 2007.
There is no expiration date governing the period over which the Company can repurchase shares. On November 6, 2007, the Company's Board of Directors authorized the repurchase of an additional
500,000 shares. On December 26, 2007, the Board of Directors authorized the repurchase of an additional 500,000 shares, bringing the total authorization to 2,000,000 shares. During the second
half of fiscal 2007, the Company repurchased, in the open market, 1,695,032 shares at a cost of $24.2 million or $14.28 per share.

NOTE 16. EARNINGS PER SHARE

The following table sets forth the computations of basic and diluted earnings per share:

53 Weeks Ended

52 Weeks Ended

52 Weeks EndedJanuary 2,
2010

December 27,
2008

December 29,
2007Net income (loss)

$
(8,694,000
)
$
(7,122,000
)
$
6,521,000Net income (loss) per sharebasic

$
(0.68
)
$
(0.53
)
$
0.41Net income (loss) per sharediluted

$
(0.68
)
$
(0.53
)
$
0.40Weighted average common shares outstanding


12,795,000


13,329,000


15,966,000Dilutive effect of stock options








234,000Weighted average common and potentially dilutive common shares


12,795,000


13,329,000


16,200,000


Options
and unvested restricted common shares of 893,336 and 732,675 were excluded from the computation of diluted earnings per share for fiscal 2009 and 2008, respectively, because of
the net loss
incurred by the Company. Diluted weighted average shares for the fiscal year ended December 29, 2007 included 234,000 shares due to the potential exercise of stock options that were outstanding
and exercisable during that year.

F-35

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter(In thousands, except per share data)53 weeks ended January 2, 2010Net sales

$
53,006

$
56,866

$
44,941

$
64,962Gross profit


21,795


25,230


14,214


26,546Income (loss) before income tax provision (benefit)


(2,513
)

1,331


(10,850
)(4)

(2,325
)(3)(4)Income tax provision (benefit)


(918
)

486


(4,067
)

(1,164
)Net income (loss)

$
(1,595
)
$
845

$
(6,783
)
$
(1,161
)Basic and diluted earnings (loss) per share:Basic earnings (loss) per share:

$
(0.12
)
$
0.07

$
(0.53
)
$
(0.09
)Diluted earnings (loss) per share:

$
(0.12
)
$
0.07

$
(0.53
)
$
(0.09
)52 weeks ended December 27, 2008Net sales

$
67,708

$
73,973

$
58,139

$
65,908Gross profit


28,415


34,192


25,614


21,471Income (loss) before income tax provision (benefit)


(3,258
)(1)

3,341


(2,613
)(2)

(8,844
)(3)Income tax provision (benefit)


(1,205
)

1,236


(967
)

(3,316
)Net income (loss)

$
(2,053
)
$
2,105

$
(1,646
)
$
(5,528
)Basic and diluted earnings (loss) per share:Basic earnings (loss) per share:

$
(0.15
)
$
0.16

$
(0.12
)
$
(0.42
)Diluted earnings (loss) per share:

$
(0.15
)
$
0.16

$
(0.12
)
$
(0.42
)


(1)Includes
a charge $2.3 million for the closure of Cache Luxe stores.(2)Includes
a charge of $449,000 for the closure of several Cache stores.(3)Includes
impairment charges of approximately $1.9 million for 23 underperforming stores and $1.1 million for 12 underperforming stores for
fiscal 2009 and 2008, respectively. In addition, includes impairment charge of approximately $891,000 against the carrying value of the Company's intangible assets associated with its wholesale
divisionMary L. and $1.0 million against the carrying value of the Company's goodwill, for its AVD reporting unit, for fiscal 2009 and 2008, respectively.(4)Includes
total net charges of approximately $2.0 million in connection with separation agreements entered into with two of its then executive
officers during the third and fourth quarter of fiscal 2009.


Per
share amounts are calculated independently for each quarter. The sum of the quarters may not equal the full year per share amounts.

F-36

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SCHEDULE II    Cache, Inc and Subsidiaries  Valuation and Qualifying Accounts

AdditionsSales Return Reserve

Balance at
Beg. of
Period

Charge to
Costs and
Expenses

Other
Accounts

Deductions

Balance at
End of
Period53 Weeks Ended January 2, 2010

$
550,000

$


$


$
80,000
(1)
$
470,00052 Weeks Ended December 27, 2008

$
752,000

$


$


$
202,000
(1)
$
550,00052 Weeks Ended December 29, 2007

$
845,000

$


$


$
93,000
(1)
$
752,000




AdditionsReserve for Sales Allowances and Doubtful Accounts

Balance at
Beg. of
Period

Charge to
Costs and
Expenses

Other
Accounts

Deductions

Balance at
End of
Period53 Weeks ended January 2, 2010

$
111,000

$
652,000

$
12,000

$
722,000

$
53,00052 Weeks ended December 27, 2008

$
234,000

$
1,473,000

$


$
1,596,000

$
111,00052 Weeks ended December 29, 2007

$


$
234,000

$


$


$
234,000


(1)Represents
net change of reserves recorded and utilized during the year.


F-37

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