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



FORM 10-K

FOR 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 December 27, 2008oro

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 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 ý

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

Smaller reporting company o


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 $130 million as of June 28, 2008,
the last business day of the registrant's most recently completed second fiscal quarter, based upon the closing sale price of $11.39 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 12, 2009, 12,927,837 common shares were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain
information included in the Registrant's Proxy Statement to be filed in connection with its 2009 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
DECEMBER 27, 2008

TABLE OF CONTENTS



PagePART IItem 1.

Business

3Item 1A.

Risk Factors

9Item 1B.

Unresolved Staff Comments

16Item 2.

Properties

16Item 3.

Legal Proceedings

17Item 4.

Submission of Matters to a Vote of Security Holders

17PART IIItem 5.

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

17Item 6.

Selected Financial Data

19Item 7.

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

20Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

34Item 8.

Financial Statements and Supplementary Data

35Item 9.

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

35Item 9A.

Controls and Procedures

35Item 9B.

Other Information

36PART IIIItem 10.

Directors and Executive Officers of the Registrant

36Item 11.

Executive Compensation

36Item 12.

Security Ownership of Certain Beneficial Owners and Management

36Item 13.

Certain Relationships and Related Transactions

36Item 14.

Principal Accountant Fees and Services

36PART IVItem 15.

Exhibits and Financial Statement Schedule

36


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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 December 27, 2008, we operated 296 Cache and Cache Luxe 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, and requires a missy fit. 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.

Fiscal
2008 marked a year of economic instability 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 and stock value of the Company for fiscal 2008. We were disappointed in our performance, as the economic crisis during 2008 resulted in lower than
expected sales and higher than expected markdowns.

On
January 2, 2008, the Board of Directors authorized an increase to its previously announced share repurchase program of 1,000,000 shares and subsequently authorized the
repurchase of an additional 500,000 shares on February 5, 2008. These authorizations combined with the previously announced repurchase program of fiscal 2007, brought the total authorization to
3,500,000 shares. As of December 27, 2008, the Company had repurchased 3,372,000 shares. 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. 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
January 24, 2008, Mr. Brian Woolf, then Chairman and Chief Executive Officer, as well as the principal executive officer of Cache, Inc. resigned from the Company.
On January 24, 2008, Mr. Thomas Reinckens, then Cache Inc.'s President, was appointed as the Company's Chairman and Chief Executive Officer, as well as the Company's principal
executive officer. He also continued in his position as the Company's President, in addition to assuming these new roles.

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Table of Contents

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. See Item 7 and Note 9 herein for additional details.

During
the 13-week period ended, December 27, 2008, the Company recorded an impairment charge of $1.1 million for 12 stores coupled with an impairment charge of
approximately $1.0 million for goodwill. See Item 7 and Notes 6 and 10 herein for additional details.

The
Company's credit line with Bank of America, N.A. of $17.5 million, which was due to expire on November 30, 2008, was extended to January 29, 2009. On
January 27, 2009, the Company and Bank of America N.A. agreed to extend the line of credit until March 2, 2009, with a reduced credit line of $10.0 million. After consideration,
given the Company's current strong liquidity position and expected liquidity needs, coupled with the onerous terms currently being offered by banks on credit facilities due to the ongoing credit
crisis, the Company decided not to enter in to a new credit facility at the present time and as such, the existing credit line expired on March 2, 2009. There were no outstanding loans due to
Bank of America, N.A., as of the expired date of the revised credit line.

Merchandising, Design and Production

Our merchandising focuses on providing an attractive selection of sportswear and dresses extending from casual and daytime sportswear
into elegant eveningwear, as well as a collection of complementary accessories. All of our merchandise is sold under our own Cache label. We employ a constant process of
test-and-ordering that allows us to
restock popular items during the same season. We also maintain a key item strategy, providing some popular and core items for longer periods to meet ongoing customer demand. New merchandise arrives on
a frequent basis at each of our stores, giving our customers a reason to visit often. We introduce new floor sets into each of our stores approximately every six weeks. These new floor sets provide
changes in visual merchandising within both our stores and our window presentations.

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 $60 to $300.

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 $125 to $450.

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 $30 to $150.

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.

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Table of Contents

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

52 Weeks EndedDecember 27,
2008

December 29,
2007

December 30,
2006Sportswear


60.7
%

58.7
%

65.7
%Dresses


30.4


32.1


24.5Accessories


8.9


9.2


9.8Total


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. 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 missy 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 based on market tests. 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
addition to introducing new merchandise, we 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.

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Production, Sourcing and Distribution

During fiscal 2007, we acquired certain assets ("AVD Acquisition") of our then largest vendor, Adrienne Victoria Design, Inc.
("AVD"). Prior to the AVD Acquisition, we purchased substantially all of our merchandise from third party agents who arranged for the
manufacture of our apparel. Merchandise purchased in this manner was direct shipped to our stores by the agents.

Since
the AVD Acquisition, we have had an in-house production team that 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, as opposed
to purchasing finished goods from a vendor or agent. Merchandise direct sourced through our in-house production team is generally distributed to our stores via one third party distribution
facility. During fiscal 2008, the Company direct sourced approximately 61% of its merchandise. We expect to direct source approximately 75% of our merchandise during fiscal 2009.

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 2008, the Company purchased approximately 39% of its product through this channel. Our five largest vendors accounted for 12% of our
purchases and our largest vendor accounted for 4% of our purchases during fiscal 2008. We expect to purchase approximately 25% of our merchandise through this channel during fiscal 2009.

In
order to achieve cost savings, the Company implemented a new shipping method to stores, during the fourth quarter of fiscal 2008. Under this new 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. The Company expects to achieve significant cost savings in fiscal 2009, as a result of this new initiative.

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. In addition, we have moved the
dressing rooms from the middle of the store to the rear, and check-out locations from the front of the store to the side. This eliminates barriers to movement throughout the store and
permits greater flexibility in merchandise displays, allowing us to more effectively market our merchandise.

We
generally remodel stores as leases come up for renewal. We remodeled 11 Cache stores in fiscal 2008, 16 stores in fiscal 2007 and expect to remodel approximately 2 stores in fiscal
2009. By the end of fiscal 2009, we expect to have remodeled approximately 83.4% 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 32 district managers. Each
of our district managers is typically responsible for eight to

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ten
stores. We typically staff our stores with two opening employees, three 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 December 27, 2008, we operated 296 Cache and Cache Luxe stores located in 43 states, as well as Puerto Rico and the U.S.
Virgin Islands.

The
following table indicates our Cache stores by state as of December 27, 2008:

Alabama

7

Louisiana

4

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

6Delaware

1

Mississippi

1

Tennessee

8Florida

40

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

2

New Mexico

2

Wisconsin

3Kansas

2

New York

12

Puerto Rico

1Kentucky

3

North Carolina

8

US Virgin Islands

2


The
following table indicates our Cache Luxe stores by state as of December 27, 2008:

Florida

5

New Jersey

1

Texas

1Louisiana

1

North Carolina

1


The
following table indicates the number of Cache stores opened and closed over the past five fiscal years ended December 27, 2008:

Fiscal Period

Stores Open at
Beginning of
Period

Stores Opened
During Period

Stores Closed
During Period

Stores Open at
End of Period

Total Square
FootageFY2004


227


31


4


254


596,000FY2005


254


17


4


267


614,000FY2006


267


17


7


277


600,000FY2007


277


10


5


282


601,000FY2008


282


13


8


287


598,000


The
Company opened 16 Cache Luxe stores during fiscal 2006, of which, one Cache Luxe store was closed during fiscal 2007 and six Cache Luxe stores were closed during fiscal 2008. The
Company expects to close the remaining Cache Luxe stores in early fiscal 2009.

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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. We believe that street locations and outlet stores can enhance our potential store base. We plan to expand our openings
of street locations and outlet stores.

During
fiscal 2009, 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".

During
May 2007, the Company launched the Cache Accents program. This program is designed to encourage repeat sales, increase per transaction spending and create customer loyalty. A
customer can enroll in theCache Accentsprogram 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 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 4.0 million names. We also believe that the Cache Accents program
has enhanced our comparable store sales and margins.

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 $3.0 million in fiscal 2006 to
approximately $7.3 million in fiscal 2008.

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:



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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 2008, the Company made additional infrastructure investments in information technology. This includes
investing in in-house disaster recovery capabilities, as well as customer service systems. The Company has also started a multi retail channel (in store and on-line) integration, which
stores information on our customers and sales from both Cache stores and the Cache.com website in a central location. The multi retail channel project, which is expected to be completed in the first
half of fiscal 2009, will give our customers a seamless, more convenient shopping experience.

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 "Mary L." trademark
was acquired in connection with the purchase of Adrienne Victoria Designs, Inc. in fiscal 2007. 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 December 27, 2008, we had approximately 2,526 employees, of whom approximately 1,228 were full-time employees
and approximately 1,298 were part-time employees. As of December 27, 2008, we had approximately 2,356 store personnel and approximately 170 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

Recent economic events 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. The recent disruptions in the overall economy and 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, recent economic events 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.

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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:



During
fiscal 2009, we expect to open approximately three to five new Cache stores. We intend to continue to open a significant number of 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 2008, we closed six Cache Luxe stores and expect to close substantially all of our Cache Luxe stores during fiscal 2009.

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 has declined generally in recent months due to macro-economic 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.

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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 2006, our quarterly comparable sales at Cache stores have ranged from an increase of 8% to a decrease of 17%. Our comparable store sales and quarterly
results of operations are affected by a variety of factors, most of which we cannot control, including:



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 Chief Executive Officer, we may be unable to find a
suitable replacement on a timely basis. 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 2008, the Company
direct-sourced approximately 61% of its merchandise and expects the portion that is direct-sourced to increase to approximately 75% for fiscal 2009. We cannot assure you 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 2008, Cache purchased approximately 39% of the dollar volume of its product directly from third party vendors or agents.
We expect to purchase approximately 25% of our merchandise through this channel during fiscal 2009. 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

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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 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.

12

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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 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.

13

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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 warehouse 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 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

14

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Table of Contents

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 the fourth quarter of fiscal 2008, which did not follow historical quarterly patterns.

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.

The
quota system established by the World Trade Organization ("WTO") was eliminated on December 31, 2004. We cannot be certain of the full impact that this elimination will have
on international trade in general and the apparel industry in particular. We also cannot be certain of the impact of quota elimination on our business, including increased competition that could
result from the importation of an increasing amount of lower priced apparel into the United States. Notwithstanding quota elimination, China's accession agreement for membership in the WTO provides
that WTO member countries, including the United States, may re-impose safeguard quotas on specific products. 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 2009. 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 in the event that the quantity of imported apparel significantly disrupts the apparel market in the United States. Additional action by the United States
in response to a disruption in its apparel markets 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 January 1, 2007 and December 27, 2008, the market price of our common stock has ranged from $1.41 to $25.72 per
share. The stock market has, from time to time and
especially during the last several months, experienced extreme price and volume fluctuations. The market price for our common stock may change significantly in response to various factors,
including:



15

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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.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

All but a few of our 296 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 on a straight line basis over the lease term.

Our
leases expire at various dates through 2019. In most instances, we have renewal options at increased rents. The following table indicates the periods during which our leases expire.

Fiscal Years

Cache

Cache Luxe

TotalsPresent  2011


61


4


652012  2014


97


4


1012015  2017


104


1


1052018  2019


25


0


25Totals


287


9


296


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

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Table of Contents

addition,
we added 14,500 square feet located at 260 West 39th Street in New York City, as part of the AVD acquisition. The AVD leases run through 2012 at a rate of approximately $345,000 per
year.

We
contract for space in warehouses in the New York metropolitan area to serve as a staging area for new store inventories and fixtures. The rent for the staging area is immaterial.

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.

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 1, 2008. Of the
13,266,616 shares outstanding as of the record date, 12,829,665 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


12,309,297


520,368Thomas E. Reinckens


12,380,778


448,887Gene G. Gage


12,784,296


45,369Arthur S. Mintz


12,784,296


45,369Morton J. Schrader


12,592,764


236,901




For

Against

Abstain12,807,712


17,134


4,819


PART II

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

Fiscal 2008

Fiscal 2007Fiscal Period

High

Low

High

LowFirst Fiscal Quarter

$
12.43

$
8.00

$
25.72

$
17.32Second Fiscal Quarter

$
14.83

$
9.77

$
18.84

$
13.16Third Fiscal Quarter

$
14.86

$
6.29

$
18.67

$
12.50Fourth Fiscal Quarter

$
6.90

$
1.41

$
19.04

$
9.70


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Table of Contents

Plan Category

Number of
securities
to be
issued
upon
exercise of
outstanding
options

Weighted
average
exercise
price of
outstanding
options

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


732,675

$
12.98


526,032Equity compensation plans not approved by security holders


0


0


0Total


732,675

$
12.98


526,032


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 (12/31/07  1/26/08)


1,081,797

$
9.50


1,081,797


223,171February (1/27/08  2/23/08)


223,171

$
10.54


223,171


500,000May (4/27/08  5/24/08)


126,320

$
12.32


126,320


373,680June (5/25/08  6/28/08)


40,680

$
12.50


40,680


333,000December (11/23/08  12/27/08)


205,000

$
1.48


205,000


128,000Total


1,676,968

$
8.94


1,676,968


All
purchases were made pursuant to the previously announced share repurchase program approved by our Board on various dates during fiscal 2007 and 2008. The initial approval was for the
repurchase of up to 1,000,000 shares of common stock, with subsequent increases in the fourth quarter of fiscal 2007 of an additional 1,000,000 shares, and increases on January 2 and
February 5, 2008 of 1,000,000 shares and 500,000 shares, respectively, for overall total repurchases of 3,500,000 shares. 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. 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. 1,
2005

DEC. 31,
2005

DEC. 30,
2006

DEC. 29,
2007

DEC. 27,
2008(in thousands, except per share and operating data)STATEMENT OF INCOME DATA:Net sales

$
247,300

$
266,345

$
278,992
(5)
$
274,458

$
265,728Cost of sales


135,745


144,984


145,886


147,474


156,036Gross profit


111,555


121,361


133,106


126,984


109,692Store operating expenses


76,466


85,529


94,556


97,023


95,339General and administrative expenses


14,221


15,824


21,246


22,725


21,296Store exit costs








5,677
(6)

(78
)

2,757
(7)Impairment charges














2,137
(8)Operating income (loss)


20,868


20,008


11,627


7,314


(11,837
)Other income, (net)(1)


459


1,072


2,523


2,601


463Income (loss) before income taxes


21,327


21,080


14,150


9,915


(11,374
)Income tax provision (benefit)


8,030


7,675


5,879


3,394


(4,252
)Net income (loss)

$
13,297

$
13,405

$
8,271

$
6,521

$
(7,122
)Earnings per share:Basic earnings (loss) per share

$
0.85

$
0.85

$
0.52

$
0.41

$
(0.53
)Diluted earnings (loss) per share

$
0.83

$
0.83

$
0.51

$
0.40

$
(0.53
)Weighted average shares outstanding:Basic


15,589


15,726


15,849


15,966


13,329Diluted(2)


16,004


16,150


16,218


16,200


13,329Store data:Total number of stores openAt the end of period


291


306


296


297


296Cache/Cache Luxe


254


267


293


297


296Lillie Rubin


37


39


3





Total average sales per square foot(3)

$
461

$
450

$
463

$
449

$
424Cache/Cache Luxe

$
462

$
461

$
467

$
449

$
424Lillie Rubin

$
398

$
320

$
253

$


$
Sales DataTotal sales increase (decrease)


5
%

4
%

4
%

(1.6
)%

(3.2
)%Comparable stores: Cache/Cache Luxe(4)


4
%

6
%

5
%

(0.6
)%

(4.3
)%Comparable stores: Lillie Rubin(4)


8
%

(10
)%

(17
)%




Total square footage


596


614


600


601


598


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Table of Contents



JAN. 1,
2005

DEC. 31,
2005

DEC. 30,
2006

DEC. 29,
2007

DEC. 27,
2008(in thousands, except per share and operating data)BALANCE SHEET AND OTHER DATA:Working capital

$
53,469

$
63,786

$
83,391

$
59,672

$
43,461Total assets

$
132,028

$
150,884

$
159,186

$
149,125

$
119,525Total short and long-term debt

$


$


$


$
5,934

$
4,402Stockholders' equity

$
84,840

$
98,996

$
116,463

$
100,264

$
79,163Ratio of current assets to current
liabilities


2.75:1


2.92:1


4.35:1


3.11:1


3.13:1Inventory turnover ratio


4.60:1


4.46:1


4.31:1


4.51:1


5.90:1Capital expenditures

$
21,753

$
15,490

$
12,250

$
12,094

$
10,673Depreciation and amortization

$
8,232

$
9,779

$
11,026

$
12,124

$
12,774Book value per share

$
5.42

$
6.28

$
7.16

$
6.86

$
6.07


---

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 December 27, 2008, we operated 296 Cache and Cache Luxe stores, primarily situated in central
locations in high traffic, upscale malls, in 43 states, Puerto Rico and the U.S. Virgin Islands.

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Table of Contents

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, and requires a missy fit. 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 December 27, 2008, sportswear accounted for 60.7%, dresses for 30.4% and accessories for 8.9% of Cache's net sales. Cache's price points range from $60
to $300 for sportswear, $125 to $450 for dresses and $30 to $150 for accessories.

Management Overview

Fiscal 2008 marked a year of economic instability 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 and stock value of the Company for fiscal 2008. We were disappointed in our performance, as the economic
crisis during 2008 resulted in lower than expected sales and higher than expected markdowns.

On
January 2, 2008, the Board of Directors authorized an increase to its previously announced share repurchase program of 1,000,000 shares and subsequently authorized the
repurchase of an additional 500,000 shares on February 5, 2008. These authorizations combined with the previously announced repurchase program of fiscal 2007, brought the total authorization to
3,500,000 shares. As of December 27, 2008, the Company had repurchased 3,372,000 shares. 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. 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
January 24, 2008, Mr. Brian Woolf, then Chairman and Chief Executive Officer, as well as the principal executive officer of Cache, Inc. resigned from the Company.
On January 24, 2008, Mr. Thomas Reinckens, then Cache Inc.'s President, was appointed as the Company's Chairman and Chief Executive Officer, as well as the Company's principal
executive officer. He also continued in his position as the Company's President, in addition to assuming these new roles.

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.

During
the 13-week period ended, December 27, 2008, the Company recorded an impairment charge of $1.1 million for 12 stores coupled with an impairment charge of
approximately $1.0 million for goodwill.

The
Company opened 13 Cache stores in fiscal 2008 and closed 14 stores. Operating cash flow funded all store openings. For the year ended December 27, 2008, the Company remodeled
11 stores, which resulted in approximately 82% of the chain now in new remodel format. In fiscal 2009, we intend to open approximately three to five new stores, also intended to be funded by operating
cash flow.

During
fiscal 2008, the Company made additional infrastructure investments in information technology. This included investing in in-house disaster recovery capabilities as well as
customer service systems. The Company has also started a multi retail channel (in store and on-line) integration, which stores information on our customers and sales from both Cache stores
and the Cache.com website in a central location. The multi retail channel project which is expected to be completed in first half of fiscal 2009 will give our customers a seamless, more convenient
shopping experience.

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Table of Contents

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:

52 Weeks Ended

52 Weeks Ended

52 Weeks EndedDecember 27, 2008

December 29, 2007

December 30, 2006Operating ResultsTotal store count, at end of period


296


297


296Net sales increase (decrease)


(3.2
)%

(1.6
)%

4.8
%Comparable store sales increase (decrease)


(4.3
)%

(0.6
)%

4.0
%Net sales per square foot

$
424

$
449

$
463Total square footage (in thousands)


598


601


600


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.

In
connection with the acquisition of AVD in fiscal 2007, the Company also acquired the rights to the "Mary L." trademark. Mary L. products are sold in upper tier department stores and
as a result, Mary L sales are included under net sales. Mary L. sales are recorded net of any returns, chargebacks, discounts and allowances.

During
the second quarter of fiscal 2007, Cache introduced a co-branded customer credit card program. Under this program, the Company receives 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 insignificant in fiscal 2007. In fiscal 2008, fee income recorded in connection with activated credit cards totaled $218,000.

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. In fiscal 2008, costs of $363,000 for the shipping and handling of Mary L. products were included in general and administrative expenses.

Cost of sales.Cost of sales includes the cost of merchandise, costs incurred for shipping and handling, payroll for our buying and
merchandising
personnel, costs related to our AVD subsidiary 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 and 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 and other corporate level expenses. Corporate level expenses are primarily attributable to our corporate
headquarters in New York.

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Recent Developments

The Company's credit line with Bank of America, N.A. of $17.5 million, which was due to expire on November 30, 2008, was
extended to January 29, 2009. On January 27, 2009,
the Company and Bank of America N.A. agreed to extend the line of credit until March 2, 2009, with a reduced credit line of $10.0 million. After consideration, given the Company's
current strong liquidity position and expected liquidity needs, coupled with the onerous terms currently being offered by banks on credit facilities due to the ongoing credit crisis, the Company
decided not to enter in to a new credit facility at the present time and as such, the existing credit line expired on March 2, 2009. There were no outstanding loans due to Bank of America,
N.A., as of the expired date of the revised credit line.

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 52 week period ended December 27, 2008, the Company recorded
reserves of approximately $1.5 million, of which it utilized $1.6 million, resulting in an aggregate reserve amount of $111,000, as of December 27, 2008. The Company reserved
$234,000 for such items as of December 29, 2007. This amount is included as part of the sales allowance reserve, which is provided in supplemental schedules on page F-36.

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. For our AVD division, which makes up approximately 18% of total
inventory, the raw materials, work in process and finished goods inventories are valued at the lower of cost or market value, using the first-in-first-out valuation
method. The Company ensures that the raw materials, work in process and finished goods are properly valued by taking into account any obsolescence and recording a reserve in accordance with our
established policy.

23

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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 Statement of Financial Accounting Standards ("SFAS") No.144, "Accounting for the Impairment or
Disposal of Long-lived Assets" ("SFAS No. 144"). Finite-lived assets are evaluated for recoverability in accordance with SFAS No. 144 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 2008 and 2007 and
as a result, recorded an impairment charge of $1.1 million for 12 stores and $73,000 for one store, respectively. The store impaired during fiscal 2007 was closed in fiscal 2008.

Goodwill and Intangible Assets.The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142") on December 30, 2001. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment. During fiscal 2007, in connection with the acquisition of AVD, the Company recorded goodwill and other intangible assets. The Company performs impairment testing of its
subsidiaryAVD, 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 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 the fourth quarter of fiscal 2008, the instability of the U.S. economy resulted in the
Company experiencing significant decreased sales. In addition, the capital markets volatility resulted in the Company stock price declining substantially, causing the Company's book value to exceed
the market capitalization plus a reasonable control premium. The Company's impairment testing resulted in a fair value that was less than the carrying value of its subsidiaryAVD. As a
result, Cache recorded an impairment charge of approximately $1.0 million against the carrying value of AVD's goodwill for the fiscal year ended December 27, 2008.

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 2008, 2007 and 2006. 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.

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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, 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 to be 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, 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.

The
Company recorded breakage income of $287,000, $293,000 and $2.5 million during fiscal year ended 2008, 2007 and 2006, 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 ($202,000), ($93,000) and $42,000 for fiscal 2008, 2007 and 2006, 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 of $363,000 incurred for the shipping and handling of our Mary L. products is included in
general and administrative expenses. The Company records revenues net of applicable sales tax.

In
connection with the acquisition of AVD in fiscal 2007, the Company also acquired the rights to the "Mary L." trademark. Mary L. products are sold in upper tier department stores and
as a result, Mary L. sales are included under net sales when the merchandise is shipped to the department stores. Mary L. sales 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 52 week period ended December 27, 2008, the Company recorded
reserves of approximately $1.5 million, of which it utilized $1.6 million, resulting in an aggregate reserve amount of $111,000, as of December 27, 2008. The Company reserved
$234,000 for such items as of December 29, 2007.

During
the second quarter of fiscal 2007, Cache introduced a co-branded customer credit card program. Under this program, the Company receives 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 2008 and 2007, the Company received $1.4 million and $585,000, respectively, in connection with activated credit cards. The amount of fee income recorded in
connection with activated credit cards was $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

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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 insignificant in fiscal 2008 and 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 believe that historical quarterly trends were disrupted in fiscal 2008 by macroeconomic conditions during the second half of the fiscal year.

Income Taxes.The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income
Taxes." 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
December 27, 2008, the Company has recorded a $331,000 reserve, net of federal benefit for potential tax contingencies. No such reserves were recorded as of December 29, 2007.

Effective
December 31, 2006, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 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. FIN 48 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 adoption of FIN 48 did not result in any adjustment in the Company's liability for unrecognized income tax benefits.

Balance at December 29, 2007

$
Additions based on tax positions related to the current year


Additions for tax positions for prior years


331,000Reductions for tax positions for prior years due to lapse of applicable statute of limitations


Settlements


Balance at December 27, 2008

$
331,000


Included
in the above ending balance are tax positions of $331,000, which, if recognized, would favorably affect the effective tax rate.

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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 December 27, 2008, the Company had accrued $182,000 of interest and penalties related to uncertain tax positions, which is included in the $331,000 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 December 27, 2008, 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.

As
for state and local income taxes, with few exceptions, the Company is no longer subject to state and local income tax examinations by taxing authorities for years prior to 2004.

Results of Operations

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

52 Weeks Ended

52 Weeks Ended

52 Weeks EndedDecember 27, 2008

December 29, 2007

December 30, 2006Operating ResultsNet sales


100.0
%

100.0
%

100.0
%Cost of sales


58.7


53.7


52.3Gross profit


41.3


46.3


47.7Store operating expenses


35.9


35.4


33.9General and administrative expenses


8.0


8.3


7.6Store exit costs


1.0


0.0


2.0Impairment charge


0.8


0.0


0.0Operating income (loss)


(4.4
)

2.7


4.2Other income (net)


0.2


0.9


0.9Income (loss) before income taxes


(4.2
)

3.6


5.1Income tax provision (benefit)


(1.6
)

1.2


2.1Net income (loss)


(2.6
)%

2.4
%

3.0
%


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 reflects $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 Mary L.
division, and a decrease of $398,000 from our non-comparable store sales. During the first half of fiscal

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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 the 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 last
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 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 slow down in the economy. These decreases
were primarily offset by increases in shipping expense ($363,000), due to shipment of Mary L. products, sales commissions ($341,000), paid to an agent for the sale of Mary L. 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 has closed six during fiscal 2008 and expects to close the remaining stores in early 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

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$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 stores in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets". 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 goodwill, in accordance with SFAS
No. 142 "Goodwill and Other Intangible Assets".

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 last 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.

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 same period last year.

52 Weeks Ended December 29, 2007 (Fiscal 2007) Compared to 52 Weeks Ended December 30, 2006 (Fiscal 2006)

Net sales.Net sales decreased to $274.5 million from $279.0 million, a decrease of $4.5 million, or 1.6%, below the
prior
fiscal year. The decrease in fiscal 2007 net sales, as compared to fiscal 2006 reflects $1.5 million reduction in net sales primarily due to a 1% decrease in comparable store sales. Comparable
store sales declined 7% in the fourth quarter, which caused comparable store sales for the year to decrease. The decrease in comparable store sales was primarily due to lower foot traffic in the
fourth quarter that resulted from the overall softer economic environment, coupled with management's decision to reduce the frequency and volume of product catalog mailings to the Company's customers.
During fiscal 2006, Cache mailed approximately 4.0 million catalogues during fourth quarter whereas in fiscal 2007 we mailed approximately 1.7 million catalogues, a 58% reduction from
last year. The decrease in net sales was also due to the exclusion of Lillie Rubin business that had been included in fiscal 2006 and discontinued during fiscal year 2006 and was offset in part by the
inclusion of wholesale sales of our recently acquired AVD business. The fiscal 2006 sales included $13.1 million in sales from the former Lillie Rubin Stores.

Gross profit.Gross profit decreased to $127.0 million from $133.1 million, a decrease of $6.1 million, or 4.6%, below
the prior
fiscal year. As a percentage of net sales, gross profit decreased to 46.3% from 47.7%. This decrease in gross profit was the combined result of lower net sales and an increase in markdowns, which was
partially offset by an increase in initial markup as compared to fiscal 2006. Also reducing gross profit was an increase in freight charges and our production facility costs, which rose 27.6% and
100.0% respectively in fiscal 2007, as compared to fiscal 2006. This increase was

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offset
by a decrease in our buying costs, which declined 10.3% in fiscal 2007, as compared to fiscal 2006.

Store operating expenses.Store operating expenses increased to $97.0 million from $94.6 million, an increase of
$2.4 million,
or 2.6% above the prior fiscal year. As a percentage of net sales, store operating expenses increased to 35.4% from 33.9%, primarily due to an increase in payroll expense of $817,000, an increase in
advertising expense of $677,000 (rising to 4.6% of net sales in fiscal 2007, compared to 4.3% in fiscal 2006) and an increase in depreciation expense of $1.0 million (rising to 4.2% of net
sales in fiscal 2007, as compared to 3.8% in fiscal 2006). The increase in depreciation expense is partially attributable to the increase in new stores, as well as an increase in store remodels. We
anticipate store operating expenses will decrease, as a percent of net sales in future years, as comparable store sales rise in our newer locations.

General and administrative expenses.General and administrative expenses increased to $22.7 million from $21.2 million, an
increase of
$1.5 million or 7.0% from the prior fiscal year. As a percentage of net sales, general and administrative expenses increased to 8.3% from 7.6%. This increase was primarily attributable to
increases in corporate level payroll expense of $539,000, professional fees and legal settlements of $924,000 and was partially offset by a reduction in freight expense of $407,000, as well as a
reduction in telephone expense of $287,000, due to the implementation of the new store communication system.

Store exit costs.During fiscal 2006, the Company recorded a pre-tax charge of $5.7 million for store closing costs for the exit
of the Lillie Rubin business. Included in the exit costs was a write down of leasehold improvements and furniture and fixtures for 19 stores in the amount of $4.4 million, write down of
intangibles of $455,000, write down of supplies of $275,000, severance accrual of $400,000, as well as an accrual of $1.5 million for contractual termination costs negotiated prior to
year-end. These costs were partially offset by the reversal of $1.3 million of deferred rent accruals. The Company closed 16 of the stores as of December 30, 2006. The
Company closed the last three Lillie Rubin stores during the first fiscal quarter of fiscal 2007. The Company did not incur significant additional exit costs upon the closing of these remaining
properties. The reversal in fiscal 2007 was due to the Company's conversion of one Lillie Rubin store into a Cache store.

Other income/expense.Other income increased to $2.6 million from $2.5 million. The increase is attributable to a legal
settlement
award and a landlord reimbursement for a store closing totaling $299,000, partially offset by lower interest income of $70,000 and interest expense charges of $151,000, related to the note payable
recorded in connection with the acquisition of AVD. Interest income decreased due to lower interest rates and lower average cash balances.

Income taxes.Income taxes decreased to $3.4 million from $5.9 million, a decrease of $2.5 million, below
the same period last year. The overall effective tax rate decreased to 34.2% in fiscal 2007 from 41.5% in fiscal 2006. The decrease in the overall effective income tax rate is primarily attributable
to an increase in tax-free interest from municipal bond investments, in fiscal 2007. Also contributing to the reduction in effective rate during fiscal 2007 was lower taxable income in
fiscal 2007. Several non-recurring charges in fiscal 2006, such as stock offering costs and non-deductible incentive stock options caused the fiscal 2006 tax rate to be higher
than our historical tax rate. We anticipate the fiscal 2008 effective tax rate to approximate 39.0%. Refer to Note 13 to the Consolidated Financial Statements for additional details of the
income tax provision.

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Table of Contents

Net income.As a result of the foregoing, net income decreased to $6.5 million from $8.3 million, as compared to the same
period last
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 believe that historical quarterly trends were disrupted in fiscal 2008 by macroeconomic conditions during the second half of the fiscal year.

The
following table includes our unaudited quarterly results of operations data for each of the eight quarters during the two-year period ended December 27, 2008. 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

13 Weeks EndedMar. 29,
2008

June 28,
2008

Sept. 27,
2008

Dec. 27,
2008

Mar 31,
2007

June 30,
2007

Sept. 29,
2007

Dec. 29,
2007(Unaudited)(Dollars in thousands)Operating ResultsNet sales

$
67,708

$
73,973

$
58,139

$
65,908

$
64,355

$
71,027

$
60,572

$
78,504Gross profit


28,415


34,192


25,614


21,471


28,991


33,935


27,667


36,391Operating income (loss)


(3,480)
(1)

3,207


(2,680)
(2)

(8,884)
(3)

(489
)

1,291


(233
)

6,745Net income (loss)

$
(2,053
)
$
2,105

$
(1,646
)
$
(5,528
)
$
145

$
1,284

$
161

$
4,931As a Percentage of Net SalesNet sales


100.0
%

100.0
%

100.0
%

100.0
%

100.0
%

100.0
%

100.0
%

100.0
%Gross profit


42.0
%

46.2
%

44.1
%

32.6
%

45.0
%

47.8
%

45.7
%

46.4
%Operating income (loss)


(5.1
)%

4.3
%

(4.6
)%

(13.5
)%

(0.8
)%

1.8
%

(0.4
)%

8.6
%Net income (loss)


(3.0
)%

2.8
%

(2.8
)%

(8.4
)%

0.2
%

1.8
%

0.3
%

6.3
%Selected Operating DataNumber of stores open at end of period


294


297


295


296


297


294


296


297Comparable store sales increase/(decrease)


3
%

3
%

(4
)%

(17
)%

3
%

1
%

4
%

(7
)%


---

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.

31

---



Table of Contents

As
of December 27, 2008, we had working capital of $43.5 million, which included cash and marketable securities of $30.0 million.

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

52 Weeks Ended

52 Weeks Ended

52 Weeks EndedDecember 27, 2008

December 29, 2007

December 30, 2006Net cash provided by operating activities

$
6,395,000

$
30,429,000

$
12,672,000Net cash provided by (used in) investing activities


7,061,000


(18,597,000
)

(17,824,000
)Net cash provided by (used in) financing activities


(15,864,000
)

(23,952,000
)

7,762,000Net increase (decrease) in cash and cash equivalents

$
(2,408,000
)
$
(12,120,000
)
$
2,610,000


During
fiscal 2008, we generated $6.4 million in cash from operating activities primarily due to a net loss, 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 our 12 retail 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
current year net loss, coupled with estimated tax payments made during fiscal 2008 and 2007.

During
fiscal 2007, we generated $30.4 million in cash from operating activities due primarily 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.

During
fiscal 2006, we generated $12.7 million in cash from operating activities due primarily to net income, depreciation of $11.0 million, $3.8 million from
non-cash Lillie Rubin exit costs, an increase in accrued liabilities of $2.4 million, $1.4 million from non-cash stock-based compensation and a decrease in
accounts receivable of $543,000, partially offset by accounts payable decrease of $6.7 million, primarily due to reduction in the number of vendors and the increase in direct purchases paid via
letter of credit. Inventories increased $2.3 million, while we reversed deferred rent of $1.1 million and recorded in non-cash gift card breakage of $2.5 million.

Investing
activities during fiscal 2008 generated $7.1 million and, used $18.6 million and $17.8 million during fiscal 2007 and 2006, respectively. In fiscal 2008,
the Company derived $17.7 million from net maturities of marketable securities, which was partially offset by the purchase of equipment and leasehold improvements of $10.7 million for
new and remodeled stores. 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 2009 to fund new store openings and remodelings are approximately $4 to $5 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.

32

---



Table of Contents

Cash
used by financing activities during fiscal 2008 and 2007 was $15.9 million and $24.0 million, respectively. The usage of cash by financing activities during fiscal
2008 and 2007 was primarily for the repurchase of our common stock in amounts of $15.0 million and $24.2 million, respectively. During fiscal 2006, cash received by financing activities
was $7.8 million which consisted of net proceeds of $6.0 million from stock issuances and stock option exercises, as well as excess tax benefits from option exercises of
$1.8 million.

During
November 2005, the Company reached an agreement with its bank to amend the amount available under the Amended Revolving Credit Facility. Pursuant to the Amended Revolving Credit
Facility, $17.5 million was available until expiration at November 30, 2008, which was extended to
January 29, 2009. On January 27, 2009, the Company and Bank of America N.A. agreed to extend the line of credit until March 2, 2009, with a reduced credit line of
$10.0 million. After consideration, given the Company's current strong liquidity position and expected liquidity needs, coupled with the onerous terms currently being offered by banks on credit
facilities due to the ongoing credit crisis, the Company decided not to enter in to a new credit facility at the present time and as such, the existing credit line expired on March 2, 2009.
There were no outstanding loans due to Bank of America, N.A., as of the expired date. The amounts outstanding under the credit facility bear interest at a maximum per annum rate equal to the bank's
prime rate, which was 3.25% at December 27, 2008, less 0.25%. The agreement contains selected financial and other covenants. Effective upon the occurrence of an Event of Default under the
Amended Revolving Credit Facility, the Company grants to the bank a security interest in the Company's inventory and certain receivables. The Company was in compliance with all financial loan
covenants during the fiscal periods presented.

There
have been no borrowings against the line of credit during fiscal 2008 and 2007. There were outstanding letters of credit of $585,000 and $774,000, pursuant to the Amended Revolving
Credit Facility at December 27, 2008 and December 29, 2007, 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 December 27, 2008:

Payments Due in PeriodTotal

Within
1 Year

2  3 Years

4  5 Years

After 5
Years(In thousands)Contractual ObligationsEmployment contracts

$
1,720

$
785

$
785

$
150

$
Purchase obligations


12,667


12,667








Operating leases(1)


146,424


26,508


48,344


38,725


32,847Note payable


4,750


1,400


2,863


487


Total

$
165,561

$
41,360

$
51,992

$
39,362

$
32,847


33

---



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)

$
585

$
585

$


$


$
Total

$
585

$
585

$


$


$



---

On
February 24, 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 3 years expiring on February 23, 2012. The previous agreement expired in February 2009.

Off-Balance Sheet Arrangements

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. Under the terms of the agreement, Cache is obligated to make contingent payments, not to exceed
$5.5 million, based upon earn-out provisions to be paid over 5 years, if certain conditions are met. During fiscal 2008, the earn-out provision was not achieved;
therefore, Cache was not obligated to make any cash payments. Other than the operating lease commitments set forth in the table above and the aforementioned statement regarding the AVD
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. In fiscal 2008, we bore the risk in two specific ways. First, the
revolving credit facility carries a variable interest rate that is tied to market indices and, therefore, the statement of income and cash flows will be exposed to changes in interest rates. As of
December 27, 2008, we had no borrowing under our credit facility, which expired on March 2, 2009.

The
second component of 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 as well as marketable securities on our balance sheet. If there are changes in interest rates, those changes would affect the investment income we earn
on these investments and, therefore, impact our cash flows and results of operations.

34

---



Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's unaudited selected quarterly financial data is incorporated herein by reference to Note 16 to the Company's
consolidated financial statements on page F-34. 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-36.

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 December 27, 2008, 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 December 27, 2008.



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 as of December 27, 2008. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 27, 2008.

35

---





Table of Contents

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-3 through F-6.



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

March 12, 2009/s/ MARGARET FEENEY Margaret Feeney Executive Vice President and Chief Financial Officer

March 12, 2009


ITEM 9B.    OTHER INFORMATION

None.

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 2009 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-2 are filed as a part of this report.2.

The financial statement schedule is included on page F-36. 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[9]


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)(10)10.3

Form of Option Agreement relating to Options issued under the 2000 Stock Option Plan(4)(10)10.4

2003 Stock Option Plan of the Company(5)(10)10.5

Form of Option Agreement relating to Options issued under the 2003 Stock Option Plan(6)(10)10.6

2008 Stock Option Plan of Company(9)(10)


36

---



Table of Contents

10.13

Employment Agreement, dated February 24, 2009, between the Company and Thomas E. Reinckens(10)10.14

Employment Agreement, dated July 3, 2007, between the Company and Adrienne Kantor(7)(10)10.15

Employment Agreement, dated July 3, 2007, between the Company and Robert Kantor(7)(10)10.16

Severance Agreement, dated February 6, 2008, between the Company and Brian P. Woolf(8)(10)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 Mahoney Cohen and Company, CPA, P.C.23.3

Consent of Deloitte & Touche LLP31.1

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 2002.32.1

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


---



None.

37

---





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.

Date: March 12, 2009

CACHE, INC.
(Registrant)By:

/s/ THOMAS E. REINCKENSThomas 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.

Signature

Title

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

Chairman of the Board and
Chief Executive Officer

March 12, 2009/s/ MARGARET FEENEY Margaret Feeney

Executive Vice President
(Chief Financial Officer)

March 12, 2009/s/ GENE GAGE Gene Gage

Director

March 12, 2009/s/ ARTHUR S. MINTZ Arthur S. Mintz

Director

March 12, 2009/s/ ANDREW M. SAUL Andrew M. Saul

Director

March 12, 2009/s/ MORTON J. SCHRADER Morton J. Schrader

Director

March 12, 2009


38

---





Table of Contents

CACHE, INC. AND SUBSIDIARIES    CONSOLIDATED FINANCIAL STATEMENTS    FISCAL YEARS ENDED DECEMBER 27, 2008,  DECEMBER 29, 2007,  AND  DECEMBER 30, 2006

F-1

---





Table of Contents



CACHE, INC. AND SUBSIDIARIES  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



INDEX

PAGEReports of Independent Registered Public Accounting Firms

F-3Consolidated Balance Sheets

F-7Consolidated Statements of Operations

F-8Consolidated Statements of Stockholders' Equity

F-9Consolidated Statements of Cash Flows

F-10Notes to Consolidated Financial Statements

F-11Valuation and Qualifying Accounts

F-36


F-2

---





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 sheet of Cache, Inc. and subsidiaries as of December 27, 2008, as well as the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. We also have audited Cache, Inc.'s internal control over financial reporting as of December 27, 2008, based on
criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission. In addition, our audit included the financial statement schedule listed in the Index at Item 15 for the year ended December 27, 2008. Cache, Inc.'s management is
responsible for
these consolidated financial statements, for maintaining effective internal control over financial reporting, 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 opinions on these
consolidated financial statements, on the company's internal control over financial reporting 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 and whether effective internal control over financial reporting was maintained in all material
respects. 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. 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
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. and subsidiaries as of
December 27, 2008, and the results of their operations and their cash flows for the year then ended in conformity with

F-3

---



Table of Contents

accounting
principles generally accepted in the United States of America. Also, in our opinion, Cache, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 27, 2008, based upon criteria established inInternal ControlIntegrated Frameworkissued by the Committee
of Sponsoring Organizations of the Treadway Commission. 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 11, 2009

F-4

---





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 sheet of Cache, Inc. and subsidiaries as of December 29, 2007, as well as the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. 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 financial position of Cache, Inc. and subsidiaries as of
December 29, 2007, and the results of their operations and their cash flows for the year then ended 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/
Mahoney Cohen and Company, CPA, P.C.

New
York, New York
March 10, 2008

F-5

---





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 consolidated statements of operations, stockholders' equity, and cash flows of Cache, Inc. and subsidiaries (the "Company") for the year ended
December 30, 2006. Our audit also included financial statement schedule listed in the Index at Item 15 for the year ended December 30, 2006. These consolidated financial
statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows for the year ended
December 30, 2006, 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 30, 2006, 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.

As
discussed in Note 1 to the consolidated financial statements, in 2006 the Company adopted Statement of Financial Accounting Standards No. 123(R),
"Share-Based Payment," as revised, effective January 1, 2006.

/S/Deloitte & Touche LLP

New
York, New York
March 15, 2007

F-6

---





Table of Contents

CACHE, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

December 27, 2008

December 29, 2007ASSETSCURRENT ASSETSCash and equivalents (Note 1)

$
4,835,000

$
7,243,000Marketable securities (Note 2)


25,153,000


42,887,000Receivables, net (Note 3)


3,898,000


4,788,000Income tax receivable (Note 3)


5,883,000


691,000Inventories, net (Note 4)


22,321,000


30,547,000Prepaid expenses and other current assets


1,795,000


1,774,000Total Current Assets


63,885,000


87,930,000EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net(Notes 5 and 10)


43,320,000


49,298,000GOODWILL(Note 6)


9,092,000


10,089,000INTANGIBLE ASSETS, net(Note 6)


1,304,000


1,423,000OTHER ASSETS


1,924,000


385,000Total Assets

$
119,525,000

$
149,125,000LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
6,375,000

$
10,510,000Note payable (Note 6)


1,259,000


1,586,000Accrued compensation


1,713,000


1,910,000Accrued liabilities (Note 7)


11,077,000


14,252,000Total Current Liabilities


20,424,000


28,258,000NOTE PAYABLE(Note 6)


3,143,000


4,348,000OTHER LIABILITIES(Note 11)


16,795,000


16,172,000DEFERRED INCOME TAXES, net(Note 13)





83,000COMMITMENTS AND CONTINGENCIES(Note 12)STOCKHOLDERS' EQUITYCommon stock, par value $.01; authorized, 20,000,000 shares; issued 16,410,036 and 16,319,358 shares (Note 14)


164,000


163,000Additional paid-in capital


47,155,000


46,136,000Retained earnings


71,053,000


78,175,000Treasury stock, 3,372,000 and 1,695,032 shares, at cost (Note 14)


(39,209,000
)

(24,210,000
)Total Stockholders' Equity


79,163,000


100,264,000Total Liabilities and Stockholders' Equity

$
119,525,000

$
149,125,000


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

F-7

---





Table of Contents

CACHE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS

52 Weeks Ended

52 Weeks Ended

52 Weeks EndedDecember 27, 2008

December 29, 2007

December 30, 2006NET SALES

$
265,728,000

$
274,458,000

$
278,992,000COST OF SALES, including buying and occupancy(Note 12)


156,036,000


147,474,000


145,886,000GROSS PROFIT


109,692,000


126,984,000


133,106,000EXPENSESStore operating expenses


95,339,000


97,023,000


94,556,000General and administrative expenses


21,296,000


22,725,000


21,246,000Store exit costs (Note 9)


2,757,000


(78,000
)

5,677,000Impairment charges (Notes 6 and 10)


2,137,000





TOTAL EXPENSES


121,529,000


119,670,000


121,479,000OPERATING INCOME (LOSS)


(11,837,000
)

7,314,000


11,627,000OTHER INCOME (EXPENSE)Interest expense


(243,000
)

(151,000
)

Interest income


706,000


2,453,000


2,523,000Miscellaneous income





299,000


TOTAL OTHER INCOME


463,000


2,601,000


2,523,000INCOME (LOSS) BEFORE INCOME TAXES


(11,374,000
)

9,915,000


14,150,000INCOME TAX PROVISION (BENEFIT)(Note 13)


(4,252,000
)

3,394,000


5,879,000NET INCOME (LOSS)

$
(7,122,000
)
$
6,521,000

$
8,271,000BASIC EARNINGS (LOSS) PER SHARE

$
(0.53
)
$
0.41

$
0.52DILUTED EARNINGS (LOSS) PER SHARE

$
(0.53
)
$
0.40

$
0.51BASIC WEIGHTED AVERAGE SHARES OUTSTANDING


13,329,000


15,966,000


15,849,000DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING


13,329,000


16,200,000


16,218,000


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        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock





Treasury StockAdditional
Paid-In
Capital

Retained
EarningsShares

Amount

Shares

Amount

TotalBalance at December 31, 2005


15,770,553

$
158,000

$
35,455,000

$
63,383,000




$


$
98,996,000Net income











8,271,000








8,271,000Tax benefit from stock option exercises








1,790,000











1,790,000Issuance of common stock


505,155


5,000


5,967,000











5,972,000Stock based compensation








1,434,000











1,434,000Balance 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
)
$
79,163,000


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

F-9

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Table of Contents

CACHE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS

52 Weeks Ended

52 Weeks Ended

52 Weeks EndedDecember 27, 2008

December 29, 2007

December 30, 2006Cash flows From Operating Activities:Net income (loss)

$
(7,122,000
)
$
6,521,000

$
8,271,000Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization


12,774,000


12,124,000


11,026,000Impairment charges


2,137,000





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


1,570,000





Provision for sales allowances and doubtful accounts


(123,000
)

234,000


Deferred income taxes


(1,474,000
)

(1,875,000
)

(25,000
)Excess tax benefit from stock-based compensation


(160,000
)

(92,000
)

(1,790,000
)Amortization of deferred rent


(1,996,000
)

(1,875,000
)

(1,137,000
)Amortization of deferred income for co-branded credit card


(218,000
)




Gift card breakage


(287,000
)

(293,000
)

(2,545,000
)Other





(21,000
)

(29,000
)Stock-based compensation


299,000


835,000


1,434,000Non-cash Lillie Rubin exit costs





(78,000
)

3,827,000Non-cash interest expense on note payable


54,000


73,000


Change in assets and liabilities:Decrease (increase) in receivables and income tax receivable


(4,019,000
)

1,259,000


543,000Decrease (increase) in inventories


8,226,000


5,295,000


(2,319,000
)Decrease (increase) in prepaid expenses and other current assets


(169,000
)

3,247,000


(330,000
)Decrease in accounts payable


(4,135,000
)

(1,192,000
)

(6,702,000
)Increase in accrued liabilities and accrued compensation


1,038,000


6,267,000


2,448,000Net cash provided by operating activities


6,395,000


30,429,000


12,672,000Cash Flows From Investing Activities:Purchase of marketable securities


(42,118,000
)

(88,880,000
)

(81,264,000
)Maturities of marketable securities


59,852,000


88,087,000


75,690,000Purchase of equipment and leasehold improvements


(10,673,000
)

(12,094,000
)

(12,250,000
)Purchase of assets from Adrienne Victoria Designs





(5,710,000
)

Net cash provided by (used in) investing activities


7,061,000


(18,597,000
)

(17,824,000
)Cash Flows From Financing Activities:Net proceeds from secondary common stock offering








4,409,000Proceeds from the issuance of common stock


561,000


563,000


1,563,000Excess tax benefit from stock-based compensation


160,000


92,000


1,790,000Repayment of note payable


(1,586,000
)

(397,000
)

Repurchase of common stock


(14,999,000
)

(24,210,000
)

Net cash provided by (used in) financing activities


(15,864,000
)

(23,952,000
)

7,762,000Net increase (decrease) in cash and equivalents


(2,408,000
)

(12,120,000
)

2,610,000Cash and equivalents, at beginning of period


7,243,000


19,363,000


16,753,000Cash and equivalents, at end of period

$
4,835,000

$
7,243,000

$
19,363,000


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

F-10

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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") owns and operates two chains of women's apparel specialty stores, of
which 287 stores (as of December 27, 2008) are operated under the trade name "Cache" and nine stores are operated under the trade name "Cache Luxe". 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 and sales returns and allowances. 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 2008, 2007 and 2006 include 52 weeks.

Fair Value of Financial Instruments

The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate their estimated fair values due to
their short-term nature. The Company's note payable due to a related party (previous owners from AVD acquisition and employees of the Company) 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.

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)

Marketable Securities

Marketable securities at December 27, 2008 and December 29, 2007 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. 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 $25.2 million and $42.9 million as of December 27, 2008 and December 29, 2007, 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 52 week period
ended December 27, 2008, the Company recorded reserves of approximately $1.5 million, of which it utilized $1.6 million, resulting in an aggregate reserve amount of $111,000, as
of December 27, 2008. The Company reserved $234,000 for such items, as of December 29, 2007. This amount is included as part of the sales allowance reserve, which is provided in
supplemental schedules on page F-36.

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. For our AVD

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)

division,
which makes up approximately 18% of total inventory, the raw materials, work in process and finished goods inventories are valued at the lower of cost or market value, using the
first-in-first-out valuation method. The Company ensures that the raw materials, work in process and finished goods are properly valued by taking into account any
obsolescence and recording a reserve in accordance with our established policy.

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 Statement of Financial Accounting Standards ("SFAS") No.144, "Accounting for the Impairment or
Disposal of Long-lived Assets" ("SFAS No. 144"). Finite-lived assets are evaluated for recoverability in accordance with SFAS No. 144 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 of the
asset and eventual disposition. 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 2008, 2007, and 2006 and
as a result, recorded an impairment charge of $1.1 million for 12 stores (see note 10), $73,000 for one store and $101,000 for one store during fiscal 2008, 2007 and 2006, respectively.
Stores impaired during fiscal 2007 and 2006 were closed in the year subsequent to when the impairment charge was taken by the Company.

Goodwill and Intangible Assets

The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 142") on December 30, 2001. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment. During fiscal 2007, in
connection with the acquisition of AVD, the Company recorded goodwill and other intangible assets. The Company performs impairment testing of its subsidiaryAVD, 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 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 the fourth quarter of fiscal 2008, the instability of the U.S. economy resulted in the Company experiencing significant decreased sales. In
addition, the capital markets volatility resulted in the Company stock price declining substantially, causing the Company's book value to exceed the market capitalization plus a reasonable control
premium. The Company's impairment testing resulted in a fair value that was less than the carrying value of its
subsidiaryAVD. As a result, Cache recorded an impairment charge of approximately $1.0 million against the carrying value of AVD's goodwill for the fiscal year ended
December 27, 2008.

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)

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 2008, 2007 and 2006. 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,
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 to be redeemed is remote. As such, we have recorded breakage income based upon this 5%, which is continually reviewed on a quarterly
basis for propriety. Breakage income represents the balance of Gift Cards, 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 record it under net sales.

The
Company recorded breakage income of $287,000, $293,000 and $2.5 million during fiscal years ended 2008, 2007 and 2006, 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 ($202,000), ($93,000) and $42,000 for
fiscal 2008, 2007 and 2006, 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 of $363,000 incurred for the shipping and handling of our Mary L. products is included in general and administrative expenses. The Company records
revenues net of applicable sales tax.

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)

In
connection with the acquisition of AVD in fiscal 2007, the Company also acquired the rights to the "Mary L." trademark. Mary L. products are sold in upper tier department stores and
as a result, Mary L. sales are included under net sales when the merchandise is shipped to the department stores. Mary L. sales are recorded net of any returns, chargebacks, discounts and allowances.
The Company also maintains a reserve as a reduction to sales for potential returns, chargebacks, discounts and allowances.

During
the second quarter of fiscal 2007, Cache introduced a co-branded customer credit card program. Under this program, the Company receives 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 2008 and 2007, the Company received $1.4 million and $585,000, respectively, in connection with activated credit cards. The amount of fee income recorded in
connection with activated credit cards was $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 insignificant in fiscal 2008 and 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 believe that historical quarterly trends were disrupted in fiscal 2008 by macroeconomic conditions during the second half of the fiscal year.

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

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
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
$10.7 million, $12.6 million and $11.9 million on advertising in fiscal 2008, 2007, and 2006, respectively.

Pre-Opening Store Expenses

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

Employee Benefit 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 18% 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 2008, 2007 and 2006 were $420,000, $403,000 and $236,000, respectively.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income
Taxes." 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
December 27, 2008, the Company has recorded a $331,000 reserve, net of federal benefit for potential tax contingencies. No such reserves were recorded as of December 29, 2007.

Effective
December 31, 2006, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 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. FIN 48 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.

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
cumulative effect of adoption of FIN 48 did not result in any adjustment in the Company's liability for unrecognized income tax benefits.

Balance at December 29, 2007

$
Additions based on tax positions related to the current year


Additions for tax positions for prior years


331,000Reductions for tax positions for prior years due to lapse of applicable statute of limitations


Settlements


Balance at December 27, 2008

$
331,000


Included
in the above ending balance are tax positions of $331,000, 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 December 27, 2008, the Company had accrued $182,000 of interest and penalties related to uncertain tax positions, which is included in the $331,000 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 December 27, 2008, 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.

As
for state and local income taxes, with few exceptions, the Company is no longer subject to state and local income tax examinations by taxing authorities for years prior to 2004.

Stock-Based Compensation

On January 1, 2006, the Company adopted SFAS No. 123(R) "Share-Based
Payment" requiring the recognition of compensation expense in the Consolidated Statements of Income related to the fair value of employee share- based awards. 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. Prior to adopting SFAS No. 123(R), the Company applied Accounting Principles Board ("APB") Opinion No. 25, and related Interpretations, in accounting for its share-based
compensation plans. All employee stock options were granted at or above the grant date market price. Accordingly, no compensation cost was recognized for fixed stock option grants in prior periods. In
accordance with SFAS No. 123(R), judgment is required in estimating the amount of share-based awards expected to be forfeited prior to
vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted. (See Note 14).

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)

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) outstanding during the period.

Comprehensive Income

The Company reports comprehensive income in accordance with the provisions of SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 established 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

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," 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. The Company performed an analysis of its wholesale division, Mary L., which it acquired in connection with the
acquisition of AVD in fiscal
2007 and has determined that the results of operations of the Mary L. division were insignificant in fiscal 2008 and 2007. The chart below is that of retail segment only.

52 Weeks Ended

52 Weeks Ended

52 Weeks EndedDecember 27,
2008

December 29,
2007

December 30,
2006Sportswear


60.7
%

58.7
%

65.7
%Dresses


30.4


32.1


24.5Accessories


8.9


9.2


9.8Total


100.0
%

100.0
%

100.0
%


Concentration

The Company has five major suppliers, which accounted for approximately 12% of our purchases during fiscal 2008, and our largest
supplier accounted for 4% of our purchases during fiscal 2008. The loss of any of these suppliers could adversely affect the Company's operations.

Recent Accounting Developments

During September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157,"Fair
Value Measurements"("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 for financial assets and liabilities, as well as any other assets and liabilities
that are carried at fair value on a recurring

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)

basis
in financial statements, are effective for financial statements issued for fiscal years beginning after November 15, 2007 (fiscal year 2008 for the Company). In February 2008, the FASB
issued FASB Staff Positions ("FSP") 157-1, which amended SFAS 157 to remove leasing transactions accounted for under SFAS 13, "Accounting for Leases" and FSP
157-2, which deferred the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis to fiscal years beginning after November 15, 2008 (fiscal year 2009 for the Company). The implementation of SFAS No. 157 for financial assets and
financial liabilities, effective December 30, 2007, did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. The Company is
currently evaluating the impact of SFAS No. 157 for nonfinancial assets and liabilities on its consolidated financial statements. The Company does not expect to have a material impact on its
consolidated financial statements upon adoption.

During
December 2007, the FASB issued SFAS No. 160,"Noncontrolling interests in Consolidated Financial Statementsan amendment of ARB
No. 51"("SFAS No. 160"). SFAS No. 160 requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between
the interests of the parent's owners and the interests of noncontrolling owners of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The
Company does not expect this statement to have a material impact on its consolidated financial statements upon adoption.

During
December 2007, the FASB issued SFAS No. 141R,"Business Combinations"("SFAS No. 141R"). Under Statement 141R, an
acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. In addition,
acquisition costs will generally be expensed as incurred. The revised statement also includes a substantial number of new disclosure requirements. SFAS 141R is effective prospectively to
business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement
No. 133" ("SFAS No. 161"). SFAS No. 161
requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how they affect an entity's financial
position, financial performance, and cash flows. The Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. The Company does not expect this statement to have a material impact on its consolidated financial statements upon adoption.

In
May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS No. 162").
SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities
that are presented in conformity with generally accepted accounting principles in the United States. This statement became effective November 15, 2008 following the SEC's approval of the Public
Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles," which occurred in September
2008. The Company did not have a material impact on its consolidated financial statements from the adoption of SFAS No. 162.

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)

In
May 2008, the FASB issued SFAS No. 163,"Accounting for Financial Guarantee Insurance Contractsan interpretation of FASB Statement
No. 60"("SFAS No. 163"). SFAS 163 requires recognition of an insurance claim liability prior to an event of default when there is evidence that credit
deterioration has occurred in an insured financial obligation. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim
periods within those fiscal years. Early application is not permitted. The Company's adoption of SFAS 163 will not have a material effect on the Consolidated Financial Statements.

Supplemental Statements of Cash Flow Information

The Company accrued $243,000 and $151,000 for interest expense on a note payable in connection with the acquisition of AVD, of which,
$263,000 and $78,000 was paid during fiscal 2008 and 2007, respectively. No interest charges were paid in fiscal 2006. As a result of the acquisition of AVD, the Company issued a note for
$6.3 million during fiscal 2007. During fiscal 2008, 2007 and 2006, the Company paid $1.9 million, $3.8 million and $5.9 million in income taxes, respectively. In addition,
during fiscal 2008, 2007 and 2006, the Company accrued equipment and leasehold improvements of $216,000, $752,000 and $2.0 million, respectively.

Reclassification

To conform to the 2008 presentation, a reclassification has been made to the 2007 Consolidated Balance Sheet and to the 2007 and 2006
Consolidated Statement of Cash Flows due to the segregation of income tax receivable as a separate line item.

NOTE 2. FAIR VALUE MEASUREMENT

Effective December 30, 2007, the Company adopted SFAS No. 157, 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). SFAS No. 157 establishes a fair value hierarchy, which prioritizes the inputs used
in measuring fair value into three broad levels as follows:



As
of December 27, 2008, 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

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)

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.

Effective
December 30, 2007, the Company adopted SFAS No. 159, which 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 accounting principles generally accepted
in the United States of America.

The
fair value of our marketable securities, which was determined based upon Level 1 inputs, totaled $25.2 million and $42.9 million as of December 27, 2008 and
December 29, 2007, respectively. For the fiscal periods ended December 27, 2008 and December 29, 2007, the aggregate amount of marketable securities (maturing greater than
90 days and less than one year) totaled approximately $25.2 million and $42.9 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

December 27,
2008

December 29,
2007Construction allowances

$
536,000

$
683,000Third party credit cards


2,382,000


2,522,000Accounts receivable, net


184,000


596,000Other


796,000


987,000$
3,898,000

$
4,788,000


Accounts
receivable, net includes sales from Mary L., which are recorded net of any returns, chargebacks, discounts and allowances. As of December 27, 2008 and December 29,
2007, the Company recorded $111,000 and $234,000, respectively, for such items.

During
fiscal 2008, the Company recorded an income tax receivable of $5.9 million, which resulted from estimated tax payments of $2.5 million made during fiscal 2008 and
2007 combined with a refund of $3.4 million, generated as a result of the carry back on the net loss incurred during the current fiscal year. Income tax receivable of $691,000 was recorded
during fiscal 2007 due to overpayments on the estimated tax payments made during fiscal 2007.

NOTE 4. INVENTORIES

December 27,
2008

December 29,
2007Raw materials

$
2,136,000

$
1,242,000Work in process


1,614,000


832,000Finished goods


18,571,000


28,473,000$
22,321,000

$
30,547,000


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

December 27,
2008

December 29,
2007Leasehold improvements

$
54,539,000

$
55,088,000Furniture, fixtures, and equipment


52,752,000


49,772,000107,291,000


104,860,000Less: accumulated depreciation and amortization


(63,971,000
)

(55,562,000
)$
43,320,000

$
49,298,000


Store
operating and general and administrative expenses include depreciation and amortization expense of $12.6 million, $12.1 million and $11.0 million for the
fiscal years ended 2008, 2007 and 2006, respectively. The Company took an impairment charge during fiscal 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. Under the terms of the agreement, the Company made cash payments totaling $5.7 million, including transaction costs. The agreement also calls
for the payment of a note payable of $7.0 million ($6.3 million net of imputed interest of 5%) to be paid over 5 years, as well as contingent payments, not to exceed
$5.5 million, based upon earn-out provisions to be paid also over 5 years, if certain conditions are met. 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 SFAS No. 141, "Business Combinations". Accordingly, the assets acquired were recorded at their fair values and operating results
were included in our financial statements from the date of acquisition. The settlement amount, which was paid during fiscal 2008, of the preexisting relationship consisted of a general liability that
arose from the purchase of goods in our ordinary course of business. The purchase price was allocated based upon an independent third party appraisal.

The
acquisition consideration and allocation of that consideration are as follows:

Acquisition Consideration:Cash consideration paid in fiscal 2007

$
4,821,000Additional cash consideration paid in fiscal 2008


609,000Note issued


6,257,000Transaction related fees


889,000$
12,576,000


F-22

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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)



Allocation of acquisition consideration:Inventory

$
1,013,000Equipment and leasehold improvements


67,000Other assets


27,000Intangible assets


1,380,000Goodwill


10,089,000$
12,576,000


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. The Company also has entered into employment agreements with Adrienne Kantor and Robert
Kantor, the principal officers of AVD. These agreements will cover a period of 5 years, providing compensation and employee benefits.

During
the period ended December 29, 2007, the Company recorded a note payable to Robert Kantor and Adrienne Kantor, related to the acquisition of Adrienne Victoria Designs. The
$6.3 million note, which will be paid over five years, has an imputed five percent interest rate. The note is payable in quarterly installments ranging from $163,000 to $475,000. As of
December 27, 2008, maturities of the note payable are as follows:

Fiscal years ending:2009

$
1,259,0002010


1,329,0002011


1,339,0002012


475,000Total

$
4,402,000




In accordance with SFAS No. 142,"Goodwill and Other Intangible Assets",the
Company's goodwill and its indefinite-lived 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, resulted in an impairment charge of approximately $1.0 million, which was recorded against the carrying value of AVD's goodwill for fiscal 2008. As a
result of this impairment charge, the Company's goodwill as of December 27, 2008, reduced to $9.1 million from $10.1 million as

F-23

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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)

of
December 29, 2007. The carrying amounts of intangible assets as of December 27, 2008 and December 29, 2007 are as follows:

December 27,
2008

December 29,
2007Indefinite-lived intangible assets:TrademarksCache

$
102,000

$
102,000TrademarksMary L


620,000


620,000722,000


722,000Definite-lived intangible assets:Customer relationships


300,000


300,000Non-Compete agreements


300,000


300,000Favorable market lease


160,000


160,000760,000


760,000Less: accumulated amortization


(178,000
)

(59,000
)582,000


701,000Total intangible assets, net

$
1,304,000

$
1,423,000


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

The
Company has determined that the lives of the reported intangibles, Customer relationships, Non-Compete agreements and Favorable market lease are 10, 7 and
3.5 years respectively. The following schedule lists the amortization amounts the Company will record over the next five years:

Fiscal years ending:2009

$
118,0002010


119,0002011


73,0002012


73,0002013


73,000$
456,000


F-24

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7. ACCRUED LIABILITIES

December 27,
2008

December 29,
2007Operating expenses

$
2,469,000

$
3,954,000Taxes, including income taxes


2,593,000


2,364,000Share repurchase liability





2,033,000Group insurance


656,000


557,000Sales return reserve


550,000


752,000Leasehold additions


216,000


752,000Gift cards, merchandise credit cards and other customer deposits and credits


3,644,000


3,840,000Lease termination cost (Note 9)


616,000


Deferred income


333,000


$
11,077,000

$
14,252,000


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

During November 2005, the Company reached an agreement with its bank to amend the amount available under the Amended Revolving Credit Facility. Pursuant to the Amended Revolving Credit
Facility, $17.5 million was available until expiration at November 30, 2008, which was extended to January 29, 2009. On January 27, 2009, the Company and Bank of America
N.A. agreed to extend the line of credit until March 2, 2009, with a reduced credit line of $10.0 million. After consideration, given the Company's current strong liquidity position and
expected liquidity needs, coupled with the onerous terms currently being offered by banks on credit facilities due to the ongoing credit crisis, the Company decided not to enter in to a new credit
facility at the present time and as such, the existing credit line expired on March 2, 2009. There were no outstanding loans due to Bank of America, N.A., as of the expired date. The amounts
outstanding under the credit facility bear interest at a maximum per annum rate equal to the bank's prime rate, which was 3.25% at December 27, 2008, less 0.25%. The agreement contains selected
financial and other covenants. Effective upon the occurrence of an Event of Default under the Amended Revolving Credit Facility, the Company grants to the bank a security interest in the Company's
inventory and certain receivables. The Company was in compliance with all financial loan covenants during the fiscal periods presented.

There
have been no borrowings against the line of credit during fiscal 2008 and 2007. There were outstanding letters of credit of $585,000 and $774,000 pursuant to the Amended Revolving
Credit Facility at December 27, 2008 and December 29, 2007, respectively.

NOTE 9. STORE EXIT COSTS

During the fiscal year ended December 27, 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

F-25

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. STORE EXIT COSTS (Continued)

stores.
During this period, the Company also recorded payments for severance and lease termination costs. The schedule below identifies the exit costs and the payments made 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


During
fiscal 2006, the Company recorded a pre-tax charge of $5.7 million for store closing costs for the exit of the Lillie Rubin business. Included in the exit costs
was a write down of leasehold improvements and furniture and fixtures for 19 stores in the amount of $4.4 million, write down of intangibles of $455,000, write down of supplies of $275,000,
severance accrual of $400,000, as well as an accrual of $1.5 million for contractual termination costs negotiated prior to year-end. These costs were partially offset by the
reversal of $1.3 million of deferred rent accruals. The Company closed 16 of the stores as of December 30, 2006. The Company closed the last three Lillie Rubin stores during the first
fiscal quarter of fiscal 2007. The Company did not incur significant additional exit costs upon the closing of these remaining properties. The reversal in fiscal 2007 was due to the Company's
conversion of one Lillie Rubin store into a Cache store.

The
following is a summary of the activity in the reserve for exit costs in fiscal 2007:

Liability
Balance
Beginning
of Year

Cash
Payments

Reversals

Liability
Balance
End
of YearContractual termination costs

$
385,000

$
307,000

$
(78,000
)
$
Severance


43,000


43,000








NOTE 10. IMPAIRMENT CHARGE

In accordance with SFAS 144"Accounting for Impairment or Disposal of Long-Lived Assets", 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

F-26

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10. IMPAIRMENT CHARGE (Continued)

Company
compared the undiscounted future cash flows against the carrying value of the long lived assets, as of December 27, 2008, for each store and as a result, identified 12 stores where the
sum of undiscounted future cash flows were less than the corresponding carrying amounts. The Company then compared the net present value of future cash flows for these 12 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 $1.1 million for the 12 stores
identified. As a result of this impairment charge, which was recorded during the fourth quarter of fiscal 2008, the Company also adjusted the cost basis of the long lived assets at the affected stores
in accordance with SFAS 144.

NOTE 11. OTHER LIABILITIES

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

NOTE 12. COMMITMENTS AND CONTINGENCIES

Leases

At December 27, 2008, the Company was obligated under operating leases for the corporate office, location of our AVD subsidiary
and various store locations expiring at various times through 2019. 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 from landlords and/or rent holidays. In recognizing landlord incentives and minimum rent expenses, the Company amortizes the charges 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:

52 Weeks Ended

52 Weeks Ended

52 Weeks EndedDecember 27, 2008

December 29, 2007

December 30, 2006Minimum rentals

$
24,726,000

$
24,432,000

$
25,029,000Contingent rentals


11,640,000


11,536,000


10,977,000$
36,366,000

$
35,968,000

$
36,006,000


Future
minimum payments under non-cancelable operating leases consisted of the following at December 27, 2008:

Fiscal years ending:2009

$
26,508,0002010


24,999,0002011


23,345,0002012


20,864,0002013


17,861,000Thereafter


32,847,000Total future minimum lease payments

$
146,424,000


F-27

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)

The
operating leases included in the above table do not include contingent rent based upon sales volume, which represented approximately 0.4% of minimum rent expense in fiscal 2008, or
variable costs such as promotional funds, common area maintenance and heating, ventilation and air conditioning charges, which represented approximately 31.8% of minimum rent expense in fiscal 2008.

Other Commitments

The following tables summarize our other commitments as of December 27, 2008:

Payments Due in PeriodTotal

2009

2010

2011

2012

2013

Thereafter(in thousands)Other ObligationsEmployment Contracts

$
1,720

$
785

$
485

$
300

$
150

$


$
Purchase Obligations


12,667


12,667














Letters of credit


585


585














Total

$
14,972

$
14,037

$
485

$
300

$
150

$


$



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.

On
February 24, 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 3 years expiring on February 23, 2012. The previous agreement expired in February 2009.

Contingencies

On July 3, 2007, the Company, through a wholly-owned subsidiary which was created in connection with the acquisition, acquired
certain assets of AVD, our largest vendor. Under the terms of the agreement, Cache is obligated to make contingent payments, not to exceed $5.5 million, based upon earn-out
provisions to be paid over 5 years, if certain conditions are met. During fiscal 2008, the earn-out provision was not achieved; therefore, Cache was not obligated to make any cash
payments.

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 December 27, 2008 and December 29, 2007.

F-28

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13. INCOME TAXES

The provision (benefit) for income taxes includes:

52 Weeks Ended

52 Weeks Ended

52 Weeks EndedDecember 27,
2008

December 29,
2007

December 30,
2006Current:Federal

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

$
5,536,000State


634,000


680,000


368,000(2,778,000
)

5,269,000


5,904,000Deferred:Federal


(898,000
)

(1,609,000
)

(59,000
)State


(576,000
)

(266,000
)

34,000(1,474,000
)

(1,875,000
)

(25,000
)Provision (benefit) for income taxes

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

$
5,879,000


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

52 Weeks Ended

52 Weeks Ended

52 Weeks EndedDecember 27,
2008

December 29,
2007

December 30,
2006Effective federal tax rate


34.0
%

34.0
%

35.0
%Federal benefit on NOL carry back over 34%


0.7
%

0.0
%

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


1.2
%

2.7
%

3.5
%Other net, primarily permanent differences


1.5
%

(2.5
)%

3.0
%Provision for income taxes


37.4
%

34.2
%

41.5
%


The
major components of the Company's net deferred tax assets (liabilities) at December 27, 2008 and December 29, 2007 are as follows:

Current

December 27,
2008

December 29,
2007Group insurance

$
251,000

$
271,000Sales return reserve


211,000


295,000Inventory


464,000


353,000Prepaid expenses


(491,000
)

(350,000
)Total Current

$
435,000

$
569,000




Non Current

December 27,
2008

December 29,
2007State tax net operating loss carryforwards

$
481,000

$
71,000Deferred rent


1,377,000


1,320,000Deferred construction allowances


(3,768,000
)

(2,205,000
)Other (principally depreciation expense)


3,436,000


731,000Total Non current

$
1,526,000

$
(83,000
)


F-29

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14. STOCK BASED COMPENSATION

Effective January 1, 2006, the Company began recording compensation expense associated with stock options in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123(R), "Share-Based Payment," as interpreted by SEC Staff Accounting Bulletin No. 107. Prior to January 1, 2006, the Company
had accounted for stock options according to the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and
therefore no related compensation expense was recorded for awards granted with no intrinsic value. We adopted the modified prospective transition method provided for under SFAS No. 123(R), and,
consequently, have not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock options recognized in Fiscal 2006 includes:
1) quarterly amortization related to the remaining unvested portion of all stock option awards granted prior to January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123; and 2) quarterly amortization related to all stock option awards granted subsequent to January 1, 2006, when granted,
based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).

The
Company's 2003 Stock Option Plan provides for the granting of either ISO's or non-qualified options to purchase up to 1,350,000 shares of common stock. As of
December 27, 2008, there were 526,032 shares under the 2003 plan available for future grant. All of the Company's prior stock option plans have expired as to the ability to grant new options.

The
Company's 2008 Stock Option Plan provides for the granting of either ISO's or non-qualified options to purchase up to 800,000 shares of common stock. 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.

Stock
awards outstanding under the Company's current plans have generally been granted at prices which are equal to the market value of our stock on the date of grant, generally vest
over four years and expire no later than ten years after the grant date. Effective January 1, 2006, we recognized compensation expense ratably over the vesting period, net of estimated
forfeitures. As of December 27, 2008, there was $519,000 of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a remaining
weighted-average vesting period of 2.1 years. The total intrinsic value of options exercised during the 52 week period ended December 27, 2008 was approximately $469,000.

In
accordance with SFAS No. 123(R), 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:

2008
Grants

2007
GrantsExpected dividend rate

$
0.00

$
0.00Expected volatility


36.1
%

35.4  36.9
%Risk free interest rate


2.6
%

4.7  5.0
%Expected lives (years)


4.0


4.0


F-30

---



Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14. STOCK BASED COMPENSATION (Continued)

The
weighted average fair value of options granted during fiscal years ended December 27, 2008 and December 29, 2007 were $3.14 and $5.06, respectively.
There were no options granted during fiscal 2006.

Stock Plans

On July 22, 2003, the Company adopted the 2003 Stock Option Plan. The plan is administered by the Compensation and Plan
Administration Committee of the Company's Board of Directors. Under the option plan the Company reserved 900,000 shares of the Company's authorized common stock for issuance to officers and key
employees of the Company.

On
June 18, 2004, the Company paid a 3 for 2 stock dividend to holders of record.

Options
granted under the plans have a ten-year term and may be either incentive stock options or non-qualified stock options. The options are granted at an
exercise price equal to the fair market value on the date of grant and generally vest over a four year period. The granted options generally become exercisable at the maximum rate of 25% 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.

The
following table summarizes all stock option transactions for the three fiscal years ended December 27, 2008:

Weighted
Average Shares

Exercise
PricesShares under option as of December 31, 2005


1,481,500

$
10.85Options exercised in 2006


(298,997
)

5.12Options cancelled in 2006


(42,875
)

13.33Shares under options as of December 30, 2006


1,139,628


12.26Options granted in 2007


155,000


14.38Options exercised in 2007


(43,650
)

12.91Options canceled 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 option as of December 27, 2008


732,675

$
12.98




Options Exercisable at:

Number
of Shares

Weighted average
exercise priceDecember 30, 2006


732,628

$
11.93December 29, 2007


1,017,853

$
12.22December 27, 2008


503,425

$
12.69


F-31

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14. STOCK BASED COMPENSATION (Continued)

Significant
option groups outstanding at December 27, 2008 and related weighted average price and life information follows:

Grant Date

Options
Outstanding

Options
Exercisable

Exercise
Price

Remaining
Life (Years)1/23/08


15,000


0

$
9.81


107/5/07


100,000


0


14.40


96/19/07


55,000


0


14.34


98/30/05


25,000


12,500


16.40


75/3/05


70,000


31,500


11.53


65/2/05


10,000


4,500


11.61


64/25/05


5,000


2,250


11.00


61/22/04


52,500


52,500


15.17


57/22/03


389,175


389,175


12.65


510/2/01


11,000


11,000

$
2.13


3


A
summary of the changes in stock options outstanding during the 52-week period ended December 27, 2008 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 29, 2007


1,232,103

$
12.51


6.25

$
470,503


1,017,853

$
12.22


5.68

$
470,503Granted


15,000


9.81











Vested

















Canceled/forfeited


(423,750
)

12.94








(423,750
)

12.94Exercised


(90,678
)

6.19








(90,678
)

6.19December 27, 2008


732,675

$
12.98


5.86

$



503,425

$
12.69


4.84

$



---

F-32

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14. STOCK BASED COMPENSATION (Continued)

Prior to the adoption of SFAS No. 123(R), we presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Condensed Consolidated
Statement of Cash Flows. SFAS No. 123(R) 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. 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 December 27, 2008, there was approximately $519,000 of future compensation cost related to nonvested share-based compensation awards granted under the stock option plans.
That cost is expected to be recognized over a weighted average period of 2.1 years. The total fair value of shares vested during the year ended December 27, 2008 was $299,000. The
following table represents as of December 27, 2008 the share-based compensation expense to be recognized in future periods:

Fiscal years ending:

Compensation Expense on Stock Options2009

$
234,0002010


187,0002011


98,000$
519,000




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.

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.

F-33

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. EARNINGS PER SHARE

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

52 Weeks Ended

52 Weeks Ended

52 Weeks EndedDecember 27, 2008

December 29, 2007

December 30, 2006Net income (loss)

$
(7,122,000
)
$
6,521,000

$
8,271,000Net income (loss) per sharebasic

$
(0.53
)
$
0.41

$
0.52Net income (loss) per sharediluted

$
(0.53
)
$
0.40

$
0.51Weighted average common shares outstanding


13,329,000


15,966,000


15,849,000Dilutive effect of stock options





234,000


369,000Weighted average common and potentially dilutive common shares


13,329,000


16,200,000


16,218,000


Options
to purchase 732,675 common shares were excluded from the computation of diluted earnings per share for the year ended December 27, 2008 due to the net loss incurred by the
Company. Options to purchase 10,000 common shares at an exercise price of $18.30 per share were outstanding during fiscal 2006, but were not included in the computation of dilutive earnings per share
because to do so would have been anti-dilutive.

NOTE 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter(In thousands, except per share data)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
)52 weeks ended December 29, 2007Net sales

$
64,355

$
71,027

$
60,572

$
78,504Gross profit


28,991


33,935


27,667


36,391Income before income tax provision


237


2,049


212


7,417Income tax provision


92


765


51


2,486Net income

$
145

$
1,284

$
161

$
4,931Basic and diluted earnings per share:Basic earnings per share:

$
0.01

$
0.08

$
0.01

$
0.32Diluted earnings per share:

$
0.01

$
0.08

$
0.01

$
0.32


---

F-34

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Table of Contents

CACHE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Continued)

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

NOTE 17. SUBSEQUENT EVENTS

On January 8, 2009, the Board of Directors authorized the repurchase of an additional 1,000,000 shares. This authorization combined with the previously announced repurchase
programs of fiscal 2008 and 2007 brings the total authorization to 4,500,000 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 the prevailing market rates.

The
Company's credit line with Bank of America, N.A. of $17.5 million, which was due to expire on November 30, 2008, was extended to January 29, 2009. On
January 27, 2009, the Company and Bank of America N.A. agreed to extend the line of credit until March 2, 2009, with a reduced credit line of $10.0 million. After consideration,
given the Company's current strong liquidity position and expected liquidity needs, coupled with the onerous terms currently being offered by banks on credit facilities due to the ongoing credit
crisis, the Company decided not to enter in to a new credit facility at the present time and as such, the existing credit line expired on March 2, 2009. There were no outstanding loans due to
Bank of America, N.A., as of the expired date of the revised credit line.

F-35

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Table of Contents

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
Period52 Weeks EndedDecember 27, 2008

$
752,000

$


$


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

$
845,000

$


$


$
(93,000)
(1)
$
752,00052 Weeks EndedDecember 30, 2006

$
803,000

$
42,000
(1)
$


$


$
845,000




AdditionsReserve for Sales Allowances and Doubtful Accounts

Balance at
Beg. of
Period

Charge to
Costs and
Expenses

Other
Accounts

Deductions

Balance at
End of
Period52 Weeks endedDecember 27, 2008

$
234,000

$
1,473,000

$


$
1,596,000

$
111,00052 Weeks endedDecember 29, 2007

$


$
234,000

$


$


$
234,000


---

F-36

---