**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K**

**FOR ANNUAL AND TRANSITIONREPORTS PURSUANT TO SECTIONS 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

| **(MARK ONE)** | ** **                                                                          |
|----------------|-------------------------------------------------------------------------------------|
| **x**          | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15  (D) OF THE SECURITIES**     |
| ** **     | **EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED  DECEMBER 30, 2006**               |
| **OR**         |
| **o**          | **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 asspecified in its charter)**

| **Florida**                               |   | **59-1588181**                     |
|-------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of          |   | (IRS Employer  Identification No.) |
| incorporation or  organization)           |   |                               |
| **1440 Broadway, New York, New York**     |   | **10018**                          |
| (Address of  principal executive offices) |   | (Zip Code)                         |

 

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

**Securitiesregistered pursuant to Section 12(b) of the Act: none**

**Securitiesregistered pursuant to Section 12(g) of the Act:**

**Common Stock $.01 parvalue**

(Title of Class)

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

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o   No x

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).

| Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o |
|---------------------------|---------------------|-------------------------|

 

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

The aggregate market value of voting stock held bynon-affiliates of the registrant was approximately $220 million as of June 30,2006, the last business day of the registrant’s most recently completed secondfiscal quarter, based upon the closing sale price of $17.34 of the registrant’sCommon Stock as reported on the Nasdaq National Market on such date. Shares ofCommon Stock held by each executive officer and director and by each person whoowns 10% or more of the outstanding Common Stock have been excluded in thatsuch persons may be deemed to be affiliates. This determination of affiliatestatus is not necessarily conclusive for other purposes.

As of February 28, 2007, 16,284,333 common shareswere outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Certaininformation included in the Registrant’s Proxy Statement to be filed inconnection with its 2007 Annual Meeting of Stockholders has been incorporatedby reference into Part III (Items 10, 11, 12, 13, 14 and 15) of thisreport on Form 10-K.

 

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**CACHE, INC.**

**FORM 10-K ANNUAL REPORT**

**DECEMBER 30, 2006**

**TABLEOF CONTENTS**

|                   | ** ** | ** **                                                                                  | ** ** | **PAGE** | ** ** |
|-------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**   |       |                                                                                        |       |     |       |
| Item 1.           |       | Business                                                                                    |       |     | 1          |   |   |
| Item  1A.         |       | Risk  Factors                                                                               |       |     | 8          |   |   |
| Item 1B.          |       | Unresolved Staff  Comments                                                                  |       |     | 15         |   |   |
| Item  2.          |       | Properties                                                                                  |       |     | 15         |   |   |
| Item  3.          |       | Legal  Proceedings                                                                          |       |     | 15         |   |   |
| Item 4.           |       | Submission of  Matters to a Vote of Security Holders                                        |       |     | 16         |   |   |
| **PART II**  |       |                                                                                        |       |     |       |   |   |
| Item 5.           |       | Market for the  Registrant’s Common Stock and Related Stockholder Matters              |       |     | 17         |   |   |
| Item 6.           |       | Selected Financial  Data                                                                    |       |     | 18         |   |   |
| Item 7.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       |     | 19         |   |   |
| Item 7A           |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       |     | 28         |   |   |
| Item 8.           |       | Financial  Statements and Supplementary Data                                                |       |     | 29         |   |   |
| Item 9.           |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure       |       |     | 29         |   |   |
| Item 9A           |       | Controls and  Procedures                                                                    |       |     | 29         |   |   |
| Item 9B           |       | Other Information                                                                           |       |     | 34         |   |   |
| **PART III** |       |                                                                                        |       |     |       |   |   |
| Item 10.          |       | Directors and Executive Officers of the Registrant                                          |       |     | 34         |   |   |
| Item 11.          |       | Executive Compensation                                                                      |       |     | 34         |   |   |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management                             |       |     | 34         |   |   |
| Item 13.          |       | Certain Relationships and Related Transactions                                              |       |     | 34         |   |   |
| Item 14           |       | Principal Accountant Fees and Services                                                      |       |     | 34         |   |   |
| **PART IV**  |       |                                                                                        |       |     |       |   |   |
| Item 15.          |       | Exhibits and  Financial Statement Schedule                                                  |       |     | 34         |   |   |

 

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**STATEMENT REGARDINGFORWARD LOOKING STATEMENTS**

Except for the historicalinformation and current statements contained in this Annual Report, certainmatters discussed herein, including, without limitation, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” areforward-looking statements that involve risks and uncertainties. Actual resultsand timing of certain events could differ materially from those projected in orcontemplated by forward-looking statements due to a number of factorsincluding, without limitation, industry trends, merchandise and fashion trends,competition, changes in general economic conditions and consumer spendingpatterns, vendor procurement issues and the ability to obtain financing, any ofwhich could cause actual results to differ materially.

**PART I**

**ITEM 1.**                BUSINESS

**GENERAL**

We are a nationwide, mall-based specialty retailer oflifestyle sportswear and dresses targeting style-conscious women. Ourmerchandise offerings extend from elegant eveningwear to sophisticated casualand daytime sportswear, which encompasses a variety of tops, bottoms, dressesand accessories, all of which are sold under our Cache brand. We believe theappeal of our merchandise is enhanced through the intimate boutique-like environmentwe offer to our customers. This environment is achieved through a high level ofcustomer service combined with our smaller store format, which averagesapproximately 2,000 square feet. As of December 30, 2006, we operated 293Cache and Cache Luxe stores, primarily situated in central locations in hightraffic, upscale malls, in 44 states, Puerto Rico and the U.S. Virgin Islands.

We target women between the ages of 25 and 45 throughour differentiated merchandising mix and Cache and Cache Luxe storeenvironments. Our brand appeals to a woman who has a youthful attitude, isself-confident and fashion-conscious, and requires a missy fit. Our sportswearembodies a mix of lifestyle separates for both day and evening. Our storescarry a range of diverse merchandise, which includes dresses for daytime andevening, and continues to be an important dress resource and destination forour target customers. Our accessories complement the seasonal themes andpalettes of our sportswear and dresses.

In May 2006, we announced plans to introduce anew concept, Cache Luxe, and exit our Lillie Rubin business. During the thirdfiscal quarter of 2006, we converted 16 Lillie Rubin locations to Cache Luxestores. In addition, we expanded three Cache stores by combining them intothree adjacent Lillie Rubin stores and added Cache Luxe merchandise to theseCache stores. Our three remaining Lillie Rubin store locations are anticipatedto be closed by the end of the first fiscal quarter of 2007.

Our Cache Luxe conceptprimarily focuses on our daytime and evening merchandise. This concept isexpected to broaden our customer base, enable us to offer a larger selection ofevening apparel and accessories at higher price points and allows us toleverage our marketing under a single Cache brand. In addition, Cache storeslocated in malls containing a Cache Luxe store have increased capacity to offeran expanded casual assortment. Almost all of our current Cache Luxe stores arein malls that also contain a Cache store.

**Merchandising**

Our merchandising focuseson providing an edited selection of sportswear and dresses extending fromcasual and daytime sportswear into elegant eveningwear, as well as a collectionof complementary accessories. All of our merchandise is sold under our own Cachelabel. We employ a constant process of test-and-ordering that allows us torestock popular items during the same season. We also maintain a key itemstrategy, providing some popular and core items for longer periods to meetongoing customer 

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demand.New merchandise arrives on a frequent basis at each of our stores, giving ourcustomers a reason to visit often. We introduce new floor sets into each of ourstores approximately every six weeks. These new floor sets provide excitingchanges in visual merchandising within both our stores and our windowpresentations.

***Merchandise***

We design and market three general categories ofmerchandise:

*Sportswear.*   Sportswearconsists of related tops and bottoms, versatile enough to be worn during theday or out for evening events. Price points for sportswear in our Cache storesgenerally range from $60 to $300.

*Dresses.*   Dressesrange from shorter lengths for cocktail and day-into-evening wear to specialoccasion long dresses. Price points for dresses in our Cache stores generallyrange from $125 to $450.

*Accessories.*   Accessoriesconsist primarily of jewelry, belts and handbags selected to complement oursportswear and dress selections. Price points for accessories in our Cachestores generally range from $30 to $150.

While the majority of our merchandise is the same inall of our stores of the same concept, we employ both lower price pointmerchandise and higher priced merchandise in select Cache locations. Our newCache Luxe stores generally have higher price points than our Cache stores.

Thefollowing table indicates the percentage of net sales by merchandise categoryat our Cache and Cache Luxe stores for each of the periods indicated below:

| ** **  | ** ** | **53 Weeks  Ended**  | ** ** | **52 Weeks  Ended**    | ** ** | **52 Weeks  Ended**    | ** ** |
|-------------|------------|---------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **  | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** | **December 30,  2006** | ** ** |
| Sportswear  |       |                      | 69.1       | %                           |       |                        | 68.7       | % |   |   | 65.7 | % |   |
| Dresses     |       |                      | 22.3       |                        |       |                        | 21.7       |   |   |   | 24.5 |   |   |
| Accessories |       |                      | 8.6        |                        |       |                        | 9.6        |   |   |   | 9.8 |   |   |
| Total       |       |                      | 100.0      | %                           |       |                        | 100.0      | % |   |   | 100.0 | % |   |

 

The percentage of net sales represented by dresses atour Cache stores is typically higher in the first half of the year due to theprom season.

***Design***

Our merchandise offerings are organized around thespring and fall seasons. Our merchandising team is currently comprised of adesigner, merchants who specialize in particular fashion classifications andexecutive management. Following the end of a season, our merchandising teamreviews data from that season’s results as well as market research, retailtrends and trade shows. Based on this information, our team develops seasonalthemes, which will influence our exclusive designs for the following year.

Prior to each season, we begin to coordinate with ourvendors to select specific styles that reflect seasonal themes. Incollaboration with our vendors, our merchants adjust test garments for colorand style to ensure offerings reflect the appropriate balance between fashioncontent and marketability. Our team then works with our technical department,in-house fit model and manufacturers to guarantee our missy fit andhigh-comfort standards are met. Our close relationships with our vendorsfacilitates a fluid design cycle that enables us to create fashion-forward,exclusive styles and test merchandise in select stores before store roll-outs.

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Accessories aremanufactured for us by third party vendors, a process that allows our designand merchandising team to focus on our core apparel offerings. We also maintainclose relationships with our accessory vendors so that our accessoriescomplement our seasonal themes and palettes.

***Planning***

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

Our merchandising and planning teams determine theappropriate level and type of merchandise for each store and communicate thatinformation to our vendors who drop ship the merchandise to each store.Following receipt at our stores, the merchandising staff obtains daily salesinformation and store-level inventory generated by our POS system. Basedupon this data, management makes decisions with respect to re-orders, storetransfers and markdowns.

In addition to introducingnew merchandise, we employ a key item strategy whereby we maintain an inventoryof core items in every store. This provides customers with a level of certaintythat these items will be in stock when they visit. In certain situations, astore that is experiencing particularly strong sell-throughs relays theinformation to our management team and merchandisers, who in turn may add oradjust new merchandise in response to this feedback.

***Sourcing and Distribution***

Our relationships with our vendors and their abilityto drop ship products to our stores allow us to respond quickly to fashionpreferences and demand, and reduce inventory risk. We currently purchase thevast majority of our merchandise from third party agents who arrange for themanufacture of our apparel overseas. Our five largest vendors accounted forapproximately 44% of our purchases during the 52 weeks ended December 30,2006, and our largest vendor accounted for 27% of our purchases during the 52weeks ended December 30, 2006.

In early 2006, we hired an executive whose primaryresponsibility is to increase the sourcing of merchandise directly fromoverseas manufacturers. Directly-sourced merchandise is expected to havea higher gross margin due to the reduction in our use of domestic vendors whoprimarily directly-source merchandise from overseas. In fiscal 2006, wedirectly-sourced approximately 5% of our merchandise. By the second half offiscal 2007, we expect to directly-source approximately 20 to 25% of ourmerchandise and believe that we can increase the percentage of our merchandisethat is directly-sourced to approximately 40 to 50% in the long-term. Weexpect to utilize foreign agents as we transition to direct-sourcing inorder to seek the lowest possible cost and mitigate execution risk.

Our merchandise is dropshipped directly by our vendors to our individual stores rather than sent to awarehouse or distribution center. Drop shipping significantly decreases ourdistribution expenses and reduces the time required to deliver merchandise toour stores.

**Store Operations**

***Store Design and Environment***

Most of our stores range in size from approximately1,500 to 2,500 square feet, with our typical store averaging approximately2,000 square feet. We believe that our relatively smaller store size enables usto create a boutique-like atmosphere by providing a more intimate shoppingenvironment and a higher level 

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of customer service thandepartment stores. Most of our stores are open during the same hours as themalls in which they are located, typically seven days and six nights a week.

We continue to remodel our Cache stores to enhancetheir appeal to our customers, including increasing access to merchandise,facilitating movement throughout the store and improving our merchandisedisplays. Our remodeled store design emphasizes a modern, sophisticated andwell-lit atmosphere with streamlined exteriors and sleek interiors. Inaddition, we have moved the dressing rooms from the middle of the store to therear, and check-out locations from the front of the store to the side. Thiseliminates barriers to movement throughout the store and permits greaterflexibility in merchandise displays, allowing us to more effectively market ourclothing.

We began to remodelexisting stores using this new design in late fiscal 2001. We generally remodelstores as leases come up for renewal. We remodeled 20 Cache stores in fiscal2005, and remodeled 11 stores in fiscal 2006 and expect to remodelapproximately 20 stores in fiscal 2007. By the end of fiscal 2007, we expect tohave remodeled approximately 70% of our Cache stores. Most store remodels takefrom six to eight weeks. During this period, we typically utilize temporarylocations in the mall near our existing locations so that customers cancontinue to shop for our merchandise.

***Store Management and Training***

We organize our stores into regions and districts,which are overseen by five regional vice presidents and 36 district managers.Each of our district managers is typically responsible for eight to 12 stores.We typically staff our stores with two opening employees, three mid-dayemployees and two closing employees.

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

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***Store Locations***

As of December 30, 2006, we operated 293 Cacheand Cache Luxe stores located in 44 states, as well as Puerto Rico and the U.S.Virgin Islands.

The following tableindicates our Cache stores by state as of December 30, 2006:

| Alabama     |   | 7  |   | Maine          |   | 1      |   | Oklahoma          |   | 2      |
|-------------|--------|----|--------|----------------|--------|--------|--------|-------------------|--------|--------|
| Arizona     |   | 5  |   | Maryland       |   | 7      |   | Oregon            |   | 2      |
| Arkansas    |   | 2  |   | Massachussets  |   | 9      |   | Pennsylvania      |   | 8      |
| California  |   | 29 |   | Michigan       |   | 6      |   | Rhode Island      |   | 2      |
| Colorado    |   | 4  |   | Minnesota      |   | 2      |   | South Carolina    |   | 5      |
| Connecticut |   | 4  |   | Mississippi    |   | 1      |   | Tennessee         |   | 6      |
| Delaware    |   | 1  |   | Missouri       |   | 4      |   | Texas             |   | 22     |
| Florida     |   | 36 |   | Nebraska       |   | 2      |   | Utah              |   | 1      |
| Georgia     |   | 9  |   | Nevada         |   | 7      |   | Vermont           |   | 1      |
| Hawaii      |   | 3  |   | New Hampshire  |   | 3      |   | Virginia          |   | 7      |
| Illinois    |   | 9  |   | New Jersey     |   | 13     |   | Washington        |   | 4      |
| Indiana     |   | 3  |   | New Mexico     |   | 2      |   | West Virginia     |   | 1      |
| Iowa        |   | 2  |   | New York       |   | 13     |   | Wisconsin         |   | 3      |
| Kansas      |   | 2  |   | North Carolina |   | 8      |   | Puerto Rico       |   | 1      |
| Kentucky    |   | 3  |   | Ohio           |   | 10     |   | US Virgin Islands |   | 1      |
| Louisiana   |   | 4  |   |           |   |   |   |              |   |   |

 

Thefollowing table indicates our Cache Luxe stores by state as ofDecember 30, 2006:

| Arizona |   | 1 |   | Louisiana  |   | 1 |   | North Carolina |   | 1 |
|---------|--------|---|--------|------------|--------|---|--------|----------------|--------|---|
| Florida |   | 7 |   | Michigan   |   | 2 |   | Tennessee      |   | 1 |
| Georgia |   | 1 |   | New Jersey |   | 1 |   | Texas          |   | 1 |

 

Thefollowing table indicates the number of Cache stores opened and closed over thepast five fiscal years ended December 30, 2006:

| **Fiscal Period** | ** ** | ** ** | ** ** | **Stores Open  at Beginning of  Period** | ** ** | **Stores Opened  During Period** | ** ** | **Stores Closed  During Period** | ** ** | **Stores Open at  End of Period** | ** ** | **Total Square  Footage** | ** ** |
|------------------------|------------|------------|------------|---------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------|------------|
| FY2002                 |       |       | 197        |                                                    |       |                                       | 10         |                                       |       |                                                  | 0          |                           |       |   | 207 |   |   |   | 478,000 |   |   |
| FY2003                 |       |       | 207        |                                                    |       |                                       | 22         |                                       |       |                                                  | 2          |                           |       |   | 227 |   |   |   | 514,000 |   |   |
| FY2004                 |       |       | 227        |                                                    |       |                                       | 31         |                                       |       |                                                  | 4          |                           |       |   | 254 |   |   |   | 596,000 |   |   |
| FY2005                 |       |       | 254        |                                                    |       |                                       | 17         |                                       |       |                                                  | 4          |                           |       |   | 267 |   |   |   | 614,000 |   |   |
| FY2006.                |       |       | 267        |                                                    |       |                                       | 17         |                                       |       |                                                  | 7          |                           |       |   | 277 |   |   |   | 600,000 |   |   |

 

All 16 Cache Luxe storeswere opened in fiscal 2006.

***New Store Development***

During fiscal 2006, we opened 17 Cache stores andclosed seven Cache stores. During fiscal 2006, we closed 37 Lillie Rubin stores.During the second fiscal quarter of 2006, we purchased five leases fromApril Cornell and converted these five locations to Cache stores. We alsoconverted one of our Lillie Rubin stores to a Cache store. During fiscal 2006,we closed seven Cache stores as part of our ongoing efforts to eliminate underperforming stores. In fiscal 2007, we intend to open approximately 20 new Cachestores.

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In connection with the introduction of our Cache Luxeconcept in the third fiscal quarter of 2006, we converted 16 Lillie Rubinlocations to Cache Luxe stores and combined three Lillie Rubin locations withadjacent Cache stores allowing us to include Cache Luxe merchandise in thesethree expanded Cache stores. Almost all of our Cache Luxe stores are in mallsthat contain a Cache store. We do not expect to open any new Cache Luxe storesin fiscal 2007.

We continually review potential new locations forstores. We locate our new stores primarily in upscale shopping malls. Whenselecting a new mall site, we target high traffic locations with suitabledemographics and favorable lease economics. When evaluating a new malllocation, we also look at the principal and anchor stores in the mall, locationof our store within the mall and other specialty stores located in the mall.

We currently operate fivestreet locations and two outlet stores. We believe that street locations andoutlet stores can enhance our potential store base. We plan to expand ouropenings of street locations and outlet stores.

**Marketing andPromotion**

We use a variety of media to promote our brand andincrease sales, consisting primarily of advertisements in magazines such as *Cosmopolitan, Elle, People* and *Vogue*. In addition, during the thirdfiscal quarter of 2006 we began broadcast and cable television advertising. Wehave increased our advertising and marketing expenditures as a percentage ofnet sales, as we believe this will help us increase our future sales.

Over the last year, we have taken several steps toimprove our marketing initiatives in an effort to enhance our brandrecognition. In July 2006, we retained a leading consultant to spearheadour new marketing effort, including direct marketing, print and televisionadvertising and the introduction of a customer loyalty program in 2007. Tosupport this new marketing effort, we plan on increasing our marketing expensesas a percentage of our net sales. Additionally, in 2006, we introduced anupgraded POS system, which, among other things, is expected to allow us tolaunch a customer loyalty program in the first half of fiscal 2007. We believethis loyalty program will significantly improve our ability to leverage ourcustomer database, which contains more than 1.5 million names. We believethat a customer loyalty program could help us achieve higher comparable storesales and improve our margins.

Our brand is also supported by visual merchandising,which consists of window displays, front table layouts and various in-storepromotions. Visual merchandising is an important component of our marketing andpromotion strategy since our mall locations provide us with significant foottraffic. We make decisions regarding store displays and signage at thecorporate level, ensuring a consistent appearance throughout all our stores. Inaddition, we encourage store management to become involved in communityaffairs, such as participating in local charity fashion shows, to expand ourbrand 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 scheduleprivate fittings of merchandise at any Cache store. Over the past three years,web site sales have increased from approximately $1.9 million infiscal 2004 to approximately $3.0 million in fiscal 2006.

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**Competition**

The market forwomen’s sportswear, dresses and accessories is highly competitive. We competeprimarily with specialty retailers of women’s apparel and department storeslocated in the same mall or a nearby location. We believe our target customerschoose to purchase apparel based on the following factors:

·       Styleand fashion;

·       Fitand comfort;

·       Customerservice;

·       Shoppingconvenience and environment; and

·       Value.

**Information Systems**

We have historicallyinvested in information systems to improve sales, gain efficiencies and reduceoperating costs. Our information systems integrate all major aspects of ourbusiness, including sales, finance, distribution, purchasing, inventory controland merchandise planning. Our stores utilize a POS system with price look-upcapabilities for both inventory and sales transactions. The Company completedthe rollout of a new upgraded POS system to its stores. We also installed awide area network as part of this upgrade, which allows us to add functionalityto our POS system including the ability to process debit card transactions atlower rates, centralize credit authorizations, enhanced labor scheduling,centralize our customer database, introduce our customer loyalty program, speedup customer transaction time and analyze real-time sales data. In addition, webegan to sell gift cards and use merchandise credit cards during the secondhalf of 2006, replacing paper-based gift certificates and merchandisecredits.

**Trademarks andService Marks**

We are the owner in theUnited States of the “Cache” trademark and service marks. The marks areregistered with the United States Patent and Trademark Office. Each federalregistration is renewable indefinitely if the mark is still in use at the timeof renewal. Our rights to the “Cache” mark are a significant part of ourbusiness. Accordingly, we intend to maintain this mark and the related registration.We are currently unaware of any material claims of infringement or otherchallenges to our right to use our marks in the United States.

**Employees**

As of December 30,2006, we had approximately 2,860 employees, of whom approximately 1,230 werefull-time employees and approximately 1,630 were part-time employees. As of December 30,2006, we had approximately 2,720 store personnel and approximately 140non-store personnel. None of these employees are represented by a labor union.We consider our employee relations to be satisfactory.

**AvailableInformation**

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

Our Code of BusinessConduct and Ethics, and Board of Directors’ Committee Charters are alsoavailable on our website, under “Corporate Governance”.

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**ITEM 1A.**        RISKFACTORS

**Risks Related toOur Business**

**Our growth willdepend on our ability to successfully open and operate new stores. This maystrain our ability to manage our business.**

Our growth strategydepends 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 abilityto:

·       Identifysuitable markets and sites for store locations;

·       Negotiateacceptable lease terms;

·       Hire,train and retain competent store personnel;

·       Maintaina proportion of new stores to mature stores that does not harm existing salesor profitability;

·       Fostercurrent relationships and develop new relationships with vendors that are capableof supplying an increasing volume of merchandise;

·       Manageinventory effectively to meet the needs of new and existing stores on a timelybasis; and

·       Expandour infrastructure to accommodate growth.

In fiscal 2004, we opened 31 new Cache stores and infiscal 2005 we opened 17 new Cache stores. In fiscal 2006, we opened 17 Cachestores. In addition, during the third fiscal quarter of fiscal 2006, weconverted 16 Lillie Rubin locations to Cache Luxe stores. In fiscal 2007, weintend to open approximately 20 new Cache stores. We intend to continue to opena significant number of new stores in future years and to remodel many of ourexisting stores as their leases come up for renewal. Our proposed expansionwill place demands on our operational, managerial and administrative resources.These increased demands could have a material adverse effect on our ability tomanage our business. As we open more stores, our resources may come undergreater strain and may prove to be inadequate. If we are unable to open newstores or remodel our existing stores as planned, or if our new stores areunsuccessful, 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 openedstores may not be commercially successful, possibly resulting in their closureat a significant cost to us or a material adverse effect on our financialcondition or results of operations.

**Our expansion intonew markets could adversely affect our financial condition and results ofoperations.**

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

**Our new Cache Luxeconcept may not be successful, which could adversely affect our financialcondition and results of operations and divert management’s time and attentionfrom our core Cache store business.**

In the third fiscal quarter of 2006, we opened 16Cache Luxe stores. Almost all of our Cache Luxe stores are located in mallsthat also contain a Cache store. As a new concept, Cache Luxe may not besuccessful. It may detract from our existing Cache brand and/or result inreduced sales at Cache stores that are located in the same mall as a Cache Luxestore. The continued implementation and expansion of the 

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Cache Luxe concept coulddivert our management’s time and resources from our core Cache store business.If the results of operations of our Cache Luxe stores are not significantlybetter than the Lillie Rubin stores they replaced, there could be a materialadverse effect on our business, financial condition and results of operations.

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

All but a few of our existing stores are located inshopping malls. Sales at these stores are derived in large part from the volumeof consumer traffic in these malls. Our stores benefit from the ability ofmalls and their other tenants to generate traffic. We cannot control thedevelopment of new shopping malls, the availability or cost of appropriatelocations within existing or new shopping malls, or the continued popularity ofmalls as shopping destinations. A significant decrease in shopping mall trafficwould have a material adverse effect on our results of operations.

**Fluctuations incomparable store sales and quarterly results of operations could cause theprice of our common stock to decline substantially.**

Our quarterlyresults of operations for our individual stores have fluctuated in the past andwill continue to fluctuate in the future. Since the beginning of fiscal 2004,our quarterly comparable sales at Cache stores have ranged from an increase of12% to a decrease of 1%. We cannot assure you that we will be able to increasecomparable store sales in the future over any given period. Our comparablestore sales and quarterly results of operations are affected by a variety offactors, including:

·       Fashiontrends;

·       Calendarshifts of holiday or seasonal periods;

·       Theeffectiveness of our inventory management;

·       Changesin our merchandise mix;

·       Thetiming of promotional events;

·       Weatherconditions;

·       Changesin general economic conditions and consumer spending patterns; and

·       Actionsof competitors or mall anchor tenants.

If our future comparable store sales or our quarterlyfinancial results fail to meet market expectations, then the market price ofour common stock could decline substantially.

**Our success dependsin part on the efforts of our management team.**

Our success in implementing our business and growthstrategies depends on the abilities and experience of our management team. Ifwe were to lose the services of one or more members of this team, and inparticular the services of Brian Woolf, our Chief Executive Officer, we may beunable to find a suitable replacement on a timely basis. This in turn couldadversely affect our business, financial condition and results of operations.

**We rely on arelatively small number of domestic vendors, and our success depends onmaintaining good relationships with these vendors to source our products.**

In fiscal 2006, we purchased approximately 44% of ourmerchandise from five vendors, with approximately 27% being purchased from onevendor. The terms of our relationships with our vendors generally are notcontractual 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 alteredthe terms of our relationship, we may be 

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unable to obtainmerchandise in a timely manner, in the desired styles, fabrics or colors, or atthe prices and volumes we wish to purchase. This could hurt our ability torespond to changing fashion trends and thus our sales and profitability. Wehave been reducing the number of vendors with which we do business andanticipate continuing this process. As we continue to do so, the risksassociated with a vendor ceasing to sell to us may increase. In addition, anincrease in our direct-sourcing of merchandise from international vendorscould cause our existing domestic vendors to reduce or eliminate their sales tous.

**Our manufacturersmay be unable to manufacture and deliver products in a timely manner or meetour quality standards, which could result in lost sales, cancellation chargesor excessive markdowns.**

We purchase apparel and accessories from importers anddirectly from third-party manufacturers. Similar to most other specialtyretailers, we have short selling seasons for much of our inventory. Factorsoutside of our control, such as manufacturing or shipping delays or qualityproblems, could disrupt merchandise deliveries and result in lost sales,cancellation charges or excessive markdowns, all of which could have a materialadverse effect on our financial condition and results of operations.

**Substantially allof our merchandise is produced in foreign facilities. This subjects us to therisks of international trade and other risks generally associated with doingbusiness in foreign markets.**

Substantially all of our vendors utilize overseasproduction facilities. The failure of foreign manufacturers to ship products tous in a timely manner could result in our stores lacking needed inventory. Anyevent causing a disruption of imports, including financial or politicalinstability, currency fluctuations, terrorism or heightened security, traderestrictions in the form of tariffs or quotas or both, political or militaryconflict involving the United States, or the migration of manufacturers, couldnegatively affect our business, financial condition or results of operations.These adverse impacts may include an increased cost to us, reductions in thesupply of merchandise or delays in our manufacturing lead time.

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

We do not control our manufacturers or their labor andother business practices. If one of our manufacturers violates labor or otherlaws or implements labor or other business practices that are generallyregarded as unethical in the United States, the shipment of finished productsto us could be interrupted, orders could be canceled, relationships could beterminated and our reputation could be damaged. Any of these events could havea material adverse effect on our revenues and, consequently, our results ofoperations.

**Our plans toincrease our direct-sourcing of products sold in our stores frominternational vendors may not be successful, which could result in additionalcosts and manufacturing delays. To the extent that we increase direct-sourcing,interruptions in our direct-sourcing operations could result in lostsales and increased costs.**

We have limited experience with direct-sourcingfrom international vendors that can supply us merchandise at lower costs. Infiscal 2006, we directly sourced approximately 5% of our merchandise. By thesecond half of fiscal 2007, we expect to increase direct-sourcing toapproximately 20 to 25% of our merchandise, and we believe that we can increasethe percentage of our merchandise that is directly-sourced toapproximately 40 to 50% in the long-term. We cannot assure you that direct-sourcingwill result in the cost savings we anticipate. Furthermore, we may not be ableto effectively cultivate and manage these direct relationships withmanufacturers, which could result in additional costs and manufacturing delays.

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To the extent that we are successful in significantlyincreasing direct-sourcing, we will be further subject to risksassociated with doing business in foreign markets. Interruptions in our direct-sourcingoperations could disrupt manufacturing, shipment or receipt of our merchandise,which could result in lost sales and increase our costs. Increasing our direct-sourcingcould adversely affect our relationships with our existing domestic vendors.

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

The efficient operation of our business depends on theability of our vendors to ship merchandise through third party carriers, suchas United Parcel Service, directly to our individual stores. These carrierstypically employ personnel represented by labor unions and have experiencedlabor difficulties in the past. Due to our reliance on these parties for ourshipments, interruptions in the ability of our vendors to ship our merchandiseor the ability of carriers to fulfill the distribution of merchandise to ourstores could adversely affect our business, financial condition and results ofoperations. The increase in fuel prices may also increase our shipping costs, whichcould adversely affect our business, financial condition and results ofoperations.

**The raw materialsused to manufacture our products and our distribution and labor costs aresubject to availability constraints and price volatility, which could result inincreased costs.**

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

**Because our Cachebrand is associated with all of our merchandise, our success depends heavily onthe value associated with our brand. If the value associated with our brandwere to diminish, our sales could decrease, causing losses or lower profits.**

Our success depends on our Cache brand and its value.The Cache name is integral to our business, as well as to the implementation ofour new Cache Luxe concept. The Cache brand could be adversely affected if ourpublic image or reputation were to be tarnished, which could result in amaterial adverse effect on our business.

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

We believe that our trademarks and service marks areimportant to our success and our competitive position due to their namerecognition with our customers. There can be no assurance that the actions wehave taken to establish and protect our trademarks and service marks will beadequate to prevent imitation of our products by others or to prevent othersfrom seeking to block sales of our products as a violation of the trademarks,service marks and proprietary rights of others. Also, others may assert rightsin, or ownership of, our trademarks and other proprietary rights, and we may beunable to successfully resolve those types of conflicts to our satisfaction.

**Any materialdisruption of our information systems could disrupt our business and reduce oursales.**

Our information systems integrate all major aspects ofour business, including sales, finance, distribution, purchasing, inventorycontrol and merchandise planning. We have completed the rollout of a new upgradedPOS system to all of our stores and installation of a wide area network thatallows us to add functionality to our POS system, including the ability toprocess debit card transactions at lower rates, centralize creditauthorizations, enhance labor scheduling, centralize our customer database,introduce our 

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customer loyalty program,speed up customer transaction time and analyze real-time sales data. We areincreasingly dependent on these information systems for the efficient operationof our business, including our web site, and to facilitate the enhancement ofour marketing efforts.

We may experience operational problems with ourinformation systems as a result of system failures, viruses, computer “hackers”or other causes. Any material disruption or slowdown of our systems, includinga disruption or slowdown caused by any failure on our part to successfullymaintain or perform additional upgrades to our systems, could cause informationto be lost or delay our ability to process and make use of that information inour business, which may lead to declines in sales. In addition, if futurechanges in technology cause our information systems to become obsolete, or ifour current information systems prove to be inadequate to support our growth,we could lose customers.

**Our marketingefforts rely upon the effective use of customer information. Restrictions onthe availability or use of customer information could adversely affect ourmarketing program, which could result in lost sales and a decrease in profits.**

We use our customer database to market to ourcustomers. We intend to expand the use of our customer database when weimplement our customer loyalty program, which is expected to occur in the firsthalf of fiscal 2007. Any limitations imposed on the use of such consumer data,whether imposed by federal or state governments or business partners, couldhave an adverse effect on our future marketing activity. In addition, to theextent our security procedures and protection of customer information prove to beinsufficient or inadequate, we may become subject to litigation, which couldexpose us to liability and cause damage to our reputation or brand.

**We are subject tonumerous regulations that could affect our operations. Changes in suchregulations could impact the operation of our business through delayedshipments 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 andzoning and occupancy ordinances, that regulate retailers generally and/orgovern the importation, promotion and sale of merchandise, the use ofproprietary credit cards and the operation of retail stores and warehousefacilities. Although we undertake to monitor changes in these laws, if theselaws change without our knowledge, or are violated by our employees, importers,buying agents, manufacturers or distributors, we could experience delays inshipments and receipt of goods or be subject to fines or other penalties underthe controlling regulations, any of which could have a material adverse effecton our business, financial condition and results of operations.

**We reported amaterial weakness in our internal control over financial reporting and, if we areunable to improve our internal controls, our financial results may not beaccurately reported.**

In connection with thepreparation of our Annual Report on Form 10-K for fiscal 2006, management identified a material weakness inthe operations of the Company’s internal control. The material weakness relatedto the completeness of the review and inadequate consideration in theapplication of certain technical interpretations of generally acceptedaccounting principles, evidenced by adjustments in the following areas;(1) forfeiture rates associated with stock based compensation andclassification of excess tax benefits, associated with the exercise of stockoptions within the statement of cash flows, in accordance with Statement ofFinancial Accounting Standards No. 123(R) “*Share-BasedPayments*”, (2) completeness of the Company’s analysis of theaccounting for income taxes, and (3) documentation of an analysis inregard to fixed asset impairment, which resulted in the Company recording anadjustment relating to fixed asset impairment for one store that will close in2007. As a result of this material weakness, we concluded that ourdisclosure controls and procedures were not effective as of December 30,2006.

We continue our efforts toremediate this material weakness through ongoing process improvements and theimplementation of enhanced policies, engaging third-party tax, financialand financial system 

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consultants,improving quality control standards and providing additional training andeducation to our financial reporting and accounting personnel. Accordingly,this material weakness is not yet fully remediated. No material weaknesses willbe considered remediated until the remedial procedures have operated for anappropriate period, have been tested, and management has concluded that theyare operating effectively. We cannot be certain that these measures will ensurethat we implement and maintain adequate controls over our financial reportingprocesses and that we will remediate the material weakness. Any failure toimplement required new or improved controls or to remediate the materialweakness, or difficulties encountered in their implementation, could prevent usfrom accurately reporting our financial results, result in materialmisstatements in our financial statements or cause us to fail to meet ourreporting obligations. In addition, we cannot assure you that we will not inthe future identify further material weaknesses in our internal control overfinancial reporting that we have not discovered to date, which may impact thereliability of our financial reporting and financial statements. Insufficientinternal controls could also cause investors to lose confidence in our reportedfinancial information.

**Risks Related toOur Industry**

**Our success dependson our ability to respond rapidly to ever-changing fashion trends and customerdemands.**

Customer tastes and fashion trends change rapidly. Oursuccess depends in large part on our ability to anticipate the fashion tastesof 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 thisoccurs, we may be forced to rely on additional markdowns or promotional salesto dispose of excess or slow moving inventory. This could also cause us to missopportunities. Both of the foregoing could have a material adverse effect onour business, financial condition and results of operations. In addition, if wemisjudge fashion tastes and our customers come to believe that we are no longerable to offer fashions that appeal to them, our brand image may suffer.

**We may be adverselyimpacted at any time by a significant number of competitors.**

The women’s apparel market is highly competitive, fragmentedand characterized by low barriers to entry. We compete against a diverse groupof retailers, including traditional department stores, national and localspecialty retail stores, internet-based retailers and mail orderretailers. Many of our competitors, particularly traditional department storesand national specialty retail stores, are larger and have greater resources toexpend on marketing and advertising campaigns. In addition, many of thesecompetitors are already established in markets that we have not yet penetratedand have greater name recognition in general. We cannot assure you that we willcontinue to be successful in competing against existing or future competitors.Our expansion into markets served by our competitors or entry of new competitorsor expansion of existing competitors into our markets could have a materialadverse effect on our business, financial condition and results of operations.

**Our sales fluctuate on a seasonal basis and aresensitive to economic conditions and consumer spending patterns, leaving ouroperating results particularly susceptible to changes in shopping patterns.**

Our net sales and net income are generally highesteach year during our fourth fiscal quarter (October, November andDecember) and lowest in our third fiscal quarter (July, August andSeptember). Sales during any period cannot be used as an accurate indicator ofour annual results. Any significant decrease in sales during the fourth quarterin a given year would hurt our profitability.

Our business is also sensitive to changes in overalleconomic conditions and consumer spending patterns. Our growth, sales andprofitability may be adversely affected by the timing of holidays, unfavorablelocal, regional, national or international economic and other conditions,including rising 

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energy prices,climatological events such as hurricanes, or the effects of war, terrorism orthe threat of either of these events.

**If new legislationrestricting the importation or increasing the cost of textiles and apparel producedabroad is enacted, our business could be adversely affected.**

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

The quota systemestablished by the World Trade Organization (“WTO”) was eliminated on December 31,2004. We cannot be certain of the full impact that this elimination will haveon international trade in general and the apparel industry in particular. Wealso cannot be certain of the impact of quota elimination on our business,including increased competition that could result from the importation of anincreasing amount of lower priced apparel into the United States. Notwithstandingquota elimination, China’s accession agreement for membership in the WTOprovides that WTO member countries, including the United States, may re-imposesafeguard quotas on specific products. In May 2005, the United Statesimposed unilateral quotas on several product categories, limiting growth inimports of these categories to 7.5% a year. The safeguard quotas in severalcategories have been extended by the United States government and will likelycontinue through 2008. These limitations apply to a limited number of productsimported by us from China. We are unable to assess the potential for additionalaction by the United States government with respect to these or other productcategories in the event that the quantity of imported apparel significantlydisrupts the apparel market in the United States. Additional action by theUnited States in response to a disruption in its apparel markets could limitour ability to import apparel and increase our costs.

**Risks Related toOur Common Stock**

**Our share price hasfluctuated significantly and could continue to fluctuate significantly.**

Between January 1,2005 and December 30, 2006, the market price of our common stock hasranged from $10.90 to $26.32 per share. The stock market has, from time totime, experienced extreme price and volume fluctuations. The market price forour common stock may change significantly in response to various factors,including:

·       Periodicvariations in the actual or anticipated financial results of our business orother companies in the retail industry;

·       Ashortfall in net sales or net income from that expected in securities analysts’estimates or from that expected by investors;

·       Thetiming of new store openings and net sales contributed by new stores;

·       Materialannouncements by us or our competitors;

·       Publicsales of a substantial number of common shares and

·       Adversechanges in general market conditions or economic trends.

In the past, companies that have experiencedvolatility in the market price of their shares have been the subject ofsecurities class action litigation. If we become involved in a securities classaction litigation in the future, it could result in substantial costs anddiversion of our management’s attention and resources, thus harming ourbusiness.

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

Ourarticles of incorporation and by-laws contain anti-takeover provisions,including those listed below, that could make it more difficult for a thirdparty to acquire control of us, even if that change in control would bebeneficial to our stockholders:

·       ourboard of directors has the authority to issue common stock and preferred stockand to determine the price, rights and preferences of any new series ofpreferred stock without further stockholder approval; and

·       thereare limitations on who can call special meetings of stockholders.

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

**Item 1B:**      UnresolvedStaff Comments

**None.**

**ITEM2.**                PROPERTIES

All but a few of our 296stores are located in shopping malls. The substantial majority of our storescontain between 1,500 and 2,500 square feet of space, with the typical storeaveraging 2,000 square feet. All of our stores are in leased facilities, and wetypically negotiate our rental agreements based on our portfolio of storelocations with a particular landlord rather than on an individual basis. Rentalterms usually include a fixed minimum rent plus a percentage rent based onsales in excess of a specified amount. In addition, we generally are requiredto pay a charge for common area maintenance, utility consumption, promotionalactivities and/or advertising, insurance and real estate taxes. Many leases containfixed escalation clauses. Most leases contain leasehold improvementreimbursements from landlords and/or rent holidays. In recognizing landlordincentives and minimum rent expenses, the Company amortizes the charges on astraight line basis over the lease term.

Ourleases expire at various dates through 2019. In most instances, we have renewaloptions at increased rents. The following table indicates the periods duringwhich our leases expire.

| **Fiscal Years** | ** ** | ** ** | ** ** | **Cache** | ** ** | **Cache Luxe** | ** ** | **Totals** | ** ** |
|-----------------------|------------|------------|------------|-----------|------------|---------------------|------------|------------|------------|
| Present-2009          |       |       | 52         |      |       |                | 2          |       |       |   | 54 |   |   |
| 2010-2012             |       |       | 57         |      |       |                | 7          |       |       |   | 64 |   |   |
| 2013-2015             |       |       | 112        |      |       |                | 4          |       |       |   | 116 |   |   |
| 2016-2019             |       |       | 56         |      |       |                | 3          |       |       |   | 59 |   |   |
| Totals                |       |       | 277        |      |       |                | 16         |       |       |   | 293 |   |   |

 

Our corporate office is a20,000 square foot facility located at 1440 Broadway in New York City. We leasethis space under a 10-year lease through 2013 at a rate of approximately$543,000 per year.

We contract for space in awarehouse in New York on an as-needed basis to serve as a staging area for newstore inventories and fixtures.

**ITEM3.**                LEGAL PROCEEDINGS

We are party to variouslawsuits arising in the ordinary course of our business. Management does notbelieve it is reasonably possible that resolution of these matters will resultin a material loss.

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**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

Cache, Inc.held its annual meeting of shareholders at its headquarters in New York, NewYork on November 8, 2006. Of the 15,791,003 shares outstanding as of therecord date, 14,585,187 shares were represented by proxy at the meeting.Proxies were solicited by Cache pursuant to Regulation 14A under the SecuritiesExchange Act of 1934, as amended. At the meeting, Cache’s shareholders voted onthe following matters:

(1)         Proposalto elect five directors to hold office for a one-year term and until theirsuccessors are elected and qualified.

| ** **         | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|--------------------|------------|------------|------------|--------------|------------|
| Andrew M. Saul     |       | 13,373,775 |       | 1,211,412    |       |
| Brian Woolf        |       | 14,115,469 |       | 469,718      |       |
| Gene G. Gage       |       | 13,504,825 |       | 1,080,362    |       |
| Arthur S. Mintz    |       | 14,347,962 |       | 237,225      |       |
| Morton J. Schrader |       | 14,224,718 |       | 360,469      |       |

 

(2)         Proposalto ratify the appointment of Deloitte and Touche LLP as the Company’sindependent auditors for the fiscal year ending December 30, 2006.

| **For**    | ** ** | **Against** | ** ** | **Abstain** |
|------------|------------|-------------|------------|-------------|
| 14,574,963 |       | 6,848       |       | 3,376       |

 

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**PART II**

**ITEM 5.**                MARKETFOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

a.                  Theprincipal market in which the Company’s Common Stock is being traded is theNASDAQ National Market System. The stock symbol is CACH. The price range of thehigh and low bid information for the Company’s Common Stock during 2005 and2006, by fiscal quarters, are as follows:

| **Fiscal Period** | ** ** | ** ** | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2006** | ** ** |
|------------------------|------------|------------|------------|----------------------|------------|----------------------|------------|
| ** **             | ** ** | **High**   | ** ** | **Low**              | ** ** | **High**             | ** ** | **Low** | ** ** |
| First Fiscal  Quarter  |       | $          | 18.05      |                 | $          | 13.33                |       | $ | 19.77 |   | $ | 15.87 |   |
| Second Fiscal  Quarter |       | $          | 17.69      |                 | $          | 10.90                |       | $ | 20.65 |   | $ | 15.71 |   |
| Third Fiscal  Quarter  |       | $          | 18.52      |                 | $          | 13.71                |       | $ | 19.80 |   | $ | 15.00 |   |
| Fourth Fiscal Quarter  |       | $          | 19.09      |                 | $          | 14.47                |       | $ | 26.32 |   | $ | 17.23 |   |

 

Suchover-the-counter market quotations reflect inter-dealer prices, without retail mark-up,markdown or commission and may not necessarily represent actual transactions.

b.                 As of February 28,2007 there were approximately 300 registered holders of record of the Company’sCommon Stock.

c.                  The Company hasnever paid cash dividends on its common stock. Payment of dividends is withinthe discretion of the Company’s Board of Directors. On June 18, 2004, theCompany paid a 3 for 2 stock dividend to holders of record.

d.                 Thefollowing table summarizes our equity compensation plans as of December 30,2006:

| **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     |       |       | 1,139,628  |                                                                                                             |       |                                                                             | $          | 12.26                                                                                                                                                                                                         |       |   |   | 253,407 |   |   |
| Equity  compensation plans not approved by security holders |       |       | 0          |                                                                                                             |       |                                                                             | 0          |                                                                                                                                                                                                          |       |   | 0 |   |   |
| Total                                                       |       |       | 1,139,628  |                                                                                                             |       |                                                                             | $          | 12.26                                                                                                                                                                                                         |       |   |   | 253,407 |   |   |

 

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**ITEM 6.**             SELECTEDFINANCIAL DATA

Thefollowing Selected Consolidated Financial Data should be read in conjunctionwith the Company’s Consolidated Financial Statements and Notes thereto.

| ** **                            | ** ** | **52 WEEKS ENDED**                                                               | ** ** | **53 WEEKS  ENDED** | ** ** | **52 WEEKS ENDED** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **DEC. 28,**                                                                          | ** ** | **DEC. 27,**        | ** ** | **JAN. 1,**             | ** ** | **DEC. 31,** | ** ** | **DEC 30,** | ** ** |
| ** **                            | ** ** | **2002**                                                                                   | ** ** | **2003**                 | ** ** | **2005**                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                            | ** ** | **(in thousands, except per share and operating data)** | ** ** |
| STATEMENT OF INCOME  DATA:            |       |                                                                                       |       |                     |       |                         |       |   |   |   |   |   |   |
| Net sales                             |       | $                                                                                          | 200,315    |                     | $          | 216,256                      |       |   | $ | 247,300 |   |   | $ | 266,345 |   | $ | 278,992 | (5) |
| Cost of sales                         |       | 116,490                                                                                    |       | 120,731                  |       |                         | 135,745    |   |   | 144,984 |   | 145,886 |   |
| Gross profit                          |       | 83,825                                                                                     |       | 95,525                   |       |                         | 111,555    |   |   | 121,361 |   | 133,106 |   |
| Store operating expenses              |       | 57,322                                                                                     |       | 63,546                   |       |                         | 76,466     |   |   | 85,529 |   | 94,556 |   |
| General and administrative expenses   |       | 12,190                                                                                     |       | 14,074                   |       |                         | 14,221     |   |   | 15,824 |   | 21,246 |   |
| Lillie Rubin exit costs               |       | —                                                                                     |       | —                   |       |                         | —     |   |   | — |   | 5,677 | (6) |
| Operating income                      |       | 14,313                                                                                     |       | 17,905                   |       |                         | 20,868     |   |   | 20,008 |   | 11,627 |   |
| Other income, (net)(1)                |       | 260                                                                                        |       | 273                      |       |                         | 459        |   |   | 1,072 |   | 2,523 |   |
| Income before income taxes            |       | 14,573                                                                                     |       | 18,178                   |       |                         | 21,327     |   |   | 21,080 |   | 14,150 |   |
| Income tax provision                  |       | 5,632                                                                                      |       | 7,089                    |       |                         | 8,030      |   |   | 7,675 |   | 5,879 |   |
| Net income                            |       | $                                                                                          | 8,941      |                     | $          | 11,089                       |       |   | $ | 13,297 |   |   | $ | 13,405 |   | $ | 8,271 |   |
| Earnings per share:                   |       |                                                                                       |       |                     |       |                         |       |   |   |   |   |   |   |
| Basic earnings per share              |       | $                                                                                          | 0.66       |                     | $          | 0.78                         |       |   | $ | 0.85 |   |   | $ | 0.85 |   | $ | 0.52 |   |
| Diluted earnings per share            |       | $                                                                                          | 0.62       |                     | $          | 0.75                         |       |   | $ | 0.83 |   |   | $ | 0.83 |   | $ | 0.51 |   |
| Weighted average shares  outstanding: |       |                                                                                       |       |                     |       |                         |       |   |   |   |   |   |   |
| Basic                                 |       | 13,650                                                                                     |       | 14,256                   |       |                         | 15,589     |   |   | 15,726 |   | 15,849 |   |
| Diluted(2)                            |       | 14,448                                                                                     |       | 14,721                   |       |                         | 16,004     |   |   | 16,150 |   | 16,218 |   |
| Store data:                           |       |                                                                                       |       |                     |       |                         |       |   |   |   |   |   |   |
| Total number of stores  opened        |       |                                                                                       |       |                     |       |                         |       |   |   |   |   |   |   |
| At the end of period                  |       | 234                                                                                        |       | 255                      |       |                         | 291        |   |   | 306 |   | 296 |   |
| Cache/Cache Luxe                      |       | 207                                                                                        |       | 227                      |       |                         | 254        |   |   | 267 |   | 293 |   |
| Lillie Rubin                          |       | 27                                                                                         |       | 28                       |       |                         | 37         |   |   | 39 |   | 3 |   |
| Total average sales  per              |       |                                                                                       |       |                     |       |                         |       |   |   |   |   |   |   |
| square foot(3)                        |       | $                                                                                          | 438        |                     | $          | 450                          |       |   | $ | 461 |   |   | $ | 450 |   | $ | 463 |   |
| Cache/Cache Luxe                      |       | $                                                                                          | 450        |                     | $          | 456                          |       |   | $ | 462 |   |   | $ | 461 |   | $ | 467 |   |
| Lillie Rubin                          |       | $                                                                                          | 337        |                     | $          | 355                          |       |   | $ | 398 |   |   | $ | 320 |   | $ | 253 |   |
| Total comparable store                |       |                                                                                       |       |                     |       |                         |       |   |   |   |   |   |   |
| Sales increase(4)                     |       | 7%                                                                                         |       | 3%                       |       |                         | 5%         |   |   | 4% |   | 4% |   |
| Cache/Cache Luxe                      |       | 7%                                                                                         |       | 3%                       |       |                         | 4%         |   |   | 6% |   | 5% |   |
| Lillie Rubin                          |       | 5%                                                                                         |       | 6%                       |       |                         | 8%         |   |   | (10)% |   | (17)% |   |
| Total square footage                  |       | 478                                                                                        |       | 514                      |       |                         | 596        |   |   | 614 |   | 600 |   |

 

 

 

 

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| ** **                                     | ** ** | **DEC. 28,**                                                                          | ** ** | **DEC. 27,** | ** ** | **JAN. 1,** | ** ** | **DEC. 31,** | ** ** | **DEC. 30,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                     | ** ** | **2002**                                                                                   | ** ** | **2003**          | ** ** | **2005**         | ** ** | **2005**          | ** ** | **2006**          | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share and operating data)** | ** ** |
| STATEMENT OF BALANCE SHEET AND OTHER DATA:     |       |                                                                                       |       |              |       |             |       |              |       |              |       |
| Working capital                                |       | $                                                                                          | 26,654     |              | $          | 41,034           |       | $                 | 53,469     |              | $          | 63,786 |   | $ | 83,391 |   |
| Total assets                                   |       | $                                                                                          | 76,480     |              | $          | 104,067          |       | $                 | 132,028    |              | $          | 150,884 |   | $ | 159,186 |   |
| Total long-term debt                           |       | —                                                                                     |       | —            |       | —           |       | —            |       | —            |       |
| Stockholders’ equity                      |       | $                                                                                          | 45,292     |              | $          | 65,142           |       | $                 | 84,840     |              | $          | 98,996 |   | $ | 116,463 |   |
| Ratio of current assets to current liabilities |       | 2.07  : 1                                                                                  |       | 2.41  : 1         |       | 2.75 : 1         |       | 2.92:1            |       | 4.35:1            |       |
| Inventory turnover ratio                       |       | 5.28  : 1                                                                                  |       | 4.94  : 1         |       | 4.60 : 1         |       | 4.46:1            |       | 4.31:1            |       |
| Capital expenditures                           |       | $                                                                                          | 9,033      |              | $          | 15,628           |       | $                 | 21,753     |              | $          | 15,490 |   | $ | 12,250 |   |
| Depreciation and amortization                  |       | $                                                                                          | 5,519      |              | $          | 6,395            |       | $                 | 8,232      |              | $          | 9,779 |   | $ | 11,026 |   |
| Book value per share                           |       | $                                                                                          | 3.32       |              | $          | 4.35             |       | $                 | 5.42       |              | $          | 6.28 |   | $ | 7.16 |   |

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(1)           Other income generally consists ofinterest income.

(2)           Diluted weighted average shares for thefiscal years ended December 28, 2002, December 27, 2003, January 1,2005, December 31, 2005 and December 30, 2006 include 798,000,465,000, 415,000, 424,000, and 369,000 shares respectively, due to thepotential exercise of stock options that were outstanding and exercisableduring those years.

(3)           Average sales per square foot arecalculated by dividing net sales by the weighted average store square footageavailable.

(4)           Comparable store sales data is calculatedbased on the net sales of stores open at least 12 full months at the beginningof the period for which the data are presented.

(5)           Includes recognition of $2.5 millionof breakage income for previously issued gift cards and merchandise credits.

(6)           Includes a charge of $5.7 million forthe exit of the Lillie Rubin business.

**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**General**

We are a nationwide,mall-based specialty retailer of lifestyle sportswear and dresses targetingstyle-conscious women. Our merchandise offerings extend from eleganteveningwear to sophisticated casual and daytime sportswear, which encompasses avariety of tops, bottoms, dresses and accessories, all of which are sold underour Cache brand. We believe the appeal of our merchandise is enhanced throughthe intimate boutique-like environment we offer to our customers. Thisenvironment is achieved through a high level of customer service combined withour smaller store format, which averages approximately 2,000 square feet.

We target women betweenthe ages of 25 and 45 through our differentiated merchandising mix and excitingCache and Cache Luxe store environments. Our brand appeals to a woman who has ayouthful attitude, is self-confident and fashion-conscious, and requiresa missy fit. Our sportswear embodies a mix of lifestyle separates for both dayand evening. Our stores carry a diverse range of merchandise, which includesdresses for daytime and evening, and continues to be an important dressresource and destination for our target customers. Our accessories complementthe seasonal themes and palettes of our sportswear and dresses.

In May 2006, weannounced plans to introduce a new concept, Cache Luxe, and exit our LillieRubin business. During the third fiscal quarter of 2006, we converted 16 LillieRubin locations to Cache Luxe stores. In addition, we expanded three Cachestores by combining them into three adjacent Lillie Rubin stores and addedCache Luxe merchandise to these Cache stores. Our three remaining Lillie Rubinstore locations are expected to be closed by the end of the first fiscalquarter of 2007.

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Our Cache Luxe conceptprimarily focuses on our daytime and evening merchandise. This concept isexpected to broaden our customer base, enable us to offer a larger selection ofevening apparel and accessories at higher price points and allows us toleverage our marketing under a single Cache brand. In addition, Cache storeslocated in malls containing a Cache Luxe store have increased capacity to offeran expanded casual assortment. Almost all of our current Cache Luxe stores arein malls that also contain a Cache store.

For the fiscal year ended December 30,2006, sportswear accounted for 65.7%, dresses for 24.5% and accessories for9.8% of Cache’s net sales. Cache’s price points range from $60 to $300 forsportswear, $125 to $450 for dresses and $30 to $150 for accessories. Our newCache Luxe stores generally have higher price points than our Cache stores. Asof December 30, 2006, we operated 293 Cache and Cache Luxe stores,primarily situated in central locations in high traffic, upscale shoppingmalls, in 44 states, Puerto Rico and the U.S. Virgin Islands.

**Management Overview**

Fiscal 2006 represents theCompany’s sixteenth consecutive profitable year.

Fiscal 2006 marked a yearin which we positioned Cache to report sustained growth in sales andprofitability. During the Fall, with our merchandise assortments resonatingwith our core customers, and the exit of Lillie Rubin substantially complete,we began to implement marketing initiatives aimed at increasing customerloyalty and awareness of our Cache brand. We also extended Cache’s reach byappealing to a higher income consumer with the launch of Cache Luxe. Finally,we began to take advantage of sourcing opportunities that have already producedhigher gross margins for our Company. Nonetheless, we were disappointed in ourfourth quarter performance, as we did not experience the expected lift in salesduring late December. As a result, we were unable to offset our investment inmarketing.

In fiscal 2006, theCompany focused on its sourcing strategy after hiring an Executive VicePresident of Production and Sourcing in February 2006 to lead thisinitiative. The merchandising team had in the past also been responsible forsourcing. We believe that having a separate area, responsible for this integralprocess, will enhance consistent flow and quality of product.

The Company opened 17Cache stores in fiscal 2006 and closed seven Cache stores. Operating cash flowfunded all store openings. In fiscal 2007, we intend to open approximately 20Cache stores, also intended to be funded by operating cash flow. In fiscal2006, the Company remodeled 11 Cache stores, approximately 66% of the chain isnow in the new format.

In Fall 2006, the Companyintroduced an upgrade to its POS system for all locations. The upgraded system,which provides many productivity enhancements, also will allow the Company tolaunch a customer loyalty program in 2007, which will complement the Company’sdirect marketing initiatives.

We usea number of key indicators of financial condition and operating performance toevaluate the performance to evaluate the performance of our business, some ofwhich are forth in the following table:

| ** **                           | ** ** | **53 Weeks Ended**  | ** ** | **52 Weeks Ended**    | ** ** | **52 Weeks Ended**    | ** ** |
|--------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **January 1, 2005** | ** ** | **December 31, 2005** | ** ** | **December 30, 2006** | ** ** |
| **Operating  Results**               |       |                          |       |                            |       |                            |       |   |   |   |   |   |   |
| Total store  count, at end of period |       |                          | 291        |                            |       |                            | 306        |   |   |   | 296 |   |   |
| Net sales growth                     |       |                          | 14.3       | %                               |       |                            | 7.7        | % |   |   | 4.8 | % |   |
| Comparable store  sales growth       |       |                          | 5.0        | %                               |       |                            | 4.0        | % |   |   | 4.0 | % |   |
| Net sales per  square foot           |       |                          | $          | 461                             |       |                            |       | $ | 450 |   |   |   | $ | 463 |   |   |
| Total square footage (in  thousands) |       |                          | 596        |                            |       |                            | 614        |   |   |   | 600 |   |   |
|                                      |            |                               |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |  |

 

20

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*Net sales.*   Netsales consist of sales from comparable stores and non-comparable stores. Astore is not included in comparable store sales until the first day of thefiscal month following the twelfth full month of sales. Non-comparable storesales include sales generated at new stores prior to the period when they areconsidered comparable stores and sales generated from stores that we have sinceclosed.

*Shipping and handling.*   Amountsbilled to customers for shipping and handling fees are included in net sales atthe time of shipment. Costs incurred for shipping and handling are included incost of sales.

*Cost of sales.*   Costof sales includes the cost of merchandise, cost of freight from vendors, costsincurred for shipping and handling, payroll for our design, buying andmerchandising personnel and store occupancy costs. Store occupancy costsinclude rent, contingent rents, common area maintenance and real estate taxes.

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

*General and administrativeexpenses.**  *Generaland 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 levelexpenses. Corporate level expenses are primarily attributable to our corporateheadquarters in New York.

**Critical Accounting Policies and Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires the appropriate applicationof certain accounting policies, many of which requires us to make estimates andassumptions about future events and their impact on amounts reported in ourfinancial statements and related notes. Since future events and their impactcannot be determined with certainty, the actual results will inevitably differfrom our estimates. Such differences could be material to the financialstatements.

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

*Inventories.*   Ourinventories are valued at lower of cost or market using the retail inventorymethod. Under the retail inventory method (“RIM”), the valuation of inventoriesat cost and the resulting gross margins are calculated by applying a calculatedcost to retail ratio to the retail value of inventories. RIM is an averagingmethod that had been widely used in the retail industry due to its practicality.Additionally, it is recognized that the use of RIM will result in valuinginventories at the lower of cost or market if markdowns are currently taken asa reduction of the retail value of inventories. Inherent in the RIM calculationare certain significant management judgments including, among others,merchandise markon, markups, and markdowns, which significantly impact theending inventory valuation at cost as well as the resulting gross margins. Wetake markdowns due to changes in fashion and style, based on the followingfactors: (i) supply on hand, (ii) historical experience and (iii) ourexpectations as to future sales. We do not anticipate any significant change inour markdown strategy that would cause a significant change in our earnings. Webelieve that our RIM provides an inventory valuation, which results in acarrying value at the lower of cost or market.

*Finite-long lived assets.*   TheCompany’s judgment regarding the existence of impairment indicators is based onmarket and operational performance. We assess the impairment of long-livedassets, primarily fixed assets, whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Factors we considerimportant which could trigger an impairment review include the following:

·       significantchanges in the manner of our use of assets or the strategy for our overallbusiness;

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·       significantnegative industry or economic trends;

·       storeclosings; or

·       underperformingbusiness trends.

In the evaluation of thefair value and future benefits of finite long-lived assets, we perform ananalysis by store of the anticipated undiscounted future net cash flows of therelated finite long-lived assets. If the carrying value of the related assetexceeds the undiscounted cash flows, the carrying value is reduced to its fairvalue. Various factors including future sales growth and profit margins areincluded in this analysis. To the extent these future projections or strategieschange, the conclusion regarding impairment may differ from the currentestimates. No impairment charges were incurred in fiscal 2004 and 2005,respectively. In fiscal 2006, the Company recorded an impairment charge of$101,000, related to a one store, which the Company expects to close in early2007.

*SelfInsurance.  *We are self-insured for losses andliabilities related primarily to employee health and welfare claims. Losses areaccrued based upon our estimates of the aggregate liability for claims incurredusing certain actuarial assumptions followed in the insurance industry andbased on Company experience. Adjustments to earnings resulting from changes inhistorical loss trends have been insignificant for fiscal 2004, 2005 and 2006.Further, we do not anticipate any significant change in loss trends,settlements or other costs that would cause a significant change in ourearnings.

*Gift Cards, GiftCertificates and Credits.**  *The Company sells gift cards and gift certificates (“GiftCards”) and issues credits to its customers when merchandise is returned. TheCompany recognizes sales from Gift Cards when they are redeemed by the customerand income when the likelihood of the Gift Card being redeemed by the customeris remote (Gift Card breakage) and the Company determines that it does not havea legal obligation to remit the value of unredeemed Gift Cards to the relevantjurisdiction as abandoned property. The Company determines Gift Card breakageincome based upon historical redemption patterns. Breakage income representsthe balance of Gift Cards, for which the Company believes the likelihood ofredemption by the customer is remote. At that time, the Company will recognizebreakage income for those Gift Cards.

During the third quarterof fiscal 2006, the Company formed a new subsidiary to handle all Gift Cardsales and maintain the liability related to Gift Cards. As a result oftransferring all existing obligations to the newly formed subsidiary, theCompany recognized $2.4 million of breakage income, within net sales, in thethird quarter related to gift certificates and merchandise credits sold/issuedsince the inception of the Gift Card program. An additional $120,000 ofbreakage income was recognized in the fourth quarter of 2006. There was nobreakage income recognized for the same period in the prior year.

*Revenue Recognition.*   Salesare recognized at the “point of sale,” which occurs when merchandise is sold inan “over-the-counter” transaction or upon receipt by a customer. Sales ofmerchandise via our website are recognized at the expected time of delivery tothe customer. Our customers have the right to return merchandise. Sales arereported net of actual and estimated returns. We maintain a reserve forpotential product returns and record, as a reduction to sales, a provision forestimated product returns, which is determined based on historical experience.Charges or credits to earnings resulting from revisions to estimates on oursales return provision were approximately $20,000, ($29,000) and $42,000 forFiscal 2004, 2005 and 2006, respectively. Amounts billed to customers forshipping and handling fees are included in net sales at the time of shipment. Costsincurred for shipping and handling are included in cost of sales.

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*Income Taxes.**  *TheCompany accounts for income taxes in accordance with SFAS No. 109, “*Accounting for Income Taxes*.” Thisstatement requires the Company to recognize deferred tax liabilities and assetsfor the expected future tax consequences of events that have been recognized inthe Company’s financial statements or tax returns. Under this method, deferredtax liabilities and assets are determined based on the difference between thefinancial statement carrying amounts and tax bases of assets and liabilities,using applicable tax rates for the years in which the differences are expectedto reverse. When tax contingencies become probable, a liability for thecontingent amount is estimated based upon the Company’s best estimation of thepotential exposures associated with the timing and amount of deductions, aswell as various tax filing positions. As of December 30, 2006, the Companydoes not have any tax contingencies.

*Seasonality.**  *We experience seasonal andquarterly fluctuations in net sales and operating income. Quarterly results ofoperations may fluctuate significantly as a result of a variety of factors,including the timing of new store openings, fashion trends and shifts in timingof certain holidays. Our business is subject to seasonal influences, characterizedby highest sales during the fourth quarter (October, November andDecember) and lowest sales during the third quarter (July, August andSeptember).

**Results of Operations**

Thefollowing table sets forth our operating results, expressed as a percentage ofnet sales.

| ** **                           | ** ** | **53 Weeks**   | ** ** | **52 Weeks**     | ** ** | **52 Weeks**     | ** ** |
|--------------------------------------|------------|---------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **Ended**           | ** ** | **Ended**             | ** ** | **Ended**             | ** ** |
| ** **                           | ** ** | **January 1,** | ** ** | **December 31,** | ** ** | **December 30,** | ** ** |
| ** **                           | ** ** | **2005**            | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| **Operating Results**                |       |                |       |                  |       |                  |       |   |   |   |   |   |   |
| Net sales                            |       |                | 100.0      | %                     |       |                  | 100.0      | % |   |   | 100.0 | % |   |
| Cost of sales                        |       |                | 54.9       |                  |       |                  | 54.4       |   |   |   | 52.3 |   |   |
| Gross profit                         |       |                | 45.1       |                  |       |                  | 45.6       |   |   |   | 47.7 |   |   |
| Store operating  expenses            |       |                | 30.9       |                  |       |                  | 32.1       |   |   |   | 33.9 |   |   |
| General and  administrative expenses |       |                | 5.8        |                  |       |                  | 5.9        |   |   |   | 7.6 |   |   |
| Lillie Rubin exit  costs             |       |                | —     |                  |       |                  | —     |   |   |   | 2.0 |   |   |
| Operating income                     |       |                | 8.4        |                  |       |                  | 7.5        |   |   |   | 4.2 |   |   |
| Other income  (net)                  |       |                | 0.2        |                  |       |                  | 0.4        |   |   |   | 0.9 |   |   |
| Income before  income taxes          |       |                | 8.6        |                  |       |                  | 7.9        |   |   |   | 5.1 |   |   |
| Income taxes                         |       |                | 3.2        |                  |       |                  | 2.9        |   |   |   | 2.1 |   |   |
| Net income                           |       |                | 5.4        | %                     |       |                  | 5.0        | % |   |   | 3.0 | % |   |

 

**52 WeeksEnded December 30, 2006 (Fiscal 2006) Compared to 52 Weeks Ended December 31,2005 (Fiscal 2005)**

*Net sales.**  *Net sales increased to $279.0 million from $266.3million, an increase of $12.7 million, or 4.8%, over the prior fiscal year. Thesales increase reflects $9.5 million of additional net sales as a result of a5% increase in comparable store sales, excluding the comparable sales declinefor Lillie Rubin sales. The increase also included $2.5 million of breakageincome, as a result of the conversion of our Gift Card system from apaper-based to a card-based system. The remainder of the increase was the resultof additional net sales from non-comparable new Cache and Cache Luxe storesales, partially offset by a decrease in Lillie Rubin sales, due to the exitfrom this business. The improvement in net sales was driven by an increase indress sales, primarily shorter length dresses, as dress sales increased to24.5% of total sales from 21.7% in fiscal 2005. Accessory sales continued toimprove, increasing to 9.8% of net sales in fiscal 2006 from 9.6% in fiscal2005.

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*Gross profit.**  *Gross profit increased to $133.1 million from $121.4million, an increase of $11.7 million, or 9.6%, over the prior fiscal year.This increase was the combined result of higher net sales and increased grossprofit margins. As a percentage of net sales, gross profit increased to 47.7% from45.6%. This increase as a percentage of net sales was primarily due to higherinitial margins, resulting from sourcing improvements. Also contributing tohigher gross margins in fiscal 2006 was a decrease in buying and occupancyexpenses of 0.4%, as a percent of sales, as compared to fiscal 2005.

*Store operating expenses.**  *Store operating expenses increased to $94.6 millionfrom $85.5 million, an increase of $9.1 million, or 10.6%, over the priorfiscal year. As a percentage of net sales, store operating expenses increasedto 33.9% from 32.1%. The increase in store operating expenses, as a percentageof net sales was primarily due to the increase in stores opened over the pasttwo years, as well as due to an increase in marketing and advertising expenses of$4.2 million. Store operating expenses in Fiscal 2006 were also higher thanFiscal 2005, due to higher depreciation expense of $1.2 million, payroll andrelated expenses increased $1.4 million, insurance expense increased $830,000,licenses and taxes increased $509,000 and utilities increased $508,000.

*General and administrativeexpenses.**  *Generaland administrative expenses increased to $21.2 million from $15.8 million, anincrease of $5.4 million or 34.2%, above the prior fiscal year. As a percentageof net sales, general and administrative expenses increased to 7.6% from 5.9%,primarily due to higher professional and consulting fees of $2.0 million inFiscal 2006. Payroll related expenses rose approximately $1.2 million,primarily due to stock based compensation expense of $1.4 million, resultingfrom our adoption of FASB 123(R). The Company did not record any stock basedcompensation expense in Fiscal 2005. General and administrative expenses inFiscal 2006 also increased over Fiscal 2005 levels, due to higher travel costsof $445,000 and telephone expense of $331,000, primarily due to expensesassociated with the new POS Lan network.

*Other income.*   Otherincome increased to $2.5 million from $1.1 million, in the prior fiscal year,primarily attributable to higher average cash balances and higher interestrates during fiscal 2006, as compared to fiscal 2005.

*Income taxes.*   Incometaxes decreased to $5.9 million from $7.7 million, a decrease of $1.8 million,below the prior fiscal year. This decrease was attributable to lower taxableincome, and was partially offset by an increase in the effective tax rate from36.4% in fiscal 2005 to 41.5% in fiscal 2006. The higher tax rate was in fiscal2006, primarily due to a net increase in permanent non-deductible operatingexpenses recorded in Fiscal 2006, due to reduced investment in municipal bonds,as well as non-deductible incentive stock options and offering costs. We expectthe effective tax rate in fiscal 2007 to return to historical levels.

*Net income.**  *As a result of the foregoing, net income decreased to$8.3 million from $13.4 million, a decrease of $5.1 million or 38.1%, below thesame period last year.

**52 WeeksEnded December 31, 2005 (Fiscal 2005) Compared to 53 Weeks Ended January 1,2005 (Fiscal 2004)**

*Net sales.**  *Net sales increased to $266.3 million from $247.3million, an increase of $19.0 million, or 7.7%, over the prior fiscal year.Fiscal 2004 sales included a fifty-third week, on a comparable basis, assuminga fifty-two week year in both periods, total sales would have risen 10.0% infiscal 2005. The actual increase in fiscal 2005 net sales as compared to fiscal2004 reflects $10.1 million of additional net sales primarily due to a 4%increase in comparable store sales. Comparable store sales were higher in thesecond half of fiscal 2005, rising 5.4%, as compared to a 3.1% increase duringthe first half of fiscal 2005. This improvement resulted from a change in themerchandise assortment in the second half of fiscal 2005, to reflect a greaterproportion of fashion-forward merchandise. The increase in full year fiscal2005 sales were also partially attributable to the increase in accessory sales,which increased to 9.6% of total sales for 

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our Cache stores infiscal 2005, from 8.6% of sales in fiscal 2004. The remainder of the increasein sales was the result of additional net sales from non-comparable stores.

*Gross profit.**  *Gross profit increased to $121.4 million from $111.6million, an increase of $9.8 million, or 8.8%, over the prior fiscal year. As apercentage of net sales, gross profit increased to 45.6% from 45.1%. Thisincrease in gross profit was the combined result of higher net sales and anincrease in gross profit margins, due to improved inventory management, whichled to an increase in initial markup as compared to fiscal 2004. Partiallyoffsetting the increase in gross margins was an increase in occupancy costs,which rose to 0.6% of sales in fiscal 2005 as compared to fiscal 2004,primarily due to the increase in new stores opened in late 2004 and during2005. We believe it generally takes three years for new stores to reachmaturity levels, which provide positive leverage for occupancy costs. Weestimate that excluding the fifty-third week from fiscal 2004 results, grossprofit would have risen by an additional approximately 0.8% in fiscal 2005.

*Store operating expenses.**  *Store operating expenses increased to $85.5 millionfrom $76.5 million, an increase of $9.0 million, or 11.8%, over the priorfiscal year. This was due primarily to an increase in the total number of newstores open. As a percentage of net sales, store operating expenses increasedto 32.1% from 30.9%, primarily due to an increase in payroll expense of $3.3million, an increase in licenses and taxes of $1.0 million (rising to 1.7% ofnet sales in fiscal 2005, compared to 1.4% in fiscal 2004) and an increase indepreciation expense of $2.8 million (rising to 3.5% of net sales in fiscal2005, as compared to 2.6% in fiscal 2004). The increases in depreciation andtaxes were partially attributable to the increase in new stores, as well as anincrease in store remodels. Excluding the fifty-third week from fiscal 2004results, we estimate that store operating expenses would have risen byapproximately 1.5% in fiscal 2005. We anticipate store operating expenses willdecrease, as a percent of net sales in future years, as comparable store salesrise in our newer locations.

*General and administrativeexpenses.**  *Generaland administrative expenses increased to $15.8 million from $14.2 million, anincrease of $1.6 million or 11.3% from the prior fiscal year. As a percentageof net sales, general and administrative expenses increased to 5.9% from 5.8%.This increase was primarily attributable to increase in corporate level payrollof $520,000, as well as an increase in incentive compensation expense of$680,000 (rising to 0.5% of net sales in fiscal 2005 as compared to 0.2% infiscal 2004) and was partially offset by a reduction in travel expense of$297,000 (decreasing to 0.7% of net sales in fiscal 2005 as compared to 0.8%isfiscal 2004). Excluding the fifty-third week from fiscal 2004 results, weestimate that general and administrative expenses would have been 5.7% of netsales.

*Other income.*   Otherincome increased to $1.1 million from $459,000, primarily attributable tohigher average cash balances and higher interest rates in fiscal 2005, ascompared to fiscal 2004. Other income generally consists of interest income. Weexpect interest income to grow in the future due to stronger cash flows fromoperations.

*Income taxes.*   Incometaxes decreased to $7.7 million from $8.0 million, a decrease of $355,000,below the same period last year. The overall effective tax rate decreased to36.4% in fiscal 2005 from 37.7% in fiscal 2004. The decrease in the overalleffective income tax rate is primarily attributable to a reversal of overaccruedstate income taxes. An increase in tax-free interest from municipal bondinvestments in the first half of fiscal 2005 also contributed to the reductionin effective rate during fiscal 2005. Refer to Note 9 to the ConsolidatedFinancial Statements for additional details of the income tax provision.

*Net income.**  *As a result of the foregoing, net increased to $13.4million from $13.3 million, as compared to the same period last year.

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**Quarterly Resultsand Seasonality**

We experience seasonal and quarterly fluctuations inour net sales and operating income. Our quarterly results of operations mayfluctuate significantly as a result of a variety of factors, including thetiming of new store openings, fashion trends and shifts in timing of certainholidays. Our business is subject to seasonal influences, characterized byhighest sales during our fourth fiscal quarter (October, November andDecember) and lowest sales during our third fiscal quarter (July,August and September).

The following table includes our unaudited quarterlyresults of operations data for each of the eight quarters during the two-yearperiod ended December 30, 2006. We derived this data from our unauditedquarterly consolidated financial statements. We believe that we have preparedthis information on the same basis as our audited consolidated financialstatements and that we have included all necessary adjustments, consisting onlyof normal recurring adjustments, to present fairly the selected quarterlyinformation when read in conjunction with our audited annual consolidatedfinancial statements and the notes to those statements included elsewhere inthis document. The operating results for any particular quarter are not necessarilyindicative of the operating results for any future period.

|  

** **                     | ** ** | **13 Weeks**                    | ** ** | **13 Weeks** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|-------------------|------------|
| ** **                             | ** ** | **Ended**                            | ** ** | **Ended**         | ** ** |
| ** **                             | ** ** | **Apr. 1,**                     | ** ** | **July 2,**  | ** ** | **Oct. 1,** | ** ** | **Dec. 31,** | ** ** | **Mar. 31,** | ** ** | **July 1,** | ** ** | **Sept. 30,** | ** ** | **Dec. 30,** | ** ** |
| ** **                             | ** ** | **2005**                             | ** ** | **2005**          | ** ** | **2005** | ** ** | **2005** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                             | ** ** | **(Unaudited)**                      | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)** | ** ** |
| **Operating Results**                  | ** ** | ** **                           | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                              |       | $                                    | 62,793     |              | $          | 66,970 |   | $ | 57,262 |   | $ | 79,320 |   | $ | 63,821 |   | $ | 71,682 |   | $ | 59,935 | (1) | $ | 83,554 |   |
| Gross profit                           |       | 27,133                               |       | 30,366            |       | 26,113 |   | 37,749 |   | 29,182 |   | 35,297 |   | 28,266 |   | 40,361 |   |
| Operating income                       |       | 2,751                                |       | 4,717             |       | 1,541 |   | 10,999 |   | 2,304 |   | 2,054 | (2) | 474 |   | 6,795 |   |
| Net income                             |       | $                                    | 1,757      |              | $          | 3,000 |   | $ | 1,107 |   | $ | 7,541 |   | $ | 1,728 |   | $ | 1,658 |   | $ | 690 |   | $ | 4,195 |   |
| **As a  Percentage of Net Sales**      | ** ** | ** **                           | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                              |       | 100.0%                               |       | 100.0%            |       | 100.0% |   | 100.0% |   | 100.0% |   | 100.0% |   | 100.0% |   | 100% |   |
| Gross profit                           |       | 43.2%                                |       | 45.3%             |       | 45.6% |   | 47.6% |   | 45.7% |   | 49.2% |   | 47.2% |   | 48.3% |   |
| Operating income                       |       | 4.4%                                 |       | 7.0%              |       | 2.7% |   | 13.9% |   | 3.6% |   | 2.9% |   | 0.8% |   | 8.1% |   |
| Net income                             |       | 2.8%                                 |       | 4.5%              |       | 1.9% |   | 9.5% |   | 2.7% |   | 2.3% |   | 1.2% |   | 5.0% |   |
| **Selected  Operating Data**           | ** ** | ** **                           | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of stores open at end of period |       | 294                                  |       | 297               |       | 301 |   | 306 |   | 302 |   | 309 |   | 294 |   | 296 |   |
| Comparable store  sales increase       |       | 1%                                   |       | 5%                |       | 8% |   | 4% |   | 1% |   | 6% |   | 1% |   | 7% |   |

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(1)             Includes recognition of $2.4 millionof breakage income for previously issued gift cards and merchandise credits.

(2)             Includes a charge of $5.7 million forthe exit of the Lillie Rubin business.

**Liquidity andCapital Resources**

Our cash requirements are primarily for theconstruction of new stores and inventory for new stores as well as theremodeling of existing stores. We have historically satisfied our cashrequirements principally through cash flow from operations. Cash flows haveincreased significantly in recent years, due to the dramatic increase in grossmargin contribution.

As of December 30, 2006, we had working capitalof $83.4 million, which included cash and marketable securities of$61.5 million.

26

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Thefollowing table sets forth our cash flows for the period indicated (inthousands):

| ** **                                             | ** ** | **53 Weeks Ended  January 1, 2005** | ** **  | **52 Weeks Ended  December 31, 2005** | ** ** | **52 Weeks Ended  December 30, 2006** | ** **  |
|--------------------------------------------------------|------------|---------------------------------------------------------|-------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|-------------|
| Net cash from  operating activities                    |       |                                                    | $           | 23,024,000                                                |       |                                                      |        | $ | 25,450,000 |   |   |   | $ | 12,672,000 |   |   |
| Net cash used by  investing activities                 |       |                                                    | (27,881,000 | )                                                         |       |                                                      | (26,136,000 | ) |   |   | (17,824,000 | ) |   |
| Net cash from  financing activities                    |       |                                                    | 4,818,000   |                                                      |       |                                                      | 591,000     |   |   |   | 7,762,000 |   |   |
| Net (decrease), increase  in cash and cash equivalents |       |                                                    | $           | (39,000                                                   | )          |                                                      |        | $ | (95,000 | ) |   |   | $ | 2,610,000 |   |   |

 

During fiscal 2006, we generated $12.7 million in cashfrom operating activities due primarily to net income, depreciation of $11.0million, $3.8 million from non-cash Lillie Rubin exit costs, an increase inaccrued liabilities of $2.4 million, $1.4 million from non-cashstock-based compensation and a decrease in accounts receivable of $0.2 million,partially offset by accounts payable decrease of $6.7 million, primarily due toreduction in the number of vendors and the increase in direct purchases paidvia letter of credit. Inventories increased $2.3 million, while we reverseddeferred rent of $1.1 million and recorded in non-cash gift card breakageof $2.5 million.

During fiscal 2005, we generated $25.5 million in cashfrom operating activities due primarily to net income, depreciation of $9.8million, an increase in accrued liabilities and compensation of $5.3 million,an increase in accounts payable of $1.3 million, partially offset by a decreaseof $1.0 million in deferred taxes and, an increase in prepaid expenses of $2.8million.

During fiscal 2004, we generated $23.0 million in cashfrom operating activities due primarily to net income, depreciation of $8.2million, an increase in deferred taxes of $2.7 million, an increase in accountspayable of $2.7 million, an increase in accrued liabilities of $3.9 million anda tax benefit of $1.6 million from stock option exercises, which were partiallyoffset by an increase in inventories of $5.6 million (primarily due to the netincrease of 36 stores), reversal of deferred rent of $1.2 million, and anincrease in receivables of $1.9 million.

Cash used in investing activities was approximately$17.8 million in fiscal 2006, $26.1 million in fiscal 2005 and $27.9 million infiscal 2004. These amounts were used for the purchase of marketable securities,the payment for equipment and leasehold improvements in new and remodeledstores, as well as improvements to the POS system. Our capital requirementsdepend primarily on the number of new stores we open, the number of existingstores we remodel and the timing of these expenditures. Projected capitalexpenditures for fiscal 2007 to fund new store openings and remodelings areapproximately $10.0 to $12.0 million.

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

During fiscal 2006, we received net proceeds of $6.0million from stock issuances and stock option exercises, as well as excess taxbenefits from option exercises of $1.8 million. Cash provided by financingactivities was approximately $591,000 in fiscal 2005, primarily due to cash providedfrom the proceeds of common stock issuances. Cash provided by financingactivities was approximately $4.8 million in fiscal 2004, primarily due tostock option exercises and stock issuances.

We have a line of credit with Bank of America, N.A.,(successor in interest to Fleet Bank, N.A.) permitting us to borrow up to $17.5million on a revolving basis. At December 30, 2006, there was nooutstanding balance under this credit facility. Amounts outstanding under thecredit facility bear interest at a maximum annual rate equal to the bank’sprime rate, currently 8.25% at February 28, 2007, less 0.25%. 

27

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The agreement relating tothis facility contains selected financial and other covenants. In addition, thecredit facility contains restrictions on our ability to make capitalexpenditures, incur indebtedness or create or incur liens on our assets. Whilethis facility is unsecured, if a default occurs under the facility, we arerequired to grant the lender a security interest in our inventory and accountsreceivable. We have at all times been in compliance with all loan covenants.This facility currently expires in November 2008.

We believe that cash flowfrom operations, our current available cash and funds available under ourrevolving credit facility will be sufficient to meet our working capital needsand contemplated new store opening expenses for at least the next 12 months. Ifour cash flow from operations should decline significantly or if we shouldaccelerate our store expansion or remodeling program, it may be necessary forus to seek additional sources of capital.

**ContractualObligations and Commercial Commitments**

Thefollowing tables summarize our minimum contractual obligations and commercialcommitments as of December 30, 2006:

| ** **               | ** ** | **Payments Due in Period** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **Total**                                 | ** ** | **Within  1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
| ** **               | ** ** | **(In thousands)**                   | ** ** |
| Contractual  Obligations |       |                                      |       |   |   |   |   |   |   |   |   |
| Employment contracts     |       | $                                         | 2,855      |   | $ | 1,370 |   | $ | 1,485 |   | $ | — |   | $ | — |   |
| Purchase Obligations     |       | 36,696                                    |       | 36,696 |   | — |   | — |   | — |   |
| Operating leases         |       | 174,109                                   |       | 25,869 |   | 48,745 |   | 42,851 |   | 56,644 |   |
| Total                    |       | $                                         | 213,660    |   | $ | 63,935 |   | $ | 50,230 |   | $ | 42,851 |   | $ | 56,644 |   |

 

| ** **                | ** ** | **Payments Due in Period** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **Total**                                 | ** ** | **Within  1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
| ** **                | ** ** | **(In thousands)**                   | ** ** |
| Commercial  Commitments   |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Standby Letters of credit |       | $                                         | 1,122      |   | $ | 1,122 |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Total                     |       | $                                         | 1,122      |   | $ | 1,122 |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |

 

We issue standby lettersof credit primarily for the importation of merchandise inventories. Theoperating leases included in the table on the previous page do not includecontingent rent based upon sales volume, which represented approximately 1.1%of minimum lease obligations in fiscal 2006, or variable costs such asmaintenance, insurance and taxes, which represented approximately 42.8% ofminimum lease obligations in fiscal 2006.

**Off Balance SheetArrangements**

Other than operating leasecommitments set forth in the table above, we are not a party to any materialoff-balance sheet financing arrangements.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk relates primarily to changes ininterest rates. We bear the risk in two specific ways. First, the revolvingcredit facility carries a variable interest rate that is tied to market indicesand, therefore, the statement of income and cash flows will be exposed tochanges in interest rates. As of December 30, 2006, we had no borrowingunder our credit facility. However, we may borrow funds under the revolvingcredit facility, as needed.

28

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The second component ofinterest rate risk involves the short-term investment of excess cash inshort-term, investment-grade interest-bearing securities. These investments areincluded in cash and equivalents as well as marketable securities on ourbalance sheet, if there are changes in interest rates, those changes wouldaffect the investment income we earn on these investments and, therefore,impact our cash flows and results of operations.

**Recent AccountingDevelopments**

See the section “RecentAccounting Developments” included in note 1 in the Notes to the ConsolidatedFinancial Statements for a discussion of recent accounting developments andtheir impact on our consolidated financial statements.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The Company’s unauditedselected quarterly financial data is incorporated herein by reference to Note12 to the Company’s consolidated financial statements on page *F-23*. The Company’s consolidated financial statementsand the report of independent public accountants are listed at Item 15 of thisReport and are included in this Form 10-K on pages F-1through *F-24*.

**ITEM 9.**                CHANGESIN AND/OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

(1)   *Disclosure Controls and Procedures*—TheCompany maintains a system of disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the Company’sreports under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to management, including the Company’s ChiefExecutive Officer (“CEO”) and the Chief Financial Officer (“CFO”), asappropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, as the Company’s are designed to do, and managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

29

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In connection with the preparation of this AnnualReport on Form 10-K, as of December 30, 2006, an evaluation wasperformed under the supervision and with the participation of the Company’smanagement, including the CEO and CFO, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Exchange Act). Managementidentified a material weakness in the operations of the Company’s internalcontrol. The material weakness related to the completeness of the review andinadequate consideration in the application of certain technicalinterpretations of generally accepted accounting principles, evidenced byadjustments in the following areas; (1) forfeiture rates associated withstock based compensation and classification of excess tax benefits, associatedwith the exercise of stock options within the statement of cash flows, inaccordance with Statement of Financial Accounting Standards No. 123(R) “*Share-Based Payments*”, (2) completeness of theCompany’s analysis of the accounting for income taxes, and (3) documentationof an analysis in regard to fixed asset impairment, which resulted in theCompany recording an adjustment relating to fixed asset impairment for onestore that will close in 2007.

Based on that evaluation,the Company’s CEO and CFO concluded that the Company’s disclosure controls andprocedures were not effective as of December 30, 2006.

(2)   *Management’s Annual Report on Internal Control overFinancial Reporting*—Management is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).A system of internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation and fair presentation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Allinternal control systems, no matter how well designed, have inherentlimitations. Therefore, even those systems determined to be effective canprovide only reasonable assurance with respect to financial statementpreparation and presentation.

Management has assessed the effectiveness of theCompany’s internal control over financial reporting as of December 30,2006. In making its assessment of internal control over financial reporting,management used the criteria set forth by the Committee of SponsoringOrganizations (“COSO”) of the Treadway Commission in *Internal Control—Integrated Framework*.

In performing this assessment, management evaluatedthe impact of certain matters identified during its financial year-end closingand reporting process. These matters related to the completeness of the reviewand inadequate consideration in the application of certain technicalinterpretations of generally accepted accounting principles, evidenced byadjustments in the following areas; (1) forfeiture rates associated withstock based compensation and classification of excess tax benefits, associatedwith the exercise of stock options within the statement of cash flows inaccordance with Statement of Financial Accounting Standards No. 123(R) “*Share-Based Payments*”, (2) completeness of theCompany’s analysis of the accounting for income taxes, and (3) documentationof an analysis in regard to fixed asset impairment, which resulted in theCompany recording an adjustment relating to fixed asset impairment for onestore that will close in 2007. Based upon the foregoing, management hasdetermined that material weakness described above represents a materialweakness and that the Company’s internal control over financial reporting wasnot effective based on the criteria established by COSO as of December 30,2006.

A material weakness in internal control over financialreporting is a control deficiency (within the meaning of the Public CompanyAccounting Oversight Board’s (“PCAOB”) Auditing Standard No. 2), orcombination of control deficiencies, that results in there being more than aremote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected. PCAOB Auditing StandardNo. 2 identifies a number of circumstances that, because of their likelysignificant negative effect on internal control over financial reporting, areto be regarded as at least significant deficiencies as well as strongindicators that a material weakness exists, including the restatement ofpreviously issued financial statements to reflect the correction of amisstatement.

30

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The Company’s independent registered public accountingfirm, Deloitte & Touche LLP, has issued an attestation report onmanagement’s assessment of the Company’s internal control over financialreporting. This report appears below.

*Remediation Steps toAddress the Material Weakness—**We* are currentlyreviewing our remediation process for the material weakness described above. Wemay conclude to take one or more of the following actions:

i.                   Clearly defineroles and responsibilities throughout the accounting/finance organization;

ii.               Implementadditional training of finance personnel;

iii.           Conducting a review ofaccounting processes to strengthen the design and operation of controls;

iv.             Implement policies toensure the accuracy of accounting calculations supporting the amounts reflectedin our financial statements

These remediationplans will be implemented during the second and third quarters of fiscal 2007.The material weakness will not be considered remediated until the applicableremedial procedures operate for a period of time, such procedures are testedand management has concluded that the procedures are operating effectively.

(4)   *Change inInternal Control Over Financial Reporting*—No changes in the Company’sinternal control over financial reporting has occurred during the Company’slast fiscal quarter that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

| /s/ Brian Woolf                                         | March 15, 2007  |
|---------------------------------------------------------|----------------------|
| Brian Woolf                                             | ** **           |
| *Chairman  and Chief Executive Officer*                 | * *             |
| /s/ Margaret  Feeney                                    | March 15,  2007 |
| Margaret Feeney                                         |                 |
| *Executive  Vice President and Chief Financial Officer* | * *             |

 

31

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**Report ofIndependent Registered Public Accounting Firm**

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

We have audited management’s assessment, included inthe accompanying Management’s Annual Report on Internal Control over FinancialReporting, that Cache, Inc. (the “Company”) did not maintain effectiveinternal control over financial reporting as of December 30, 2006, becauseof the effect of the material weakness identified management’s assessment basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

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

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management andother personnel to provide reasonable assurance regarding the reliability ofthe financial reporting and the preparation of the financial statements forexternal purposes in accordance with generally accepted accounting principles.A company’s internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations, internal controlover financial reporting, including the possibility of collusion or impropermanagement override of controls, material misstatements due to error or fraudmay not be prevented or detected on a timely basis. Also, projections of anyevaluation of effectiveness of the internal control over financial reporting tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

A material weakness is a significant deficiency, orcombination of significant deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The Company identified andincluded in management’s assessment a material weakness, relating to theineffective control over the completeness of the review and inadequateconsideration in the application of certain technical interpretations ofgenerally accepted accounting principles, evidenced by adjustments in thefollowing areas; (1) forfeiture rates associated with stock basedcompensation and classification of excess tax benefits, associated with theexercise of stock options within the statement of cash flows, in accordancewith Statement of Financial Accounting 

32

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Standards No. 123(R) “*Share-Based Payments*,” (2) completeness of theCompany’s analysis of the accounting for income taxes and(3) documentation of an analysis in regard to fixed asset impairment,which resulted in the Company recording an adjustment relating to fixed assetimpairment for one store that will close in 2007. The material weakness wasconsidered in determining the nature, timing, and extent of audit tests appliedin our audit of the consolidated financial statements as of and for the yearended December 30, 2006, of the Company and this report does not affectour report on such consolidated financial statements and consolidated financialstatement schedule.

In our opinion, management’s assessment that theCompany did not maintain effective internal control over financial reporting asof December 30, 2006, is fairly stated, in all material respects, based onthe criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Also in ouropinion, because of the effect of a material weakness described above on theachievement of the objectives of the control criteria, the Company has notmaintained effective internal control over financial reporting as of December 30,2006, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as of and for the yearended December 30, 2006 of the Company and the related financial statementschedule listed in the Index at Item 15, and our report dated March 15,2007 expressed an unqualified opinion on those consolidated financialstatements and consolidated financial statement schedule.

/s/ DELOITTE & TOUCHE LLP

New York, New YorkMarch 15, 2007

33

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**ITEM 9B.   OTHERINFORMATION**

None.

**PART III**

The information called forby Items 10, 11, 12, 13, and 14 is incorporated herein by reference from thedefinitive proxy statement to be filed by the Company in connection with its2007 Annual Meeting of Shareholders.

**PART IV**

**ITEM15.   EXHIBITS and FINANCIAL STATEMENT SCHEDULE**
| (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.                                                                                                                                                                                                                                                    | Financial statement  schedule is included on page F-24 or is omitted because it is not  applicable or the required information is shown in the financial statements  or notes thereto. |
|   | 3.                                                                                                                                                                                                                                                    | Exhibits(9)                                                                                                                                                                                 |
| 1.1    | Underwriting Agreement  dated November 14, 2006, between the Company, Thomas Weisel Partners LLC  and Piper Jeffray & Co.(3)                                                                                                            |
| 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(10)                                                         |
| 10.2   | 2000 Stock Option Plan  of the Company(7)(12)                                                                                                                                                                                                         |
| 10.3   | Form of Option  Agreement relating to Options issued under the 2000 Stock Option Plan(8)(12)                                                                                                                                                     |
| 10.4   | 2003 Stock Option Plan  of the Company(9)(12)                                                                                                                                                                                                         |
| 10.5   | Form of Option  Agreement relating to Options issued under the 2003 Stock Option Plan(10)(12)                                                                                                                                                    |
| 10.6   | Second Amended and  Restated Revolving Credit Agreement (the “Revolving Credit Agreement”) dated  as of August 26, 1996, between Fleet Bank, N.A. (Successor in interest  to National Westminster Bank, New Jersey) and the Company(4) |
| 10.7   | Security Agreement,  dated as of August 26, 1996 (the “Security Agreement”), between the  Company and Fleet Bank, N.A.(4)                                                                                                              |
| 10.8   | Amended and Restated  Asset Purchase Agreement dated August 10, 1998 between Lillie Rubin  Fashions, Inc. and the Company(5)                                                                                                                |
| 10.9   | Master Amendment, dated  July 19, 1999, to Revolving Credit Agreement and Security Agreement(6)                                                                                                                                                  |
| 10.10  | Second Master Amendment,  dated November 21, 2002, to Revolving Credit Agreement(10)                                                                                                                                                             |
| 10.11  | Third Master Amendment,  dated May 20, 2004, to Revolving Credit Agreement(3)                                                                                                                                                                    |
| 10.12  | Fourth Master Amendment,  dated November 30, 2005 to Revolving Credit Agreement(11)                                                                                                                                                              |
| 10.13  | Employment Agreement,  dated February 8, 2006, between the Company and Brian P. Woolf(11)(12)                                                                                                                                                    |

34

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| 10.14 | Employment Agreement,  dated February 8, 2006, between the Company and Thomas E. Reinckens(11)(12)                                    |
|-------|---------------------------------------------------------------------------------------------------------------------------------------|
| 11.1  | Calculation of Basic and  Fully Diluted Earnings per Common Share                                                                     |
| 12.1  | Statements re:  Computation of Ratios                                                                                                 |
| 23.1  | Consent of Deloitte  & Touche LLP                                                                                                 |
| 23.2  | Consent of KPMG LLP                                                                                                                   |
| 31.1  | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                             |
| 31.2  | Certification of the  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. |

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(1)          Incorporatedby reference to the Company’s Registration Statement on Form S-18,dated December 29, 1980.

(2)          Incorporatedby reference to the Company’s Current Report on Form 8-K, dated September 15,1993.

(3)          Incorporatedby reference to the Company’s Registration statement on Form S-3,dated November 14, 2006.

(4)          Incorporatedby reference to the Company’s Annual Report on Form 10-K for thefiscal year ended December 28, 1996.

(5)          Incorporatedby reference to the Company’s Annual Report on Form 10-K for thefiscal year ended January 2, 1999.

(6)          Incorporatedby reference to the Company’s Annual Report on Form 10-K for thefiscal year ended January 1, 2000.

(7)          Incorporatedby reference to the Company’s Definitive Proxy Statement filed on September 18,2001.

(8)          Incorporatedby reference to the Company’s Annual Report on Form 10-K for thefiscal year ended December 29, 2001.

(9)          Incorporatedby reference to the Company’s Definitive Proxy Statement filed on October 6,2003.

(10) Incorporated by reference to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 27,2003.

(11) Incorporated by reference to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2005.

(12) Exhibits 10.2 through 10.5, 10.13 and 10.14 aremanagement contracts or compensatory plans or arrangements, which are requiredto be filed as an exhibit pursuant to Item 15(b) of this Annual Report on Form 10-K.

                           AStockholder may obtain a copy of any of the exhibits included in the AnnualReport on Form 10-K upon payment of a fee to cover the reasonableexpenses of furnishing such exhibits, by written request to CACHE, Inc.,at 1440 Broadway, 5th Floor, New York, New York 10018 Attention:Chief Financial Officer.

(b)          Reportson Form 8-K

None.

35

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**Signatures**

Pursuantto the requirement of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
| Date:  March 15, 2007 | CACHE, INC.                 |
|-----------------------|-----------------------------|
|                  | (Registrant)                |
|                  | By: /s/ BRIAN WOOLF         |
|                  | Brian Woolf                 |
|                  | Chairman of the Board       |
|                  | and Chief Executive Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.
|                          | **Signature** | ** **                 | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|--------------------------|---------------|----------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ BRIAN  WOOLF         |          | Chairman of the  Board     |       | March 15, 2007 |
| Brian  Woolf             |          |                       |       |                |
| /s/ THOMAS  E. REINCKENS |          | President                  |       | March 15, 2007 |
| Thomas  E. Reinckens     |          | (Chief Operating  Officer) |       |                |
| /s/ MARGARET FEENEY      |          | Executive Vice  President  |       | March 15, 2007 |
| Margaret  Feeney         |          | (Chief Financial  Officer) |       |                |
| /s/ GENE  GAGE           |          | Director                   |       | March 15, 2007 |
| Gene  Gage               |          |                       |       |                |
| /s/ ARTHUR  S. MINTZ     |          | Director                   |       | March 15, 2007 |
| Arthur  S. Mintz         |          |                       |       |                |
| /s/ ANDREW  M. SAUL      |          | Director                   |       | March 15, 2007 |
| Andrew  M. Saul          |          |                       |       |                |
| /s/ MORTON  J. SCHRADER  |          | Director                   |       | March 15, 2007 |
| Morton J.  Schrader      |          |                       |       |                |

 

36

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**CACHE, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDFINANCIAL STATEMENTS**

**FISCAL YEARS ENDEDDECEMBER 30, 2006,**

**DECEMBER 31, 2005,**

**AND**

**JANUARY 1, 2005**

F-1

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**CACHE,INC. AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

| INDEX                                                | ** ** | **PAGE** | ** ** |
|------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Accounting Firm     |       |     | F-3        |   |   |
| Consolidated Balance Sheets                          |       |     | F-5        |   |   |
| Consolidated Statements of Income                    |       |     | F-6        |   |   |
| Consolidated Statements of Stockholders’ Equity |       |     | F-7        |   |   |
| Consolidated Statements of Cash Flows                |       |     | F-8        |   |   |
| Notes to Consolidated Financial Statements           |       |     | F-9        |   |   |
| Valuation and  Qualifying Accounts                   |       |     | F-24       |   |   |

 

F-2

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have audited the accompanying consolidated balancesheets of Cache, Inc. and subsidiaries (the “Company”) as of December 31,2005 and December 30, 2006, and the related consolidated statements ofincome, stockholders’ equity, and cash flows for the two fiscal years thenended. Our audit also included financial statement schedule listed in the Indexat Item 15. These consolidated financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements and financial statement schedule based on our audits.

We conducted our audits in accordance with standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyas of December 31, 2005 and December 30, 2006, and the results oftheir operations and their cash flows for each of the years in the two yearperiod ended December 30, 2006, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, suchconsolidated financial statement schedule, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly, inall material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financialstatements, in 2006 the Company adopted Statement of Financial AccountingStandards No. 123(R), “*Share-Based Payment*,”as revised, effective January 1, 2006.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 30, 2006, based on the criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 15,2007 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anadverse opinion on the effectiveness of the Company’s internal control overfinancial reporting because of a material weakness.

/s/ DELOITTE &TOUCHE LLP

New York, New YorkMarch 15, 2007

F-3

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and StockholdersCache, Inc.:

We have audited the accompanying consolidated consolidatedstatements of income, stockholders’ equity and cash flows for the year ended January 1,2005. In connection with our audit of the consolidated**financialstatements, we also have audited the financial statement schedule. Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements and financial statementschedule based on our audit.

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

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the results of operations of Cache, Inc. andsubsidiaries and their cash flows for the year ended January 1, 2005, inconformity with U.S. generally accepted accounting principles. Also in ouropinion, the related financial statement schedule, when considered in relationto the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

/s/ KPMG LLP

New York, New YorkMarch 15, 2005

F-4

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**CACHE, INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                      | ** ** | **December 31,** | ** **  | **December 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2005**              | ** **  | **2006**              | ** ** |
| **ASSETS**                                                                                                                      |       |                  |        |                  |       |
| **CURRENT  ASSETS**                                                                                                             |       |                  |        |                  |       |
| Cash and equivalents (Note 1)                                                                                                   |       | $                     | 16,753,000  |                  | $          | 19,363,000 |   |
| Marketable securities                                                                                                           |       | 36,520,000            |        | 42,094,000            |       |
| Receivables, net (Note 2)                                                                                                       |       | 5,734,000             |        | 4,794,000             |       |
| Inventories                                                                                                                     |       | 32,785,000            |        | 34,829,000            |       |
| Prepaid expenses and other current assets                                                                                       |       | 5,468,000             |        | 7,217,000             |       |
| Total Current Assets                                                                                                            |       | 97,260,000            |        | 108,297,000           |       |
| **EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net**  (Note 3)                                                                         |       | 52,760,000            |        | 50,450,000            |       |
| **OTHER ASSETS**                                                                                                                |       | 864,000               |        | 439,000               |       |
| **Total Assets**                                                                                                                |       | $                     | 150,884,000 |                  | $          | 159,186,000 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                  |       |                  |        |                  |       |
| **CURRENT  LIABILITIES**                                                                                                        |       |                  |        |                  |       |
| Accounts payable                                                                                                                |       | $                     | 18,404,000  |                  | $          | 11,702,000 |   |
| Accrued compensation                                                                                                            |       | 2,624,000             |        | 1,689,000             |       |
| Accrued liabilities (Note 4)                                                                                                    |       | 12,446,000            |        | 11,515,000            |       |
| Total Current Liabilities                                                                                                       |       | 33,474,000            |        | 24,906,000            |       |
| **OTHER LIABILITIES** (Note 7)                                                                                                  |       | 16,309,000            |        | 15,749,000            |       |
| **DEFERRED INCOME TAXES, net**  (Note 9)                                                                                        |       | 2,105,000             |        | 2,068,000             |       |
| **COMMITMENTS  AND CONTINGENCIES** (Note 8)                                                                                     |       |                  |        |                  |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                  |       |                  |        |                  |       |
| Common stock, par value $.01; authorized, 20,000,000  shares; issued and outstanding 15,770,553 and 16,275,708 shares (Note 10) |       | 158,000               |        | 163,000               |       |
| Additional paid-in capital                                                                                                      |       | 35,455,000            |        | 44,646,000            |       |
| Retained earnings                                                                                                               |       | 63,383,000            |        | 71,654,000            |       |
| Total Stockholders’ Equity                                                                                                 |       | 98,996,000            |        | 116,463,000           |       |
| **Total  Liabilities and Stockholders’ Equity**                                                                            |       | $                     | 150,884,000 |                  | $          | 159,186,000 |   |

 

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

F-5

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**CACHE, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME**

| ** **                                                 | ** ** | **53 Weeks Ended** | ** **  | **52 Weeks Ended** | ** ** | **52 Weeks Ended** | ** **  |
|------------------------------------------------------------|------------|------------------------------|-------------|------------------------------|------------|------------------------------|-------------|
| ** **                                                 | ** ** | **January 1,**          | ** **  | **December 31,**        | ** ** | **December 30,**        | ** **  |
| ** **                                                 | ** ** | **2005**                     | ** **  | **2005**                     | ** ** | **2006**                     | ** **  |
| **NET  SALES**                                             |       |                         | $           | 247,300,000                  |       |                         |        | $ | 266,345,000 |   |   |   | $ | 278,992,000 |   |   |
| **COST OF SALES, including buying and occupancy**(Note  8) |       |                         | 135,745,000 |                         |       |                         | 144,984,000 |   |   |   | 145,886,000 |   |   |
| **GROSS PROFIT**                                           |       |                         | 111,555,000 |                         |       |                         | 121,361,000 |   |   |   | 133,106,000 |   |   |
| **EXPENSES**                                               |       |                         |        |                         |       |                         |        |   |   |   |   |   |   |
| Store operating expenses                                   |       |                         | 76,466,000  |                         |       |                         | 85,529,000  |   |   |   | 94,556,000 |   |   |
| General and administrative expenses                        |       |                         | 14,221,000  |                         |       |                         | 15,824,000  |   |   |   | 21,246,000 |   |   |
| Lillie Rubin exit costs                                    |       |                         | —      |                         |       |                         | —      |   |   |   | 5,677,000 |   |   |
| TOTAL EXPENSES                                             |       |                         | 90,687,000  |                         |       |                         | 101,353,000 |   |   |   | 121,479,000 |   |   |
| **OPERATING INCOME**                                       |       |                         | 20,868,000  |                         |       |                         | 20,008,000  |   |   |   | 11,627,000 |   |   |
| **OTHER  INCOME (EXPENSE)**                                |       |                         |        |                         |       |                         |        |   |   |   |   |   |   |
| Interest income                                            |       |                         | 439,000     |                         |       |                         | 1,071,000   |   |   |   | 2,523,000 |   |   |
| Miscellaneous income (net)                                 |       |                         | 20,000      |                         |       |                         | 1,000       |   |   |   | — |   |   |
| TOTAL OTHER INCOME                                         |       |                         | 459,000     |                         |       |                         | 1,072,000   |   |   |   | 2,523,000 |   |   |
| **INCOME BEFORE INCOME TAXES**                             |       |                         | 21,327,000  |                         |       |                         | 21,080,000  |   |   |   | 14,150,000 |   |   |
| **INCOME TAX PROVISION**(Note 9)                           |       |                         | 8,030,000   |                         |       |                         | 7,675,000   |   |   |   | 5,879,000 |   |   |
| **NET INCOME**                                             |       |                         | $           | 13,297,000                   |       |                         |        | $ | 13,405,000 |   |   |   | $ | 8,271,000 |   |   |
| **BASIC EARNINGS PER SHARE**                               |       |                         | $           | 0.85                         |       |                         |        | $ | 0.85 |   |   |   | $ | 0.52 |   |   |
| **DILUTED EARNINGS PER SHARE**                             |       |                         | $           | 0.83                         |       |                         |        | $ | 0.83 |   |   |   | $ | 0.51 |   |   |
| **BASIC WEIGHTED AVERAGE SHARES OUTSTANDING**              |       |                         | 15,589,000  |                         |       |                         | 15,726,000  |   |   |   | 15,849,000 |   |   |
| **DILUTED  WEIGHTED AVERAGE SHARES OUTSTANDING**           | ** ** |                         | 16,004,000  |                         |       |                         | 16,150,000  |   |   |   | 16,218,000 |   |   |

 

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

F-6

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**CACHE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

| ** **                               | ** ** | ** **            | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **   | ** ** |
|------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------|------------|--------------|------------|
| ** **                               | ** ** | **Common Stock** | ** ** | **Paid-In**    | ** ** | **Retained** | ** ** | ** **   | ** ** |
| ** **                               | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Capital**  | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| **Balance  at December 27, 2003**   |       | 9,981,150             |       | $              | 100,000    |         | $          | 28,361,000   |       | $ | 36,681,000 |   | $ | 65,142,000 |   |
| Net income                               |       | —                |       | —         |       | —       |       | 13,297,000   |       | 13,297,000 |   |
| Tax benefit from  stock option exercises |       | —                |       | —         |       | 1,583,000    |       | —       |       | 1,583,000 |   |
| Issuance of  common stock                |       | 472,125               |       | 5,000          |       | 4,813,000    |       | —       |       | 4,818,000 |   |
| Stock split                              |       | 5,211,778             |       | 52,000         |       | (52,000      | )          | —       |       | — |   |
| **Balance at January 1, 2005**      |       | 15,665,053            |       | 157,000        |       | 34,705,000   |       | 49,978,000   |       | 84,840,000 |   |
| Net income                               |       | —                |       | —         |       | —       |       | 13,405,000   |       | 13,405,000 |   |
| Tax benefit from  stock option exercises |       | —                |       | —         |       | 160,000      |       | —       |       | 160,000 |   |
| Issuance of  common stock                |       | 105,500               |       | 1,000          |       | 590,000      |       | —       |       | 591,000 |   |
| **Balance at December 31, 2005**    |       | 15,770,553            |       | 158,000        |       | 35,455,000   |       | 63,383,000   |       | 98,996,000 |   |
| Net income                               |       | —                |       | —         |       | —       |       | 8,271,000    |       | 8,271,000 |   |
| Tax benefit from  stock option exercises |       | —                |       | —         |       | 1,790,000    |       | —       |       | 1,790,000 |   |
| Issuance of  common stock                |       | 505,155               |       | 5,000          |       | 5,967,000    |       | —       |       | 5,972,000 |   |
| Stock based  compensation                |       | —                |       | —         |       | 1,434,000    |       | —       |       | 1,434,000 |   |
| **Balance  at December 30, 2006**   |       | 16,275,708            |       | $              | 163,000    |         | $          | 44,646,000   |       | $ | 71,654,000 |   | $ | 116,463,000 |   |

 

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

F-7

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**CACHE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                         | ** ** | **53 Weeks Ended** | ** **  | **52 Weeks Ended** | ** ** | **52 Weeks Ended** | ** **  |
|------------------------------------------------------------------------------------|------------|------------------------------|-------------|------------------------------|------------|------------------------------|-------------|
| ** **                                                                         | ** ** | **January 1,**          | ** **  | **December 31,**        | ** ** | **December 30,**        | ** **  |
| ** **                                                                         | ** ** | **2005**                     | ** **  | **2005**                     | ** ** | **2006**                     | ** **  |
| **Cash flows From Operating  Activities:**                                         |       |                         |        |                         |       |                         |        |   |   |   |   |   |   |
| Net income                                                                         |       |                         | $           | 13,297,000                   |       |                         |        | $ | 13,405,000 |   |   |   | $ | 8,271,000 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                         |        |                         |       |                         |        |   |   |   |   |   |   |
| Depreciation and  amortization                                                     |       |                         | 8,232,000   |                         |       |                         | 9,779,000   |   |   |   | 11,026,000 |   |   |
| Decrease  (increase) in deferred tax assets                                        |       |                         | 2,705,000   |                         |       |                         | (1,042,000  | ) |   |   | (25,000 | ) |   |
| Income tax  benefit from stock option exercises                                    |       |                         | 1,583,000   |                         |       |                         | 160,000     |   |   |   | — |   |   |
| Excess tax  benefit from stock-based compensation                                  |       |                         | —      |                         |       |                         | —      |   |   |   | (1,790,000 | ) |   |
| Amortization of  deferred rent                                                     |       |                         | (1,221,000  | )                            |       |                         | (940,000    | ) |   |   | (1,137,000 | ) |   |
| Gift card  breakage                                                                |       |                         | —      |                         |       |                         | —      |   |   |   | (2,545,000 | ) |   |
| Other, net                                                                         |       |                         | 41,000      |                         |       |                         | (32,000     | ) |   |   | (29,000 | ) |   |
| Stock-based  compensation                                                          |       |                         | —      |                         |       |                         | —      |   |   |   | 1,434,000 |   |   |
| Non-cash Lillie  Rubin exit costs                                                  |       |                         | —      |                         |       |                         | —      |   |   |   | 3,827,000 |   |   |
| Change in assets  and liabilities:                                                 |       |                         |        |                         |       |                         |        |   |   |   |   |   |   |
| Decrease (increase)  in receivables                                                |       |                         | (1,931,000  | )                            |       |                         | 811,000     |   |   |   | 184,000 |   |   |
| Increase in  inventories                                                           |       |                         | (5,572,000  | )                            |       |                         | (489,000    | ) |   |   | (2,319,000 | ) |   |
| Increase in  prepaid expenses and other current assets                             |       |                         | (709,000    | )                            |       |                         | (2,829,000  | ) |   |   | 29,000 |   |   |
| Increase  (decrease) in accounts payable                                           |       |                         | 2,693,000   |                         |       |                         | 1,349,000   |   |   |   | (6,702,000 | ) |   |
| Increase in  accrued liabilities and accrued compensation                          |       |                         | 3,906,000   |                         |       |                         | 5,278,000   |   |   |   | 2,448,000 |   |   |
| Net cash provided by operating activities                                          |       |                         | 23,024,000  |                         |       |                         | 25,450,000  |   |   |   | 12,672,000 |   |   |
| **Cash  Flows From Investing Activities:**                                         |       |                         |        |                         |       |                         |        |   |   |   |   |   |   |
| Purchase of  marketable securities                                                 |       |                         | (25,874,000 | )                            |       |                         | (54,828,000 | ) |   |   | (81,264,000 | ) |   |
| Maturities of  marketable securities                                               |       |                         | 19,746,000  |                         |       |                         | 44,182,000  |   |   |   | 75,690,000 |   |   |
| Payments for  equipment and leasehold improvements                                 |       |                         | (21,753,000 | )                            |       |                         | (15,490,000 | ) |   |   | (12,250,000 | ) |   |
| Net cash used in investing activities                                              |       |                         | (27,881,000 | )                            |       |                         | (26,136,000 | ) |   |   | (17,824,000 | ) |   |
| **Cash  Flows From Financing Activities:**                                         |       |                         |        |                         |       |                         |        |   |   |   |   |   |   |
| Net proceeds from  secondary common stock offering                                 |       |                         | 3,888,000   |                         |       |                         | —      |   |   |   | 4,409,000 |   |   |
| Proceeds from  exercises of stock options                                          |       |                         | 930,000     |                         |       |                         | 591,000     |   |   |   | 1,563,000 |   |   |
| Excess tax  benefit from stock-based compensation                                  |       |                         | —      |                         |       |                         | —      |   |   |   | 1,790,000 |   |   |
| Net cash provided by financing activities                                          |       |                         | 4,818,000   |                         |       |                         | 591,000     |   |   |   | 7,762,000 |   |   |
| Net increase (decrease) in cash and equivalents                                    |       |                         | (39,000     | )                            |       |                         | (95,000     | ) |   |   | 2,610,000 |   |   |
| Cash and  equivalents, at beginning of period                                      |       |                         | 16,887,000  |                         |       |                         | 16,848,000  |   |   |   | 16,753,000 |   |   |
| Cash and  equivalents, at end of period                                            |       |                         | $           | 16,848,000                   |       |                         |        | $ | 16,753,000 |   |   |   | $ | 19,363,000 |   |   |

 

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

F-8

----

**CACHE, INC. ANDSUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1.   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

**Business**

Cache, Inc. (togetherwith its subsidiaries, the “Company”) owns and operates two chains of women’sapparel specialty stores, of which 277 stores (as of December 30, 2006)are operated under the trade name “Cache” and 16 stores are operated under thetrade name “Cache Luxe”. The Company specializes in the sale of high fashionwomen’s apparel and accessories in the better to expensive price range.

**Basis ofConsolidation**

The consolidated financialstatements include the accounts of the Company and its subsidiaries, all ofwhich are wholly owned. All significant intercompany balances and transactionshave been eliminated.

**Use of Estimates inthe Preparation of Financial Statements**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and use assumptions that affect thereported amounts of assets and liabilities and disclosure of contingentliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

The most significantestimates made by management include those made in the areas of inventory;deferred taxes; contingencies; self insurance reserves; and sales returns andallowances. Management periodically evaluates estimates used in the preparationof the consolidated financial statements for continued reasonableness.Appropriate adjustments, if any, to the estimates used are made prospectivelybased on such periodic evaluations.

**Fiscal ReportingPeriod**

The Company reports itsannual results of operations based on fiscal periods comprised of 52 or 53weeks, which is in accordance with industry practice. Results for fiscal 2004include 53 weeks. Results for fiscal 2005 and 2006 include 52 weeks.

**Fair Value ofFinancial Instruments**

The carrying amounts of accountsreceivable, accounts payable and accrued liabilities approximate fair value dueto the short-term nature of such items.

**Cash Equivalents**

The Company considers allhighly liquid investments that mature within three months or less whenpurchased to be cash equivalents.

**MarketableSecurities:**

Marketable securities at December 31,2005 and December 30, 2006 primarily consist of short-term UnitedStates Treasury bills. The Company classifies its short-term investmentsas held-to-maturity. Held-to-maturity securities arethose securities in which the Company has the ability and intent to hold thesecurities until maturity. Because the Company’s held-to-maturitysecurities mature within one year of the purchase date, the securities areclassified as short-term marketable securities. Held-to-maturitydebt securities are recorded at amortized cost, adjusted for the amortizationor accretion of premiums or 

F-9

----

discountsand such carrying values approximate fair value. A decline in the market valueof any held-to-maturity security below cost that is deemed to beother 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 isestablished. Premiums and discounts are amortized or accreted over the life ofthe related held-to-maturity as an adjustment to yield using theeffective interest method. Interest income is recognized when earned.

**Inventories**

Our inventories are valuedat lower of cost or market using the retail inventory method. Under the retailinventory method (“RIM”), the valuation of inventories at cost and theresulting gross margins are calculated by applying a calculated cost to retailratio to the retail value of inventories. RIM is an averaging method that hadbeen 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 thelower of cost or market if markdowns are currently taken as a reduction of theretail value of inventories. Inherent in the RIM calculation are certainsignificant management judgments including, among others, merchandise markon,markups, and markdowns, which significantly impact the ending inventoryvaluation at cost as well as the resulting gross margins. We take markdowns dueto changes in fashion and style, based on the following factors: (i) supplyon hand, (ii) historical experience and (iii) our expectations as tofuture sales. We do not anticipate any significant change in our markdownstrategy that would cause a significant change in our earnings. We believe thatour RIM provides an inventory valuation, which results in a carrying value atthe lower of cost or market.

**Equipment andLeasehold Improvements**

Equipment and leasehold improvements are stated atcost. Depreciation and amortization are computed using the straight-linemethod over the estimated useful lives of the related assets which generallyrange from three to 10 years. For income tax purposes, accelerated methods aregenerally used. Leasehold improvements are amortized over the shorter of theiruseful life or lease term.

The Company evaluatesfinite-lived assets in accordance with SFAS No.144, *“Accountingfor the Impairment or Disposal of Long-lived Assets” (“SFAS No. 144”)*.This statement supersedes SFAS No. 121, *“Accountingfor Impairment of Long-lived Assets and for Long-lived Assets to beDisposed of.”* Finite-lived assets are evaluated forrecoverability in accordance with SFAS No. 144 whenever events or changesin circumstances indicate that an asset may have been impaired. In evaluatingas asset for recoverability, the Company estimates the future cash flowsexpected to result from the use of the asset and eventual disposition. If thesum of the expected future cash flows (undiscounted and without interestcharges) 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 theasset is recognized. The Company evaluated its finite-lived assets duringfiscal 2004, 2005, and 2006. Based on current and projected performance therewas no fixed asset impairments in fiscal 2004 and 2005. In fiscal 2006, theCompany recorded an impairment charge of $101,000, related to a one store,which the Company expects to close in early 2007. Management believes thecarrying value and useful lives are appropriate.

**Self Insurance**

We are self-insuredfor losses and liabilities related primarily to employee health and welfareclaims. Losses are accrued based upon our estimates of the aggregate liabilityfor claims incurred using certain actuarial assumptions followed in theinsurance industry and based on Company experience. Adjustments to earningsresulting from changes in historical loss trends have been insignificant forFiscal 2004, 2005 and 2006. Further, we do not anticipate any significantchange in loss trends, settlements or other costs that would cause asignificant change in our earnings.

F-10

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**Gift Cards, GiftCertificates and Credits**

The Company sells gift cards and gift certificates (“GiftCards”) and issues credits to its customers when merchandise is returned. TheCompany recognizes sales from Gift Cards when they are redeemed by the customerand income when the likelihood of the Gift Card being redeemed by the customeris remote (Gift Card breakage) and the Company determines that it does not havea legal obligation to remit the value of unredeemed Gift Cards to the relevantjurisdiction as abandoned property. The Company determines Gift Card breakageincome based upon historical redemption patterns. Breakage income representsthe balance of Gift Cards, for which the Company believes the likelihood ofredemption by the customer is remote. At that time, the Company will recognizebreakage income for those Gift Cards.

During the third quarter of fiscal 2006, the Company formeda new subsidiary to handle all Gift Card sales and maintain the liabilityrelated to Gift Cards. As a result of transferring all existing obligations tothe newly formed subsidiary, the Company recognized $2.4 million of breakageincome, within net sales, in the third quarter related to gift certificates andmerchandise credits sold/issued since the inception of the Gift Card program.An additional $120,000 of breakage income was recognized in the fourth quarterof 2006. There was no breakage income recognized for the same period in theprior year.

**Revenue Recognition**

Sales are recognized atthe “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 websiteare recognized at the expected time of delivery to the customer. Our customershave the right to return merchandise. Sales are reported net of actual andestimated returns. We maintain a reserve for potential product returns andrecord, as a reduction to sales, a provision for estimated product returns,which is determined based on historical experience. Charges or credits toearnings resulting from revisions to estimates on our sales return provisionwere approximately $20,000, ($29,000) and $42,000 for fiscal 2004, 2005 and2006, respectively. Amounts billed to customers for shipping and handling feesare included in net sales at the time of shipment. Costs incurred for shippingand handling are included in cost of sales.

**Operating Leases**

The Company leases retail stores and office spaceunder operating leases. Most leases contain construction allowancereimbursements by landlords, rent holidays, rent escalation clauses and/orcontingent rent provisions. The Company recognizes the related rental expenseon a straight-line basis over the lease term and records the differencebetween the amounts charged to expense and the rent paid as a deferred rentliability.

To account forconstruction allowance reimbursements from landlords and rent holidays, theCompany records a deferred rent liability included in accrued liabilities andother long-term liabilities on the consolidated balance sheets andamortizes the deferred rent over the lease term, as a reduction to rent expenseon the consolidated income statements. For leases containing rent escalationclauses, the Company records minimum rent expense on a straight-linebasis over the lease term on the consolidated income statement. The lease termused for lease evaluation includes option periods only in instances in whichthe exercise of the option period can be reasonably assured and failure toexercise such options would result in an economic penalty.

**Advertising costs**

Costs associated withadvertising are charged to store operating expense when the advertising firsttakes place. We spent $7,373,000, $7,695,000 and $11,895,000 on advertising infiscal 2004, 2005 and 2006, respectively.

F-11

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**Pre-OpeningStore Expenses**

Expenses associated withthe opening of new stores are expensed as incurred.

**Employee Benefit Plan**

Employees are eligible toparticipate in the Company’s 401(k) plan if they have been employed by theCompany for one year, have reached age 21, and work at least 1,000 hoursannually. Generally, employees can defer up to 18% of their gross wages up to themaximum limit allowable under the Internal Revenue Code. We can make adiscretionary matching contribution for the employee. Employer contributions tothe plan for fiscal 2004, fiscal 2005 and fiscal 2006 were $205,000, $227,000,and $236,000 respectively.

**Income Taxes**

The Company accounts forincome taxes in accordance with SFAS No. 109, “*Accounting for Income Taxes*.” This statement requires theCompany to recognize deferred tax liabilities and assets for the expectedfuture tax consequences of events that have been recognized in the Company’sfinancial statements or tax returns. Under this method, deferred taxliabilities and assets are determined based on the difference between thefinancial statement carrying amounts and tax bases of assets and liabilities,using applicable tax rates for the years in which the differences are expectedto reverse. When tax contingencies become probable, a liability for thecontingent amount is estimated based upon the Company’s best estimation of thepotential exposures associated with the timing and amount of deductions, aswell as various tax filing positions. As of December 30, 2006, the Company doesnot have tax contingencies.

**Stock-BasedCompensation**

On January 1, 2006,the Company adopted SFAS No. 123(R) “*Share-BasedPayment*” requiring the recognition of compensation expense in theConsolidated Statements of Income related to the fair value of employee share-basedawards. Determining the fair value of options at the grant date requiresjudgment, including estimating the expected term that stock options will beoutstanding prior to exercise, the associated volatility and the expecteddividends. Prior to adopting SFAS No. 123(R), the Company appliedAccounting Principles Board (“APB”) Opinion No. 25, and relatedInterpretations, in accounting for its share-based compensation plans.All employee stock options were granted at or above the grant date marketprice. Accordingly, no compensation cost was recognized for fixed stock optiongrants in prior periods. In accordance with SFAS No. 123(R), judgment isrequired in estimating the amount of share-based awards expected to beforfeited prior to vesting. If actual forfeitures differ significantly from theseestimates, share-based compensation expense could be materially impacted.(See Note 10).

**Earnings Per Share**

Basic earnings per shareis computed by dividing net income by the weighted-average number ofcommon shares outstanding for the period. Diluted earnings per share alsoincludes the dilutive effect of potential common shares (dilutive stockoptions) outstanding during the period.

**ComprehensiveIncome**

The Company reportscomprehensive income in accordance with the provisions of SFAS 130,*“Reporting Comprehensive Income.”*SFAS 130 established standards for the reporting and display ofcomprehensive income. Components of comprehensive income could include netincome, foreign currency translation adjustments and gains or losses associatedwith investments available for sale. There was no difference between net incomeand comprehensive income for any of the periods presented.

F-12

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**Segment Reporting**

SFAS No. 131,*“Disclosures about Segments of an Enterpriseand Related Information,”* establishesstandards for reporting information about a company’s operating segments. Italso establishes standards for related disclosures about products and services,geographic areas and major customers. We report in a single operating segment—theoperation of mall-based specialty retail stores. Revenues from externalcustomers are derived from merchandise sales and we do not rely on any major customersas a source of revenue.

| ** **  | ** ** | **53 Weeks Ended** | ** ** | **52 Weeks Ended** | ** ** | **52 Weeks Ended** | ** ** |
|-------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **  | ** ** | **January 1,  2005**    | ** ** | **December 31,  2005**  | ** ** | **December 30,  2006**  | ** ** |
| Sportswear  |       |                         | 69.1       | %                            |       |                         | 68.7       | % |   |   | 65.7 | % |   |
| Dresses     |       |                         | 22.3       |                         |       |                         | 21.7       |   |   |   | 24.5 |   |   |
| Accessories |       |                         | 8.6        |                         |       |                         | 9.6        |   |   |   | 9.8 |   |   |
| Total       |       |                         | 100.0      | %                            |       |                         | 100.0      | % |   |   | 100.0 | % |   |

 

**Concentration**

The Company has five major suppliers, who in totalrepresented over 44% of purchases in fiscal 2006, of which the largest vendoraccounted for 27% of the purchases during the year. The loss of any of thesesuppliers could adversely affect the Company’s operations.

**Recent AccountingDevelopments**

On October 6, 2005, the FASB issued FASB StaffPosition (“FSP”) No. FAS 13-1 “*Accountingfor Rental Costs Incurred during a Construction Period*.” The FASBhas concluded that rental costs incurred during and after a construction periodare for the right to control the use of a leased asset and must be recognizedas rental expense. Such costs were previously capitalized as constructioncosts, if the company had a policy to do so. The FSP is effective for reportingperiods beginning after December 15, 2005. The Company implemented FSP No. FAS13-1 during fiscal 2006. The impact of implementation decreased netincome by $182,000 for the fiscal year ended December 30, 2006.

On November 3, 2005, FASB issued FSP Nos. FAS 115-1and FAS 124-1, “*The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments.”* This FSPaddresses the determination as to when an investment is considered impaired,whether that impairment is other than temporary, and the timing and measurementof an impairment loss. The FSB is required to be applied to reporting periodsbeginning after December 15, 2005 and was adopted by the Company in thefirst quarter of fiscal 2006. The impact of the adoption of this FSP did nothave a material impact on its consolidated financial statements.

In July 2006, FASBissued Interpretation No. 48 (“FIN 48”), “*Accountingfor Uncertainty in Income Taxes*,” which clarifies the accounting foruncertainty in income taxes recognized in the financial statements inaccordance with FASB No. 109, “*Accountingfor Income Taxes”*. FIN 48 provides guidance on the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosures and transition. FIN 48 is effective for fiscal years beginningafter December 15, 2006. We are currently evaluating the impact of thisstandard on our consolidated financial statements.

**SupplementalStatements of Cash Flow Information**

The Company paid nointerest charges in fiscal 2004, 2005 and 2006. During fiscal 2004, 2005 and2006 the Company paid $4,143,000, $8,248,000 and $5,880,000 in income taxes,respectively. During fiscal 

F-13

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2004,2005 and 2006 the Company accrued equipment and leasehold improvements of$928,000, $859,000 and $2,000,000, respectively.

**NOTE 2.   RECEIVABLES**

| ** **              | ** ** | **December 31,** | ** ** | **December 30,** | ** ** |
|-------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| Construction allowances |       |                  | $          | 1,523,000             |       |   |   | $ | 876,000 |   |   |
| Third party credit card |       |                  | 3,500,000  |                  |       |   | 3,327,000 |   |   |
| Other                   |       |                  | 711,000    |                  |       |   | 591,000 |   |   |
|                    |       |                  | $          | 5,734,000             |       |   |   | $ | 4,794,000 |   |   |

 

**NOTE 3.   EQUIPMENT AND LEASEHOLD IMPROVEMENTS**

| ** **                                      | ** ** | **December 31,** | ** ** | **December 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| Leasehold improvements                          |       | $                     | 51,827,000 |                  | $          | 51,320,000 |   |
| Furniture, fixtures, and equipment              |       | 51,715,000            |       | 45,687,000            |       |
|                                            |       | 103,542,000           |       | 97,007,000            |       |
| Less: accumulated depreciation and amortization |       | (50,782,000           | )          | (46,557,000           | )          |
|                                            |       | $                     | 52,760,000 |                  | $          | 50,450,000 |   |

 

Store operating and general and administrativeexpenses include depreciation and amortization of $8,232,000, $9,779,000 and$11,026,000 in fiscal years 2004, 2005 and 2006, respectively.

**NOTE 4.   ACCRUED LIABILITIES**

| ** **                          | ** ** | **December 31,** | ** ** | **December 30,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| Operating expenses                  |       | $                     | 2,894,000  |                  | $          | 2,978,000 |   |
| Taxes, including income taxes       |       | 2,540,000             |       | 2,190,000             |       |
| Group insurance                     |       | 598,000               |       | 737,000               |       |
| Sales return reserve                |       | 803,000               |       | 845,000               |       |
| Leasehold additions                 |       | 859,000               |       | 2,000,000             |       |
| Other customer deposits and credits |       | 4,752,000             |       | 2,765,000             |       |
|                                |       | $                     | 12,446,000 |                  | $          | 11,515,000 |   |

 

Leasehold additionsgenerally represent a liability to general contractors for a final 10% payableon construction contracts for store construction or renovations.

**NOTE 5.   BANKDEBT**

During November 2005, the Company reached anagreement with its bank to amend the amount available under the AmendedRevolving Credit Facility. Pursuant to the newly Amended Revolving CreditFacility, $17,500,000 is available until expiration at November 30, 2008.The amounts outstanding under the credit facility bear interest at a maximumper annum rate equal to the bank’s prime, currently 8.25% rate at February 28,2007, less 0.25%. The agreement contains selected financial and othercovenants. Effective upon the occurrence of an event of default under the AmendedRevolving Credit Facility, the 

F-14

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Company grants to the banka security interest in the Company’s inventory and certain receivables. TheCompany has at all times been in compliance with all loan covenants.

There have been noborrowings against the line of credit during fiscal 2005 and 2006. There wereoutstanding letters of credit of $1.0 million and $1.1 million pursuant to the AmendedRevolving Credit Facility at December 31, 2005 and December 30, 2006,respectively.

**NOTE 6.   LILLIERUBIN EXIT COSTS**

During fiscal 2006, the Company recorded a pre-taxcharge of $5.7 million for asset impairment and store closing costs for theexit of the Lillie Rubin business. Included in the exit costs was a write downof leasehold improvements, furniture and fixtures on 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 millionfor contractual termination costs negotiated prior to year-end. Thesecosts were partially offset by the reversal of $1.3 million of deferred rentaccruals. The Company closed 16 of the stores as of December 30, 2006 andanticipates the closing of the remaining three stores, by the end of the firstfiscal quarter of 2007. The Company does not expect to incur significantadditional exit costs upon the closing of these properties in fiscal 2007.

Thefollowing is a summary of the activity in the reserve for exit costs:

| ** **                                    | ** ** | **BALANCE  BEGINNING  OF YEAR** | ** ** | **CHARGES** | ** ** | **CASH  PAYMENTS** | ** ** | **BALANCE  END  OF YEAR** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|-------------|------------|--------------------|------------|--------------------------------|------------|
| Contractual  termination costs                |       |                                 | $          | —      |       |               | $          | 1,449,000                      |       | $ | 1,064,000 |   | $ | 385,000 |   |
| Severance                                     |       |                                 | —     |        |       | 400,000            |       | 357,000                        |       | 43,000 |   |
| Impairment of  long lived assets and supplies |       |                                 | —     |        |       | 5,089,000          |       | —                         |       | — |   |
| Reversal of deferred  rent liability          |       |                                 | —     |        |       |   (1,261,000  | )          | —                         |       | — |   |
|                                               |            |                                      |            |             |            |                    |            |                                |            |  |  |  |  |  |  |

 

**NOTE 7.   OTHERLIABILITIES**

Other liabilitiesprimarily consist of accruals of future rent escalations and unamortizedlandlord construction allowances.

**NOTE 8.   COMMITMENTSAND CONTINGENCIES**

**Leases**

At December 30, 2006, the Company was obligatedunder operating leases for various store locations expiring at various timesthrough 2019. The terms of the leases generally provide for the payment ofminimum annual rentals, contingent rentals based on a percentage of sales inexcess of a stipulated amount, and a portion of real estate taxes, insuranceand common area maintenance. Most leases contain leasehold improvementreimbursements from landlords and/or rent holidays. In recognizing landlordincentives and minimum rent expenses, the Company amortizes the charges on astraight line basis over the lease term.

Storerental expense related to these leases, included in cost of sales, consisted ofthe following:

| ** **          | ** ** | **53 Weeks Ended** | ** ** | **52 Weeks Ended** | ** ** | **52 Weeks Ended** | ** ** |
|---------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **          | ** ** | **January 1,**          | ** ** | **December 31,**        | ** ** | **December 30,**        | ** ** |
| ** **          | ** ** | **2005**                     | ** ** | **2005**                     | ** ** | **2006**                     | ** ** |
| Minimal rentals     |       |                         | $          | 21,410,000                   |       |                         |       | $ | 23,980,000 |   |   |   | $ | 25,029,000 |   |   |
| Contingent  rentals |       |                         | 9,176,000  |                         |       |                         | 10,625,000 |   |   |   | 10,977,000 |   |   |
|                |       |                         | $          | 30,586,000                   |       |                         |       | $ | 34,605,000 |   |   |   | $ | 36,006,000 |   |   |

 

F-15

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Futureminimum payments under non-cancelable operating leases consisted of thefollowing at December 30, 2006:

| **Fiscal Year**                 | ** ** | ** ** | ** **  |
|--------------------------------------|------------|------------|-------------|
| 2007                                 |       | $          | 25,869,000  |   |
| 2008                                 |       | 24,710,000 |        |
| 2009                                 |       | 24,035,000 |        |
| 2010                                 |       | 22,194,000 |        |
| 2011                                 |       | 20,657,000 |        |
| Thereafter                           |       | 56,644,000 |        |
| Total future  minimum lease payments |       | $          | 174,109,000 |   |

 

The operating leasesincluded in the above table do not include contingent rent based upon salesvolume, which represented approximately 1.1% of minimum lease obligations infiscal 2006, or variable costs such as maintenance, insurance and taxes, whichrepresented approximately 42.8% of minimum lease obligations in fiscal 2006.

**ContractualObligations and Commercial Commitments**

Thefollowing tables summarize our contractual obligations and commercialcommitments as of December 30, 2006.

| ** **               | ** ** | **Payments Due in Period** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | ** **                                | ** ** | **Within** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **               | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| ** **               | ** ** | **(In thousands)**                   | ** ** |
| Contractual  Obligations |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Employment Contracts     |       | $                                         | 2,855      |   | $ | 1,370 |   |   | $ | 1,485 |   |   |   | — |   |   |   | — |   |   |
| Purchase Obligations     |       | 36,696                                    |       | 36,696 |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total                    |       | $                                         | 39,551     |   | $ | 38,066 |   |   | $ | 1,485 |   |   |   | — |   |   |   | — |   |   |

 

| ** **                | ** ** | **Payments Due in Period** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | ** **                                | ** ** | **Within** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **                | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| ** **                | ** ** | **(In thousands)**                   | ** ** |
| Commercial Commitments    |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit Facility           |       | $                                         | —     |   | $ | — |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Standby Letters of Credit |       | 1,122                                     |       | 1,122 |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total                     |       | $                                         | 1,122      |   | $ | 1,122 |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |

 

We issue standby lettersof credit primarily for the importation of merchandise inventories. The Companydoes not have any off balance sheet financing arrangements.

**Contingencies**

The Company is exposed to a number of asserted andunasserted potential claims. Management does not believe it is reasonablypossible that resolution of these matters will result in a material loss. TheCompany had no guarantees, subleases or assigned lease obligations as of December 31,2005 and December 30, 2006.

F-16

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**NOTE 9.   INCOMETAXES**

Theprovision for income taxes includes:

| ** **                  | ** ** | **53 Weeks  Ended** | ** ** | **52 Weeks  Ended** | ** ** | **52 Weeks  Ended** | ** ** |
|-----------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                  | ** ** | **January 1,**      | ** ** | **December 31,**    | ** ** | **December 30,**    | ** ** |
| ** **                  | ** ** | **2005**                 | ** ** | **2005**                 | ** ** | **2006**                 | ** ** |
| Current:                    |       |                     |       |                     |       |                     |       |   |   |
| Federal                     |       | $                        | 4,328,000  |                     | $          | 7,792,000                |       |   | $ | 5,536,000 |   |   |
| State                       |       | 996,000                  |       | 925,000                  |       |                     | 368,000    |   |   |
|                        |       | 5,324,000                |       | 8,717,000                |       |                     | 5,904,000  |   |   |
| Deferred:                   |       |                     |       |                     |       |                     |       |   |   |
| Federal                     |       | 2,489,000                |       | (959,000                 | )          |                     | (59,000    | ) |   |
| State                       |       | 217,000                  |       | (83,000                  | )          |                     | 34,000     |   |   |
|                        |       | 2,706,000                |       | (1,042,000               | )          |                     | (25,000    | ) |   |
| Provision for  income taxes |       | $                        | 8,030,000  |                     | $          | 7,675,000                |       |   | $ | 5,879,000 |   |   |

 

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

| ** **                                                | ** ** | **53 Weeks  Ended** | ** ** | **52 Weeks  Ended** | ** ** | **52 Weeks  Ended** | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                | ** ** | **January 1,**      | ** ** | **December 31,**    | ** ** | **December 30,**    | ** ** |
| ** **                                                | ** ** | **2005**                 | ** ** | **2005**                 | ** ** | **2006**                 | ** ** |
| Effective federal  tax rate                               |       |                     | 34.5       | %                        |       |                     | 35.0       | % |   |   | 35.0 | % |   |
| State and local  income taxes, net of federal tax benefit |       |                     | 3.3        | %                        |       |                     | 3.5        | % |   |   | 3.5 | % |   |
| Other net,  primarily permanent differences               |       |                     | (0.1       | )%                       |       |                     | (2.1       | )% |   |   | 3.0 | % |   |
| Provision for income taxes                                |       |                     | 37.7       | %                        |       |                     | 36.4       | % |   |   | 41.5 | % |   |

 

Themajor components of the Company’s net deferred tax assets (liabilities) at December 31,2005 and December 30, 2006 are as follows:

| ** **            | ** ** | **December 31,** | ** ** | **December 30,** | ** ** |
|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| **Current**           | ** ** | ** **            | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Group insurance       |       |                  | $          | 237,000               |       |   |   | $ | 292,000 |   |   |
| Sales return  reserve |       |                  | 319,000    |                  |       |   | 335,000 |   |   |
| Inventory             |       |                  | 481,000    |                  |       |   | 447,000 |   |   |
| Prepaid expenses      |       |                  | (346,000   | )                     |       |   | (395,000 | ) |   |
| Total Current         |       |                  | $          | 691,000               |       |   |   | $ | 679,000 |   |   |
|                       |            |                       |            |                       |            |  |  |  |  |  |  |  |  |

 

| ** **                                  | ** ** | **December 31,** | ** ** | **December 30,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **Non Current**                        | ** ** | ** **            | ** ** | **2005**              | ** ** | **2006** | ** ** |
| State tax net  operating loss carryforwards |       | $                     | 76,000     |                  | $          | 71,000 |   |
| Deferred rent                               |       | 875,000               |       | 1,041,000             |       |
| Deferred  construction allowances           |       | (650,000              | )          | (1,865,000            | )          |
| Other  (principally depreciation expense)   |       | (2,406,000            | )          | (1,315,000            | )          |
| Total Non-current                           |       | $                     | (2,105,000 | )                     | $          | (2,068,000 | ) |
|                                             |            |                       |            |                       |            |  |  |  |  |

 

The Company’s income taxreturns are periodically audited by various state and local jurisdictions.Additionally, the Internal Revenue Service audits the Company’s federal incometax return. The Company 

F-17

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reservesfor tax contingencies, when it is probable that a liability has been incurredand the contingent amount is reasonably estimable. These reserves are basedupon the Company’s best estimation of the potential exposures associated withthe timing and amount of deductions as well as various tax filing positions.

**NOTE 10.   STOCKBASED COMPENSATION**

Effective January 1, 2006, the Company beganrecording compensation expense associated with stock options in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 123(R), “*Share-BasedPayment,*” as interpreted by SEC Staff Accounting Bulletin No. 107.Prior to January 1, 2006, we had accounted for stock options according tothe provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees,and related interpretations, and therefore no related compensation expense wasrecorded for awards granted with no intrinsic value. We adopted the modifiedprospective transition method provided for under SFAS No. 123(R), and,consequently, have not retroactively adjusted results from prior periods. Underthis transition method, compensation cost associated with stock optionsrecognized in Fiscal 2006 includes: 1) quarterly amortization related to theremaining unvested portion of all stock option awards granted prior to January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS No. 123; and 2) quarterly amortization relatedto all stock option awards granted subsequent to January 1, 2006, whengranted, based on the grant-date fair value estimated in accordance with theprovisions of SFAS No. 123(R).

The Company’s 2000 Stock Option Plan provides for thegranting of either incentive stock options (“ISO’s”) or non-qualified optionsto purchase up to 825,000 shares of common stock. As of December 30, 2006,there were 67,032 shares under the 2000 plan available for future grant. TheCompany’s 2003 Stock Option Plan provides for the granting of either ISO’s ornon-qualified options to purchase up to 1,350,000 shares of common stock. As ofDecember 30, 2006, there were 186,375 shares under the 2003 plan availablefor future grant. All of the Company’s prior stock option plans have expired asto the ability to grant new options.

Stock awards outstandingunder the Company’s current plans have generally been granted at prices whichare equal to the market value of our stock on the date of grant, generally vestover four years and expire no later than ten years after the grant date.Effective January 1, 2006, we recognize compensation expense ratably overthe vesting period, net of estimated forfeitures. As of December 30, 2006,there was $939,000 of total unrecognized compensation cost related tonon-vested options, which is expected to be recognized over a remainingweighted-average vesting period of 1.35 years. The total intrinsic valueof options exercised during the 52 week period ended December 30, 2006 wasapproximately $5.0 million.

**Secondary Offering**

On November 21, 2006, the Company completed asecondary offering of the Company’s Common Stock. The Company issued 200,000shares of Common Stock and received net proceeds of $4.4 million. Thefunds will be used for general corporate purposes. In addition, 1,675,000shares were sold by officers and controlling shareholders.

F-18

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Thefollowing table details the effect on net income and earnings per share “asreported” as if compensation expense had been recorded for the years ended December 31,2005 and January 1, 2005 based on the fair value method under SFAS No. 123,“*Accounting for Stock-Based Compensation*”.The reported and pro forma net income and earnings per share for the year endedDecember 30, 2006 is the same since share-based compensation expense iscalculated under the provisions of SFAS No. 123(R).

| ** **                                                                                                                  | ** ** | **53 weeks  Ended**  | ** ** | **52 Weeks  Ended**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                  | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** |
| Net income as  reported                                                                                                     |       | $                         | 13,297,000 |                        | $          | 13,405,000 |   |
| Add: Stock-based  employee compensation expense determined under APB 25, net of tax                                         |       | —                    |       | —                      |       |
| Deduct: Total  stock based employee compensation determined under fair value based method of  SFAS No. 123, net of tax |       | $                         | 1,086,000  |                        | $          | 930,000 |   |
| Pro-forma net  income                                                                                                       |       | $                         | 12,211,000 |                        | $          | 12,475,000 |   |
| Basic earnings  per share:                                                                                                  |       |                      |       |                        |       |
| As reported                                                                                                                 |       | $                         | 0.85       |                        | $          | 0.85 |   |
| Pro-forma                                                                                                                   |       | $                         | 0.78       |                        | $          | 0.80 |   |
| Diluted earnings  per share:                                                                                                |       |                      |       |                        |       |
| As reported                                                                                                                 |       | $                         | 0.83       |                        | $          | 0.83 |   |
| Pro-forma                                                                                                                   |       | $                         | 0.76       |                        | $          | 0.78 |   |

 

Inaccordance with SFAS No. 123, the fair value of each option grant isestimated on the date of grant using the Black-Scholes option pricing model usingthe assumptions below for grants in the respective periods:

| ** **               | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|--------------------------|------------|------------|------------|------------|------------|
| ** **               | ** ** | **Grants** | ** ** | **Grants** | ** ** |
| Expected dividend  rate  |       |       | $          | 0.00       |       |   |   | $ | 0.00 |   |   |
| Expected  volatility     |       |       | 43.9       | %          |       |   | 40.1 | % |   |
| Risk free  interest rate |       |       | 3.8        | %          |       |   | 4.25 | % |   |
| Expected lives (years)   |       |       | 5.0        |       |       |   | 5.0 |   |   |

 

The weighted average fairvalue of options granted during fiscal years ended January 1, 2005 and December 31,2005 were $15.17 and $12.83. The were no options granted during fiscal 2006.

**Stock Plans**

On October 4, 2000, the Company adopted the 2000Stock Option Plan. The plan is administered by the Compensation and PlanAdministration Committee of the Company’s Board of Directors. Under the optionplan the Company reserved 550,000 shares of the Company’s authorized commonstock for issuance to officers and key employees of the Company.

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

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

Options granted under the plans have a ten-year termand may be either incentive stock options or non-qualified stock options. Theoptions are granted at an exercise price equal to the fair market value on thedate of grant and generally vest over a four year period. The granted optionsgenerally become 

F-19

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exercisable at the maximumrate of 25% per annum, to the extent the Company’s earning plan, as approved bythe Compensation and Plan Administration Committee, is achieved. The price ispayable in cash at the time of the exercise or, at the discretion of theAdministrators, through the delivery of shares of Common Stock or the Company’swithholding of shares otherwise deliverable to the employee, or a combinationthereof.

Thefollowing table summarizes all stock option transactions for the three fiscalyears ended December 30, 2006:

| ** **                                         | ** ** | **Weighted Average** | ** ** | **Exercise** | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|--------------|------------|
| ** **                                         | ** ** | **Shares**                | ** ** | **Prices**   | ** ** |
| Shares under  option as of December 27, 2003  |       |                      | 2,022,000  |         |       |   | $ | 8.46 |   |   |
| Options granted in 2004                            |       |                      | 105,000    |         |       |   | 15.17 |   |   |
| Options exercised in 2004                          |       |                      | (392,750   | )            |       |   | 2.36 |   |   |
| Options canceled in 2004                           |       |                      | (82,500    | )            |       |   | 9.67 |   |   |
| Shares under option as of January 1, 2005     |       |                      | 1,651,750  |         |       |   | 10.43 |   |   |
| Options granted in 2005                            |       |                      | 140,000    |         |       |   | 12.83 |   |   |
| Options exercised in 2005                          |       |                      | (105,500   | )            |       |   | 5.63 |   |   |
| Options canceled in 2005                           |       |                      | (204,750   | )            |       |   | 11.48 |   |   |
| Shares under option as of December 31, 2005   |       |                      | 1,481,500  |         |       |   | 10.85 |   |   |
| Options exercised in 2006                          |       |                      | (298,997   | )            |       |   | 5.12 |   |   |
| Options cancelled in 2006                          |       |                      | (42,875    | )            |       |   | 13.33 |   |   |
| Shares under  options as of December 30, 2006 |       |                      | 1,139,628  |         |       |   | $ | 12.26 |   |   |

 

| **Options Exercisable at:** | ** ** | ** ** | ** ** | **Number  of Shares** | ** ** | **Weighted average  exercise price** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------|------------|------------------------------------------------|------------|
| January 1,  2005                 |       | 712,375    |       |                       | $          | 7.47                                           |       |   |
| December 31,  2005               |       | 742,250    |       |                       | $          | 8.80                                           |       |   |
| December 30, 2006                |       | 732,628    |       |                       | $          | 11.93                                          |       |   |

 

Significantoption groups outstanding at December 30, 2006 and related weightedaverage price and life information follows:

| **Grant Date** | ** ** | ** ** | ** ** | **Options  Outstanding** | ** ** | **Options  Exercisable** | ** ** | **Exercise  Price** | ** ** | **Remaining  Life (Years)** | ** ** |
|---------------------|------------|------------|------------|--------------------------|------------|--------------------------|------------|---------------------|------------|----------------------------------|------------|
| 8/30/05             |       |       | 25,000     |                     |       |                     | 6,250      |                |       |                             | $          | 16.40 |   |   |   | 9 |   |   |
| 7/25/05             |       |       | 2,500      |                     |       |                     | 2,500      |                |       |                             | 18.30      |   |   |   | 9 |   |   |
| 5/3/05              |       |       | 78,000     |                     |       |                     | 34,000     |                |       |                             | 11.53      |   |   |   | 8 |   |   |
| 5/2/05              |       |       | 10,000     |                     |       |                     | 4,500      |                |       |                             | 11.61      |   |   |   | 8 |   |   |
| 4/25/05             |       |       | 5,000      |                     |       |                     | 2,250      |                |       |                             | 11.00      |   |   |   | 8 |   |   |
| 1/22/04             |       |       | 102,500    |                     |       |                     | 71,000     |                |       |                             | 15.17      |   |   |   | 7 |   |   |
| 7/22/03             |       |       | 832,050    |                     |       |                     | 527,550    |                |       |                             | 12.65      |   |   |   | 6 |   |   |
| 4/16/02             |       |       | 73,578     |                     |       |                     | 73,578     |                |       |                             | 4.69       |   |   |   | 5 |   |   |
| 10/2/01             |       |       | 11,000     |                     |       |                     | 11,000     |                |       |                             | 2.13       |   |   |   | 5 |   |   |

 

F-20

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Asummary of the changes in stock options outstanding during the 52-weekperiod ended December 30, 2006 is presented below:

| ** **              | ** ** | **Total Outstanding** | ** ** | **Currently Exercisable** | ** ** |
|-------------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **Number**                 | ** ** | ** **                     | ** ** | ** ** | ** ** | **Aggregate** | ** ** | **Number** | ** ** | ** ** | ** ** | ** ** | ** ** | **Aggregate** | ** ** |
| ** **              | ** ** | **of**                     | ** ** | **Average**                    | ** ** | **Average** | ** ** | **Intrinsic** | ** ** | **of** | ** ** | **Average** | ** ** | **Average** | ** ** | **Intrinsic** | ** ** |
| ** **              | ** ** | **Options**                | ** ** | **Price(1)**                   | ** ** | **Life(2)** | ** ** | **Value(3)** | ** ** | **Options** | ** ** | **Price(1)** | ** ** | **Life(2)** | ** ** | **Value(3)** | ** ** |
| December 31, 2005  |       | 1,481,500                  |       |                           | $          | 10.85 |   |   | 7.45 |   | $ | 9,579,495 |   | 742,250 |   |   | $ | 8.80 |   |   |   | 6.92 |   |   | $ | 6,324,778 |   |
| Granted                 |       | —                     |       |                           | —     |   | ** ** | ** ** | ** ** | ** ** |   | — |   |   | — |   |   |   |   |   |   |   |   |
| Vested                  | ** ** | ** **                 | ** ** |                           |       |   |   |   |   |   |   | 289,375 |   |   |   |   |   |   |   |   |   |   |   |
| Canceled/forfeited      |       | (42,875                    | )          |                           | 13.33      |   | ** ** | ** ** | ** ** | ** ** |   | — |   |   | — |   |   |   |   |   |   |   |   |
| Exercised               |       | (298,997                   | )          |                           | 5.12       |   | ** ** | ** ** | ** ** | ** ** |   | (298,997 | ) |   | 5.12 |   |   |   |   |   |   |   |   |
| December 30,  2006 |       | 1,139,628                  |       |                           | $          | 12.26 |   |   | 6.80 |   | $ | 6,412,887 |   | 732,628 |   |   | $ | 11.93 |   |   |   | 6.66 |   |   | $ | 4,370,362 |   |

----

(1)          Weighted-averageexercise price.

(2)          Weighted-averagecontractual life remaining in years.

(3)          The aggregate intrinsicvalues in the table above are based on the Company’s closing stock price as ofthe last business day of the periods ended December 31, 2005 and December 30,2006, which was $17.32 and $25.24, respectively.

A summary of the activity for the non-vested shareawards during the 52-week period ended December 30, 2006 ispresented below:

| ** **                              | ** ** | ** **             | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                              | ** ** | **Common**             | ** ** | **at**              | ** ** |
| ** **                              | ** ** | **Stock Options** | ** ** | **Grant Date** | ** ** |
| Non-vested—December 31,  2005 |       |                   | 739,250    |                |       |   | $ | 12.92 |   |   |
| Granted                                 |       |                   | —     |                |       |   | — |   |   |
| Vested                                  |       |                   | (289,375   | )                   |       |   | 12.91 |   |   |
| Cancelled/forfeited                     |       |                   | (42,875    | )                   |       |   | 13.33 |   |   |
| Non-vested—December 30,  2006 |       |                   | 407,000    |                |       |   | $ | 12.87 |   |   |

 

----

(1)          We anticipateapproximately 397,000 shares will vest in future periods.

Prior to the adoption ofSFAS No. 123(R), we presented all tax benefits resulting from the exerciseof stock options as operating cash flows in the Condensed ConsolidatedStatement of Cash Flows. SFAS No. 123(R) requires that cash flowsresulting from tax deductions in excess of the cumulative compensation costrecognized for options exercised (“excess tax benefits”) be classified asfinancing cash flows. For the 52-week period ended December 30, 2006,there was $1.8 million of excess tax benefits realized from the exercise ofstock options.

F-21

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As of December 30,2006, there was approximately $939,000 of total recognized compensation costrelated to nonvested share-based compensation awards granted under the stockoption plans. That cost is expected to be recognized over a weighted averageperiod of 1.35 years. The total fair value of shares vested during the yearended December 30, 2006 was $1.4 million. The following table representsas of December 30, 2006 the share-based compensation expense to berecognized in future periods:

| **Fiscal Year** | ** ** | ** ** | ** ** | **Compensation  Expense on  Stock Options** | ** ** |
|----------------------|------------|------------|------------|-------------------------------------------------------|------------|
| 2007                 |       |       | $          | 760,229                                               |       |   |
| 2008                 |       |       | 125,965    |                                                  |       |
| 2009                 |       |       | 53,214     |                                                  |       |
|                 |       |       | $          | 939,408                                               |       |   |

 

**NOTE 11. EarningsPer Share**

Thefollowing table sets forth the computations of basic and diluted earnings pershare (in thousands, except per share amounts):

| ** **                                                      | ** ** | **53 weeks Ended**  | ** ** | **52 Weeks Ended**    | ** ** | **52 Weeks Ended**    | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **January 1, 2005** | ** ** | **December 31, 2005** | ** ** | **December 30, 2006** | ** ** |
| Net income                                                      |       |                          | $          | 13,297,000                      |       |                            |       | $ | 13,405,000 |   |   |   | $ | 8,271,000 |   |   |
| Net income per  share—basic                                |       |                          | $          | 0.85                            |       |                            |       | $ | 0.85 |   |   |   | $ | 0.52 |   |   |
| Net income per  share—diluted                              |       |                          | $          | 0.83                            |       |                            |       | $ | 0.83 |   |   |   | $ | 0.51 |   |   |
| Weighted average  common shares outstanding                     |       |                          | 15,589,000 |                            |       |                            | 15,726,000 |   |   |   | 15,849,000 |   |   |
| Dilutive effect  of stock options                               |       |                          | 415,000    |                            |       |                            | 424,000    |   |   |   | 369,000 |   |   |
| Weighted average common  and potentially dilutive common shares |       |                          | 16,004,000 |                            |       |                            | 16,150,000 |   |   |   | 16,218,000 |   |   |

 

Optionsto purchase 25,000 and 10,000 common shares at exercise prices of $16.40 and$18.30 per share, respectively, were outstanding, during fiscal 2005 andfiscal 2006, but were not included in the computation of dilutive earnings pershare because to do so would have been anti-dilutive.

F-22

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**NOTE 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)**

| ** **                                 | ** ** | **First**                                 | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                 | ** ** | **Quarter**                               | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                 | ** ** | **(In thousands, except per share data)** | ** ** |
| **52  weeks ended December 30, 2006** |       |                                      |       |        |       |        |       |        |       |
| Net sales                                  |       | $                                         | 63,821     |        | $          | 71,682      |       | $           | 59,935     | (1) | $ | 83,554 |   |
| Gross profit                               |       | 29,182                                    |       | 35,297      |       | 28,266      |       | 40,361      |       |
| Income before  income tax provision        |       | 2,833                                     |       | 2,718       | (2)        | 1,131       |       | 7,468       |       |
| Income tax  provision                      |       | 1,105                                     |       | 1,060       |       | 441         |       | 3,273       |       |
| Net income                                 |       | $                                         | 1,728      |        | $          | 1,658       |       | $           | 690        |   | $ | 4,195 |   |
| Basic and diluted  earnings per share:     |       |                                      |       |        |       |        |       |        |       |
| Basic earnings  per share:                 |       | $                                         | 0.11       |        | $          | 0.11        |       | $           | 0.04       |   | $ | 0.26 |   |
| Diluted earnings  per share:               |       | $                                         | 0.11       |        | $          | 0.10        |       | $           | 0.04       |   | $ | 0.26 |   |
| **52 weeks ended December 31, 2005**  | ** ** | ** **                                | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Net sales                                  |       | $                                         | 62,793     |        | $          | 66,970      |       | $           | 57,262     |   | $ | 79,320 |   |
| Gross profit                               |       | 27,133                                    |       | 30,366      |       | 26,113      |       | 37,749      |       |
| Income before  income tax provision        |       | 2,908                                     |       | 4,960       |       | 1,820       |       | 11,392      |       |
| Income tax  provision                      |       | 1,151                                     |       | 1,960       |       | 713         |       | 3,851       |       |
| Net income                                 |       | $                                         | 1,757      |        | $          | 3,000       |       | $           | 1,107      |   | $ | 7,541 |   |
| Basic and diluted  earnings per share:     |       |                                      |       |        |       |        |       |        |       |
| Basic earnings  per share:                 |       | $                                         | 0.11       |        | $          | 0.19        |       | $           | 0.07       |   | $ | 0.48 |   |
| Diluted earnings per  share:               |       | $                                         | 0.11       |        | $          | 0.19        |       | $           | 0.07       |   | $ | 0.47 |   |

----

(2)          Includes recognition of$2.4 million of breakage income for previously issued gift cards andmerchandise credits.

(2)          Includes a charge of$5.7 million for the exit of the Lillie Rubin business.

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

** **

F-23

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**Cache,Inc and SubsidiariesValuation and Qualifying Accounts**

| ** **                             | ** ** | ** **          | ** ** | **Additions**      | ** ** | ** **   | ** ** | ** **     | ** ** |
|----------------------------------------|------------|---------------------|------------|--------------------|------------|--------------|------------|----------------|------------|
| ** **                             | ** ** | **Balance at** | ** ** | **Charge to** | ** ** | ** **   | ** ** | ** **     | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **Beg. of**    | ** ** | **Costs and** | ** ** | **Other**    | ** ** | **Deductions** | ** ** | **End of** | ** ** |
| **Sales Return Reserve**     | ** ** | **Period**          | ** ** | **Expenses**       | ** ** | **Accounts** | ** ** | **$**          | ** ** | **Period** | ** ** |
| 53 Weeks Ended  January 1, 2005   |       | $              | 812,000    |               |       | $       | 20,000     |           |       |   | — |   |   |   | — |   |   | $  | 832,000 |   |
| 52 Weeks Ended  December 31, 2005 |       | $              | 832,000    |               |       | $       | —     |           |       |   | — |   |   |   | ($29,000 | ) |   | $  | 803,000 |   |
| 52 Weeks Ended  December 30, 2006 |       | $              | 803,000    |               |       | $       | 42,000     |           |       |   | — |   |   |   | — |   |   | $  | 845,000  |   |

 

F-24

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