Except for the historical information contained in this Form 10-Q, the matters addressed herein are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company's expectation or belief concerning future events. Without limiting the foregoing, the words "believes," "thinks," "anticipates," "estimates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. The Company cautions that forward-looking statements are subject to risks, uncertainties, assumptions and other important factors that could cause actual results to differ materially, or otherwise, from those expressed or implied in the forward-looking statements, including, without limitation, the effect of economic and market conditions and competition, the ability to open new stores and expand into new markets, the risks relating to foreign importing operations and the other risks detailed from time to time in the Company's most recent Form 10-K, Forms 10-Q and other reports filed with the Securities and Exchange Commission. Other unknown or unpredictable factors also could harm the Company's business, financial condition and results. Consequently, there can be no assurance that actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable securities laws.

RESULTS OF OPERATIONS

The following table sets forth our results of operations for the 39 and 13-week periods ended September 27, 2008 and September 29, 2007, respectively, expressed as a percentage of net sales. Amounts include the combined results of our Cache and Cache Luxe stores.

                                       39-Weeks Ended                   13-Weeks Ended
                               September 27,    September 29,   September 27,    September 29,
                                   2008             2007            2008             2007
Sales                                  100.0 %          100.0 %         100.0 %          100.0 %
Cost of sales                           55.9             53.8            55.9             54.3
Gross profit                            44.1             46.2            44.1             45.7
Store operating expenses                35.9             37.1            39.6             38.1
General and administrative
expenses                                 8.3              8.9             8.3              8.1
Store exit costs                         1.4             (0.0 )           0.8             (0.1 )
Operating income (loss)                 (1.5 )            0.2            (4.6 )           (0.4 )
Interest expense                        (0.1 )            0.0            (0.1 )           (0.1 )
Interest income                          0.3              1.0             0.2              0.9
Income (loss) before income
taxes                                   (1.3 )            1.2            (4.5 )            0.4
Income tax provision
(benefit)                               (0.5 )            0.5            (1.7 )            0.1
Net income (loss)                       (0.8 )%           0.7 %          (2.8 )%           0.3 %

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

                                              39-Weeks Ended                           13-Weeks Ended
                                     September 27,       September 29,      September 27,         September 29,
                                         2008                2007               2008                  2007
Total store count, at end of
period                                          295                 296                295                    296
Net sales growth (decrease)                     2.0 %               0.3 %             (4.0 )%                 1.1 %
Comparable store sales growth                     1 %                 2 %               (4 )%                   4 %
Average sales per transaction
decrease                                       (1.5 )%             (7.8 )%            (1.2 )%                (6.7 )%
Average number of transactions
growth (decrease)                               2.5 %              10.6 %             (2.8 )%                11.0 %
Net sales per average square foot   $           319     $           319    $            93      $              98
Total square footage, at end of
period (in thousands)                           596                 604                596                    604

Net sales

During the 39-week period ended September 27, 2008, net sales increased to $199.8 million from $195.9 million, an increase of $3.9 million, or 2.0%, over the same 39-week period last year. This reflects $1.8 million of additional net sales, as a result of a 1% increase in comparable store sales, an increase of $2.3 million of net sales from our Mary L. division, and a decrease of $198,000 from our non-comparable store sales. During the first half of fiscal 2008, comparable store sales increased due to strong customer response to the sportswear assortment and the Company's aggressive pricing strategy. This increase was partially offset by a decrease in comparable store sales during the 13-week period ended September 27, 2008, as discussed below. The increase in net sales in fiscal 2008 at Cache stores reflected a 2.5% increase in sales transactions, which was partially offset by a 1.5% decrease in average dollars per transactions, primarily due to the new pricing strategy.

During the 13-week period ended September 27, 2008, net sales decreased to $58.1 million from $60.6 million, a decrease of $2.5 million, or 4.0%, below the same 13-week period last year. This reflects a $2.2 million decrease in net sales, as a result of a 4% decrease in comparable stores sales and a $473,000 decrease in net sales from our Mary L. division. These decreases were partially offset by a $263,000 increase in net sales from our non-comparable stores. Comparable store sales decreased due to the challenging economy, which heightened in severity in September causing a dramatic reduction in mall traffic. The decrease in net sales in fiscal 2008 at Cache stores reflected a 2.8% decrease in sales transactions and a 1.2% decrease in average dollars per transaction, primarily due to our new pricing strategy.

Gross profit

During the 39-week period ended September 27, 2008, gross profit decreased to $88.2 million from $90.6 million, a decrease of $2.4 million, or 2.6%, as compared to the same 39-week period last year. As a percentage of net sales, gross profit decreased to 44.1% from 46.2%, last year. This decrease was primarily due to the Company's implementation of the new pricing strategy, as compared to the same period last year, and an increase in operational costs related to our subsidiary - Adrienne Victoria Designs or "AVD". These costs were partially offset by savings from increased direct sourcing of merchandise through AVD and a decrease in buying expense, as compared to the same period last year.

During the 13-week period ended September 27, 2008, gross profit decreased to $25.6 million from $27.7 million, a decrease of $2.1 million, or 7.4%, as compared to the same 13-week period last year. As a percentage of net sales, gross profit decreased to 44.1% from 45.7%, last year. The decrease of 160 basis points was due to the Company's implementation of the new pricing strategy, as compared to the same period last year, and partially due to an increase in operational costs related to AVD. These costs were partially offset by savings from increased direct sourcing of merchandise through AVD and a decrease in buying and occupancy expense, as compared to the same period last year. The decrease in gross profit of $2.1 million was a result of the decrease in sales due to the challenging economy, which heightened in severity in September, causing a dramatic reduction in mall traffic.

Store operating expenses

During the 39-week period ended September 27, 2008, store operating expenses decreased to $71.7 million from $72.7 million, a decrease of $962,000, or 1.3%, as compared to the same 39-week period last year. As a percentage of net sales, store operating expenses decreased to 35.9% from 37.1%, for the 39-week period last year. Store operating expenses decreased principally due to lower marketing expenses ($3.1 million), which was primarily caused by the Company eliminating all branding (TVand print) efforts in fiscal 2008, along with a reduction in direct mail advertisements mailed to customers. The decrease in marketing expense was partially offset by an increase in depreciation and amortization expense ($674,000), due to full nine months depreciation on assets purchased towards the latter part of fiscal 2007, assets purchased to enhance our customer service department and installation of second registers at a majority of our stores, self insured medical expense ($611,000), due to an increase in claim payments to the insurance company, payroll expense ($573,000), primarily due to annual increases and other miscellaneous expense categories.

During the 13-week period ended September 27, 2008, store operating expenses decreased to $23.0 million from $23.1 million, a decrease of $32,000, or 0.1%, as compared to the same 13-week period last year. As a percentage of net sales, store operating expenses increased to 39.6% from 38.1%, for the 13-week period last year. Store operating expenses decreased, principally due to lower marketing expenses ($126,000) and lower payroll expense ($405,000), primarily due to a reduction in hours

offered to employees paid on an hourly basis and reductions in other miscellaneous expense categories, partially offset by an increase in self insured medical expense ($619,000), due to an increase in claim payments to the insurance company.

General and administrative expenses

During the 39-week period ended September 27, 2008, general and administrative expenses decreased to $16.7 million from $17.4 million, a decrease of $723,000, or 4.2%, below the same 39-week period last year. As a percentage of net sales, general and administrative expenses decreased to 8.3% from 8.9%. General and administrative expenses decreased, primarily due to lower professional fees ($2.0 million), which was due to lower audit fees during the current fiscal year and the inclusion of nonrecurring legal settlement costs ($1.0 million) in the same period last year. The decrease was partially offset by increases in shipping expense ($343,000), due to shipment of products for our Mary L. division, sales commissions ($313,000), paid to an agent for the sale of products related to our Mary L. division, outside services ($282,000), repair and maintenance ($210,000), amortization ($89,000) of intangibles acquired in connection with the acquisition of AVD and several other miscellaneous expense categories.

During the 13-week period ended September 27, 2008, general and administrative expenses decreased to $4.8 million from $4.9 million, a decrease of $101,000, or 2.1%, below the same 13-week period last year. As a percentage of net sales, general and administrative expenses increased to 8.3% from 8.1%. General and administrative expenses decreased, primarily due to a reduction in professional fees ($107,000).

Store exit costs

During the 39-week period ended September 27, 2008, the Company recorded a pre-tax charge of $2.8 million ($1.7 million after tax or $0.13 per diluted share) for 16 underperforming stores. Of the 16 underperforming stores, the Company has closed five during fiscal 2008 and expects to close the remaining stores over the balance of fiscal 2008 and early 2009. Included in the store exit costs is a write down of equipment and leasehold improvements and furniture and fixtures in the amount of $2.3 million, severance accrual of $198,000 and lease termination costs of $990,000. These costs were offset by the reversal of $750,000 of deferred rent accruals. Store exit costs of $449,000 were recorded during the 13-week period ended September 27, 2008, for additional store closure costs.

Other income/expense

During the 39-week period ended September 27, 2008, other income (expense) decreased to $423,000 from $1.9 million, a decrease of $1.5 million, or 78.1%, as compared to the same 39-week period last year. This decrease was due to a reduction in interest income of $1.4 million, caused by lower interest rates and lower average cash and marketable securities balances, coupled with charges related to interest expense for the note payable recorded in connection with the acquisition of AVD. The reduction in average cash balances was primarily due to the repurchases of the Company's common stock. During the 13-week period ended September 27, 2008, other income (expense) decreased to $67,000 from $445,000, a decrease of $378,000, or 85.0%, as compared to the same 13-week period last year. This decrease was due to a reduction in interest income of $398,000, caused by lower interest rates and lower average cash balances, coupled with charges related to interest expense for the note payable recorded in connection with the acquisition of AVD.

Income taxes

During the 39-week period ended September 27, 2008, an income tax benefit of $936,000 was recorded as compared to a tax provision of $908,000 recorded in the same 39-week period last year. During the 13-week period ended September 27, 2008, income tax benefit of $967,000 was recorded as compared to a tax provision of $51,000 in the same 13-week period last year. The estimated effective tax rate for fiscal 2008 is projected to be 37.0%, as compared to the fiscal 2007 estimate of 37.5%.

Net income (loss)

As a result of the factors discussed above, net loss of $1.6 million was recorded during the 39 and 13-week periods ended September 27, 2008, each. In fiscal 2007, net income of $1.6 million and $161,000 was recorded during the 39 and 13-week periods ended September 27, 2007, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash requirements are primarily for working capital, the construction of new stores, the remodeling of existing stores and to improve and enhance our information technology systems. During the 39-week period ended

September 27, 2008, we used $343,000 of cash flow from operations, as compared to $12.6 million generated for the same period in fiscal 2007. We expect to continue to meet our operating cash requirements primarily through cash flows from operating activities, existing cash and equivalents, and short-term investments. In addition, we have available a $17.5 million revolving credit facility (the "credit facility") with Bank of America Retail Finance, under which we have not had outstanding borrowings for several years. The revolving credit facility of $17.5 million is available until expiration at November 30, 2008. The Company is currently negotiating the terms for a new line of credit. The Company expects the new terms to be similar to the existing line of credit. At September 27, 2008, we had working capital of $46.6 million, cash and marketable securities of $25.6 million and $4.7 million in third party debt outstanding related to the purchase of AVD.

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

                                                                    39-Weeks Ended
                                                            September 27,    September 29,
                                                                2008              2007
Net cash provided by (used in) operating activities        $      (343,000 ) $   12,561,000
Net cash provided by (used in) investing activities             10,397,000      (13,126,000 )
Net cash used in financing activities                          (15,274,000 )     (9,823,000 )
Net decrease in cash and equivalents                       $    (5,220,000 ) $  (10,388,000 )

During the 39-week period ended September 27, 2008, cash and equivalents decreased by $5.2 million, primarily due to repurchases of common stock under a previously announced stock buyback ($14.7 million), amortization of deferred rent ($1.7 million), a seasonal increase in inventories ($3.3 million), an increase in prepaid expenses ($3.0 million) primarily due to estimated tax payments, a decrease in accounts payable ($1.6 million), repayment of a note payable ($1.3 million) and a net loss of $1.6 million. Decreases in cash flows for the current period also resulted from capital expenditures for our new store expansion and remodeling program totaling $8.9 million. This decrease was partially offset by operating cash flows from net maturities of marketable securities ($19.3 million), depreciation and amortization expense ($9.4 million) and write down of equipment and leasehold improvements, net of deferred rent ($1.6 million).

The Company plans to open approximately 13 new stores during fiscal 2008, 11 of which have been opened as of September 27, 2008. We also renovated 10 existing stores as of September 27, 2008. We spent approximately $8.9 million through September 27, 2008 and expect to spend an additional $1 million to $2 million during the balance of fiscal 2008, for both new store and existing store construction and remodeling. We announced the closure of 16 underperforming stores throughout fiscal 2008, which is not inclusive of nine stores closed in the normal course of business. Of the 16 underperforming stores, we have closed five stores as of September 27, 2008 and we expect to close the remaining stores over the balance of fiscal 2008 and early 2009.

As of September 27, 2008, the Company has repurchased during fiscal 2008, in the open market, a total of 1,471,968 shares at a cost of $14.7 million or $9.98 per share for a total repurchase, since inception of the buyback program in 2007, of 3,167,000 shares, at a cost of $38.9 million or $12.28 per share.

There have been no borrowings against the line of credit during fiscal 2007 and fiscal 2008. There were outstanding letters of credit of $550,000, $774,000 and $608,000 pursuant to the Amended Revolving Credit Facility, at September 27, 2008, December 29, 2007 and September 29, 2007, respectively. The Company is currently negotiating the terms for a new line of credit.

Inflation / Recession

The Company does not believe that its sales revenue or operating results have been materially impacted by inflation during the past two fiscal years. There can be no assurance, however, that our sales revenue or operating results will not be impacted by inflation in the future.

Many believe the U.S. economy has entered into a recession. Recent economic events have affected, and continued economic weakness in the United States is likely to continue to affect, the sales volume and profitability levels of our company. Furthermore, a further reduction in the availability of consumer credit, especially of credit cards, is likely to adversely affect customer demand for our products, which could result in a decrease in our net sales, which could adversely effect our business, financial condition and results of operations.

Many of our suppliers rely on working capital financing to finance their operations. As a result of current economic conditions, lenders have over the last several months generally tightened credit standards and terms. To the extent that any of our suppliers are unable to obtain adequate credit or their borrowing costs increase, we may experience delays in obtaining products, the suppliers may increase their wholesale prices to us or they may modify payment terms in a manner that is unfavorable to us. Any of the foregoing could adversely effect our net sales or gross margins, which could adversely effect our business, financial condition and results of operations.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements or transactions with unconsolidated, limited purpose entities. In the normal course of our business, we enter into operating leases for store locations and utilize letters of credit principally for the importation of merchandise. We do not have any undisclosed material transactions or commitments involving related persons or entities.

Critical Accounting Policies and Estimates

The Company's accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements in our fiscal 2007 Form 10-K. As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results will differ from those estimates. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results will differ from these under different assumptions or conditions.

The Company's management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Consolidated Financial Statements.

Inventories. The Company's finished goods inventories at our retail stores are valued at the lower of cost or market using the retail inventory method. Under the retail inventory method ("RIM"), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. We take markdowns due to changes in fashion and style, based on the following factors: (i) supply on hand, (ii) historical experience and (iii) our expectations as to future sales. We do not anticipate any significant change in our markdown strategy that would cause a significant change in our earnings. We believe that our RIM provides an inventory valuation that results in a carrying value at the lower of cost or market. For our AVD division, which makes up approximately 18% of total inventory as of September 27, 2008, the raw materials, work in process and finished goods inventories are valued at the lower of cost or market value, using the first-in-first-out valuation method. The Company ensures that the raw materials, work in process and finished goods are properly valued by taking into account any obsolescence and recording a reserve in accordance with our established policy.

Reserve for sales allowance and doubtful accounts. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in existing accounts receivable. The allowance is determined based on historical write-off experience and the current retailer environment. We regularly review the allowance for doubtful accounts. Balances over 90 days past due and over a specified amount are reviewed individually for collectability; other balances are considered on an aggregate basis considering the aging of balances. Account balances are written off against the allowance when it is probable the receivable will not be recovered. There is no off-balance sheet credit exposure related to our customers. Management believes that the risk associated with trade accounts receivable is adequately provided for in the allowance for doubtful accounts. During the 39-week period ended September 27, 2008, we recorded a reserve of approximately $1.3 million and utilized $1.3 million, resulting in an aggregate reserve amount of $226,000 as of September 27, 2008. As of December 29, 2007, the company reported a reserve balance of $234,000.

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

† significant changes in the manner of our use of assets or the strategy for our overall business;

† significant negative industry or economic trends;

† store closings; or

† underperforming business trends.

In the evaluation of the fair value and future benefits of finite long-lived assets, we perform an analysis by store of the anticipated undiscounted future net cash flows of the related finite long-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates. In fiscal 2006, the Company recorded an impairment charge of $101,000 related to one store that the Company closed in early 2007. No impairment charges, other than the store exit costs, were recorded during the 39-week period ended September 27, 2008. No impairment charges were recorded in the same period last year.

Goodwill and Intangible Assets. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") on December 30, 2001. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment. During fiscal 2007, in connection with the acquisition of AVD, the Company recorded goodwill of $10.1 million and other intangible assets of $1.3 million. The Company performs annual impairment testing which considers the Company's fair value to determine whether an impairment charge related to the carrying value of the Company's recorded goodwill and other intangible assets is necessary. As a result of this testing, the Company concluded that there was no such impairment loss necessary during fiscal 2007. This is reevaluated annually during the fourth quarter, or more frequently if necessary, using similar testing.

Self Insurance. The Company is self-insured for losses and liabilities related primarily to employee health and welfare claims. Losses are accrued based upon . . .